BY ED FELIEN
Up until the middle of 2014 the price of oil had been relatively stable at around $110 a barrel. But then the Saudis started over producing and flooding the market with cheap oil. The price of oil fell to under $50 a barrel.
What has been good news for consumers has been bad news for oil stocks, and the stock market lost 5% of its value last year.
The Saudi economy has been in a tailspin. There was a record $98 billion deficit last year and a projected $87 billion deficit this year. They’re starting to draw on their financial reserves. They own $290 billion in U.S. treasury bonds. When they start to cash those in that could put pressure on the U.S. dollar. In a worst case scenario, a run on U.S. treasury notes by Saudi Arabia and China could weaken the dollar and depress the stock market. When those countries start wanting back the money they lent us, then everything in America would be worth just a little less. The U.S. economy could probably survive it, but we’d notice it.
The Saudis have had one of the highest standards of living in the Middle East. A year ago, the new king, Salman, gave away $30 billion to celebrate his new reign. But now the bills are coming due, and Saudi Arabia has recently raised the price of domestic fuel by 40%. They’re also raising the price of water and electricity. The finance ministry is considering plans to raise charges on public services and apply a sales tax on all purchases.
The population of the kingdom was 4 million in 1960. Today it’s over 30 million. It provides all its citizens with housing, education and health care.
There has always been a very clear social contract: The kingdom will take care of you, if you don’t criticize the kingdom. And to bolster its authority the kingdom enforces a state religion that is the most conservative form of Islam. It is only recently that women have been allowed to vote and run for small elective offices. They still can’t drive a car. They’re allowed to work in retail because the authorities finally concluded it was improper for a man to sell underwear to a woman.
What happens when the goodies stop coming, when there’s no more cash and things start costing more? That’s going to cause strains on the social contract. The power of the king will seem less absolute, and ordinary people will begin to demand more of a say in their government.
How did the Saudis get into such a situation?
Why did the Saudis lower the price of oil? The only explanation would be that they wanted to drive out the competition. By lowering the price of crude oil, the Saudis have stopped the production of tar sands oil in Alberta. Edmonton is becoming a ghost town. North Dakota has stopped booming and started busting.
But this is only a very short-term solution. The oil will still be in the tar sands, and eventually it will be profitable to extract it. And, yes, they’ve temporarily made it less attractive to invest in renewables. But the wind and sun will still be there tomorrow.
No matter how powerful those in control of Saudi Arabia think they are, the kingdom cannot shovel sand against the tide or stop the wind and the sun. This was probably their last desperate act to save their world before it slips away from them forever.
