Saudi officials fear effects of Iraq's return to oil production

Knight Ridder - Monday, May 05, 2003 <a href=www.menafn.com>MENAFN.com-Chicago Tribune By Stephen Franklin

RIYADH, Saudi Arabia _ Faced with Iraq's return as a major oil producer, Saudi Arabian officials fear more pressure on prices _ and on their already struggling economy.

To some observers, such as Said al Sheik, chief economist in Jeddah for National Commercial Bank, Saudi Arabia cannot afford to sit back and wait to see how oil prices will play out.

"The war has been positive for the economy," said al Sheik, referring to the run-up in oil prices, and increased oil output by Saudi Arabia. "But down the road, there are huge challenges," he said.

Their worst fear is that Iraq will not only return to its pre-invasion production, but will go far beyond _ to levels even higher than those reached before the first Gulf War more than a decade ago.

Before the American-led invasion, the Iraqis were pumping out about 2.5 million barrels daily. But if cash-hungry Iraq wants to rebuild its economy in a hurry, it could press for a return to the 1990 level of 3.5 million barrels per day, oil industry experts say.

It has the capacity to do so: Iraq's oil reserves are second only to Saudi Arabia.

"If they want to prices to stay steady, (OPEC) will have to cut back on production, or on the other hand, they could pump up volume and accept lower prices," said Leonidas Drollas, chief economist for the Centre for Global Energy Studies in London.

He agrees with other experts who predict the stiff competition for petroleum dollars in the coming years could lead "to the unraveling" of the 43-year-old oil cartel, which has managed to keep prices steady for the last few years.

But that is not the official Saudi line.

Saudi officials such as Foreign Minister Prince Saud bin Feisel have calmly put down such a dire possibility, saying OPEC has endured many crises over the years and survived intact.

Still, Saudi officials do not discount the coming challenges their oil industry is likely to face.

Saying it is almost impossible to accurately predict oil prices, Hamad Saud al Sayari, governor of the Saudi Monetary Authority, the Saudi equivalent to the Federal Reserve, conceded that he was "cautiously pessimistic" about the fate of oil prices in coming years.

"Yes, the chances of some pressure on oil prices are high," added the U.S.-educated economist.

The problem is, when the Iraqis rejoin the oil market in full production in a few years, a gush of oil is also expected from the Russians as well as from the Caspian region, possibly producing a price-reducing glut on the world oil market, industry experts say.

"A lot of it depends on how the Iraqis view the market," said a Saudi oil company official. "If they want to see high oil prices, they will think twice before embarking on any actions that will bring down the house."

"They'll be rational folks, and live like the rest of us," he added.

Newly found oil money, largely because of Iraq's decreased oil output over the years, has been salvation for Saudi Arabia's troubled economy, which barely limped along in the 1990s.

Since last November the Saudis have boosted their daily production from about 7 million barrels a day to more than 9 million barrels daily to make up for Iraq's production cutbacks as well as production problems in Venezuela and Nigeria, oil experts say.

The higher oil prices and production hike have reportedly brought in million of dollars weekly.

Likewise, after the first Gulf War in the early 1990s, the Saudis stepped up their production to make up for the cutbacks in the Iraqis' oil output. In both cases, the money has helped the Saudis deal with growing deficits and government expenditures.

Saudi Arabia's economic problems, as he and other Saudi experts explain, are many.

The country has not used its wealth to diversify, especially building a stronger industrial base, they say.

Industries account for only six percent of Saudi Arabia's gross domestic product. The country has been slow to privatize businesses. And it has not updated its educational system to churn out workers needed for a competitive economy.

In the meantime, it has one of the highest rates of income dependency. For every wage earner there are six who depend on the salary, according to a National Commercial Bank study. The global average is about two persons per wage earner, bank officials said.

They also estimate the nation's unemployment rate at between 15 to 18 percent. Regularly updated figures are not available from the government.

Debt, too, is increasing. Until now, Saudi Arabia has mostly borrowed locally to pay for its debt, according to al Sheik. The government's domestic debt is about $170 billion, according to news accounts.

But al Sheik fears that Saudi Arabia will soon have to look outside for loans, forcing it to face the same kind of international pressures as Argentina and other countries that have ran into problems paying off their bills.

Without major economic reforms, the future scenario is quite troublesome to economist Nahed Taher, also with the National Commercial Bank in Jeddah. Reduced oil prices combined with Saudi Arabia's internal economic woes could eventually drive Saudi Arabia's per capita further downward, she said.

From a per capita income of $18,000 over 20 years ago, the number has dropped to about $7,500 today, she explained. And if a number of things go wrong for the Saudi economy, such as decline oil prices, the figure could plummet to about $3,000 by 2010, she predicted.

That, incidentally, was the same amount for pre-war Iraq.

"If we don't diversify our economy, this is likely. If we depend on oil revenues, and Iraq reaches 5 million barrels (per day) in five years, and the Russians and Caspians increase, then we are really in a dilemma," she said.

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