OIL CONSERVATION AND ECONOMIC DEVELOPMENT IN SAUDI ARABIA

This dissertation is to discuss and recommend an appropriate oil-conservation policy for Saudi Arabia in the light of past, present and future economic development plans. The basic concept is the fact that oil is a depletable resource representing over 95 percent of Saudi National income. Two exogenous constraints face the government in its efforts to develop an efficient conservation policy. The first is the membership of Saudi Arabia in the Organization of Petroleum Exporting Countries. The second is the world energy market. These two constraints hinder the ability of Saudi Arabia to use an appropriate social rate of discount to allocate oil revenues efficiently. Using social rate of discount implies that Saudi oil reserves would be allocated over time according to a rate that reflects the Saudi Society's time preference. A high discount rate means that oil production would be pushed from the future to the present, whereas a low discount rate means that Saudi Arabia prefers producing oil in the future rather than the present. A strategy based on social rates of return on domestic and foreign investment seems to be appropriate for Saudi Arabia. But the existence of the exogenous constraints and also events of 1983 and 1984 in the domestic economy and world energy market impose restrictions on using discount rate. It is appropriate for Saudi Arabia in the meantime to deal with the deteriorating situation in the world energy market. This may be accomplished by reducing the elasticity of demand by reducing the price of oil and increasing production. The huge oil reserves, the high productive capacity of Saudi Arabia and the negligible cost of production are the major sources of strength for accomplishing such policy.