U.S. vs. Saudi Arabia: The Oil War

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The Kingdom of Saudi Arabia may suffer a financial crisis before winning the economic oil war with the United States if the oil prices remain at its current level. The Kingdom needs the oil price to be around $106 per barrel to maintain its economy.

Saudi Arabia leads the Organization of the Petroleum Exporting Countries (OPEC), launched an economic oil war with the United States in November last year when it decided not to cut its production despite the declining oil prices.

Its intention was to stop the rapid development of the U.S. shale industry, and put all American oil producers out of business by driving oil prices down to levels to make it difficult for them to sustain their operations.

Saudi Arabia believed that it was better to endure short-term pain to achieve a long-term gain. Saudi Arabia underestimated the resilience of the U.S. shale industry.

Saudi Arabia oil war policy is not working

The latest stability report of Saudi Arabia’s central bank indicated, “It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short –run. The main impact has been to cut back down on developmental drilling on new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience.”

An oil industry expert in Saudi Arabia said, “This policy hasn’t worked, and it will never work.”

Saudi Arabia’s policy is not working because U.S. shale producers found new ways to extract oil cheaper. Although the number of fields declined, the production output per field increased. Oil industry experts believed that U.S. shale producers will be able to reduce their costs by 45% this year.

At present, the WTI Crude Oil on the New York Mercantile Exchange is $44.17 per barrel and the Brent Crude on ICE Futures is $48.92 per barrel.

Saudi Arabia is experiencing budget deficit

Saudi Arabia’s economy is dependent on high oil prices. The Kingdom generates 80% of its revenue from the oil industry. The oil-rich country is now experiencing a budget deficit due to the declining oil prices and increasing military spending.

The budget deficit prompted Saudi Arabia to run down its foreign currency reserves by almost $62 billion this year and borrowed $4 billion from local banks last months. Saudi Arabia’s budget deficit is estimated to be around 20% of GDP this year.

Saudi Arabia intends to $27 billion by selling bonds, a sign that it is hurting from the economic oil war with the United States. It needs deep pockets to achieve its objective.

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