In October 2015, the International Monetary Fund released an economic outlook report,
stating that current cheap oil prices could lead to economic downturn in the Gulf Coast.
As the world’s largest producers of oil, this slowdown is predicted to drain Saudi
Arabia’s cash reserves within five years.
So, we wanted to know, is Saudi Arabia headed for economic collapse?
Well, the problem initially began in 2014.
Economists noted that China’s demand for oil decreased that year, and as the second
largest oil consumer in the world, this began a slow global drop in oil prices.
Brazil, Russia, and India also lowered their oil intake, accounting for four of the top
7 oil consumers.
At the same time, the United States and Canada doubled down on their own production, using
fracking and unconventional oil reserves to lower their amount of imported oil.
This left a relative glut of oil being produced for export, and where there is lower demand,
prices usually drop.
However, OPEC, the organization controlling a majority of the world’s oil, would usually
respond to similar situations by cutting oil production, thereby increasing demand and
prices.
But not this time.
In November 2014, OPEC counterintuitively increased oil production, which some say was
a response to the US’s new efforts.
By dropping the price, they attempted to make it unprofitable for the US to extract unconventional
oil.
But today, that low cost oil is threatening to drain worldwide cash reserves.
Already, the Middle East, North Africa, Afghanistan, and Pakistan are expected to lose out on 360
billion dollars in oil revenue.
And while Saudi Arabia has reserves of about $750 billion dollars, they would need to sell
oil at $106 a barrel in order to avoid dipping into those reserves.
At the current price of less than $50 a barrel, economists have predicted that Saudi Arabia
could run out of cash in five years.
But despite the grim forecast, one of OPEC’s leading countries, the United Arab Emirates,
has called the $50-dollar-a-barrel oil a “gift to the world”.
They say that although they’d like more expensive oil, it could hurt global economic
growth.
Still, some economists suggest that as the US continues to compete with OPEC oil, the
price could drop further, even down to $10 a barrel.
While this would be incredibly difficult for the US to sustain, oil revenue only accounted
for 1.6% of their GDP in 2011.
Meanwhile, 80% of Saudi Arabia’s economy relies on oil revenue.
And while it may hurt them in the coming years, it seems unlikely that they’ll bankrupt
themselves in an attempt to weaken US oil.
While the IMF’s report does suggest that Saudi Arabia is stretching their reserves
to remain competitive, their diversification efforts, and a long period of oil domination,
suggests that they’ll probably stay financially stable.
Oil production is not just a problem for Saudi Arabia, but for the whole world.
To find out how much oil the earth has left, check out our video up at the top.
To find out the interesting story behind why big oil is fighting over a prairie chicken,
check out Seeker Stories’ video below.
Thanks for watching!
Don’t forget to like and subscribe to TestTube News down below.