Is Saudi dominance in world oil market over?
A significant decline in oil revenue is forcing painful adjustments on the Saudi society which has long been dependent on the generosity of government
Syed Ahmed, Ph.D.
For the greater part of the 20th century, Saudi Arabia dominated the world oil market as the largest OPEC individual oil producer and exporter. Since crude oil was first discovered in the kingdom in 1938, the economy has become a quintessential oil state. The society was defined by billions of dollar that export of the liquid gold brought into the coffer of the state. With an uninterrupted flow of cash from abroad, the Saudi government lavishly spent money on its citizens providing for basic needs of its people such as free education, healthcare, subsidized housing and discounted utility. Thus oil helped formation of an implicit social contract between the government and society, thanks to the soaring world demand for oil.
In the eighties, the desert kingdom boasted of more than a quarter of worlds proven reserves of oil. As the most powerful member of OPEC, the kingdom played a key role in keeping the price of oil relatively low and the market stable. Several factors are eroding the strategic power that the House of Saud held over the oil market. Increased oil and gas exploration all over the world, particularly in non-OPEC countries, reduced the share of Saudi Arabia in the world oil market. The share of proven world reserves of oil in Saudi Arabia has gone down from about one-quarter in the early eighties to about one-sixth in 2015.
Traditional economic theory suggests that super-normal profit attracts new firms into the industry. Higher oil prices in the last few decades brought new players into the market. Among countries that experienced massive surge in production are Canada, USA and Russia. In 1980, Saudi Arabia produced 9.9 million barrels per day while total world production was 59.5 million barrels/day in 2015. Saudi Arabia produced 10 million barrel while world production increased to about 80 million barrel in 2015. Thus Saudi production increased by a meagre 2% in the 1980-2015 period, while world production of oil has increased by 34.4% during the same period. Saudi Arabia, once the behemoth of oil production, faces increasing stiff competition from other non-OPEC producers. It should be mentioned here that dominance of OPEC has also gone down relative to non-OPEC producers. The total non-OPEC production increased from 32, 598 barrels/day in 1980 to 45,973 barrels/day in 2015, a growth of 41%.
Additionally, development of alternative energy sources, such as wind and solar power, challenges Saudi dominance in energy market. High oil price during the last decade has not only increased new oil exploration, but also encouraged development of alternative sources of energy. The exploration and development of non-fossil fuels got a boost due to environmental concerns, particularly regarding carbon emission.
The rise in oil price caused the recession in developed economies in the 1970s when western nations were not prepared for a big jump in oil price and subsequently led to the popularity of the supply side economic policies. The year 2014 witnessed another shock in the form a sharp downward spiral in the oil price. This time, it was the decline in oil price. The unprecedented decline in oil price was caused by increase in global oil production, aided by the new shale technology in the USA and slowing demand due to worldwide economic slowdown. A significant decline in oil revenue is forcing painful adjustments on the Saudi society which has long been dependent on the generosity of government. For once carefree Saudis, the party is over and the day of reckoning for desert kingdom may just be around the corner.
Like many commodity producing nations, high dependence on a single commodity renders the Saudi economy particularly vulnerable to vicissitudes in oil price. The Saudi economy has long been highly dependent on exports of oil and oil related products. Decline in oil price has resulted in tremendous loss of export earnings. Oil and oil products constitute 90% of total export. Crude petroleum alone constitutes 75% of total exports and 30% of GDP in 2014. According to the US Energy Information Administration (EIA), Saudi Arabia earned $130 billion in net oil export revenues in 2015, compared to $247 billion in 2014. In January-May 2016 Saudi Arabia earned only $39 billion. On a per capita basis, Saudi Arabias net oil export earnings amounted to $4,124 in 2015 compared to $7,925 in 2014.
The 2014 crash in oil price coupled with high spending in recent years had a drastic impact on the budget situation, forcing a painful adjustment on the society. The drastic decline in oil revenue led to imposition of harsher restrictions by the government on the use of foreign workers who have long dominated the Saudi labour market. For example, Ministry of Labour decided to replace foreign workers in sales and maintenance of mobile phones with local workers, by September of this year a bid to create more jobs for Saudis.
According to a United Nations estimate, non-Saudi workers totaling 6 million constitute more than 50% of workers employed. This creates the challenge of finding suitable Saudi citizens willing to work in jobs that for a long time used foreign labour. Any type of manual work is looked down by Saudi youth. As the government faces a drastic decline in its oil revenue, it needs to create more private sector jobs. A drastic change in attitude towards work is all the more crucial because of the young nature of Saudi population. The task becomes all the more onerous because of demographic challenges arising from a larger young population. According to a United Nations estimate, the largest group of Saudi population falls in the age brackets, 15-19 and 20-24.
The world energy market is being transformed in a way that oil will lose its strategic importance as the primary energy producing commodity in running factories, trains and planes. The Saudi Arabia can still ride out the current crash with less financial damage than many other oil producing nations because of its very low breakeven price (the price at which oil companies start making profit) at $9.90 per barrel as compared to Russia at $50/barrel, Britain, USA and Canada at above $60/per barrel. Saudi Arabia, sitting on a sovereign wealth fund of hundreds of billion dollars, may delay the day of reckoning, but not for long. Economic diversification away from over-dependence on oil should be the first crucial step the country should take to prevent a full blown economic and social cisis.
The author is a Lawton Independent Agents Chair and Professor of Economics and Director of Bill Burgess Jr. Business Research Center at Cameron University, Lawton, Oklahoma, USA
