Oil prices plunging around 60% since the summer of 2014 is not only hurting energy companies’ balance sheets but it’s slowly killing of oil-rich countries economies — the latest being Saudi Arabia.
What’s crazy though is that arguably Saudi Arabia is to blame for killing off its own economy because it produces so much oil, it has the ability to radically shift prices depending on how much it releases onto the market. This is called a “swing producer.”
The country’s budget deficit — the amount in which expenditures exceed revenue — for 2015 hit a huge $98 billion (£65.7 billion).
Spending this year rose by 13% more than analysts forecasted and topped $260 billion (£174 billion), mainly due to its war efforts in Yemen and its role in helping fight ISIS (also known as Islamic State, Daesh and ISIL) troops in neighbouring states. In tandem, revenues were down 15% from official expectations, reaching $162 billion (£108.7 billion).
Over the last year, oil prices dropped from triple digit highs in June 2014, to now $36.94 as of 7.10 GMT today. This is a huge deal because oil revenues make up 77% of the country’s total revenue figures but the severe drop in oil prices are down by 23% compared to the previous year.
The situation is so bad that the Saudi government said petrol prices, which is usually very cheap in Saudi Arabia because of the glut of oil it produces, may increase by 50% and diesel, electricity and water prices will also increase.
What would seem crazy to many market participants is the fact Saudi Arabia’s economic situation is largely made from its own doing.
Saudi Arabia is the largest member of OPEC and it has consistently refused to cut output in order for prices to go up. At the moment there is too much supply and too little demand. The reason why it is refusing to cut supply is because it wants to put US oil producing companies out of business.
Two days ago, in an in-depth report on long-term energy trends, OPEC, the 13-member cartel of oil producers, said a barrel of oil would not be worth $100 until after 2040.