Will Saudi Arabia Go Bust?  

The global oil market has been seriously shaken up over the past 12 months, and according to the oil futures market Saudi Arabia may go broke before the US industry collapses. With the contract price of 2020 US crude oil currently sitting at $62.05, the Middle East is in for a shock. Industry experts maintain that it’s too late for OPEC to kill the shale revolution which could mean the Saudis will start encountering economic unrest in as little as 24 months. By the end of the decade the nation will have hit an irreversible crisis.

Saudis shake up the market

So what’s led to the crisis? It was largely triggered by the Saudi decision to cease supporting prices last November. Instead they flooded the market with 10.6 million barrels a day in a bid to drown rivals. The goal was to strangle the US shale industry however the Saudis have gravely misjudged the scope of the sector. By single handily creating an oil price crash the Saudis have crushed any hopes of securing high-cost ventures in potentially lucrative areas such as the Russian Arctic, the Gulf of Mexico, the mid-Atlantic deep waters and the Canadian tar sands. This has led to major oil and gas companies have abandoning 46 large projects and putting $200bn worth of investment cash on hold. The Bank of America maintains that OPEC is now "effectively dissolved" and that the intergovernmental organisation should close the doors of its Vienna offices.

No ‘Plan B’

Saudi Arabia relies critically on its oil, with virtually no other form of industry in existence. Citizens aren’t subject to tax on income, interest and stock dividends, subsidised petrol costs just 12 cents a litre and electricity is virtually free at 1.3 cents per kilowatt-hour. Not to mention the huge amounts of cash the country is channelling into its military. The Arab Spring saw patronage spending explode however if the oil industry crashes, so too will Saudi Arabia as we know it. By the end of 2015 the International Monetary Fund estimates that the budget deficit will hit a huge 20% of GDP, the equivalent of $140bn.

So will Saudi Arabia go broke? While the outlook is not looking good for the oil rich desert country, the US oil industry could find that it enjoys greater staying power than the market currently indicates.

Want to know more about the shale revolution? ‘Hydraulic Fracture, Gas Seepage and Other Environmental Issues Concerning Shale Gas’ explores the environmental issues surrounding the production of unconventional gas trapped in shales, and how other nations can learn from the American experience.