MIDDLE EAST: SOME IMPLICATIONS OF INCREASING OIL REVENUES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T01098A000100030001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 36
• Document Creation Date: December 16, 2016
• Document Release Date: April 26, 2005
• Sequence Number: 1
• Publication Date: April 1, 1973
• Content Type: REPORT

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abroad on imports of goods and services, according
to estimates by Tehran. Continued expansion of
foreign spending through 1980 at rates consistent
with current plans would raise foreign expenditures
from almost $3 billion in 1971 to more than $10 billion
in constant prices in 1980.
Kuwait: Rich Conservationist
37. In 1972, Kuwait produced 16% of Middle East
oil. Production and revenues are expected to ex-
pand less rapidly than those in most Middle East
states. Concern over depletion of reserves has
prompted Kuwait to limit expansion of oil pro-
duction to 2% a year. Kuwait shares, of course, in
increases in revenue per barrel negotiated under
OPEC. Thus, annual oil earnings are projected to
increase from $1.7 billion in 1972 to between
$3 billion and $5 billion in 1980 (see Table 4).
38. Kuwait's oil receipts make up 95% of export
earnings, 84% of government revenues, and 75% of
total foreign exchange earnings. Long one of the
most prosperous countries in the Middle East,
Kuwait has well-developed outlets for its foreign
exchange earnings. In 1971, imports, mostly in-
vestment and consumer goods, were valued at $850
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million. In addition, Kuwait dispenses aid to many
Arab states through the Kuwaiti Fund for Arab Eco
regional development funds, or
nomic Development,
local financial institutions. Annual aid disburse-
ments since 1970 have amounted to $190 million,
including Khartoum payments of $120 million to
Jordan and Egypt. Kuwait's considerable investments
abroad in a variety of assets were increased by al-
Interest payments on
most $700 million in 1971.
million to
these foreign investments bring in $200 $300 million a year.
pr obably will
39. Kuwait's future expenditures
reflect past trends. continued spending on domestic
development, welfare programs, and demands created
could expand real
by an inflated government payroll non-defense imports about 114 a year -- about as
fast as during the late 1960s. At this rate they
Although Kuwait
would exceed $2 billion in 1980.
imports
will no doubt purchase armaments abroad,
of military equipment almost certainly would not
exceed $100 million in most Years- The small
including 7,000
Kuwaiti armed forces of 15,000 men, expanded.
to be greatly
policemen, is not likely
Foreign aid disbursements could be expanded but
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probably will not exceed $0.5 billion to $1.0 billion
a year by 1980, leaving $0.2 billion to $1.5 billion
that could be added to foreign exchange reserves
or invested abroad.
40. Kuwait is the only Middle East oil state
which has been wealthy for many years. Its foreign
exchange reserves exceeded $1 billion as early as
1966 and had grown to more than $2 billion in 1972.
These reserves may double by 1975 and triple by
1980. The government is required to put oil
royalties into state reserves to hedge against the
eventual depletion of oil reserves, and Kuwait has
years of experience in investing abroad. The govern-
ment recently expressed an interest in investing
in oil assets in the United States, Canada, and
Japan.
Abu Dhabi and Qatar
41. Abu Dhabi and Qatar together produce 7% of
Persian Gulf and North African oil. Oil earnings
are large relative to their respective populations
of roughly 50,000 and 136,000, and combined foreign
exchange holdings surpass $600 million. By 1980,
Abu Dhabi's oil production will exceed current
Kuwaiti levels and, combined with much smaller
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Qatar output, will generate revenues from $4 billion
to $7 billion (see Table 4). Combined imports of
Abu Dhabi and Qatar in 1970 are estimated to have
been about $150 million. Neither of these affluent
states is inclined to spend heavily on military
equipment, but imports may increase rapidly as Abu
Dhabi seeks to spend its explosively increasing
revenues. The inclination to give aid to other Arab
states has risen with recent oil revenue increases.
Aid may reach as much as $0.7 billion to $1.0 billion
annually during the decade. Nevertheless, by 1980
foreign expenditures probably will not exceed $2
billion, and the reserves held by these tiny states
could reach about $15 billion to $20 billion.
Although they could afford to reduce oil production,
Qatar and Abu Dhabi generally follow the lead of
Saudi Arabia. They may invest some surplus funds in
fixed assets abroad.
Libya: Financial Tightening
42. During recent years, Libya has realized
substantial surpluses in its balance of payments
and has added to its foreign exchange reserves at
unprecedented rates. Libya's reserves of $2.9
billion in December 1972 were the largest in the
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area. However, prospects are dimming for continued
large-scale accumulation of financial reserves. In
1972, Libya trailed Saudi Arabia, Iran, and Kuwait
in oil production. The Libyan authorities cut
production from 3.7 million b/d in April 1970 to
3.0 million b/d in August 1970 to pressure companies
into accepting new tax demands. Subsequently, pro-
duction problems, marketing difficulties, and state
efforts to conserve oil reserves have caused an
almost uninterrupted decline in Libyan output. Pro-
duction in 1972 was about 2.2 million b/d. Increased
revenues per barrel boosted oil earnings from $1.3
billion in 1970 to $1.8 billion in 1971; earnings
will be about $1.6 billion in 1972.
43. At current levels of output, oil revenues
will little more than cover anticipated expenditures.
In 1971, Libyan aid disbursements, mainly to Egypt
and other Muslim states, totaled $370 million.
Estimated imports of defense equipment reached about
$140 million, and other imports for development and
consumption were about $640 million. By 1975 these
combined expenditures could total more than $1.5
billion.
44. Several factors make Libya's future financial
position difficult to project. The proposed union
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with Egypt, if implemented, would increase foreign
exchange requirements for the merged state sufficiently
to call for increased Libyan oil production and
perhaps substantial foreign borrowing.5 The increase
in annual expenditures resulting from the union of
Egypt and Libya might absorb an estimated increase
in revenues of about $700 million that could be
derived by expanding Libyan oil production to
3 million b/d. Increased annual requirements of
the merged state would include Egypt's current
account deficit, which in 1975 could exceed $200
million a year. If Egypt's client-state relation-
ship with the USSR were ended because of the union,
an additional $100 million to $350 million annually
would be required to maintain Egypt's present
military machine. Moreover, after union Egypt might
not continue to receive Khartoum aid payments of
about $190 million from Saudi Arabia and Kuwait.
45. Libya's policies with respect to the
participation agreements that are presently under
negotiation could prevent increases in?output or
could even result in further cuts. Libya appears
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intent upon accelerating ownership transfers at a
rate exceeding that negotiated under OPEC for most
area states. Having nationalized British Petroleum
(BP) operations in Libya in December 1971 and having
obtained a 50% share in new production by the Italian
state oil firm ENI, Libya has demanded 50% partici-
pation in BP's partner company, Bunker Hunt, and in
the oasis group.6 As of March 1973 these companies
have resisted Libyan demands in the interest of
protecting the more moderate participation agree-
ments with the Persian Gulf states. In the event
of the possible unilateral nationalization of
foreign oil companies, Libyan production might
suffer from punitive action.
46. These uncertainties in the Libyan case,
together with the mercurial behavior of Libya's
leader Colonel Mu'ammar Qadhafi make any forecast
of Libyan oil production particularly difficult.
Economic demand for increased oil earnings may
well be there, but other considerations may dominate
policy.
Iraq: Compensation Issues Settled
47. Iraq accounts for about 10% of oil produced
in the Persian Gulf area and North Africa. Output
6. Composed of Amerada, Continental Oil, Marathon
Petroleum, and Shell Oil.
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has been held below potential levels for many years
by the failure to agree on compensation for assets
nationalized in 1961 and in June 1972. Compensation
issues were settled in early 1973, however, and
production is expected to increase substantially.
State participation in remaining company assets is
still to be settled. The government has agreed in
principle to the accords reached by other Persian
Gulf countries, but difficulty in working out details
could disrupt production.
48. Oil revenues account for more than three-
fourths of government revenues and nine-tenths of
export earnings. They finance a large share of
the ambitious development program designed to di-
versify the country's economy. Development spending
in Iraq's $5 billion 1971-74 development plan was
cut back in 1972 because of expected revenue losses
following nationalization. In FY 1972/73, govern-
ment investment has been reduced from $736 million
to $361 million. As production rises, development
expenditures probably will be increased. In any
event, Iraq's long-term objective of reducing de-
pendence on oil revenues already has been delayed.
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49. Because most Iraqi military assistance comes
from the Communist countries, expenditures for de-
fense have been only indirectly affected by oil
revenues. The repayment of loans in petroleum has
been acceptable to the Communists since mid-1972.
Communist economic aid also is being made increasingly
available to Iraq in exchange for oil. Further
commitments to repayments in oil for aid from Com-
munist countries will also encourage Iraqi efforts
to raise oil output levels.
Algeria: Support for Development
50. Algeria's economic needs suggest that oil
production will be increased as rapidly as possible;
production may even exceed currently projected
levels. Algeria's earnings from oil are projected
to rise from $700 million in 1971 to about $2 billion
to $3 billion in 1980 (see Table 4), reflecting a
scheduled increase in output from 721,000 b/d to
2,000,000 b/d.7 Natural gas sales of about $40
million in 1971 also are expected to increase
sharply to about $750 million in 1980.
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51. Oil, gas, and other foreign exchange earn-
ings taken together probably will not be large enough
to finance Algeria's projected foreign expenditures.
A primary national goal is implementation of the
country's ambitious capital-intensive development
plans. Planned development could boost Algerian
imports from $900 million in 1970 to $3.0 billion
in 1980, forcing Algeria to seek foreign investment
and credit in most years.
52. Other factors suggest that Algeria will not
choose to restrict oil production. In 1971 the
government nationalized the majority interest in all
foreign oil companies operating in Algeria. Since
then the state firm SONATRACH has produced and
marketed about 80% of Algeria's oil. Interested
in establishing a reputation as a reliable supplier,
Algeria would be reluctant to risk losing current
or prospective petroleum markets by restraining pro-
duction. In addition, the government is trying to
attract foreign investment in petroleum exploration
in Algeria in order to reduce the heavy dependence
on SONATRACH for investment. Any arbitrary reduction
in oil output would undermine this policy.
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