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Saudi Arabia and Extreme Specialization

Saudi Arabia is a country which specializes in oil production, and has historically exported at a significantly higher rate than it has imported goods.  The country has vast oil reserves, and has become dependent on oil for its economic prosperity.  Why has Saudi Arabia become such a specialized country, specifically in oil?  What advantages does this country have as a result of its extreme specialization in one major good, and what problems may be present as a result of having >90% of its GDP come from this particular industry?  Can you explain any of the trends in these graphs?  What effect would those particular trends have on Saudi Arabia's economy?

Lukas Campbell and Ally Thai

20 thoughts on “Saudi Arabia and Extreme Specialization

  1. johnsonj20

    Saudi Arabia has become such a specialized country in oil because it has a comparative advantage in oil production and over 90% of its GDP comes from the oil industry. An advantage of its extreme specialization in oil production is inelastic demand for oil since it's a necessity. However, a potential problem is that fluctuations in the demand for oil (and thereby the price of oil) would destabilize Saudi Arabia's GDP and exchange rate, which would make its currency volatile and deter investment. In the top graph, Saudi Arabia's oil exports plummeted during the Great Recession since income in America (which is a large consumer of oil) dropped precipitously and the American dollar depreciated, both of which lead to less imports. As for the second graph, since the oil industry makes up more than 90% of Saudi Arabian GDP, a fall in oil exports would cause GDP to plummet by reverberating shocks of pessimism and concern throughout the economy. As such, Saudi Arabian income would fall and the government wouldn't receive as much tax revenue.

    1. Juliana Kerper

      As Jack stated, Saudi Arabia specializes in oil because the country has a comparative advantage in its production. I believe he is also correct that the main problem with overspecialization is that any fluctuation in demand for Saudi Arabian oil will have major effects on GDP and the exchange rate. Since oil is also a nonrenewable resource, it's possible that resource scarcity could be an issue in the long run. I would also add to the advantages of overspecialization. When exports exceed imports, it is called a favorable surplus according to the balance of trade. Thus, it is favorable to dominate the economy with the production of oil exports. Because of this favorable surplus, there is a net inflow of domestic currency from foreign markets, which in turn strengthens Saudi Arabian currency.

  2. yuy20

    By specializing in oil, Saudi Arabia retains its power in the global oil industry and gives it immense power to control prices. However, just like now it is better to diversify your investments, their GDP is not diversified and has an extreme focus on oil. Whats interesting about their oil exports is that even though the graph shows their exports increasing, according to an article from The Atlantic, Saudi Arabia burns about a quarter of all oil that they produce. If they are not able to curb this consumption rate, the article predicts that they may even become an oil importer by 2038. Therefore, even though having oil power is good, it means the country needs to find energy alternatives to limit their own oil consumption. As a result, they are developing solar power for the country. They definitely took advantage of their natural resources, but it has forced them to turn to other energy sources to balance domestic and foreign demand.

  3. motturt20

    If any country discovered it had access to a globally demanded good within it's borders, one would expect the proportion of GDP devoted to the production and distribution of that good to rise accordingly. The Saudi Arabian economy is a demonstration of this principle, having taken advantage of the abundant supply of oil they possess. This has led them to having one of the higher GDP's per capita among middle eastern states (7th out of 17), but has linked their economy to one specific good almost entirely. This is, both on principle and in practice, a concerning fact for Saudi Arabia. Oil is a finite resource that will inevitably run out, making the Saudi Arabian economy collapse if they fail to redistribute their production in such a way that it does not have such a dependency.

  4. williamse19

    Saudi Arabia is a specialized country because their comparative advantage is highest in oil. As oil is a part of the supply chain for essentially every good or service I can think of, exporting oil is much more profitable than any other natural resource the country has. This country's specialization allows them to become very very good at one thing. Yet, as oil is a finite resource, this specialization has an expiration date. When oil reserves become depleted, the country's GDP will fall significantly and without much of a backup plan.

  5. lentza20

    It is clear that Saudi Arabia specializes in oil production because it has the comparative advantage in that product; what seems to be less clear is the correlation between how high the prices rise and fall before and after the recessions. If prices get to high, they will fall with the economy, however, if the world market is not in a recessions the prices still fluctuate up and down. What causes these fluctuations? Why didn't the prices going higher than ever before in 2015 create a more dramatic effect, or will that effect come in the future? These questions have no clear answer because as we have talked about in class, the only predictor for what the market will do is what it is doing right now.

  6. liur20

    The reason why Saudi Arabia has become a country that specializes only in the production of oil is because of the oil reserves it has. Saudi Arabia could produce oil at a much more lower cost and could produce more and have a better productivity then any other countries. From the prompt, we could see that oil production has accounted for more then 90% of the oil production and the biggest problem is that the oil production is not diversified. Just like Russia which heavily depended on natural gas and other energy as their main GDP component, if the oil price drops or other countries decide no longer buy or use the oil that is produced in Saudi Arabia, it will hugely harm its GDP. This is also reflected in the graph where we see a huge drop in both oil production and non-oil revenue for Saudi Arabia during the 2008-2009 finical crisis.

  7. Andrew Blair

    Saudi Arabia has the largest oil reserves. Because they don't have much other natural resources to offer, they are able to specialize in exporting oil. If they did not specialize in exporting oil they would not be very profitable. So it makes sense that 90% of their GDP comes from producing oil.

  8. perelk20

    Historically oil is a resource that has been at the center of conflict. Oil is a lucrative industry that Saudi Arabia has taken full advantage of by specializing in it. As 90% of their economy is based upon one resource, anything that happens to oil will result in something happening to Saudi Arabia. Say the price of oil goes down, Saudi Arabia's economy goes down with it. On the flip side, an increase in the price of oil will result in a positive increase to Saudi Arabia's economy. The main issue with the dominant specialization of oil in Saudi Arabia is that it leaves their economy unstable and completely dependent on oil, a resource that may become obsolete in the future due to improving technology and public sentiment regarding oil.

  9. Mac

    Obviously Saudi Arabia has a comparative advantage for producing and exporting oil. Its large supply of the natural resource has placed Saudi Arabia at the top of the oil hierarchy in the world. The economy weighs heavy in dependency upon this one sector. As other major countries, like the United States, become more independent of importing oil, the Saudi Arabian economy will suffer. As supply increases on a global scale, the demand for Saudi Arabia's oil diminishes. Hopefully, the Saudi Arabians have been using their economic wealth from the oil industry to create a stable economic market that can flourish once its depletable oil supply is gone. It is like the metaphor "Don't have all your eggs in one basket" and thats exactly what Saudi Arabia wants to avoid with its dominant oil economy.

  10. gutierrezcuadras20

    Saudi Arabia has become a highly specialized country in the production of oil because it has one of the largest oil reserves in the world. So, the country takes full advantage of its abundant, natural resource, especially since the resource remains highly desirable and quantity remains limited (there exists no infinite supply of oil in the world). Profits consequently increase, but also decrease with economic hardships that lead to low demand for oil as seen in the graph in 2008 with the Great Recession. Ultimately, the effect of this trend is that Saudi Arabia's economy becomes easily susceptible to global crisis, especially with an economy not diverse.

  11. wilkinsonw20

    Saudi Arabia is a unique case of extreme specialization. They have become such a specialized nation due simply to necessity. They live in a region of the world that lacks many natural resources or rich farm land. Necessity has driven them to become so dependent on oil because they need to trade for other goods they cannot produce domestically. This however can be an issue as its market is extremely volatile depending on other countries and oil prices. In the Total Oil Exports graph above, there is a sudden drop in oil exports around 2008. This can be explained by the economic recession that occurred. The US dollar dropped and less oil was imported causing a severe reaction in the amount of oil Saudi Arabia exported. This demonstrates how dependent their economy is on other's as they focus on only one good for 90% of their GDP.

  12. hermana20

    As Jack mentioned earlier, Saudi Arabia has specialized in oil production because it has a comparative advantage in this area. A big part of this comparative advantage comes from the fact that Saudi Arabia has some of the largest oil reserves in the world giving it a climatic comparative advantage in oil production over a non-oil rich country like Spain. If a country has large oil reserves, it makes sense for them to specialize in oil production at least partially so that they can export this oil and make a fortune. Venezuela was the richest country in South America in 1982 because of its vast oil reserves. One fear for Saudi Arabia and its hyper-specialization in oil production is the dependence of the Saudi Arabian economy on world oil prices and world oil demand. If countries start to switch more heavily to renewable energy, Saudi Arabia will begin to see itself in crisis as demand for their oil declines. Additionally, Saudi Arabia's reliance on oil production to fuel its economy can exacerbate certain regional tensions with Qatar. Qatar is another oil production based economy but they also have the world class Qatar airlines and global Al Jazeera media company. In this sense, Qatar's economy is more diversified and women have more rights, and play a larger role in the economy, whereas in Saudi Arabia women have just recently won the right to drive. With Qatar's economy becoming increasingly diverse, inclusive, and more powerful, other gulf states such as Saudi Arabia have become increasingly jealous which is part of the reason for their economic sanctions against Qatar. However, Saudi Arabia seems to now be realizing that a more inclusive economy that allows women to drive and work, and one that diversifies and does more than oil production is the future for a stronger economy. One more thing to note is that in the first graph, the trend for Saudi Arabian crude oil exports has gone up sharply since 2014, but should likely drop or plateau a bit after Hurricane Harvey in August/September of this year. With 20% of U.S. refining capacity knocked out (e.g. Baytown, TX and now much of Mississippi) demand for crude oil temporarily dropped slightly while demand for gas increased. Gas prices increased, gasoline futures soared, and crude oil futures dropped.

  13. the prof

    Again, what can Saudi Arabia do to alleviate their vulnerability? Look at Norway for an example of a country that has done well in addressing that issue. The key jargon is "sovereign wealth fund".

    1. Nate Abercrombie

      A sovereign wealth fund would considerably help the Saudi government reduce the risk of negative impacts on their economy from oil volatility. The ability to invest their surplus cash reserves from oil exportation all over the world would surely bring more stability to the country. The United Arab Emirates has a similar economy and have already taken to establishing a SWF of their own. There have been increasing numbers of countries, especially single-commodity countries, who've established these funds because they see this need for diversification.

  14. hartigank20

    Saudia Arabia has a comparative advantage in producing oil due to surplus of this natural resource in their country. By specializing in this good, the country is producing efficiently and making the most profits. However by having most of its GDP based on oil production, their economy is susceptible to large fluctuations based on changes in demand and price of oil.

  15. Chris Vogel

    Saudi Arabia has become such a specialized country in oil because of its vast reserves. In the past there has been a very low elasticity of demand for oil. So, Saudi Arabia could get away with higher prices. Currently, Saudi Arabia is losing its control over oil because of many changes. Energy efficiency has lowered the demand for oil, while fracking has made previously non-profitable resources cheaper to extract (Russia, US, Mexico). All of these factors tend to decrease the demand for oil putting Saudi Arabia in a worrisome position. While this is true they still have some power over the world price of oil. With this extreme specialization of oil they are able to inflate the price of oil by limiting the supply below where demand and supply would meet. As you see from the graph of oil exports around 2008, oil has a high elasticity of income, meaning the quantity of oil demanded is highly volatile depending on individual's incomes. It would be wise for Saudi Arabia to create a sovereign wealth fund from the profits that they make from exports given global efforts to fight climate change (The Paris Agreement). This will also help to minimize the extremely volatile trends in GDP due to it's dependence on one type of export.

  16. Kathryn Martin

    Saudi Arabia has developed into such a specialized country because of its natural resources and strong comparative advantage in exporting oil. The amount of oil they export is not surprising considering their massive oil reserves. Having a diversified economy would provide more stability for Saudi Arabia so the flexibility of one good won't plummet the entire economy. The Great Recession in 2008 accounts for the sharp decline in total exports, and the non oil exports were at a high to compensate. A balance between a focus on oil and non oil exports would help Saudi Arabia's economy become less volatile.

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