Oil prices hit 14-year lows on Thursday and it’s a terrible sign for what’s to come for Middle Eastern economies.
Bank of America Merrill Lynch highlighted in its latest research note just how bad things are for companies in the world’s largest oil producing region Saudi Arabia and another energy rich region Iran.
Company stocks in the oil rich nations started rapidly tanking as soon as oil prices fell from triple digit levels in June 2014 until now.
After hitting 11-year lows on Wednesday, prices of both UK Brent and US crude tanked to 14-year lows on Thursday. Oil is currently trading around $32 per barrel today. This is around 60% lower than it was 18 months ago.
On the same day, Saudi Arabia’s stock market fell more than 3% to a 38-month low.
Saudi Arabia is arguably to blame for hurting its own economy because it is a “swing producer,”meaning it produces so much oil that it can shift prices depending on how much of the product it releases to the market.
Saudi Arabia’s entire economy is actually being hit badly, not just company stocks.
The country reported that its budget deficit — the amount in which expenditures exceed revenue — for 2015 hit $98 billion (£65.7 billion). It’s spending more while less money is coming in — mainly thanks to low oil prices.
So Saudi Arabia has the power to boost its economy with a simple policy shift.
But it doesn’t want to because as media outlet OilPrice.com and various others, including Business Insider, have pointed out Saudi Arabia is too interested in trying to kill off direct oil production competition in the US than keeping it’s economy afloat.
There are no other benefits to prices going as low as they are for oil-rich nations other than this long-term strategy.
US oil production is already in decline. The endgame is that Saudi is willing to undergo short-term financial pain to emerge with a greater controlling share of the world’s oil supply.
However, the question is, how low can Saudi Arabia go before it decides enough is enough.