The depletion theory of exhaustible resources. A case study of Saudi Arabia.

The overall aim of this study is to examine the optimal depletion policy for Saudi crude oil in the light of its impact on the economic process and the absorptive capacity of the country in order to judge to what extent the rate of oil depletion is optimal. This, of course, raises a question about the future of the Saudi economy after the oil has been depleted and entails some policy implications. In order to achieve the main objective, it is useful to examine the depletion theory in general and the depletion of oil in particular with its application to the Saudi economy through the estimation of the government's goal function. A non-linear regression model and a discount form of a dynamic recursive linear model will be used to estimate the future demand for Saudi crude oil. A price leadership model will be presented when discussion is to be made about the structure of the oil market. The impact of oil revenue on the Saudi economy will also be discussed to point out the importance of oil revenue on economic planning and foreign exchange earnings. Finally a macroeconomic model will be presented to measure the impact of oil depletion and its subsequent revenue on the Saudi absorptive capacity. A summary and some concluding remarks will then follow.