Unfortunately, the royal family’s taken this cash cow and squandered it. After years and years of pumping and selling this precious resource they’ve been unable to empower their people to stand on their own feet. Instead, their economy remains dependent on mass oil exports.
Oil contributes 45 percent of Saudi Arabia’s gross domestic product. When oil prices significantly declined in the 1990’s, per capita income fell from a high of $11,700 in 1981 to $6,300 in 1998. Conversely, when oil prices rose in the 2000s, per capita income rose to $15,000.
High oil prices, rather than helping Saudi Arabia, handicapped it. The revenue boost it provided masked over the economy’s limitations. Rather than diversifying its economy, Saudi Arabia continued to rely on its one great resource.
Now, Saudi Arabia and other oil export economies, face a great challenge. A secular oil price decline brought about by U.S. shale fracking is underway. Certainly, this will undermine Saudi Arabia’s primary revenue stream.
Cheaper Gas Prices
New shale oil discoveries “are threats to any oil-producing country in the world,” said Saudi Prince Alwaleed Bin Talal earlier this year. “It is a pivot moment for any oil-producing country that has not diversified. Ninety-two percent of Saudi Arabia’s annual budget comes from oil. Definitely it is a worry and a concern.”
Alwaleed sees the writing on the wall. Countries largely dependent on oil exports will experience declining per capita incomes for many years ahead. These are the consequences of having all eggs placed in one basket.
Perhaps countries dependent on oil exports will now be forced to diversify their economies. On the flipside, booming U.S. oil production, as a result of new fracking technologies, should provide a great boon for America. Aside from new jobs, the immediate benefit in the US is cheaper gas prices.
“Despite conflicts in the Middle East, U.S. drivers are seeing gasoline prices plummet thanks to huge increases in domestic crude oil production from hydraulic fracturing, or fracking,” explains The Daily Caller.
“Booming U.S. crude oil production has helped put downward pressure on prices, which have been reflected at the pump. Bloomberg recently reported that the average price for gasoline dropped 4.21 cents over two weeks to about $3.48 a gallon on August 22.”
Why the U.S. Government Should End the 40-Year Crude Oil Export Ban
Yet cheaper gas prices are just the beginning. Now, it appears, the U.S. fracking boom could bailout the many mistakes of the US government. For at some point the boom in U.S. oil production could lead to a boom in U.S. oil exports.
“U.S. total crude oil production, which averaged 7.5 million barrels per day in 2013, is expected to average 8.5 million barrels per day in 2014 and 9.3 million barrels per day in 2015,” the Energy Information Administration notes. “The 2015 forecast represents the highest annual average level of oil production since 1972.”
Could new revenues from U.S. oil exports offset the $17.7 trillion U.S. national debt that’s been racked up over the years? Obviously, it couldn’t hurt. But first the government will have to get out of the way.
You see, for the last 40-years it has been illegal to export crude oil from the U.S. The crude oil export ban was enacted following the 1970s oil crisis which resulted from the OPEC oil export embargo. At the time, it was believed the U.S. would always be a net oil importer. How things change…
“In the midst of a shale revolution, the United States is soon expected to surpass both Russia and Saudi Arabia as the world’s largest producer,” explains the Business Insider. “While fully overturning the ban would require Congressional action that most consider unlikely in the near-term, many argue that Obama could gradually allow for more oil to flow abroad through existing means.”
Look for Congress to pursue this in earnest following the mid-term election.
for Economic Prism