For the past three years, revenue from oil has consistently been much higher than anticipated when the annual budget was drawn up. The result has been handsome windfall surpluses. During that period, the government could have based its budget projections on figures higher than the rock bottom estimate of $17.5 a barrel for 2004 and $19 for 2005; in 2003, oil climbed to $30 a barrel; by the end of 2004 it was $45. However, it erred on the side of caution, preferring a happy windfall rather than to find the price suddenly dropping and then being faced with a horrendous deficit to fund.
The situation is now different — because of fundamental changes in the global marketplace which are unlikely to be massively reversed: China’s and India’s massive economic growth; growing demand elsewhere in the developing world; the continuing heavy reliance on energy in the US. Drop it may from the present heady heights, but the oil price is unlikely to go below $45 a barrel. The only factor that might alter that is if the Chinese economic bubble were to burst. It might, but were that to happen, the entire global economy would be in trouble. It would be back to 1929 again, a new Wall Street Crash, a new Great Depression.
Such a fearful development can be discounted at present. Chinese growth shows no sign of running out of steam. Quite the contrary. China is set to be an even bigger gas guzzler than the US.
That spells a new oil boom for oil exporting countries, and for Saudi Arabia in particular, the biggest oil producer and exporter, and the only one with significant spare capacity.
This presents a dilemma for the Kingdom, though by no mean a distressing one. For the past decade, the prevailing economic philosophy has focused on moving away from reliance on oil. The keyword is diversification. But with prices presently in the mid-$60 range, the focus is inevitably again on oil as the main money earner. No one turns their back on a golden egg that is getting bigger all the time.
Nor is Saudi Arabia doing so. With high prices a fact of life for the foreseeable future, greater attention is inevitably being paid to production levels. There is no reason to doubt claims that the Kingdom could produce 15 million barrels a day; certainly plans are already afoot to increase capacity to 12 million b/d by 2009. New-generation drilling and production equipment has been ordered to optimize production capacity; distribution facilities are to expand.
But this in turn poses a further fundamental question: How should the new oil boom be used? To increase government spending? To pay off the Kingdom’s debt? On new education and development projects? On increased security measures? On increased public subsidies? On new infrastructural projects?
All these are deemed worthy recipients, although there may be a problem with the first. The golden rule with any budgeting is that windfalls should never be used to fund normal expenditure. It is the path, as Charles Dickens’ character Mr. Micawber famously theorized, to misery; once the windfall has gone, expenditure will outstrip income. But is increased oil revenue a windfall? If prices remain high — certainly above $45 — then no. There is no reason why next year’s and future years’ budgets should not be based on an estimated government oil revenue of $154 billion. That is a staggering amount, double this year’s figure for total anticipated government income, $74.6 billion. For 2005, though, with oil revenue likely to be in the order of $154 billion, the surplus has to be seen as a one-off windfall.
Items like security will require increased spending, and some of that windfall will go to it. With the threat from terrorism constantly changing and becoming every more sensational in its targets, so too must the response, and this is an area where the costs are on the rise. Pressure too for more spending on subsidies on housing, on health care, on education, is likely to prove irresistible, not because of any desire to extend the areas of subsidy, but because of the growing population. Just to stand still requires more investment.
But infrastructural development, particularly communications projects, must have a special call on government attention. They are well suited to the present fortuitous financial situation, being one-off affairs, requiring one-off allocations. With ever tighter demands on government funding, there has not been a mass of such projects in recent years. Indeed, not since the last boom has there been a wave of infrastructural projects. They were what modernized Saudi Arabia in the 1970s. But a new leap forward is needed in infrastructure to bring Saudi Arabia up to standards enjoyed in the rest of the Arab world.
The needs are obvious. Jeddah airport, the most used airport in the Kingdom and gateway to the holy cities of Makkah and Madinah, needs a massive facelift. There has been talk for years about modernizing and expanding it. But nothing ever happens. The talk has only just recently got to the point of pre-selecting a number of companies for the project. But at least in terms of funding, there is no reason why work should not now go ahead.
The Kingdom has long been awash with plans — to build new roads, to repair old ones, to extend the rail network, to build more homes, hospitals, schools, universities, sewerage systems, water desalination plants and electricity generating stations, to give the Kingdom state-of-the-art defenses and security systems.
Plans have never been the problem in Saudi Arabia. The problem has since the boom of the 1970s been cash. Now, thanks to the new boom, that problem is not there. The upgrading of the Kingdom’s aging and missing infrastructure can be addressed.
Despite the grim news from so many parts of the world, Saudi Arabia is bucking the trend. Thanks to the new boom, though not entirely because of it, there is a new economic confidence in the air. The private sector is brimming with assurance, even excitement. The mere knowledge of increasing government revenue has been enough to instill a new optimism — and optimism is, along with hard cash, the most important factor in ensuring economic growth.
Oil is again in the vanguard of delivering change.
