Abdulateef Al-Mulhim

By : Abdulateef Al-Mulhim

Commenting on the volatility of oil prices, some energy experts say that it is the only consumable commodity that behaves like water in a swimming pool. It is the same if you take water from the center of the pool or from near the diving board.

According to some experts like Thomas Friedman of the New York Times, the reason for the fluctuation in oil prices is basically a political price war initiated by some oil producers to hurt economies of other countries. However, more objective analysts link the situation to the basic economic principle of supply and demand.

The question is: Who is benefiting from the low oil prices and who is getting affected? And what does low oil prices mean to the world? Ironically when questions like this arise, people look at Saudi Arabia (for obvious reasons) and the United States for answers or solutions.

This is a positive thing for Saudi Arabia. The negative aspect is that the Kingdom heavily relies on oil as its main and only source of income. Persistent low oil prices for a long period can eventually hurt the Saudi economy.

People look at the United States for answers and solutions because America is the biggest consumer of oil in the world and has more oil reserves than it admits. At the same time, the US economy is so diverse to the point that oil plays a small factor in the overall US national economy. In other words, the US is the only country in the world that can benefit from either low or high oil prices.

From what we have seen and heard from world top politicians during the G-20 summit in Brisbane, Australia, is that the low oil price is an indication of slowing world economy. Ironically, most OPEC members rely heavily on oil and most non-OPEC members such as Norway or the United Kingdom have other sources of income. So, why is Saudi Arabia, the largest OPEC oil producers is not in a hurry to reduce production as a means to raise the price of oil?

Many Saudi officials said that the current oil price has no impact on Saudi Arabia. The price of an oil barrel was $147 in 2008 and now it is half as much. So, how low is low according to Saudi standards of producing cost and sales level.

At this stage, there is no sign of when will the fall of price would come to an end. Saudi Arabia has earmarked many mega projects for the next five years and it is very important to reevaluate the expenditure pattern in the Kingdom. There are projects that can wait and there are many projects that can be delayed and most important at this stage is to implement harsher rules regarding the use of public funds. It is true that we can sustain the ability to cope with the lower price but Saudi Arabia is still not keeping pace with diversifying its sources of income.

Saudi Arabia has to use oil and energy products more wisely and to adapt to oil price fluctuations. Energy consumption in Saudi Arabia is very high and at this time it is important to increase the price at the oil pump, put more strict rules on energy saving building standard and should take other measures to reduce the extravagant use of our resources. Saudi economy in the long run is susceptible to the changes in oil prices. It is true a short period of cheaper oil is in Saudi Arabia’s long-term interest because it will discourage any high cost operations to look for oil in remote areas. It will also discourage investments in any new oil discovery method such as the Shale oil. But at the end of the day, there will be more modern and cheaper technologies in the future and the price of oil will rise again. We should find ways to diversify our sources of income.

 
 
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