Declining oil prices cause Saudi collapse

Resource-rich countries, overwhelmed by income from resource sales, have three options that are listed here in decreasing order of economic efficiency: (i) forced investment strategies that use income for modernising the economy in an attempt to prepare the country for a period in which income from resources falls, but which may overstress the adaptation capacities of societies; (ii) investment in funds in preparation for periods of declining sales; (iii) domestic use, which in most cases overstresses the absorption capacities of national economies and leads to price hikes in local goods, endogenous deindustrialisation and a revaluation of the currency, thus reducing national competitiveness. This follows transfer theory (Samuelson, 1964; Balassa, 1964) and is the basis of what is called the resource curse (Auty and Mikesell, 1993).2 The three strategies often appear as hybrids; however, dominant characteristics can be identified. For example, Shah Reza Pahlavi applied the first strategy in the 1960s and 1970s when trying to propel Iran into modernity. This failed because of inner opposition but left the mullahs with a formidable industry structure. Today, Norway commands one of the world’s largest investment funds. The Netherlands, on the other hand, spent gas income on domestic programmes that led to price hikes followed by wage increases in the non-tradable sector that subsequently spilled over into manufacturing. The loss of competitiveness drove the rail, car and aircraft industries out of the markets. It is known as the Dutch disease or the East German disease because of the similar effects of the stabilisation transfers from West Germany after unification (Blum, 2008). It is clear that the loss of criticality will hit a type iii country hardest, and even if type ii funds are available, they may be syphoned off. Moreover, this may completely reverse financial flows in large countries and have a devastating effect on international financial stability. Oil has been a critical resource for a long time; however, this is beginning to change. We use the Kingdom of Saudi Arabia, a major oil producer, as a reference. The country is in danger of economic collapse if oil prices suddenly fall – which is not beyond the realm of possibility. The remainder of the article is organised as follows: In the next section, we analyse the roots of crises from a resource perspective. Using oil as an example, we point to the problem of managing financial inflows efficiently and to the impact of geostrategic rivalry. We then concentrate on two major factors that have led to a regime change in the balance between global oil production and consumption: fracking and defossilisation.3 We subsequently apply this to Saudi Arabia and point to the medium- to long-term challenges for global stability given this regime change. Finally, we conclude that a substantial turnaround in investment management is required of (Middle Eastern) oil-producing countries to guarantee global stability. Geostrategic Cheap oil has promoted the rapid industrialization of the Western world and benefited oil-exporting countries by providing a sufficient influx of oil money, especially to those that joined forces and co-founded the Organization of the Petroleum Exporting Countries (OPEC) to set oil prices. Many of these oil-rich countries have achieved oil-driven economic growth and joined the group of middle- and high-income countries. Oil has been a critical energy resource since the 19th century. In 2018, crude oil made up 33% of the world’s annual primary energy consumption (BP Energy, 2020). Since its wide industrial use from the late 19th century onwards, partly due to Rockefeller’s efforts to monopolise the oil market and then the antitrust-led breakup of the Standard Oil Company, global oil consumption and production have been steadily increasing. In the 21st century, soaring demand in emerging economies has compensated for the stagnating oil demand from the developed world. Today, oil still has a relatively low degree of substitution, particularly with respect to technology (transport sector, chemicals) and transport (large tankers, pipelines). This guarantees a stable demand despite volatile prices. Empirical studies support the relatively low price elasticity of the global oil demand, especially in the short run (Cooper, 2003; Caldara et al., 2016). Due to its low substitutability and the oligopolistic market structure, oil has provided its suppliers with a steady stream of revenues. Having experienced an ever-increasing demand for fossil fuel, the second half of the 20th century was besieged by the economic threat of “peak oil”. However, this concern about a negative supply shock has now mainly shifted to “peak demand”. According to recent predictions, oil’s dominance, and therefore criticality, will decrease rapidly in the coming 30 years. The main driver of this profound shift in mindset is environmental concerns about greenhouse gas emissions. In addition, fracking turned the US from an importer to an exporter of oil and gas. This has not only put pressure on prices, it decoupled the US strategically from the Middle East as a military safeguard of global oil supplies. In response, Saudi Arabia launched an oil price offensive, trying to drive the US fracturing industry from the market and indirectly hitting its biggest regional rival, Iran, in its strategy to modernise its industries. In fact, Saudi Arabia had switched from swing pricing, which tries to pricing, which tries to equilibrate oil prices to levels that satisfy both producers and consumers, to limit pricing.