Throughout my research on the Saudi Arabian Oil Economy I focused on the most up to date and relevant sources of information regarding the current economic circumstances of globalization and the Middle East. Saudi Arabia’s current market share for oil production is 11.6 Millions of barrels per day. This makes Saudi Arabia the world’s second largest oil producer, right behind the United States. The market is changing, we can see this everyday just by simply observing our gas price fluctuations over the past couple years. So what’s so different about the Oil market today than it has been for the past 3 years? First, prices dropped dramatically starting in the summer of 2014, and the response from the top producers in the world is contrary to the previous oil market corrections.
The U.S was able to overtake Saudi Arabia as the leading global oil producer due to the shale oil fracturing boom that took place over the past five years as oil prices began to rise following the 2008 price corrections. And while things were looking up for Americans and the jobs that were created with this new market, we can’t necessarily say the same today. The main reason for the new reality in the domestic market is because shale oil production (the leading source of oil production in the US) has higher production costs than traditional oil producing methods, such as the ones that Saudi Arabia uses. The fact is that the shale boom needs both high prices and low interest rates to sustain it. The result of the relative price advantage of Saudi Arabia to produce oil at a structurally cheaper rate permitted them to allow oil prices to float to a lower price point resulting in a global price point that makes US domestic production of shale oil economically irrational.
If this research is supposed to focus on Saudi Arabia, then why exactly am I emphasizing so much on the American economy? The answer is within the scope of this course that we are in; this is an INTERNATIONAL issue that has come about through TRADE and GLOBALIZATION. One cannot simply focus on the Saudi Arabia economy and draw conclusions about their choices without considering all parties involved. In this case, those parties are practically every country that lays their hand of oil, produces oil, or buys oil, so you can say that this is possibly one the most global topics of today.
Everyone is affected by oil, oil prices, and oil production. If you drive a car, if you work in a factory, if you use electricity, you are involved with oil whether you know it or not. This is the main reason why I decided to study this topic, besides the fact that my major is economics. Oil and its economic standing is something that we should all be informed of because whether we want to admit it or not, it plays a large role on our financial decisions. There is great proof of this a few years ago when gas prices hit all-time peaks. People were scared, anxious, and irate over the economy and their well-being.
I feel fortunate enough to have the opportunity to study this topic at such an important moment in oil history. What is this moment that I am talking about? Well oil prices have hit an all-time low within the past 4 years, and the countries involved are currently making decisions that will determine the future of the oil economy in years to come. The key player in these decisions is Saudi Arabia. As mentioned before, they are the second largest producers, and they have the geographical capacity to produce oil at a much lower cost. Another thing to note is that oil production is responsible for 90% of all government income in Saudi Arabia. This means that oil production is detrimental to the people and economy of Saudi. When their production and profits go down, their economy goes down with it. With that being said, you can imagine the importance of this issue for the people of Saudi, as well as the government.
As prices began to fall in the oil market last summer, producers were left with two choices. They can either come together on a decision to cut back on production and bring back supply to allow prices to stabilize over time, or they could maintain their production at their current levels and see where the market goes. OPEC suggested that its nations involved and other non-OPEC countries take choice number one. But Saudi refused to cooperate with the request. Instead they blamed non-OPEC countries lack of cooperation and speculators for the all-time low prices in the oil market. Their action of response was to maintain their output the same. They stated “The best thing for everybody is to let the most efficient produce.” which basically sums up their plan of action and attitude towards the circumstances that the oil economy faces today.
To take things a step further, we need to look at the cause and effects of Saudi maintaining their production constant with all-time low prices in the economy. As mentioned previously, shale oil production has much higher costs than traditional production. So by maintaining production high, Saudi is practically putting the U.S and other similar countries out of business. Saudi Arabia’s oil minister stated that they predicted future demand growth in the oil market, and they claimed the future demand to be their reason for increasing their oil production at a market all time low for prices. One may look at these actions as more of a strategic point from the Saudi side. I am talking about the control of market share in the oil economy.
By maintaining market share, Saudi’s role and influence in the oil market maintains as powerful as it has been in the past. This gives them the leverage to undertake expensive and exclusive deals on large operations, such as the one currently being negotiated in Asia for their expansion. These operating decisions have caused many jobs and factories to shut down in places like the Americas. With prices remaining so low, the competing companies with higher costs are unable to be profitable at the current output level. Instead, they have reverted to finding new ways to cut down on costs and plan for the future. “We are using this time to challenge the organization to find new ways to further reduce our already low operating, sustaining and maintenance costs, and also to look at how we can grow this business utilizing less capital and continue that growth during periods of low commodity prices,” said Bill McCaffrey, CEO and president of oilsands producer MEG Energy Corp.
What are some of the reasons for the decrease in the prices of oil? Well as technology advances, we find ways to become more efficient in the way that we allocate and apply our resources. We have found ways to burn less oil while maintaining growth. Another large factor is the slow down on the Chinese expansionary acts. China had their peak of demand growth in 2010, and since then, they have slowly declined their oil demand over time. At the same time, the global oil intensity (comparing millions of barrels per day to GDP) has also declined since 2000. There has also been a large increase in renewable energy consumption over the past 5 years. All of these numbers add up to simply create a new lower demand of oil, which combined with an increase in output by all the supplies can only lead to one thing… Lower prices.
With these new prices, and new market decisions, small players in the oil industry cannot compete with the big players, obviously the biggest player being Saudi Arabia, who refuses to decrease its supply of oil. Saudi Arabia has used the market prices to put a firm, or in this case, country out of business. This is exactly what is happening to many countries, including the U.S.A as Saudi continues to produce an excess supply of oil into the market. They are able to do this because as the big players in the industry, they have the financial backing to support these decisions, as well as their geographical advantage and lower costs of production. One can look at this as perhaps – paying their way to increase market share, by putting competitors out of business.
To connect everything that has been said to relevant issues which are discussed in the book “Controversies in Globalization: Contending Approaches to International Relations“, one can pin point the chapter “Trade and Equality: Does Free Trade Promote Economic Equality?” to the issues involved which affect nearly everyone on this globalized planet. A quote taken from the YES: L. Alan Winters, University of Sussex and Center for Economic Policy Research, states the following “The evidence from country, sectoral, and firm-level studies suggests very strongly that opening up international trade stimulates productivity. Part of the way in which it does so is by allowing more efficient (exporting) firms to grow faster than less efficient ones, and allowing import competition to pick off weaker domestic firms. Such rationalization effects may lead to short-term poverty concerns, for failing firms can easily harm their workers and owners. But equally clearly, long-term progress requires adaptation and adjustment, so that higher productivity can become the norm and generate higher incomes throughout a sector.” Pg.48. The preceding statement could not be more relevant to the things that have been mentioned throughout this analysis. Saudi Arabia is by fact the “efficient” producer of oil, and therefore “picking off” the weaker domestic firms. And while short term effects do and will create fall outs in employment, and other areas, the long-term results of this is to bring down prices and allow the consumers to benefit in the long run, and new specialized jobs and sectors to grow thanks to capacity to operate with new market prices (as we have seen today with gas prices, etc.). Another thing to note is the creation of new markets due to what was an increase in demand for oil over the period before 2014. As mentioned before, we saw the creation of new alternatives to oil based solutions, such as the creation and demand of the Tesla car. These things cannot come forward without international trade and the stimulation process of competitive markets. For technology to increase, there must be a reason for it to exist.
