When we think of Saudi Arabia we typically think of oil, wealth and power. So, why are the Saudis scared these days? The price of crude oil has plummeted from $100 a barrel in mid-2014 to less than $30 a barrel today. Saudi Arabia is burning through its cash reserves in an effort to maintain the social benefits that help maintain social stability. In fact The Huffington Post is writing about Saudi Arabia facing unprecedented choices for survival.
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Oil prices are plummeting – and Saudi Arabia could devolve into chaos as a result. While cheap oil is not a bad thing per se, it can trigger substantial economic disruptions. The United States is suffering job losses in the oil sector that ultimately outweigh the benefits of cheap energy, and a few oil exporters like Venezuela are visibly melting down. Less visible, but more concerning, is the Kingdom of Saudi Arabia. There’s a lot to suggest that oil will stay close to $30 a barrel for a long time (more on this below), and Saudi Arabia simply cannot weather this storm – at least not without making major social and economic changes.
The investing world was shocked recently when a Saudi crown price publically endorsed selling shares of Saudi Aramco, the Saudi national oil company which controls more than 15 percent of proven world oil reserves. Saudi Arabia was the largest producer in the world until the advent of fracking technology increased US production. In fact US production of oil shale deposits is partially to blame for low oil prices which again is why the Saudis are scared.
What Will Happen to Saudi Arabia?
The Saudi royal family has been buying the allegiance of its people for decades. Their concern is that simmering social unrest will boil over if the government reduces the roughly $260 billion a year it pays in social benefits to its 28 million people. Already a handful of austerity measure have been introduced. CNBC asks could Saudi Arabia’s austerity spark social turmoil?
Four years after the Arab Spring, the lynchpin of OPEC faces more social unrest, as Saudis digest unaccustomed austerity amid plummeting oil prices, costly military intervention in Yemen and increased tension with Iran.
“With a decline in social spending and a reduction in subsidies comes the risk of rising domestic turmoil, as highlighted by the Arab Spring in 2011 when high inflation, lower growth and inequality resulted in mass demonstrations across the Middle East,” Alberto Gallo, head of global macro credit research, said in a research note last week.
“Prolonged low oil prices combined with escalation of tensions between Iran and Saudi Arabia could lead to a break out of violence in the eastern province of the kingdom, where most of the Shiite population is concentrated,” Garbis Iradian, chief economist for the Middle East and North Africa at the Institute of International Finance, told CNBC.
The Saudis are involved in a civil war in neighboring Yemen and funding rebel groups in Syria. If unrest breaks out inside the country on a large scale it could result in the sort of chaos that would threatens oil production.
What Will Happen if the Saudis Don’t Pump Oil
The spot price of crude oil is determined by a few million barrels a day. If the number two producer in the world slows or stops production the effect on the price of oil would be instant and dramatic. Why are the Saudis scared? It is not because of cheap oil but because the risk of losing power and seeing their wealthy, powerful oil producing country descend into chaos. We should be concerned that chaos in Saudi Arabia or a war with Iran could send oil prices to $250 and gasoline to $7 a gallon. See what Oil Price says about this.
Dr. Hossein Askari, a professor at The George Washington University, told Oil & Gas 360 that a war between the two countries could lead to supply disruptions, with predictable impacts on prices.
“If there is a war confronting Iran and Saudi Arabia, oil could overnight go to above $250, but decline [back] down to the $100 level,” said Askari. “If they attack each other’s loading facilities, then we could see oil spike to over $500 and stay around there for some time depending on the extent of the damage.”
On the other hand the U.S. oil sector would recover very nicely!