Change in the world is moving at a breakneck pace, and it’s casting a shadow over entire national economies. While oil remains a vital commodity, and still supplies the majority of our energy needs, alternatives are becoming increasingly viable. As the world moves beyond oil, perhaps no one as vulnerable as the Kingdom of Saudi Arabia in the long term. In the meantime, the oil price crash that’s been unfolding in recent months threatens the short-term outlook. Saudi Arabia only has so much cash on hand to weather the crisis. If prices stay low, the wealthy country will eventually run out of money.
Oil is extremely cheap right now (around $30 a barrel) and continues to decline on a daily basis, hitting rock bottom prices we haven’t seen since 2002. Wrap your head around this factoid: last time oil was this low, Linkin Park, Nickelback, and No Doubt were ripping up the music charts, Bush was only in his second year of his presidency, and the US economy had barely recovered from the 9-11 attacks. As oil trends ever downward, and prices stay depressed, oil-rich nations ponder their next move. Saudi Arabia is among these countries that face dim prospects if oil doesn’t recover soon.
Saudi Arabia is ruled by a family dynasty called the House of Saud. It is the only country is the world named after a family. Oil wealth has transformed this family’s kingdom from a remote desert into a fully modern country. While the kingdom is a reliable ally of the United States, Saudi Arabia has exported a great deal of extremist ideology to other countries. This is because of the royal family’s centuries-old connection to Wahhabism, an extremely conservative sect of Sunni Islam.
That extremely rigid religious philosophy permeates all facets of daily life in the kingdom: genders don’t mix, women don’t drive, and the religious police keep people in check assuring they follow Sharia law. Oil wealth has helped buy loyalty among the masses, which is largely what has kept the royal family in power.
Oil wealth has always been the great stabilizer. But now, an extended period of oil prices has the ability to completely undermine the stability of this Middle Eastern kingdom. Spending has not slowed down even though oil revenue is a staggering 80% of government revenue. The International Monetary Fund recently estimated that if oil prices remain depressed, Saudi Arabia could go broke as early as 2020.
Oil wealth has been a mixed bag for the country. The economy is only now beginning to diversify, and unemployment remains a major issue. That’s because oil producing countries often suffer from a phenomenon called “Dutch Disease.” Paradoxically, much like what happened to the Netherlands, petroleum exporting countries often become much less competitive in every other sector after discovering oil. And since the oil industry doesn’t produce many jobs, it leaves countries increasingly dependent on oil revenues to make up for the hollowing out of their economy. That all works fine and well while oil prices are high. When prices come down, countries like Saudi Arabia end up with an entire economy oriented towards a product that is worth little on the global market.
But even with wild fluctuations, oil is big business. Aramco, Saudi Arabia’s state-owned oil company could be worth trillions of dollars. That would make the company more valuable than Apple, currently the world’s most valuable publicly company. The Saudi Arabian government is considering an IPO (Initial Public Offering) for Aramco in order to get some capital and get it through the hard times. Right now, Saudi Arabia could use the cash. One of the kingdom’s current forays is a never-ending war in Yemen that is draining the country financially. The war has been called “Saudi Arabia’s Vietnam” by the Washington Post, and is considered a proxy war with the country’s archnemesis: Shiite dominated Iran.
Saudi Arabia is an excellent case study in where the business of oil intersects with geopolitics. While Saudi society is insanely conservative and repressive, they are a reliable US ally in a region that’s notoriously unstable. In the same way, while they’ve used their money to spread extremist ideology, they’ve also been a huge economic force in the Western World.
Oil has always been the lubrication for making a complex relationship work, as it has made Saudi Arabia a natural ally of the West in what would otherwise be a tale of very strange bedfellows. If you remove extreme amounts of oil revenue from the equation, things begin to look radically different for all parties involved. In the not-so-distant future, we may see oil dip even further, and Saudi Arabia will have to confront these new economic and political realities.