Saudi Arabia seems to have made its peace with the direction of the price of a barrel of crude oil, at least for now.
The kingdom has faced hard economic times lately due to the rapid decline in oil prices, which have gradually lost 75 percent of their value. From the high of $100 per barrel in the summer of 2014 to plummeting to their lowest levels in over a decade in February, 2016, it’s become clear that oil producers and exporters will need to anticipate the direction of the market to prosper.
Earlier this year, a story by Mirror UK writer Kirstie McCrum humorously noted that an actual barrel cost more than a barrel of oil.
The falling oil prices came as a result of a global production glut and stagnating demand, and though the NASDAQ notes a recent surge in the price, it has still stayed in the low range of $20 to $40 per barrel.
Saudi Arabia has been the world’s largest exporter of crude oil for decades. Exports in 2014 alone were worth $268.2 billion. But being reliant on the production and export of a single commodity has made the kingdom’s economy vulnerable to dramatic rises or falls in the price. The Saudis campaigned for a production freeze in January, when oil was spiraling down toward the $20 mark, with an eye toward keeping it in the range of $20 to $40 a barrel.
One motivation for refusing an outright production cut to raise prices was to prevent American frackers from further undermining the Saudi Arabia’s price-making power by continuing to make the U.S. the world’s largest petroleum producer, a crown it took from Russia in 2014 according to data from Bloomburg.
However, Forbes contributor Panos Mourdoukoutas quoted a commentator predicting specific foreign policy motives for Saudi Arabia’s cautious “middle ground” approach to prices. Namely, that high oil prices would help its geopolitical rivals Russia and the newly-unsanctioned Iran.
“The Saudi’s don’t care about frackers at this point. What they do care about is Russia and Iran being able to fund destabilizing groups that threaten their regime. Keeping oil down helps the U.S. and somewhat prevents Russia and Iran from funding these groups to the point they can win. The Saudi Royals don’t want to give up power just yet. And the only way to do that at the moment is to keep oil low.”
Mourdoukoutas himself echoed both these evaluations of Saudi motives when he stated in a separate article for Forbes that Saudi Arabia would not let oil go above $40 a barrel for the foreseeable future.
“Once, Saudi Arabia liked higher oil prices. The higher the better, as it will bring more revenues to the royal coffers. That was back in the old good days when Saudi Arabia was the world’s largest oil producer and OPEC’s boss. Nowadays, Saudi Arabia still likes high oil prices. But not too high, not that much above $40 that is.”
So in this brave new world, oil prices that are too high are bad for the kingdom. But prices that are too low are no better, as they make balancing the Saudi fiscal and social budget enormously difficult. Revenues have been declining and turning into losses — just last year, the country posted a $90 billion dollar deficit because of lower oil prices.
Of course, the Saudis can survive a long period of budget deficits using their reserve funds, but this is at best a temporary solution. Saudi social programs also cannot be rolled back without potential social unrest, and their cost cannot be mitigated to any significant degree. A long-term financial solution must be found if the kingdom hopes to survive the ongoing global price war, which even Ali al-Naimi, their own petroleum minister, told the Wall Street Journal in February could drive down oil to $20 a barrel.
Analysts predict that oil prices will rise significantly before the end of the year, however a return to the highs of 2013 is not expected.
[Photo by David McNew/Getty Images]