Saudi Arabia's Misguided Oil Strategy

Abstract

Saudi Arabia has been instrumental in the collapse of the crude oil prices by refusing to cut production and also prevailing on OPEC not to do so. This has so far inflicted incalculable damage on the global economy.

Saudi Arabia has taken a huge gamble by flooding the global oil market with crude oil with the intention of defending and enhancing its market share at the expense of its rivals such as Russia, Iran and Iraq and also slowing down if not killing US shale oil production altogether. This is a defunct policy which had been previously tried by Sheikh Ahmad Zaki Yamani in the early 1980s and found wanting. Saudi Arabia does not have very deep pockets to continue the oil war against others.

Saudi Arabia’s misguided oil strategy is starting to rebound on its economy, financial reserves and its currency. Other than the steep depletion of its financial reserves and the huge budget deficits, intense pressure is growing on the Saudi Riyal for possible devaluation or even floatation.

Instead of waging oil wars, Saudi Arabia should deal with the real challenges facing it such as the growing and endemic youth unemployment which continues to endanger Saudi Arabia’s national security and the need to create at least 3 million new jobs by 2020 in addition to diversification of the economy and elimination of the wasteful subsidies. All these issues need relatively high oil prices to finance them.

Keywords: gamble, price, subsidy, Deficit, shale oil, devaluation