SOME IMPLICATIONS FOR THE UNITED STATES OF THE LIKELY MASSIVE INCREASE IN MIDDLE EAST FOREIGN EXCHANGE RESERVES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010066-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 37
• Document Creation Date: December 22, 2016
• Document Release Date: May 18, 2010
• Sequence Number: 66
• Publication Date: June 1, 1971
• Content Type: IM

Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Some Implications For The United States Of The Likely
Massive Increase In Middle East Foreign Exchange Reserves
Op'D
I~tVF~. RE.0 TO
Secret
ER IM 71-114
June 1971
Copy Nc.
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
Excluded from oIomodc
alo.cngiud~nq and
JeclmdGta-!_ion
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
June 1971
Some Implications For The United States
Of The Likely- Massive Increase
In Middle East Foreign Exchange Reserves
Introduction
1. In the past year, the Persian Gulf and
Mediterranean oil exporting states have secured
substantial increases in their oil taxes. Reve-
nues will be boosted further in most of the coun-
tries by rising oil production. The increase in
incomes raises the possibility of substantial
growth in imports and foreign aid. However, the
collective gold and foreign exchange reserves of
Libya, Saudi Arabia, Iran, Kuwait, Iraq, Algeria,
Abu Dhabi, and Qatar probably will grow from $5.6
billion at the end of 1970 to more than $25 bil-
lion at the close of 1975. This memorandum
examines some of the implications of these develop-
ments for the United States.
Conclusions
2. ?ersian Gulf and North African oil produc-
ing states will receive huge increases in hard
currency earnings over the next five years. In
most of these countries, the likely level of
expenditures on domestic investment and improved
living standards fall far short of projected
revenues. Nor are increases in external aid by
the Arab states likely to affect the payments sur-
plus materially. As a consequence, the accumula-
tion of foreign e:,.change reserves in the geographic
area could easily exceed $25 billion by 1975, an
amount well over twice the size of current US
Note: This memorandum was prepared by the Office
of Economic Research and coordinated within the
Directorate of Intelligence.
SECRET 25X1
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
reserves. This accumulation of funds will repre-
sent both a commercial opportunity and a political
challenge to the United States.
3. There appears to be potential for a sizable
percentage increase in US exports, particularly of
capital goods associated with the oil and petro-
chemical industries or with general economic
development programs. US exports to these coun-
tries now greatly exceed US purchases from them,
but these sales amount to only about 2% of all US
exports, and the short-term potential for raising
sales in absolute terms would seem to be limited
by both political and economic considerations.
4. The United States' two best customers in
the group, Iran and Saudi Arabia, are expected to
experience the largest gains in oil revenues.
Iran, which now takes over 40% of US exports to
the countries under review, has economic develop-
ment and military procurement programs under way
which fully offset its foreign exchange revenues.
Iran has shopped extensively for needed imports
and has taken advantage of both Communist and West
European concessions on prices and credit terms
for competing economic and military goods. The
potential for raising US exports of capital goods
and military equipment to Saudi Arabia is favorable.
However, Saudi financial policies are conservative,
and a sizable portion of the increased revenues
probably will be put into foreign exchange reserves.
5. Weakening Franco-Algerian ties and the
improvement in US-Algerian relations provide the
United States with improved commercial potential.
Kuwait, Abu Dhabi, and Qatar probably will increase
their imports from the United States as oil revenues
grow, but these small countries have a combined
population of less than one million persons and
limited development programs. Consequently, most
of the increase in revenues will not be spent but
will be added to reserves. Waning British influence
in the Gulf may help to divert some purchases from
Britain to the United States. At present, US exports
to Libya are hampered by political restraints.
Cool political relations also have been a restrain-
ing factor in Iraq, but as in the Libyan case, the
growth potential for imports is large.
SECRET
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
6. The principal item in the US balance of pay-
ments with the Middle Eastern and North African
oil countries is not trade but repatriation of oil
companies' earnings. The roughly $3 billion of
US private oil company investment yields an annual
inflow of $1.6 billion from eight countries. A US
surplus in commodity trade brings the annual
balance-of-payments surplus to over $2 billion.
7. Accumulation of huge foreign exchange re-
serves would permit the Middle East oil producing
states to carry out a number of actions which would
be unfavorable to US interests. These include:
a. Nationalization of foreign-owned
companies. Partial nationalization has already
taken place in Algeria, and nationalization
has been threatened in other countries,
particularly Libya. By 1975, extensive
nationalization could be carried out, and
even if full compensation were paid, there
would be considerable damage to the US
balance of payments from loss of profit repa-
triation.
b. Subsidization of Arab governments
and political movements. Arab oil money is
already being used or such subsidies, in-
cluding aid to Egypt and Jordan (under the
1967 Khartoum Agreement)
Should radical power
expand in the area, US policy objectives
could be seriously affected.
c. Financial manipulation. The huge
reserves expected to be under Middle Eastern
control could be used to bring pressure in
the West -- for example, by demanding pay-
ment for dollar reserves in gold. However,
it is not clear that such actions could
actually be carried out without cost to the
initiating countries, and governments of
the wealthy oil states have shown little
taste for this type of adventurism.
SECRET
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
Discussion
Background
8. The six Persian Gulf states (Saudi Arabia,
Iran, Kuwait, Iraq, Abu Dhabi, and Qatar) and the
two states in North Africa (Libya and Algeria) that
belong to the Organization of Petroleum Exporting
Countries (OPEC) account for nearly half of Free
World oil production and about three-quarters of
the oil moving in international trade. They col-
lectively supply 75% to 80% of Western Europe's
oil and 90% of Japan's. Moreover, their dominance
in the world oil trade seems assured for the fore-
seeable future since they have about 75% of ':he
Free World's proved oil reserves.
9. The American stake in these eight countries
is great. They supply less than 5% of US oil con-
sumption including oil shipped directly to US
forces in Vietnam 1/; but, of the $7 billion that
Western oil companies have invested in these coun-
tries, $3 billion is accounted for by US firms. 2/
American companies have invested $1.3 billion in
Libya alone. In the four largest oil producers
under review -- Saudi Arabia, Iran, Libya, and
Kuwait US companies control 95%, 40%, 90%, and
50%, respectively, of the oil production. Repa-
triation of company earnings yields an annual net
capital inflow of $1.6 billion to the United States
from the group of eight countries. A US surplus
in commodity trade brings the total annual benefit
to the US balance of payments to something in ex-
cess of $2 billion, and this during a period when
the United States is running a chronic and serious
deficit in its global balance of payments.
10. In the late 1950s, a burgeoning world oil
surplus caused a price decline that was not reversed
until 1970. When reversal did come,-it resulted
1. The United States is the world's leading pro-
ducer as weZi ac consumer of oil, supplying three-
quarters of its own needs. Most of the remainder
is supplied by imports from VeneaueZa and Canada.
2. Investment has been valued at original cost
without allowance for depreciation or subsequent
increases in replacement cost.
SECRET
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
from shrewd maneuvering by the producing countries
that took advantage of a shift of bargaining power.
Factors in this shift were continued closure of
the Suez Canal; rupture of Tapline (Trans-Arabian
Pipeline); a tanker shortage resulting from the
longer hauls necessitated by loss of the Canal
and Tapline; and rapidly increasing dependence on
oil as a source of energy. In recent years, oil
constunption has been rising 10% annually in West-
ern Europe and 15%-20% in Japan. By 1970 the oil
companies and oil importing states were highly
vulnerable to a concerted push by the exporting
states for greater financial benefits.
11. In 1970 the OPEC members agreed to force
an increase in unit revenues from oil. Libya sub-
stantially boosted its tax take in September, and
the Persian Gulf producers obtained a small in-
crease before the end of the year. Then, on
14 February 1971, after strenuous negotiations,
the Persian Gulf producers bargaining as a unit
under the aegis of OPEC concluded an agreement
with the companies that provided the following:
(a) assurance from the producing countries of
security of supply and stability of financial
arrangements for five years (1971-75), (b) stabi-
lization of the income tax rate on Gulf crude oil
export profits at 55%, (c) uniform increase of 350
der barrel in the posted price (that is, the price
on which taxes are based) of Gulf crude, (d) an
inflation adjustment in the posted price of 2-1/2%
effective 1 June 1971 and on the first of each of
the years 1973 through 1975, (e) further increases
of 50 per barrel in the posted price on the same
four dates, and (f) elimination of some earlier
allowances used by the companies in computing prof-
its.
12. The revenue increases that will result
from the Persian Gulf settlement are considerable.
Revenues will increase about $1.3 billion in 1971
alone as a result of the changes in tax terms --
that is, posted prices and tax rates. The increase
in per barrel taxes will rise to about 60~ in 1975
and will push 1975 revenues to three times the 1970
level when coupled with the anticipated increase in
production (For charts on revenue and production,
see Figures 1 and 2).
SECRET
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
OIL PRODUCTION
m F1
MILLION BARRELS
PER DAY
-1 10
j5
MILLION IARRELS
PER DAY
-110
MILLION IARRELS
PER DAY
-110
1985 1970 1975
MILLION IARRELS
PER DAY
-10
OBBBSB I"--
1985 1970
MILLION IARRELS
PER DAY
--110
MILLION IARRELS
PER DAY
-10
- 6 -
SECRET
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
OIL REVENUE
1 4,15-
I4 ..
1970 1975
4
15
IIWON Us s
--15
DILUON US S
5
4
3
0 n
1965 1970 1975 1985 1470 1975
'Includes the estimated not earnings from oil production of SONATRACH, the State oil company.
"Excludes about $100 million in retroactive taxes impo;od in 1971.
SECRET
M
1985
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
13. The disparity among the six Persian Gulf
countries in both total revenues and revenue
increases is considerable and reflects primarily
differences in the level and rate of growth of oil
output. Because of their pre-eminent output roles,
Iran, Saudi Arabia, and Kuwait receive most of the
area's total revenue and will receive the biggest
increases under the new agreement, roughly six-
sevenths of the total. About two-thirds of Iraq's
oil and a small portion of Saudi Arabia's is
exported via the Mediterranean, however, and reve-
nue terms for this oil were not fixed by the Feb-
ruary Persian Gulf agreement. Terms for this Medi-
terranean oil were not settled until June 1971
and are similar to the terms for Libyan oil.
14. Libya obtained sizable concessions from
the oil companies in two series of agreements, the
first concluded in September 1970 and the second
in April 1971. The latter settlement, like the
Persian Gulf pact, is intended to cover a five-year
period. The Libyan bargaining position was very
strong because, at the peak in May 1970, Western
Europe depended on Libya for 30% of its oil.
Libya increased the pressure by ordering selective
production cutbacks that reduced output 20% and by
threateninc; to shut off production altogether.
Moreover, the sharpest cutback was imposed on
Occidental Petroleum, an independent US company
with virtually all its producing assets in Libya.
Occidental acceded to most Libyan demands in Sep-
tember, and the other companies soon followed suit.
The Libyan government continued to hold production
below the peak level, however, and in January
announced further demands that finally resulted in
new agreements in April. Together the two rounds
of agreements will raise Libyan revenues by 900 or
more per barrel, over the coming five years, more
than two-thirds of this increase stemming from the
April settlement. Libya was able to push the tax-
paid cost of its crude well above Persian Gulf oil
at least temporarily because of the higher gravity
and lower sulphur content of Libyan oil and because
of the transportation advantage resulting from
Libya's proximity to Europe, the continued closure
of the Suez Canal, and the relative scarcity of
tankers. Opening of the canal and a decline in
tanker rates would eliminate 250 a barrel in spe-
cial premiums from the posted price; however, the
SECRET
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
net effect of these developments would be a smaller
reduction A.n the European price of Libyan oil than
in that of Persian Gulf oil.
15. If the production ceiling of 3.2 million
barrels per day imposed last December is maintained
(as it may be to conserve oil. reserves), Libyan oil
revenues will approximate $2.6 billion in 1975.
This is about 80% above the 1970 level. Production
may in fact be cut back somewhat, restraining the
growth of revenues.
16. Although the Libyan settlement set the
pattern for agreements govern:ng Saudi Arabian and
Iraqi oil exports via the Mediterranean, no such
agreement was concluded until June. Negotiations
were prolonged by Iraq's unsuccessful demand for a
premium based on the low paraffin content and high
lube yield of its oil. This premium would have
paralleled that obtained by Libya for the high grav-
ity and low sulphur content of its oil.
17. The Libyan settlement also will serve as a
benchmark for an agreement between Algeria and the
French oil companies operating there. The Algerian
situation, however, has been greatly complicated
by special Franco-Algerian arrangements and prob-
lems that are a legacy from colonial times. 3/
Negotiations between Algeria and the French com-
panies have been going on since November 1969, and
since late 1970 the situation has amounted to a
confrontation. Algeria has greatly escalated its
demands, made numerous threats, and taken unilat-
eral action. In February 1971 the nationalized
portion of the formerly French-controlled companies
was increased to 51%, and oil and natural gas pipe-
lines and natural gas deposits -- almost all of
which were at least partly French-owned -- were
completely nationalized. Although compensation
was offered for nationalized assets, Paris declared
it inadequate. In April the tax take from oil pro-
duced by the French was boosted from 780 per barrel
to $1.83 per barrel. The French government took
SECRET
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
retaliatory steps that effectively terminated
preferential economic ties between France and Al-
geria. All French oil companies stopped transfer-
ring 4/ earnings to Algeria for retention there,
and most of them stopped paying taxes to Algeria.
Algeria responded by demanding that $2.95 per bar-
rel be paid at Algerian ports when the French
companies loaded oil tankers. Unable to realize
a profit at that price, French companies stopped
loading Algerian crude in April and took measures
to prevent or discourage other companies from buy-
ing "their" oil. As a result, Algerian oil exports
fell initially to 30% of the previous year's rate,
but a portion of the decline already has been re-
couped by SONATRACH (Algeria's state oil company).
At the present time the situation remains at an
impasse. When an arrangement eventually is worked
out, it should provide Algeria with a substantial
increase in revenues.
18. Changing market conditions and the push
for higher revenues also brought gains to oil
exporting countries that are outside the scope of
this memorandum. Nigeria received concessions
following Libya's gains last September and subse-
quently has obtained a five-year settlement on
terms comparable to those secured by Libya in April.
Venezuela and Indonesia did not negotiate with pro-
ducing companies for more favorable terms but
imposed tax increases effective in March and April.
Revenues, Expenditures, and Reserves, by Country
Libya 5/
19. From 1965 through 1968, the last full year
of King Idris' regime, Libya's economy grew explo-
sively, almost entirely because of rapidly expand-
ing oil production. Oil production increased an
average of 29% annually, enabling gross national
product (GNP) to grow 17% annually.
4. The 1965 Oil Accord provides for the retention
of 50% of French petroleum companies' gross earnings
in Algeria. However, French companies received
payment for oil in France, so the money actuaZZy
had to be transferred to AZgeria.
SECRET
25X1
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
20. The oil industry still accounts for about
80% of GNP, the remainder consisting mainly of
primitive agriculture and service activities. Many
Libyans are still nomildic;. There is virtually no
manufacturing, and about 60% of food and other
agricultural materials for the roughly 2 million
inhabitants are imported. 1.t,ports are equivalent
to about 27% of GNP.
21. The Revolutionary Command Council ([2CC)
government, which seized power in 1969, in harked
contrast to the conservative Idris regime, is
vigorously trying to achieve vague goals of economic
growth and increased po7,itical esteem in the Arab
world. The RCC, however, has adopted disparate and
even contradictory policies. Initially, the new
government sharply reduced domestic outlays by
curtailing ordinary expenditures and scuttling some
development projects. Although government spending
was on the rise by mid-1970, it probably remained
below the 1968 level. Efforts to eliminate corrup-
tion and a careful review of day-to-day spending
continue to restrain outlays. Although substantial
sums have been nominally allocated to new industrial
and agricultural investment, little has actually
been spent because almost none of the required
planning and other preparatory tasks have been
undertaken. There probably has been some small
increase in development spending, however, since
several old infrastructure projects have been re-
vived. Although still small, government participa-
tion in the petroleum industry has increased.
Through the Libyan National Oil Company (the fledg-
ling state oil company), the government is at least
nominally involved in all aspects of the industry.
In contrast to relatively low spending for domestic
economic and social purposes, Tripoli has been
liberal in spending for the fore.i.gn aid and defense
programs. Aid to other Arabs more than doubled
during the RCC's first year and reached at least
$300 million in the 12 months ending March 1971.
Two large contracts, one with the USSR for arms
and the other with France for arms and aircraft,
have been signed, and additional arms contracts
have been sought with other:, mainly Western, sup-
pliers.
22. Libya's already big financial reserves are
almost certain to increase rapidly. In February
1971 the country's gold and foreign exchange hol:'ings
SECRET
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
were $1,688 million, enough to finance 30 months'
imports at the 1969 !Gvel. With oil revenues ex-
pected to increase from $1.5 billion in 1970 to
$2.6 billion in 1975, we believe it quite likely
that Libya's reserves of gold and foreign exchange
will approximate $8 billion by the end of 1975 even
if oil output does not increase.
23. RCC interest in economic development has
been confirmed by a sharp increase in the amount
of money budgeted for this objective. Unliko the
previous regime, the RCC is budgeting funds to
develop agriculture and non-oil industries. Libya's
ability to increase investment in the short run,
however, is limited. The problem is that the gov-
ernment has not developed a comprehensive plan for
economic development, and none seems to be in the
offing. Moreover, a dearth of skilled managers
and technicians will hamper the implementation of
development projects. Many technocrats present
under Id.ris have been purged, and most Westerners
have left. Egyptians have entered Libya to replace
Westerners, but they are concentrated in the
security forces, health services, and education.
The RCC has resisted technical assistance from
either the West or the East and has shown some
reluctance to admit large numbers of other Arabs.
Palestinians, in particular, are not welcome in
large numbers.
24. Libya's foreign aid spending probably will
depend largely on the political leverage such
assistance could be expected to yield. Disillu
sioned with past results, the RCC recently has re-
duced aid expenditures sharply. Hussein's treat-
ment of the fedayeen prompted the RCC to end aid
to Jordan, while Syrian restoration of Tapline is
believed to have led to a stoppage of aid to that
country. Khartoum payments to Egypt continue, but
ad hoc aid to Egypt appears to have ceased since
Sadat began peace overtures to Israel.
1 Given con-
tinuing Arab-Israeli tension but no hostilities,
Libya probably will continue Khartoum payments to
Egypt and perhaps extend some ad hoc assistance.
An all-out war effort against Israel would cause
a dramatic rise in Libyan aid, while a negotiated
SECRET
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
peace might cause such assistance to terminate.
Recently Libya has given Algeria financial aid in
its dispute with France. Significant aid increases
might also be associated with Libyan entry into
federation with Egypt and Syria. But the amounts
Libya would provide would not likely be large in
terms of the country's revenues.
25. Unaffected by financial restraints for a
number of years, Libyan arms expenditures have been
determined by RCC desires. The RCC is currently
seeking approximately $700 million worth of arms.
Two contracts totaling $500 million were signed
with France ($400 million) and the USSR ($100 mil-
lion)
26. Although the Libyan government will have
the opportunity to increase development spending
in the next few years and its military and foreign
aid outlays may remain high, it will be hard put
to spend more than half its foreign exchange income.
If the RCC manages to organize a development pro-
gram, it could, in the next few years, overcome
shortages of skilled and even slightly skilled
labor by hiring foreigners, while at the same time
importing the necessary equipment. However, the
RCC probably will not carry its pan-Arab sentiments
so far as to risk much dilution of Libya's national
identity. Until restraints on immigration are
eased, labor shortages will severely constrain
economic development. Substantial expenditures
also could be made on welfare, but the Libyan regime
is strongly inclined toward a conservative social
policy. In any event, Libya will be unable to in-
crease either welfare or development expenditures
greatly in the next two or three years because of
the inevitable lags between decision and imple-
mentation.
SECRET
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
27. Given these constraints on development and
welfare spending, Libya will probably have balance-
of-payments surpluses of nearly $1.5 billion a year
in 1972 and 1973. Even rapid increases in civilian
imports (50% in three years), combined with payments
on the large arms contracts already made or ex-
pected and continuation of Khartoum payments, would
give this result. A level of per capita imports
equal to that of Kuwait -- an extremely unlikely
development -- would still leave a surplus of more
than $1.0 billion in 1972. This assumes constant
oil productions Under these circumstances, imports
for use in the oil industry would be small. If
oil production increased, foreign exchange earnings
would be further raised, but a small part would be
spent on increased imports for the oil industry.
28. The chances are good, therefore, baring
large new foreign aid, that, by the end of 1973,
Libyan foreign exchange reserves could rise to more
than $6 billion -- equivalent to about 50% of
present ITS reserves, For a regime committed to
raising its prestige, especially in the Arab world,
and willing to use its economic muscle to gain
political advantage, the potential for using this
wealth to cause problems for the West is consider-
able indeed.
Saudi Arabia 6/
29. Prior to the recent oil agreements, Saudi
officials were deeply concerned with what they saw
as an impending financial crisis. They were alarmed
by three consecutive years of small deficits in the
government budget -- the first deficits since
1959 -- and, even more, by the associated 16% drop
in the country's traditionally large foreign ex-
change holdings between 1967 and 1969. 7/ End-of-
year reserves had fallen from $944 million to $785
million because of sharply increased imports for
development and defense, expanded payments on
7. Foreign exchange h eZdings ;Include gold and
foreign currency held by the Saudi Arabian Monetary
Agency (SAMA) and SAMA investments abroad, which
generally are highly liquid.
- 14 -
SECRET
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
military debt, and aid to Egypt and Jordan induced
by the 1967 Arab-Israeli War. Outflows for aid and
arms alone increased from about $175 million in 1967
to $370 million in 1969 By early 25X1
1970, reserves were substantially below the desired
level of 1.5 times annual imports, though still
well above the level required by law as currency
cover. The financially conservative Saudis became
increasingly apprehensive about their reserves and
took several steps to reduce outlays.
30. One important economy measure was a sizable
cutback in development expenditures. For fiscal
year 1971, 8/ development expenditures were budgeted
at $276 million, some $78 million less than in FY
1970 and less than half the level of planned defense
spending. Only $22 million was allotted to new
development projects c-ompared with an estimated
$100 million the year before. The reduction in
development spending caused economic growth to slow
in the second half of 1970. The growth of real
GNP, which had averaged 8.5% annually for a decade,
8. The Saudi fiscal year runs from 2 September
1970 to 21 August 1971. The Saudi "hijra" fiscal
year is shorter than the Gregorian year; hence its
Gregorian equivalent changes from year to year.
SECRET
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
slowed to 4.5% in 1970. The slackening economic
tempo was reflected in a one-third reduction in
import growth and consequent improvement in the
balance of payments. Foreign exchange holdings
climbed by $109 million to $894 million by the and
of 1970.
31. In'late December 1970 Saudi Arabia secured
an agreement, retroactive to 14 November, that
raised its oil revenues by about 8%. This agree-
ment raised posted prices 90 a barrel on medium
and heavy crudes and raised the tax rate on company
profits from 50% to 55%. It alone was sufficient
to raise government revenue $145 million in 1971
(including $15 million in retroactive payments for
1970) and about $250 million annually by 1975 (see
Table 2).
32. Further revenue increases occurred in late
1970 and early 1971, when the posted price of
Mediterranean oil was increased at Libya's insti-
gation and transit fees were raised on oil passing
through the 540-mile Saudi portion of Tapline to
the Mediterranean. The increase in posted price
will bring Saudi Arabia an extra $18 million to
$21 million annually from exports via Tapline, and
the boost in transit fees will provide another
$12 million to $13 million annually. Saudi Arabia
also will receive a payment of $9 million to cover
retroactive Tapline claims, two-thirds of which
will be paid in 1971 and the remainder in small
installments through 1973. In addition, Saudi Arabia
should receive annual gains rising from $60 million
to $112 million during 1971-75 from the settlement
on Mediterranean exports.
33. By far the largest revenue increase for
Saudi Arabia will come from the 14 February OPEC
agreement covering oil exported via the Persian
Gulf. Under this settlement,. Saudi Arabia will
receive about $400 million in additional oil revenues
in 1971 alone. The 14 February agreement calls for
escalation of unit revenues each year through 1975,
when the Saudi increment will reach $1.4 billion.
34. Not only will Saudi Arabia gain major rev-
enue increases from each barrel of oil exported
under the new agreements, but also total revenues
- 16 -
SECRET
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
Saudi Arabia: Oil Revenues
Milli
1970
1971
1972
1973
on US $
1974 1975
Oil revenues anticipated under pre-September 1970
agreements
1,223
1,4?i6
1,844
2,242
2,484 2,737
Additions from new agreements
30 Dec 1970 (retroactive to 14 Nov 1970)
15 J
130
167
205
228
252
Late 1970 (Libyan settlement applied to Saudi
Tapline shipments b/)
2/
18
20
20
21
21
1 Feb 1971 (increased Tapline transit fees
instigated by Syria)
2/
12
12
13
13
13
n
Retroactive payments
6
2
1
0
0
14 Feb 1971 (agreement on Persian Gulf oil)
2/
362
560
812
1
033
1
305
Saudi share of increased revenue for neutral
zone (assuming equal treatment)
34
51
62
,
75
,
87
Mediterranean agreement (estimated minimum
terms)
2/
60
64
78
t4
112
Total additions
622
876
1,191
1,464
1,790
Estimated new oil revenue eohe dole
1,223
2,078
2,720
3,433
3,948
4
527
t15 2/
,
T
2,093
a.
o be paid in 1971.
b. Tapline was closed from 4 May 1970 until I February 1971.
a. Not applicable.
Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
 Sanitized Copy Approved for Release 2011/02/04: CIA-RDP85T00875R001700010066-7
SECRET
will be enhanced by rising output. Oil produc-
tion during 1971-75 may grow more than 15% a
year.
35. Given anticipated production levels, the
new agreements will boost revenues by about $640
million, or 44%, in 1971 alone. By 1975, oil
revenues will be nearly two-thirds larger than they
would have been under the old agreements and 3.7
times as great as in 1970. So far, the government
seems to have proceeded cautiously with its spending,
letting reserves accumulate. However, the extra-
ordinary rise in oil revenues will enable the
government to carry out fully all existing develop-
ment and defense programs, initiate new ones, and
continue or even expand foreign aid programs.
36. Although Saudi Arabia's population is only
perhaps 4 million, the non-oil sectors of the
economy are so backward that the scope for economic
development is considerable. Development expendi-
tures probably will be raised at least $900 million
above the $2.5 billion originally earmarked for
1971-75 to the level initially regarded as optimum
by Saudi planners. Planning delays and other ad-
ministrative problems may hold back spending for
a year or two, but a significant part of the revenue
increase could be flowing into development by the
mid-1970s. Saudi Arabia apparently is willing to
import: the skilled labor (its principal resource
constraint) needed for accelerated development.
37. increases in defense spendiii.y beyond the
$3.1 billion previously proposed for 1971-75 are
nearly i.nev., table under strong presst-r` from, special
interest groups within and outside the government.
The-, $3.1 billion program was conceived d::ing a
time of finan