Saudi Arabia Snubs OPEC and Embraces Low Oil Prices

By Published on July 11, 2016

Saudi Arabia’s energy minister announced Sunday his country will continue keeping the price of oil low.

The statement is further evidence the country won’t cut oil production to raise the global price. Oil is cheap today by historical standards, selling for a mere $45.20 per barrel. That’s less than half the price it was a mere two years ago.

“The Kingdom secures the flow of oil supplies as it retains a spare production capacity,” Khalid al-Falih, the Saudi energy minister, said in a statement. Saudi Arabia’s deputy crown prince announced Saturday plans to spend $4 trillion to transition the country’s economy away from oil while modernizing the its society.

Saudi Arabia has been keeping the price of oil relatively low since last year, to the detriment of the rest of the Organization of Petroleum Exporting Countries (OPEC). Saudi Arabia’s oil policies are apparently intended to hurt Iran, the country’s regional rival. Saudi Arabia banned ships carrying Iranian crude oil from entering the country’s waters in April, and has been escalating the economic conflict between the two countries since then.

Diplomatic tensions between Saudi Arabia and Iran have expanded into the economic sphere, with both countries battling for oil market share. Saudi Arabia and three other Sunni nations cut diplomatic ties with Iran in January and have been trying to prevent Iranian oil from reaching the global market.

The Saudis have been threatening to lower oil prices further by increasing production by up to a million barrels a day, which would lower the price of oil to the detriment of Iran. Without Saudi cooperation, OPEC can’t cut oil production enough to cause the price of oil to increase.

Iran isn’t producing much oil right now, as the country has been unable to seriously invest in its oil sector for years due to sanctions. Simply restoring previous oil production levels is estimated to require a minimum $150 billion of new investment, and could cost Iran up to $500 billion over the next five years, according to reports by the country’s state-run news agency. Iran desperately needs quick cash, and the Saudis are intentionally keeping the price of oil low to prevent that from happening.

The new Saudi policy of cheap oil has been devastating for Russia, as well. Today’s historically low oil prices caused the Russian economy to contract by 3.7 percent in 2015. Russia’s economy will keep shrinking unless oil prices recover to at least $80 per barrel, according to the Energy Research Institute of the Russian Academy of Sciences.

Other major OPEC nations have also been devastated by cheap oil; Venezuela has been forced to import oil from America and faces total economic and social collapse.

Saudi Arabia can likely handle cheap oil better than other OPEC countries, but even it is expecting a budget deficit of $140 billion — roughly 20 percent of the Saudi economy. When compared to 2013’s surplus of $48 billion, the fiscal outlook looks so dire the International Monetary Fund warned it could go through its fiscal reserves within five years. Saudi oil export revenues dropped 46 percent in just the last year and the country is selling bonds for the first time since 2007.

Cheap oil is generally good news for America and other net oil importers, especially for the poorest members of society who spend a larger proportion of their income buying oil products.


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