Oil Crisis in Saudi Arabia

OIL CRISIS IN SAUDI ARABIA 18

Table of Contents

Introduction 3

Research Problem 4

Aims and Objectives of the Research 4

Significance of the Research 5

Literature Review 6

The Nature of the Global Decline of Oil Prices 6

Dissecting the Fall in Oil Prices and Oil Price Outlook in Saudi Arabia 8

Methods 10

Sampling 10

Participants 11

Data Collection Methods 12

Data Analysis Methods 13

Ethical Issues 14

Limitations of the Study 15

Conclusion 15

References 16

Introduction

Geologists indicate that the world has reached its optimum oilproduction. Hubert’s geological theory outlines that the world isnow in a crisis of evolution. Mining oil is both a human andgeological history that has never happened before and it willpossibly not take place again. Oil is anon-renewable source of energy. A recent study by Citigroupforecasts that Saudi Arabia will run out of oil by 2030 (Nakov &ampNuño, 2013). The report authored by Heidy Rehman, a prominentscientist, sent waves across the world’s biggest oil tower. Manypeople are uncertain of the results of dry wells in the country. Saudi Arabia is on the verge of turningbankrupt due to its inability to fund lucrative lifestyles anddefiance of the OPEC control regulations.

The severee oil shock that has beenwitnessed in Saudi Arabia has shaken the economy of the country. Theprice of crude oil immensely went down as products that sold for overone hundred US dollars per barrel in 2014 went down to onlytwenty-six dollars per barrel at thebeginning of 2016 (Husain et al., 2015).Even though the price has risen from thelow values, the revenue garnered from oil is still relatively lowcompared to those in the early 2014. Saudi Arabia has been a majorexporter of oil for many years as the country’s economysignificantly relies on the revenue retrieved fromthe export of these products (Kilian, 2009). Saudi Arabia is hencevulnerable to the decline in the worldwide oil prices. In 2015,approximately 73% of the revenue retrieved from oil was utilized inthe budgets of the government. Therefore, with the drop inprices, the budget deficit in the country shoots high as the foreignexchange reserves drops by a large amount of revenue.

The drop in the oil prices affects the economy as the governmentemploys 70% of the workforce. The low revenue has rendered thecurrent spending levels of the government and taxation notsustainable in spite of the fact that the country has involved itselfin borrowing funds from other counties (Aslanoğlu &amp Deniz,2013). To counter the effectsassociated with reduced oil process, the government of SaudiArabia has heavily subsidized energy and food (Kilian, 2009). If theprices of the oil go up as it should be,the economy of the country will remain sustainable as it should.However, if the prices continue to remain as low as it currently is,the country will have to make major economic adjustments.Furthermore, the major technological changes in the world will likelylead to permanent reduction in the demands of the process of oil.

Research Problem

The oil crisis in Saudi Arabia is likely to lead to an internalcrisis in the country due to the inflated prices of basic commoditiesin the country. Saudi Arabia is likely to run bankrupt due to the oilcrisis. Consequently, this study aims to investigate the associatedeconomic and functional effect linked tothe oil crisis in Saudi Arabia.

Aims and Objectives of the Research

The core intents and aim of this study is to evaluate the featuresassociated with the oil crisis andthe reduction of oil prices in Saudi Arabia. Thespecific objectives of this research are hence as describedbelow.

  1. To recognize the problems and barriers that the government of Saudi Arabia faces due to the fall witnessed in the prices of oil.

  2. To investigate the scope and the internal crisis that are likely to occur in Saudi Arabia due to the inflated prices of the essential commodities.

  3. To examine the possibility and the extent to which Saudi Arabia is likely to run bankrupt in case of an increase in the lowering of the prices of oil.

  4. To assess the various ways through which the government of Saudi Arabia can diverse into other forms of energy to maintains the levels of the economic sustainability in the country.

  5. To find out the strategies that Saudi Arabia can adopt to manage the economic crisis that the country suffers from due to the reduction in the prices of oil.

Significance of the Research

The unexpected fall in the market prices of oil in the global scenesince the half of 2014 has lowered the costs of living in manycountries that have oils as the dominant sources of revenue. Incomparison with the previous episodes of decline in the globalprocess of oils, the current fall in the oil prices qualifies as amajor life changing event for Saudi Arabia. This study is ofsignificance to scholars and the education system as at large as thestudy will be able to provide an in-depthinsight into the nature and scope of theglobal decline in the prices of oil.

The current economic difficulties that Saudi Araba is facing islikely to affect the country negatively interm of the economic performances. Through this study, there will bethe provision of possible recommendationsthat Saudi Arabia can adopt to ensure that the country maintains itseconomic sustainability. This study will be essential forcareer development and advancement of the general knowledge thatpertains to oil prices and the effects of the prices in the economiesof major oil exporting countries. Therefore, the findingsretrieved from conducting this studywill be important for most learning institutions globally.

Literature ReviewThe Nature of the Global Decline of Oil Prices

The drop in the prices of the oil isapproximately fifty percent in 2016 in comparison to the prices oilin early 2014 (Husain et al.,2015). The depletion of oil in Saudi Arabia is likely to lead to aninternal crisis due to inflated prices of essential commodities. Thecountry produces very little to sustain the population. Thegovernment subsidizes the imports heavily from oil proceeds (Nakov &ampNuño, 2013). If the oil exports decline, the waiver put on thefoodstuff will be reduced, and people willincur extra costs. As observed in other countries, such as Egypt andSyria, instability in the economy results in internal revolts. InSaudi Arabia, the problem will exacerbate because a significantnumber of the citizens blame the royal family for the projectedcrisis (Nakov &amp Nuño, 2013).

The lower global oil prices have the potential of causing a shock onthe global economic growth and an economicdecline in countries that heavily rely onoil export. However, if governments can diversifyinto other forms of energy to retain its status as a global power,then these governments can maintain the constant economic growth intheir countries. Secondly, there is a need to monitor andmoderate the lavish consumption of the oil proceeds. Also,the country can adopt the strategy pursuedby the UAE. The government has made Dubai a hub fortrade and tourism. Although UAE’s oil may be exhaustedin 70 years time, the diversified economywill sustain it.

Figure 1: Average PetroleumSpot Price (APSP) is the simple Husain et al., 2015

Measures taken by Saudi Arabia to Counter the Effects of PlummetingOil Prices

Saudi Arabia has had a strong economic position as the oil processhave continuously and stably risen from the year 2003 until the early2014. Consequently, the economy of the country grew becoming one ofthe largest worldwide economies. However, the drop in the prices thathas been witnessed can be a temporary setback. The country can thuschoose to stand and hope for the return in the rise of the oilprices. However, the decision made by the leaders to look for otheralternative ways to find sources of incomes to the country is apromising course for the maintenance of financial sustainability.Leaders have met through workshops cinemas and confesses to discussthe ways they attempt to work out in restructuring the economy of thecountry to no longer rely on oil as a major sources of revenue. Theplan has been described to be risky and ambitious at the same time.The program for restructuring the economy include issue to do withassets tackles, cuts on the country’s spending, increase in taxes,and changes made in the methods that the government uses in managingthe county’s financial reserves amongst other methods that havebeen adopted.

Saudi Arabia, a country which is the leading exporter of oil globallyhas come up with methods that the country utilizes in order to takeadvantage of the plummeting oil prices. The country has inventedmethods that they can use to turn the crisis in the country in to anopportunity for economic growth. The leaders in the country announcedthe establishments of s sovereign wealth fund worth two trilliondollars which had the sole purpose of the diversification of theeconomy of the country. The sovereign trusts fund is financed by theselling off the states petroleum assets and in turn focusing oninvestments in the strategic industries.

Saudi Arabia is revolutionizing and transforming its economy throughthe acceleration of the growth and development of the country’sfree market. The country is as well nurturing the new industries inthe country, reducing the spending that the government makesregarding the normal functions of the country and finally includingwomen in entrepreneurship by encouraging women to be part of thecounty’s paying workforce. The country has adopted these changes inregards to the development and the growth of the economy as these aresignificant changes that have the potential of doubling the grossdomestic products of the country by the year 2030. On the same note,these changes are likely to create more employment opportunities bycreating up to six million new working opportunities and henceincrease the income rates per household by approximately sixtypercent.

Diversification beyond the commodity exports in order to attract moreof foreign investments is a strategy that has been adopted by TheSaudi Arabia government. The government emphasizes on BetterCorporation between ministries in the country. On the same note, thegovernment values the feedback it receives form the country’sprivate sector. The importance of the feedback from the privatesector is due to the objective of boosting the share of investmentsin the private sector. The country has increased the rates at whichprivate firms in the country are in charge of major projects of theeconomic development. The construction of infrastructure and otherimportant facilities is for instance tasks that are left to theprivate sector to manage.

Dissectingthe Fall in Oil Prices and Oil PriceOutlook in Saudi Arabia

Despite Saudi Arabia disregarding the news thatthey may run out of oil to be just baseless rumors the factson the ground seem to prove the contrary. Evidence show that SaudiArabia is currently consuming 25% of its gigantic oil productiontranslating to a consumption of 3 million barrels daily. Thecountry’s consumption of oil is even more than Germany,which is an industrialized nation with an economy five times largerthan that of Saudi Arabia and with a three times bigger population.More than 50% of Saudi Arabia’s oil consumption goes into thecountry’s electricity production. The situationfurther worsens by the fact thatthe country’s power demand is rising by an estimated 8% per annum.The worsening of thesituations means that in futureSaudi Arabia will likely be forced to use a larger share of itsgrowing production to generate more power so as to meet its growingelectricity demand(Roberts, 2004).

For Saudi Arabia to maintain its status as aworld power in the oil industry,it has to diversify its energy and revenue sources so as to curb itsover-relianceon oil. Currently,80% of Saudi Arabia’s total revenues come from the oil industrythis can be very dangerous if the sector was to collapse right now.To diversify theeconomy, the country shouldconsider venturing into tourism and follow the footsteps of UnitedArabs Emirates. UAE is a now a major tourist destination thus makingit less dependent on oil as its only source of income(Campbell &amp Laherrère, 2005).While the climate in the UAE is similar to the climate in SaudiArabia, the government invested a considerable amount of money in oneof the most modern cities in the world to make sure that they canattract tourists through the beautiful attractions and the qualifiedof services that are available. So Saudi Arabia should do the same inJeddah,which is located near Macca, to attract Muslim tourists’ attentionswho come to Macca from all over the place. Additionally, Saudi Arabiacan improve Dammam’s infrastructure because it has qualities tocompete with Dubai. Dammam is a clean city that has an attractivebeach that has empty places surround. The clean places can beutilized by Saudi Arabia to provide goods and services as same asDubai does.

In addition to this Saudi Arabia also needs toimprove its education through the establishment of more modern andfully equipped universities with up to date facilities and equipment.With improved study environment,more internationalstudents would be encouraged tojoin universities in Saudi Arabia. The United States of America hasdone the same,and the country’s universities are now overflowingwith internationalstudents (Meijer, 2010). KingAbdullah University is an example ofthese kinds of universities that might improve Saudi Arabia economy.If Saudi Arabia continuesbuilding universities and hiring popular professors, internationalstudents in addition to SaudiArabian students would involve in these suitable universities.

Saudi Arabia being a religious countrymodernizing the country’s education institutions will not be aneasy task. The country considers mixed gender universities to beagainst its traditions. Forinstance, the only mixed-genderuniversity in the country King Abdullah University,located in Jeddah is currentlyfacing a lot of opposition from conservative princes and clericswithin the country. Despite all this,the university has however been successful in attracting manystudents and professors from abroad(Meijer, 2010). Saudi Arabia hasthe same weather condition as United Arabs Emirates. The country ispermanently sunny with never ending white sandy seas this is thesame climatic condition that attracts tourists to the United ArabsEmirates. But Saudi Arabia cannot provide some services such asdrinking alcohol and visiting Macca, for who is non-Muslim. There is,therefore, some doubtthat if Saudi Arabia were to concentrate on tourism,the sector would be prosperous and boost the country’s economy.

Methods Sampling

Simple random sampling technique will retrievethe personnel who will be the informants in the study. Afterward,through the use of the small sample group, this investigation willmake a generalization of the study population as the sample is avivid representation of the total population under study. Simplerandom sampling has various advantages to the study population aseach and every member of the population has equal chances of beingpart of the study. Simplicity of the process is another advantage ofthe sampling procedure.

Participants

The sample that will be used to conduct this study will consist of 22members who will have advanced knowledge on thepossible effects associated with the oil crisis in SaudiArabia. The members in the study will be volunteers who will presentall aspects and profession that are likely to provide authenticinformation on the effects that the lowered global oil prices have onthe economy of Saudi Arabia

Data Collection Methods

The research will occur through the use of open-endedquestionnaires. The detailed nature of the open-endedquestions will provide the research with an opportunity to collecteddiverse information fromthe informants in the study. The informants will givefeedback on the scope of the possible impacts that the loweredprice of oil have in Saudi Arabia as an oilexporting country. The data collectors will visit the informants inthe informants preferred regions.

Data Analysis Methods

The data analysis will involve the documentation, conceptualizing,coding and categorizing of data.

Ethical Issues

Before getting the informants involved in any part of the datacollection process, the informants will be provided with informedconsent forms that will, in turn, ensurethat the study participants are not coarse into being part of theresearch but rather they are part of the research in their free will.

The data collectors and data analysits willstore documents that relate to the research in a safe place thatcannot be accessed by anyone who is not authorized to access such.The methods through which the data collection process will be a majordeterminant of the prevention of misstatements, misinterpretations,or fraudulent analysis. The research will as well preventinterference of confidentiality for all the individuals involved inthis study. Originality and authenticity will bepreserved through the appropriate protection of data.

Resultsand Findings

The informants in this research were from specific age group with theyoungest being 30 years and the oldest being 75 years. The selectionof such as an age groups is due to the knowledgeability exhibited bythe respondents. The respondents were consistently distributed whenit come to their gender identities. The participants werespecifically government officials, professors, politicians, economicanalysts and influential individuals withinSaudi Arabia. A significant number of respondents in the studyadmitted that that the reduction in the worldwide prices of oil havesignificant economic impacts in Saudi Arabia. With the reduction ofoil prices, there was decrease in the budget deficit paralyzing someof the economic activities of Saudi Arabia. On the same note, it wasreported that the foreign exchange reserves dropped by a high valueof economic incomes. The respondents were able to provide evidencewhich implied that the Saudi government spending and taxations werefar from being stable at the moment. It was evident that the Saudi’seconomy does not only rely oil but is instead inclusive of othersocial programs designed in accordance with the principles of Islam.Therefore, the lives of the people of the Saudi seem not to be quiteaffected by the reduced low prices. However, with the reduced prices,these programs cannot be implemented hence affecting the livelihoodsof citizens.

From the data collection process, it was quite evident that SaudiArabia currently faces the challenge of reduced influence on theglobal oil market. The share of oil reserves that Saudi hascontinuously diminished over the years. The attempt of the Saudigovernment to raise the global prices of oil in order to decreaseSaudi’s production resulted into reduced oil quantity that wasconsequently sold at lower prices. The respondents also reportedthat the reduced oil prices have as well resulted into high cost ofagricultural subsides. The respondents revealed that the country hasdifficulty affording the program in which the government of thecountry had earlier adopted by providing many subsidies when theincome that was related to the production of oil was high. Anotherproblem that has been associated with the reduced oil prices ismixture that has been seen in relation to the religion, politics andeconomics of the country. The government has proposed for theincrease of women who will be in the labor force in order to increasethe rate of productivity in the country. Working women opposes thereligious beliefs on the functions and the position of women in thesociety. It was as well reported that some of the approaches that thegovernment adopted are against the religious and the politicalpolicies in the country. Theresponses, additionally revealed that the OPEC has often controlledoil prices through supply manipulation. Reduced amount of oil meanshigher prices and hence increased income. However, thee manipulationshave led to negative effects on OPEC. Other sources of energy emergedleading to reduction in the number of customers who purchased oil.The increased competition has led to the reduced prices of oil henceaffecting the economy of Saudi Arabia.

The respondents in the research revealed that the Saudi governmenthas adopted various methods and practices that instead turn theplummeting oil prices into an opportunity for growth. It is evidentthat the government of Saudi Arabia has resolved into thediversification of the country’s economy and has hence establisheda sovereign wealth fund. However, the wealth fund is financed by thesale of the petroleum assets of the state with focus on investing inother industries likely to provide high financial returns for thecountry. The informants in this study reported that Saudi Arabia iscurrently involved in revolutionary transformations that have thepurpose of increasing the growth and development of the country’sfree markets. Additionally, these transformations will nurture newindustries, improve the rates of women involvement in workforce andalso cut the spending of the government. these strategies that thecountry has adopted in order to embrace the economic changes that areassociated with the reduced oil prices will continue to expand theeconomy of the country. On the same note, the job opportunities inthe country will as well increase and hence increasing the levels ofrevenue.

A majority of the respondents believe that the new leadership inSaudi Arabia did not affect the prices of oil in the country. Insteada majority of informants believe that the new leadership isresponsible for the formulation of effective strategies to manage thenegative impacts associated with reduced oil prices. Thenew King, Salman bin Abdulaziz who succeeded King Abdullah binAbdulaziz iscommitted to main economic changes in the Kingdom. The new king hasexercised major authority when it comes to the economic and foreignpolicies in the county. Changes have been seen in the replacements ofministers leading to improvements in te functions of the country. Therespondents believe that the king has taken advantage of the uniqueopportunity represented by the change in the governments with the oilshock. The proposed major changes are called the Vision 2030. Thesechanges will likely have significant impact in the economy of thecountry n he future as it deals with long-term economic reforms. Thebasic goal for the vision is the reduction of oil importance to theSaudi Arabian economy. The government has come up with long and shortterm solutions to the problem. The short term solutions includeborrowing funds to counter the current shortfall in the revenue. Onthe same note, the government has proposed the issuance of more bondsand the sale of specific percentage of the state oil companies. Thelong-term solutions on the other hand involve expansion of othersectors in the country. Tourism is one of the sectors that arecurrently being expanded to increase revenue. The new government hasalso proposed increased in the productions from other minerals aswell as processing of raw materials.

Conclusion

In conclusion, the economic problems that Saudi Arabia has faced dueto the reduced oil process have had both positive and negativeimpacts in the economy of the country. The country is currently underthe verge of becoming bankrupt as the major source of revenue hasdeclines. The Saudi economy is currently unstable and has led toincreased cost of living in the country. However, if the governmentadopts the numerous strategies that the county has come up with inorder to manage the decline in the oil prices, the economy of thecountry is likely to continue to grow and develop according to therequired levels. Through diversification of the country’s souse ofrevenue income, the kingdom will be able to sustain its economicgrowth.

References

Aslanoğlu, E. &amp Deniz, P. (2013). Oil prices once again: thelink towards middle east economies. Topics in Middle Eastern andAfrican Economies, (15)2.

Campbell, C. &amp Laherrere, J. (2005). Theend of cheap oil. ScientificAmerican, 79-84.

Husain, A. M., Arezki, R., Breuer, P., Haksar, V., Helbling, T.,Medas, P. &amp Sommer, M. (2015). Global Implications of LowerOil Prices. IMF.

Kilian, L. (2–9). Oil Price Shocks: Causes and Consequences. Retrieved on 27 July 2016 fromhttp://www-personal.umich.edu/~lkilian/arre083113_cepr.pdf

Meijer, R. (2010). Reform in Saudi Arabia:Gender segregation debate. MiddleEast Policy Journal, 6-9.

Nakov, A., &amp Nuño, G. (2013). Saudi Arabia and the oil market.The Economic Journal, 123(573), 1333-1362.

Roberts, P. (2004). TheEnd of Oil. New York: HoughtonMifflin Company.