That Old Black Magic No Longer Weaves A Spell

Oil was once a bottomless well of cash that allowed Saudi Arabian royal family to demonstrate their largesse in return for loyalty.

Cushy public sector jobs, an economy run by expats getting their hands dirty for Saudis and aid for good neighbours all came from the money generated from a seemingly endless reservoir of oil and gas.

But times are changing in the Middle East.

The price of oil has plunged and Saudi Arabia is feeling the pinch.

As one of the world’s leading oil producers, a fall in price from $100 to $50 a barrel in around a year has hit the economy hard.

Budget deficit

So hard, the government is expecting a budget deficit of around 20% this year.

To compensate, the central bank as issued $15 billion in bonds, but has not turned the taps off on the wells.

The world already has a glut of oil and oil producers are losing money, cancelling projects and laying off workers. They have not turned off supply even though demand is shrinking because they are scared of losing market share to rivals.

Oil producers are an exclusive club and Saudi Arabia sits at the top table.

Alarm bells start ringing when .

If Saudi Arabia is under the cosh because of falling oil prices, what’s happening to the rest of OPEC?

Crisis looming

OPEC reckons that the world demand for oil will be low for up to 15 years and prices will struggle to climb back to the magic $100 a barrel a mark by then.

Not so long ago, shale oil and fracking became viable because of the high price of oil.

Now OPEC wants to price the new technologies out of the market by offering cheaper crude.

Developed countries have also spent years looking at alternative energy sources, including nuclear power, to remove the spectre of other nations holding them to ransom over oil.

Saudi Arabia is not in crisis, but the economy is teetering on the brink.

Massive foreign currency reserves will prop the current regime for years, but unless the government acts now, the economy is likely to hit a wall in five years down the line.