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All Eyes on Saudi

By   /   March 18, 2011  /   Comments

 

As we see gas prices rise across the U.S., we can blame most of it to turmoil in the Middle East. Uprisings in Tunisia, Egypt and now Libya threaten monarchical rule. Markets have responded with crude oil prices rising beyond $100 per barrel. One can speculate that some of the rise can be attributed to speculation as political risk significantly increases. Political risk refers to the potential of disruption of governmental rule and usually occurs when rebellion or war takes place. As clairvoyantly reported in the February 28th, 2011 edition of Bloomberg Businessweek, the future trend in oil prices lie with Saudi Arabia.

The oil reserves in Saudi Arabia vastly supersedes those in Libya and Tunisia. Of course, unrest there impacted markets. However, severe reverberations will be felt if opposition leaders are successful in disrupting oil supply in Saudi Arabia. That is one of the main reasons why stock markets tumbled heavily on Thursday, March 9th. Of course, market analysts are prone to overreaction and the current uprising is not that significant yet. As pointed out by Bloomberg Businessweek, King Abdullah of Saudi Arabia has many resources at his disposal to quell any social unrest.

King Abdullah’s main strategy is to lavish his people with the extensive wealth earned through crude oil revenue. He recently announced $36 billion in jobless benefits, education, housing subsidies, and debt write-offs. This is quite extensive when recognizing that Saudi Arabia currently produces between $592.6 billion and $622.5 billion a year in economic activity (gross domestic product). It is still questionable whether these efforts will be enough to minimize significant income inequality that threatens to tear the social fabric of the country. Saudi authorities are also implicitly pointing blame at current U.S. foreign policy of encouraging peaceful assembly as an universal right. They believe the current stance of the U.S. is emboldening protest movements that now threatens their political stability.

It is difficult to measure the extent of income inequality in Saudi Arabia, but it is assumed to be high. According to the Heritage Foundation’s Index of Economic Freedom, their living standards are relatively high at $23,221 being their GDP per capita figure. Certainly, this ranks below the U.S. and other advanced nations in Europe, but is above Mexico and other middle income countries. Though, that can be deceiving and most analysts believe that income inequality is quite severe as pointed out by this study by economists from the University of California at Santa Cruz. Despite the efforts from Obama and U.S. State Department officials, there have been slow efforts in addressing this gap and that is cause for the current turmoil.

As we look to the future, the tenuous U.S. recovery will be heavily contingent on how Saudi Arabia weathers the storm. If King Abdullah is able to maintain order and hopefully direct economic reforms that can improve the plight of his people, then the spike in oil and energy prices will eventually moderate. Otherwise, we can expect a sustained period of high energy prices that will punish consumers and businesses alike.

That is an alternative that could dampen economic prospects in the U.S. and globally.

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