On February 6, 1991, Secretary of State James Baker admitted before the House of Foreign Affairs Committee that economic factors, particularly widespread Arab resentment that oil wealth was not more equitably distributed, had played a role in the dynamics leading to the Gulf war and would remain one of the primary “sources of conflict” in the region. To ease these tensions, he proposed the creation of an economic organization through which oil-rich states could fund the reconstruction and development of their poorer neighbors. [1] The following day, Baker advocated the creation of a multinational “Middle East Development Bank” to attain these objectives. [2]

Baker’s proposals were among several ambitious plans for economic reconstruction following the victory of Operation Desert Storm. After a March 5 meeting in Damascus of the Arab coalition that had arrayed against Iraq, Egyptian delegates emerged with their own plan for the oil-rich Gulf states to contribute $15 billion annually to their poorer neighbors. Arab nationalists, long the harshest critics of income inequality in the region, floated still other proposals. [3]

All these proposals presumed that the treasuries of Arab oil-exporting states were brimming with dollars. After all, uncertainty over the future of the Gulf had driven crude oil prices from about $15 per barrel at the beginning of July 1990 up to $40 per barrel by September. Because Iraqi and Kuwaiti oil was held off the market, Saudi Arabia and other OPEC members were able to increase production dramatically without undercutting prices. Business Week surmised that expanded pumping and higher prices could earn Saudi Arabia as much as $45 billion in 1990 ($20 billion more than in 1989), and perhaps $65 billion in 1991. [4] Surely this would be enough to repair the immediate Gulf war damage and still fund a more prosperous and equitable regional economy.

This ebullience in Washington and in some Arab capitals was misplaced. Even before the US began to bomb Iraq on January 16, 1991, the bills being presented to the Gulf states were outstripping their revenues. There was no “windfall” of petroleum profits waiting to be redistributed. For anyone who “follows the money,’ it is evident that the Middle East as a whole will be much poorer in the 1990s than in the 1980s.

What Price Victory?

Those in Washington and elsewhere who hope that the Gulf war will midwife a “new economic order” in the Middle East pin much of their hopes on contributions from Saudi Arabia — historically, the largest oil exporter, with the largest petroleum reserves, highest cash income earnings and most pivotal political position of any Gulf state.

Saudi Arabia emerged from the fighting relatively unscathed. A handful of Scud missiles hit Riyadh; Iraqi artillery set fire to the refinery at Khafji; and oil spills threatened desalinization plants. Yet the Saudis are finding their economic assets drained by the Gulf war. The day Iraq invaded Kuwait, business confidence in Gulf investments plummeted. The crisis dashed Saudi hopes that foreign concerns would invest $5-6 billion in new petrochemical works at Jubayl. [5] The government had to cancel a dozen major projects as $10 billion of anticipated investment dried up. [6] The Saudi stock market crashed. Saudi citizens began converting their savings accounts into dollars in preparation for fleeing the region, triggering a run on most banks. Eleven percent of all bank deposits were withdrawn, and the government had to pump $4.4 billion into the financial system to keep it from crashing. [7]

The Saudis initially had to house and feed 200,000 Kuwaitis who fled to the kingdom. [8] They also paid the air fare to send home hundreds of thousands of Asian “guest workers” who had fled Kuwait, and footed the bill for thousands of Saudi citizens who fled Eastern Province towns like Khafji. The cost of these emergency measures may have totaled as much as $3-4 billion. [9]

To prepare the kingdom for war, by the end of 1990 Riyadh had spent at least $13 billion on new arms purchases. It also expects to be offered an additional $17 billion American arms package (though this may be scaled back under Congressional pressure). [10] The kingdom stepped up troop training and is contemplating doubling the size of the armed forces, both of which will add to the bills. [11]

In a September meeting with James Baker, King Fahd agreed to cover the full “in-country” costs of US troops dispatched to the kingdom, including fuel, water, transportation, and rented or rapidly constructed housing. The US Treasury did not keep tabs on these expenditures, but American officials estimated they ran upwards of $500 million a month through the end of 1990. [12] When war broke out in January, the king pledged an additional $13.5 billion to cover allied military costs through March. [13]

At his meeting with Baker, King Fahd also agreed to contribute $3-4 billion to a special US Treasury fund to help countries like Turkey and Jordan bear the consequences of supporting the UN Security Council embargo against Iraq. [14] Riyadh gave $1.5 billion in loans and grants to Egypt and, together with Kuwait, wrote off $6.6 billion of Cairo’s debts. The Saudis also made a subvention of at least $1 billion to Syria. [15]

Not all of these costs had an immediate impact on the Saudi budget. Riyadh has taken its time to meet its cash pledges to support the American military and to aid states hurt by the embargo of Iraq, although it began making in-kind contributions (including $180 million a month in jet and diesel fuel) immediately. Some of the Egyptian debt never would have been repaid in any case. Still, using even the most conservative estimates, the cash cost of coping with the Gulf crisis drained $27.9 billion from the Saudi treasury by the end of 1990. By August 1991, Saudi Arabia will have spent some $64 billion on the war and associated costs, and some well-placed Saudis estimate the sum may actually reach as high as $80 billion. [16]

The Oil Windfall

In actuality, the windfall from oil exports proved much smaller than the projected $45-95 billion. [17] When Iraq invaded Kuwait, Saudi Arabia was producing oil at a rate of 5.6 million barrels per day (bpd). As soon as the UN imposed its embargo on Iraqi and Kuwaiti exports, the Saudis — at American urging — began to expand their own production to cover the shortfall. But it was not until November that Saudi production reached 8.7 million bpd, and Riyadh spent $4.7 billion taking old oil facilities out of mothballs or constructing new ones. [18] Even then, all that production was not exported. The Saudis themselves consume 800,000 bpd and they supplied at least 300,000 bpd free to allied troops. [19] (Once combat began in January 1991, Riyadh had to import jet and diesel fuel to keep up with allied military consumption.) The actual volume of Saudi exports stayed well below the levels assumed by many Western economists.

More importantly, the profit which the Saudis earned on each barrel exported was much lower than commonly assumed. Although prices in the international oil exchanges peaked at $40 per barrel in early October, they steadily retreated from then on, staying below $30 from December onwards. The day after US fighter jets began bombing Iraq, prices collapsed by $10 and have hovered around $20 per barrel ever since. [20]

International oil price quotations give an exaggerated sense of Saudi profits in any case. A significant share of Saudi oil is sold on long-term contracts, which may not reflect short-term jumps in international prices. The prices quoted by international exchanges are usually for high-quality “sweet” oils, while most Saudi exports consist of less valuable “sour” crudes. In September, when the price for sweet oil on the New York Mercantile Exchange hit $40 per barrel, the bulk of Saudi exports were earning only $28, which includes $1-3 per barrel in production and delivery costs. [21]

Most petroleum industry analysts agree that the actual Saudi receipts from oil sales in 1990 totaled $40-41 billion. [22] This represents $14-16 billion more than the kingdom had expected to earn from oil sales before the Gulf crisis erupted. The expenses Riyadh incurred as a result of the crisis exceeded the value of this windfall by at least $10 billion.

Saudi planners knew that they were running a large deficit in 1990, but hoped they might make this up in 1991. If they could earn $20 per barrel and export 8 million bpd, by December 1991 they would earn $58.4 billion dollars — enough to cover a $31 billion operating budget and most of the crisis-related expenses. [23]

Will oil prices remain high enough for Riyadh to earn $20 per barrel? Saudi production expansion guaranteed there was no drop in world oil supply (or even in strategic stockpiles) during 1990. Recession and mild weather in the industrialized countries actually reduced oil demand in the first quarter of 1991 by 0.5 percent. [24] Iraq and Kuwait will need oil revenues to rebuild their societies as soon as possible. [25]

World oil supplies could well exceed demand for the foreseeable future. There is not much chance that OPEC can get its members to reduce production enough to avoid this glut. Saudi Arabia proclaims to want a price of $21 per barrel, but does not appear ready to accept a significant decrease in its new market share. [26] Prices could well drop below $15 a barre1. [27]

If oil prices do fall back to pre-crisis levels, the Saudis will have to cover war-related expenses out of assets. These are not negligible: During the oil booms of the 1970s the kingdom laid away billions of dollars in sundry funds and accounts. But for much of the last decade, Riyadh had been tapping accounts to fund current expenses and budget deficits. The 1990 Saudi budget had projected $38 billion in outlays but only $28 billion in oil revenues; $6.7 billion of the difference was to be financed by tapping the reserve funds controlled by the Saudi Arabian Monetary Agency (SAMA) and by issuing bonds. [28]

No outsider knows for sure just how large SAMA’s assets are. Optimists claim that it had $50-70 billion in solid assets in June 1990 — enough to cover the costs of the Gulf crisis. But pessimists (including Zaki Yamani) suggest that these figures include non-performing loans to Iraq and Egypt, leaving the real value of SAMA funds closer to $25 billion. If this is true, SAMA’s liquid assets could potentially be wiped out by the confrontation with Iraq. [29]

Saudi Arabia is not about to become a “poor” country, but the costs of the Gulf war will exceed all of its petrodollar windfall and most of its liquid assets, compelling Riyadh to borrow abroad. In early February 1991, when Iraq dumped oil from Kuwaiti terminals into the Gulf to imperil Saudi Arabia’s desalinization plants, Riyadh reacted cautiously: The kingdom lacked the money to contemplate any massive effort to clean up the spill. On February 13, the Washington Post noted that the Saudis were preparing to make major sales of their holdings in US government securities, and later that month Riyadh borrowed $3.5 billion as a loan syndicated by J. P. Morgan. [30]

The war’s economic burden will weigh less heavily on Saudi Arabia than on most of the other oil-rich Gulf states. The emir of Kuwait, like King Fahd, has been making handsome contributions to allied war coffers. He also has had to pay $500 million a month to sustain the Kuwaiti refugee population. [31] Estimates of the cost of rebuilding Kuwait now generally start at $60 billion. [32] Kuwait has earned no oil export revenues since August 2, and Iraqi troops dynamited 60-85 percent of its wells before they withdrew. It may take 5-10 years to restore the emirate’s oil production to pre-war levels. [33] The costs of rebuilding the country will have to be paid largely by liquidating part of Kuwait’s $90 billion portfolio of foreign assets and taking out sizable loans secured against the rest. [34]

Iraq has been economically demolished by the war. On August 2, Baghdad was already shouldering a $23 billion fiscal deficit and $80 billion in foreign debts. [35] Once the UN embargo was imposed, it began to lose $1.25 billion a month in oil revenues. [36] Allied air strikes rapidly erased much of its economic infrastructure: bridges, power plants, factories and refineries. Now that the war is over, Baghdad may find commercial bankers unwilling to roll over old credits, much less extend new ones. Foreign firms, which built many of Iraq’s industries, may be reluctant to resume work in a country where their employees have been held as “guests by force.” As for Iraq’s foreign assets, confiscated shortly after the invasion of Kuwait, the allies plan to hold them as part of the reparations owed to the victims of Saddam’s invasion.

Some of the smaller states of the southern Gulf — Qatar and the United Arab Emirates — have been hit less hard by the war. [37] But even before the conflict, their oil revenues were not large enough to make a major contribution to the economic development of the region. The US proposal to orchestrate the economic reconstruction of the region through a Middle East Development Bank, then, suffers from a major flaw: No state in the region really has the assets necessary to fund such an institution.

Regional Consequences

The diversion of oil profits into the Gulf war and reconstruction (and away from development projects) is going to have a major impact on the economies of the Middle East for years to come. It is too soon to make hard predictions, but certain broad effects are already apparent.

Within the Gulf states themselves, the war has dealt a body blow to the one economic sector — apart from oil — which had shown potential: finance. In March 1990 Offshore Banking Units (OBUs) in Bahrain held $73.3 billion in deposits and seemed to be on the verge of recovering from the problems which had afflicted them in the 1980s. [38] When Iraq invaded Kuwait, thousands of their depositors withdrew $13.7 billion in assets (21 percent) and sent them abroad. Local commercial banks lost 15 percent of their deposits. [39] A similar run consumed 11 percent of Saudi bank deposits, and in the UAE withdrawals rose to 25 percent of liabilities. Kuwaiti banks ceased operations entirely. Iraq looted 365 million Kuwaiti dinars in securities and $800 million in gold which had been deposited with the central bank of Kuwait. [40]

Rapid government intervention prevented any of these banks from going bankrupt, but this cannot brighten the prospects for the region’s financial system. The rapid rise of military spending by Gulf governments makes it clear there will be no “excess funds.” Indeed, local regimes began to pare back their normal menu of investment projects, leaving an even smaller scope for banking operations. Japanese and Western financiers are reluctant to deal with Gulf banks, arguing that political uncertainties and shrunken assets make them unreliable partners. No one expects a collapse of Gulf financial institutions, but bankers themselves foresee a period of retrenchment in which larger and more solvent firms will swallow their competitors — and the survivors adopt more conservative and modest lending policies. [41]

The Gulf banks had been one of the major channels through which petrodollars had percolated from the Gulf into the rest of the Arab world. Aid from the oil-rich countries to their poorer neighbors had been declining throughout the 1980s. As the Gulf states divert their revenues to meeting war and reconstruction costs, aid will probably become even less available. Aid to states which appeared sympathetic to Iraq was suspended almost immediately. Saudi Arabia and Kuwait completely halted their contributions to the Palestine Liberation Organization, which had been running over $100 million per year. [42] Jordan, too, quickly lost the $300 million in aid it had been receiving annually from Iraq and Kuwait, and now Riyadh also has cut its support, suspending concessionary oil shipments to Amman (worth $1 million per day and representing half of Jordan’s consumption). It also suspended economic aid to Amman, which had totaled $200 million annually and supplied 15 percent of the state budget. [43]

Restricting aid to the Palestinians and Jordan freed up monies which the Saudis could then reallocate to countries which supported the kingdom in the Gulf conflict — chiefly, Egypt, Syria and Morocco. A similar change, benefiting Saudi allies while punishing “unfriendly” states, was evident in the most important single mechanism for redistributing petrodollars: labor migration. Before the crisis, all of the oil-rich Gulf states had employed large numbers of expatriate — largely Arab — workers who provided professional services (teachers, doctors, lawyers, engineers) or performed manual labor (construction, agriculture) which local citizens either could not or would not. Remittances formed a major source of hard currency for their home countries. The invasion of Kuwait massively disrupted this system. Half of the Palestinians and most of the Jordanians who were working in Kuwait fled the country after August 2, and those who remained could not get money out. The Palestinians of the West Bank lost access to $100 million a year. In Jordan, half of the $800 million Amman derived from remittances each year came from workers in Kuwait. [44]

These disruptions were compounded when Qatar and other Gulf states began to restrict the entry of Palestinian workers, widely suspected of pro-Iraqi sympathies. In September, Saudi Arabia punished Yemen for its neutral policy on the war by requiring Yemeni workers in the kingdom to find Saudi sponsors or face expulsion. By November 700,000 had already returned to Yemen and another 30,000 were leaving Saudi Arabia every day. This put an end to $1-2 billion a year in remittances, a loss of 20 percent of the country’s foreign currency receipts. (Saudi, Iraqi and Kuwaiti economic aid to Yemen also ended.) [45]

The interruption of workers’ remittances also hit Egypt hard. At the beginning of 1990, some 150,000 Egyptians had been working in Kuwait and another million in Iraq. After Iraq invaded Kuwait, over 400,000 Egyptians fled these countries, costing Egypt an estimated $1.1 billion in annual hard currency revenues. [46] Saudi Arabia supplied Cairo with aid to assist in relocating refugees and issued some 684,000 work visas to Egyptians by early 1991. [47]

The substitution of Egyptian workers for Jordanians, Palestinians and Yemenis in Saudi Arabia and Kuwait will reinforce the same pattern evident in the reallocation of aid from those two states. Egypt and Syria may enjoy some relief from the economic constraints which had plagued them in the 1980s. Jordan, Yemen and Sudan, which the Saudis felt had shown too much sympathy for Baghdad, will find their economic problems enormously aggravated.

This does not bode well for any “new economic order” in the Middle East. The Gulf war has made the region as a whole much poorer than it was in 1989, and the inequalities between the “have and have-not” states are likely to become even more pronounced. The growth of poverty and income disparities will translate into popular resentment and sooner or later will fuel political conflict. Instead of a “new order,” the future probably holds a return to “the Arab cold war.” [48]


[1] New York Times, February 7, 1991.
[2] Washington Post, February 8, 1991.
[3] Financial Times, March 8, 1991; al-Majalla, October 15, 1990, pp. 16-17; and al-Ahram al-Iqtisadi, February 11, 1991, pp. 12-13.
[4] Business Week, September 17, 1990, p. 30. Other sources predicted Saudi revenues for 1991 might run as high as $93 billion; see Middle East Economic Digest, October 19, 1990, pp. 4-5.
[5] Financial Times, August 21, 1990.
[6] Washington Post, August 21, 1990.
[7] Middle East Economic Digest, September 21, 1990, pp. 26-27, and October 19, 1990, p. 36.
[8] Financial Times, December 12, 1990.
[9] Washington Post, August 21, 1990; and Middle East Economic Digest, August 31, 1990, pp. 18-19.
[10] Financial Times, December 12, 1990.
[11] Financial Times, December 12, 1990; and Middle East Economic Digest, October 19, 1990, pp. 4-5.
[12] Washington Post, September 7, 1990; and New York Times, September 7, 1990.
[13] New York Times, February 11, 1991; and Middle East Economic Digest, February 8, 1991, p. 8.
[14] Wall Street Journal, November 6, 1990; and New York Times, February 11, 1991.
[15] New York Times, December 6, 1990; and Financial Times, October 30, 1990.
[16] Washington Post, April 3, 1991.
[17] For an example of such optimism, see New York Times, September 7, 1990.
[18] Middle East Economic Digest, December 14, 1990, p. 19.
[19] Financial Times, December 20, 1990.
[20] Washington Post, January 18, 1991.
[21] Washington Post, January 4, 1991.
[22] Financial Times, January 2, 1991.
[23] These crisis-related expenses would include not only the $10-20 billion deficit left over from 1990, but the $13.5 billion the Saudis committed to support American military operations for the first three months of 1991, and the $17 billion in American arms purchases still pending.
[24] Financial Times, February 6, 1991.
[25] Middle East Economic Digest, November 2, 1990, p. 15.
[26] Middle East Economic Digest, February 1, 1991, p. 5; and New York Times, February 11, 1991.
[27] New York Times, October 19, 1990; Wall Street Journal, December 10, 1990. It is plausible that OPEC prices may begin recovering by the year 2000; see Economist, August 4, 1990, pp. 51-52.
[28] Middle East Economic Digest, January 12, 1990, p. 31, and October 19, 1990, pp. 4-5.
[29] Euromoney, September 1990, pp. 70-76.
[30] Washington Post, February 13, 1991.
[31] Financial Times, December 12, 1990.
[32] Wall Street Journal, February 27, 1991; and New York Times, February 27, 1991.
[33] New York Times, March 6, 1991.
[34] Business Week, January 21, 1991, pp. 44-45; and Middle East Economic Digest, February 8, 1991, p. 6.
[35] Middle East Economic Digest, January 12, 1990, p. 26; and Washington Post, November 9, 1990.
[36] Financial Times, August 7, 1990; and New York Times, February 6, 1991.
[37] The Middle East (January 1991), pp. 25-26.
[38] The key problems had been a) too many banks offering similar services operating in a tiny market, b) a heavy reliance on loans to developing countries which had performed poorly, and c) problems collecting debts within Gulf countries because of impediments raised by Islamic law.
[39] The Middle East (January 1991), p. 33.
[40] Financial Times, October 4, 1990; and al-Majalla, January 23-29, 1991, pp. 46-48.
[41] For a slightly more upbeat assessment — which suggests that local commercial banks will survive while the OBUs take a beating — see Middle East Economic Digest, February 8, 1991, pp. 11-12.
[42] Financial Times, December 28, 1990.
[43] New York Times, September 21, 1990; Financial Times, October 1, 1990; and New York Times, October 21, 1990.
[44] Al-Quds, September 26, 1990, cited in FBIS September 27, 1990, p. 27; and al-Ra’y, September 20, 1990, cited in FBIS, September 20, 1990, pp. 33-36.
[45] New York Times, October 22 and October 26, 1990; and Middle East Economic Digest November 30, 1990, pp. 4-5.
[46] Financial Times, August 23, 1990; al-Majalla, September 12-18, 1990, pp. 40-43; and Middle East Economic Digest, January 25, 1991, p. 18.
[47] New York Times, February 5, 1991.
[48] Malcolm Kerr coined this term to describe the feud between Arab nationalists and pro-Western monarchists which plagued the region during the 1960s. See his The Arab Cold War: Gamal Abd al-Nasir and His Rivals, 1958-1970 (New York: Oxford University Press, 1971).

How to cite this article:

Yahya Sadowski "Arab Economics After the Gulf War," Middle East Report 170 (May/June 1991).

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