The Bankrupting of Saudi Arabia

If oil stays around $50 a barrel, OPEC leader Saudi Arabia will run out of cash in five years or less. Low oil prices will wipe out an estimated $360 billion from the region this year alone.

This is a far cry form the days of the 1973 oil crisis which began in October 1973 after the members of OPEC proclaimed an oil embargo. The price of oil quadrupled by 1974 to nearly $12 a barrel – a price that seems laughable now.

Not funny were all the new federal regulations the crisis helped create. This included a national maximum speed limit of 55 mph imposed in 1974 through the Emergency Highway Energy Conservation Act, the development of the Strategic Petroleum Reserve, which began in 1975, followed by the National Energy Act of 1978.

And let’s not forget that in 1977, the Department of Energy was created in response to the continuing crisis. The world price of crude, which had peaked during the 1979 energy crisis, at more than $80 per barrel, decreased during the early 1980s to $38 per barrel, but we were stuck with more and more regulations and greater power grabs by federal agencies like the EPA.

Currently huge budget surpluses are turning to massive deficits as prices crash to around $45 from over $100 last year. The depressed prices have also come at a time when spending has gone up as many Middle Eastern countries grapple with regional violence.

Saudi Arabia is unlikely to raise taxes, but it may cut some forms of spending, though it’s not likely to cut social and military spending programs for fear of a repeat of the 2011 Arab Spring uprising. That’s why, as the world’s largest oil producer, it needs to sell oil at around $106 to balance its budget.

Meanwhile, Saudi Arabia is moving fast to keep its cash. The kingdom not only raised $4 billion by selling bonds earlier this year, but its central bank has pull nearly $70 billion from asset management firms over the past six months to cover costs.

So, after years of huge surpluses, Saudi Arabia’s current account deficit’s projected to soar to 20-percent of gross domestic product this year. And while. Saudi Arabia’s war chest of cash still holds nearly $700 billion, it’s quickly shrinking.

We may yet find that the U.S. oil industry has greater staying power than OPEC, but don’t expect them to take this laying down. There is a real danger though, to the world as a whole, and the U.S. in specific, if the kingdom crumbles.

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