Tuesday, September 6, 2016


Good points about the 'blessing' of oil.  But when a country is dependent on one source of income that comes from nature, it's been also called the 'resource curse'. If we take the case of Saudi Arabia, we see that its economy is completely dependent on its production and distribution of oil. SA recognizes this and has tried unsuccessfully to diversify its economy. What happens when the price of oil drops?

Have you noticed how the price of gas has decreased at the pump in the US?  Recently,  oil prices dropped to $45 a barrel, from $70 a barrel and even $100 a barrel when China's demand was at a peak. Why did prices drop? There are a few reasons for this: US oil production doubled and Canadian, Nigerian, Iraqi and Russia kept producing record amounts which oversupplied the market thus  lowering prices. There has been a drop in production investments.  Demand for oil has been stagnating with economic recessions around the world. With sanctions against Iran lifting, now Iranian oil is coming onto an   already oversupplied market.  So is Libyan oil.

The lowering of oil prices has had a profound impact on the Saudi Arabian economy, which pays for 70 percent of its government budget out of its oil revenues. The SA government heavily subsidizes basic necessities (water, food).  The oil crisis  has created a budget deficit of 15 percent.  SA will have to borrow more, also to sustain its vast military  expenditures, weapons purchased from the US and UK, and  its war on Yemen. The new government, led by Prince Mohammed bin Salman, has proposed a new economic program called Vision 2030 to reduce the importance of oil in the economy.