Saudi Arabia’s Economy Spirals Downward With Dropping Oil Prices

Saudi Arabia’s Economy Spirals Downward With Dropping Oil Prices
Oil prices recorded from NYMEX, New York Mercantile Exchange (courtesy of nasdaq.com)
Oil prices recorded from NYMEX, New York Mercantile Exchange (courtesy of nasdaq.com)

The price of oil, just like that of any other commodity, is driven by supply and demand. In the past decade, countries with rapidly developing economies (i.e. China) presented expanding markets for oil. Since 1982, OPEC, the Organization of the Petroleum Exporting Countries, was able to maintain mandatory quotas for its members. Oil prices reached unprecedented highs of over $140 per barrel [1]. In 2008, however, the global economic recession led to the collapse of the oil industry. The fiscal year of 2014-2015 marks the oil industry’s crash, with global oil prices having more than halved since 2013 [2]. At the same time, the U.S. as well as Russia and other OPEC countries have increased production in order to maintain their market share.

Saudi Arabia holds 18 percent of the world’s proven oil reserves and will be severely affected by a drop in revenue. Oil, the traditional contributor to the Saudi Arabian economy, is expected to constitute about 80 percent of the government’s revenue, which is down from about 90 percent from previous years [3].

In the past, Saudi Arabia’s surplus budgets have allowed it to support generous public spending, including large gasoline subsidies to its citizens and zero income taxes [4]. Saudi Arabia has transitioned from a government with a budget surplus of 7 percent to a projected deficit of 16 percent. Saudi Arabia’s capital reserves are shrinking at 100 billion dollars a year. IMF has issued a warning that OPEC countries in the Middle East including Saudi Arabia, Oman, and Bahrain will run out of cash within the next five years if oil prices do not recover [5].  

by Sara Dasgupta ’19