Monday, October 17, 2016

Oil prices and Saudi Economy

Since the oil prices have come down from nearly 140 dollars a barrel to a rock bottom below 30 during the course of two years (now it is hovering around 50), many oil rich nations are having a hard time adjusting to reality. The countries mostly dependent on oil prices are Saudi Arabia, Venezuela, Nigeria, Iraq and other oil based economies but nowhere the adjustment has been harsh in countries like Saudi Arabia and Venezuela, I will come back to the sorry state of affairs in Venezuela, but let me first tackle what the oil prices has done to the reality adjustment for the Saudi Government and its people. Almost more than 80 percent of the revenues are derived from Oil to finance the budget of the Saudi Government who used to provide generous subsidies to their people and insulate them from the high prices. I have been keenly following developments in Saudi Arabia and the state of financial affairs are not very healthy although to acknowledge that they have started to realize that they have to adjust to the new oil prices. First the Saudis tried to ramp up the production of oil so that the oil glut caused by the Oil Shale boom in the United States and also the arrival of sanctions free Iran will vanish or reduce and they will be able to dictate the oil prices again like they did in the 1970s but they really underestimated the innovative Oil shale producers who changed quickly whenever the prices of oil rose drilling more oil and driving the oil prices down. Also Iran to a lesser extent dependent on Oil were in no mood to reduce their production after so many years and so we have an oil glut despite the fact that the Iraqi and Libyan and also Venezuelan oil is not coming that much on the market.

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