Oil has long been a double-edged sword for economies reliant upon it. Take Saudi Arabia, for example. Here, oil represents a staggering 95 percent of exports and contributes to 70 percent of government revenue.
Regrettably, the Saudi monarchy has not effectively utilized this wealth. Years of exploiting this valuable resource have failed to empower citizens to achieve financial independence. Instead, the nation finds itself trapped in dependence on extensive oil exports.
Oil comprises 45 percent of Saudi Arabia’s gross domestic product (GDP). During the oil price crashes of the 1990s, per capita income plummeted from a high of $11,700 in 1981 to just $6,300 by 1998. Conversely, when oil prices surged in the 2000s, per capita income rebounded to $15,000.
Ironically, soaring oil prices may have hindered Saudi Arabia’s economic development. The influx of revenue obscured the economy’s structural weaknesses, preventing meaningful diversification beyond this one dominant resource.
Presently, Saudi Arabia and other oil-dependent nations face a pressing dilemma. The ongoing decline in global oil prices, driven by advancements in U.S. shale fracking technology, threatens to diminish their primary revenue sources.
Cheaper Gas Prices
New shale oil discoveries have become serious challenges for oil-producing nations globally, as noted by Saudi Prince Alwaleed Bin Talal earlier this year. “This pivotal moment signals trouble for countries that haven’t diversified economically. Indeed, 92 percent of Saudi Arabia’s budget relies on oil, creating legitimate concerns.”
Alwaleed recognizes the looming challenges. Nations overly reliant on oil exports can expect prolonged declines in per capita income. The consequence of placing all bets on a single resource is becoming starkly evident.
This situation may compel oil-dependent countries to seek economic diversification. Conversely, the boom in U.S. oil production, fueled by innovative fracking technologies, presents a tremendous opportunity for America. One immediate advantage is the substantial drop in gas prices.
“Despite ongoing conflicts in the Middle East, U.S. consumers are enjoying lower gasoline prices, thanks to significant increases in domestic crude oil production from hydraulic fracturing,” explains The Daily Caller.
“The surge in U.S. crude oil output has exerted downward pressure on prices, which is reflected at the pump. Bloomberg noted that as of August 22, the average gasoline price decreased by 4.21 cents over two weeks, settling at around $3.48 per gallon.”
Why the U.S. Government Should End the 40-Year Crude Oil Export Ban
However, cheaper gas prices are just the beginning. The U.S. fracking boom has the potential to rectify many past governmental missteps. With time, this surge in domestic production could facilitate a rise in oil exports.
“U.S. crude oil production averaged 7.5 million barrels per day in 2013 and is projected to reach 8.5 million barrels per day in 2014 and 9.3 million barrels per day in 2015,” notes the Energy Information Administration. “This forecast marks the highest annual average production level since 1972.”
Could the new revenue from U.S. oil exports help address the staggering $17.7 trillion national debt? While it wouldn’t resolve it entirely, it certainly could alleviate some of the burden. Yet, for this to happen, the government must lift its long-standing restrictions.
For the past 40 years, crude oil exports have been banned in the U.S., a response to the oil crisis of the 1970s that stemmed from the OPEC oil embargo. At that time, the prevailing belief was that the U.S. would remain a net oil importer indefinitely. How times have changed.
“Amidst a shale revolution, the United States is on track to surpass both Russia and Saudi Arabia as the world’s leading oil producer,” reports Business Insider. “To fully repeal the ban will require Congressional action, which many consider unlikely in the immediate future. However, there are those who argue that President Obama could gradually permit more oil exports through existing channels.”
Following the mid-term elections, it will be interesting to see if Congress pursues this matter seriously.
Sincerely,
MN Gordon
for Economic Prism
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