Global oil prices have been in crisis for some time now, with oil prices descending to a 13 year low in what has been nearly two years of slump in prices. In 2014, the discussion was if Saudi Arabia had flooded the market on purpose. If they did, was it politically driven, or was it a business strategy? As a business strategy, they had underestimated the American shale revolution, and the American oil industry’s ability to cut costs when times get tough.
Most considered it a political strategy against Iran. From ForeignPolicy.com “On January 2, 1977, the Shah of Iran made a painful admission about his country’s economy. “We’re broke,” he confided bluntly to his closest aide, court minister Asadollah Alam, in a private meeting. Alam predicted still more dangers to come: “We have squandered every cent we had only to find ourselves checkmated by a single move from Saudi Arabia,” he later wrote in a letter to the shah. “[W]e are now in dire financial peril and must tighten our belts if we are to survive.”
At the end of 2015, the conversation began to focus on Saudi Arabia’s governmental structure and finances being unable to withstand and outlive the consequences of a flooded market, regardless of if there had been intent behind it or what that intent may have been. Government spending defined by mistakes in the vein of citizens of the Saudi government paying very little or nothing at all for most energy and utilities and gasoline, of coronation gifts of two month’s wages to all three million state employees, of no focus on a country export outside of oil, could not outlast the long and low drop in oil prices. The Wall Street Journal reported in December of 2015 on the government’s budget expenditure cutting, fuel-price-raising, and the GDP.
The conversation now has swung around to a new plan for Saudi Arabia. Though the prices of oil have risen slightly, and even more in the beginning of May 2016 with fires in Canada limiting Canadien supply and Nigerian shortages are rising prices globally for the moment, the glut of excess fuel for several years has turned the Saudi eyes toward a world with less dependence on crude oil.
In a world moving slowly but consistently toward renewable energy sources and an environmentally shifting focus, Saudi Arabia’s two years of drastically lowered income threw into stark relief what could face Saudi Arabia as a government in years further down the road. Saudi Arabian Prince Mohammed bin Salman has released “a package of economic and social policies aimed to free Saudi Arabia from its dependence on oil revenues, including selling a stake in the state oil company and boosting tax receipts from mining and tourism.” “The prince “seems fully committed to waging a brutal battle for market access against arch regional rival Iran,“ said Helima Croft, global head of commodity strategy at RBC Capital Markets LLC. ”He apparently is not prepared to concede an inch in terms of oil market access,” she added.”
This younger, more aggressive political style of the young Prince shows that the need to diversify the economic strategy to play a different role in the market. He has vision, and a clear desire for power. The rivalry with Iran appears to continue in full-force as part of this vision for the future of Saudi Arabia, but also the that the energy landscape is changing, and without planning on a future where oil might no longer be the commodity it has been for years, Saudi Arabia might be lost in the future.