Excerpted from a preface, by Hans Landsberg, Director of RFF's Energy and Minerals Program, to a forthcoming RFF publication by Donald Wells.
Perhaps it is just as well that the research community does not concern itself with thinking up all the potential questions to which answers may someday be needed. Some rule of relevance and timeliness does seem to order the agenda. But at times events move so rapidly that scholars are left far behind, unable to come up with good answers to burning questions. Conjecture, speculation, and the imaginative drawing of analogies then take the place of careful research.
The Arab oil embargo and the drastic increases in price associated with it are such events. They have caught the scholarly community with its cupboard bare, or at best only spottily occupied. Among the many questions still to be answered is the degree to which the rapid and large accumulation of oil revenues will affect monetary and eventually economic stability the world over. While new jargon has quickly emerged and one talks glibly about "petrodollars" and of "recycling" the swollen treasuries of the oil-exporting countries, the knowledge on which the discussion rests is pretty thin.
An important aspect of the debate is the capacity of the Arab nations to absorb the revenues through expanding consumption by their citizens as well as their investment in productive facilities. "Absorptive capacity" is a concept long employed among students of foreign aid and development economics generally. It relates to the degree to which a country can, in an orderly manner, utilize an inflow of funds. In the case of some of the Middle Eastern oil-producing countries, the expected rise in the volume of such funds is so steep that neither the existing literature nor the country's own experience is of much help in establishing a firm base on which to build forecasts. Even after domestic absorption, there will still be a substantial amount of cash available for use outside the exporter countries. The volume of this cash will be a critical factor in judging prospects for world economic stability.
Donald Wells has wisely chosen Saudi Arabia as the key country in this picture, given the contrast between the vast potential for expanding oil production and the modest economic stage of development. In developing his thesis that Saudi Arabia's absorptive capacity is greater than the casual observer would suspect, Wells leans heavily on an analysis of past budget appropriations and expenditure records and on evidence of unmet needs of the country's population. I use the term "needs" advisedly, since in the absence of matching income these needs have not attained the dimensions of "demands." This, however, is the transformation that Wells expects in the future, largely through government intervention via enlarged imports of consumer goods, social services, housing, and—last but not least—military hardware. In the investment area, agricultural infrastructure and oil-related industry rank high as potential outlets.
The net result of this absorption is a large but not overwhelming volume of funds seeking employment abroad. However, since one of the major factors contributing to a lower surplus is a large military buildup, it is hard to know whether or not to characterize the outlook as salutary. But that is not Wells's task. What he has done is make available a substantial volume of data and supplied ways of drawing conclusions from them. It will be up to the reader to judge their relevance as well as their usefulness for further analysis.
A version of this article appeared in print in the September 1974 issue of Resources magazine.
