175. Paper Prepared in the Office of Economic Research, Central Intelligence Agency1

Middle East: Some Implications of Increasing Oil Revenues

Summary and Conclusions

The demand for oil throughout the rest of this decade will be met only by massive increases in output of Middle East oil which is expected to rise from the 20 million b/d produced last year to at least 40 million b/d in 1980. Most of this increase will come from Saudi Arabia, Iran, Abu Dhabi, and Kuwait. The resulting revenues, in constant April 1973 dollars, are expected to reach $20 billion in 1975 and between $30 and $50 billion in 1980. While some important Middle East producers—Iran, Iraq, Libya and Algeria—should be able to spend the bulk of these earnings on military and economic programs others clearly cannot.2

Saudi Arabia, Abu Dhabi, and Kuwait, limited by small populations, inadequate numbers of technically capable people and a dearth of non-oil resources, will not be able to increase spending on imports as fast as oil revenues mount. Nor could their gifts to other Middle Eastern nations even on a generous scale, greatly reduce this surplus of receipts over current expenditures.3 Thus the foreign assets of the Middle East countries could amount to between $50–$80 billion by 1980 in constant 1973 dollars. At the upper limit these assets would be equal to about 60% of the world’s gold and foreign exchange reserves in 1972.

The trends already in motion, if continued through 1985, would result in the Middle East oil producing states accumulating foreign [Page 445]assets that would be truly astronomical. Their assets would range from a low of $100 billion to as much as $180 billion by 1985, comparable to total gross U.S. foreign assets and to more than double net U.S. foreign assets.

Foreign assets of such enormous magnitude would inevitably be held in relatively liquid forms, such as securities and short-term instruments. The Middle East countries lack the industries and managers to make direct investments abroad on a really massive scale. Moreover, their buying up existing foreign companies would cause strong policy reactions.

In any case the Middle East oil producers would have unprecedented financial power. Discretionary use of such vast assets obviously has enormous potential for disruption of financial markets. Attempts to neutralize these assets through capital controls in producing countries might induce the producers to curtail output. If the consuming countries consider such a situation as unacceptable they have little choice but to markedly slow the growth of their consumption of Middle East oil by developing other means of satisfying energy demands.

[Omitted here is material supporting the Summary and Conclusions.]

  1. Source: Central Intelligence Agency, Office of Economic Research, Job 80–T01315A, Box 33. Secret; No Foreign Disem. A copy was sent to Odeen, CEA, and the Departments of Treasury and Commerce.
  2. In paragraph 12 of the paper (omitted here), OER stated: “Middle East oil states will expand their capacity to spend foreign exchange for consumption, military expansion and economic development. Iran and Algeria may even borrow additional funds to support domestic programs. Most other oil nations will just about break even.”
  3. In paragraph 16 of the paper, OER stated: “The Saudi Government will be in a position of spending a diminishing share of its current oil earnings. Saudi officials acknowledge that imports for defense and domestic development, together with aid disbursement to other Arab states, will fall far short of absorbing future annual revenue increments.” In paragraph 23, OER added: “Even if military expenditures develop a momentum in the late 1970s, they still will represent only a fraction of Saudi Arabia’s income. A lack of technical capacity to maintain and operate the large amounts of equipment involved would not necessarily deter the Saudis from large expenditures on military equipment.”