It’s no secret that the national budgets of major oil producing countries like Saudi Arabia, Russia, Venezuela, and Iran (to name just a handful) are heavily dependent on the price of oil. After weathering a sharp drop as a result of the 2008 financial crisis, many oil-soaked regimes dramatically increased social spending when prices rebounded to over $100 per barrel, in part to help quell unrest from the Arab Spring.
But the past two years have been decidedly more difficult for these petrostates. With oil trading near $45 per barrel today, there’s been a lot of belt tightening. In Saudi Arabia, for example, the WSJ reports that cheap oil is hitting the Saudi middle class hard:
For decades, Saudi nationals…enjoyed a cozy lifestyle in the desert kingdom as its rulers spent hundreds of billions of dollars of its oil revenue to subsidize essentials such as fuel, water and electricity.
But a sharp drop in the price of oil, Saudi Arabia’s main revenue source, has forced the government to withdraw some benefits this year—raising the cost of living in the kingdom and hurting its middle class, a part of society long insulated from such problems. […]
The kingdom is grappling with major job losses among its construction workers—many from poorer countries—as some previously state-backed construction firms suffer from drying up government funding. Those spending cuts are now hitting the Saudi working middle class.
When you live by the price of oil, you die by it too, and while the Saudis still have massive (though diminished) foreign reserves set aside for just such an occasion, austerity is starting to trickle down throughout the country. Riyadh will be carefully gauging the public’s mood. Privation and status loss is a powerful revolutionary force..
This probably in part helps explain why Saudi Arabia is now, according to the FT, willing to cut its own oil production by a whopping 1 million barrels per day as part of a wider production “freeze” deal to be negotiated in Algiers next week, with two major contingencies: that its regional rival Iran caps its own production at current levels, and that the other major producers involved in the deal revert their output back to the numbers they were producing earlier this year.
We’ll have to wait and see if that will be enough to build consensus. The Saudis were the ones to sink talks the last time this freeze deal was attempted back in April, and they could back out again if negotiations don’t go well.
But even if these petrostates are successful next week, two larger unknowns remain: first, the extent to which this will this effect oil prices; and second, how much an increase in oil prices will correlate to an increase in U.S. shale output. That second question is particularly vexing for OPEC, because it acts as a check on any policy it can come up with: the more petrostates are able to cut output and inflate oil prices, the more American drillers will pump.
But for the Saudis, in any case, the costs of doing nothing appear to be rising.