The Impact of Oil Prices on Saudi Arabia

Iranian President Hassan Rouhani has said that the recent fall in oil prices may hurt Saudi Arabia more than other OPEC members like Kuwait and Iran1. However, the current low oil prices actually serve Saudi Arabia far more than any other country in the world and that fact has the potential to be hugely damaging to the international community.

The cost of production of oil in Saudi Arabia is amongst the lowest in the world, it costs roughly $5 per barrel to get crude out of the ground2. As such, with OPEC having failed to reach any agreements on production curbs late last year, Saudis market share has grown exponentially. First of all, production in other OPEC nations such as Iraq and Libya has been steadily falling because of continuing conflict. Moreover, the falling price of oil has made many production costs around the world unprofitable, countries such as Russia and Venezuela have been sent into turmoil because they are no longer making considerable profit off their exports. The implication of the changing oil production landscape means Saudi Arabia has a growing market share – they are the only ones who can sustain these low prices.

As Saudi’s market share grows, so too does their international influence. Despite their presence as the Middle Eastern ally of most liberal democracies, this has the potential to disrupt international growth and stability for the foreseeable future. Even though Saudi is an ally, they are always going to act in their rational self-interest. As such, the implications of a stronger Saudi are actually quite worrying.

There is the simple fact that a country with extremely socially conservative views, two Saudi women recently arrested for driving are going to be tried in a terrorism court3,  will gain a stronger sphere of international influence; this is particularly troublesome in the Middle East. Weak democracies and regional conflict mean the future of the region is uncertain. If a new government were to arise in Syria in the near future, Saudi influence, and the vast funds they could contribute to the development of a nation coming out of a devastating civil war would most likely mean the creation of another conservative, non-secular government. This would continue the trend of such governments developing in North Africa and the Middle East that has occurred since the Arab Spring; many of these regimes unfortunately are unstable and harm economic development – case in point Morsi’s former government in Egypt. Moreover, as Iran needs relatively high oil prices to be sustainable, Saudi’s relative Middle Eastern strength is expanding even further as Iran becomes a weaker player.

However, the greater potential for harm to be done by Saudi’s growing influence is on the international community at large. When Saudi has had a large market share in the past they’ve used it to their advantage. In 1973 the world saw the oil embargo. In 1990 Saudi used oil to take out their greatest competitor, the Soviet Union. Saudi has already devastated Russia, Nigeria, and Venezuela, with this recent drop in prices and it serves to gain more as prices stay low.

By,

Peter Koczanski

 

Works Cited:

http://www.bloomberg.com/news/2015-01-13/iran-president-says-oil-price-drop-to-hurt-saudi-arabia-kuwait.html

http://oilprice.com/Energy/Oil-Prices/Did-The-Saudis-And-The-US-Collude-In-Dropping-Oil-Prices.html

http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4

http://www.bbc.com/news/business-29643612