Crude oil prices have reached the lowest in 11 years at $35 a barrel, as opposed to its peak in 2014, when it soared to $112 a barrel. There are many factors that have affected this fall in price some of which are – the devaluation of Chinese currency, stagnancy of European economies, Saudi Arabia’s reduced subsidies, the possibility of resumption of Iranian exports as well as the repeal of the US export ban have all caused high supply and low demand, according to an article published by CNBC on January 5, 2016. Various analysts across the world have predicted that the bearish market will persist and all of them have different predictions for how low the prices will go. The biggest impact of this slump will be faced by the Middle East economy, which depends heavily on the crude oil and petroleum industry.
Factors Effecting Low Oil Price and Middle East Economy
Saudi Arabia being the biggest economy in the middle east, has a fair amount of influence on that of the surrounding nations. The GCC region controls about 40 per cent of the world’s crude oil reserves and as such, plays a major role in its global supply. The Organization of the Petroleum Exporting Countries or OPEC countries have historically cut down on supply in order to boost oil prices. However, given that the most influential OPEC member Saudi Arabia is at loggerheads with another member, Iran, it is refusing to cut down on its output. Therefore, if the conflict between the two nations persists and Iran begins to export crude oil of its own, chances are Saudi Arabia will pull down the prices further. Bahrain, with its strategic location between the two countries, will be instrumental in determining the impact the conflict will have on Middle East economy.
Impact of the Low Prices on Saudi Arabia
The Kingdom of Saudi Arabia announced early this year that it will be making significant budget cuts in order to address GDP deficit of 15 per cent. Subsidies for water, electricity and petroleum will all be cut and other public developmental projects deterred. The IMF has predicted that the country could go bankrupt in just five years if it does not make changes to its economic policies. Therefore, these are critical times, not just for the kingdom, but for all countries that have economies highly dependent on trading oil. Countries like Bahrain that have been working to develop a post oil identity will find themselves more resilient in the face of this crisis.