A CNN Money reports today that the Kingdom of Saudi Arabia is running out of money. This bit of news is practically unsurprising considering the drastic movements in the traditional energy market seen in recent months.
Within less than two years, oil prices have dropped from $100 per barrel to just $36. Why is this bad for Saudi Arabia? Because of the following numbers:
– Oil funds 75 percent of the Saudi government budget
– Almost 90 percent of Saudis are employed by the government.
– Saudi citizens do not pay income tax.
Over a prolonged time of abundance, Saudi Arabia had built a super welfare state that stands on a single pillar — oil. It is a single point of failure that puts at risk not just the wellbeing of Saudi citizens but the livelihoods of more than a million overseas foreign workers (OFWs) from the Philippines.
Because of the price drop, the Saudi government is now operating at a severe deficit. It racked up a $100 billion shortfall last year and is expected to continue this way so long as low oil prices prevail. According to the International Monetary Fund (IMF), Saudi Arabia “needs to sell oil at around $106 a barrel to balance its budget.” Saudi Arabia also has a growing unemployment problem thanks to the big part the state plays in keeping its people busy and the deeply-entrenched culture of entitlement that is a legacy of decades of oil-funded welfare. This does not bode well for the on-going stability of this desert kingdom and its ability to continue to host foreign workers who will likely be increasingly seen by local Saudis as undesirable aliens competing for increasingly scarce jobs.
Many factors contribute to downward pressure on oil prices, but it is mainly an increase in domestic oil and alternative energy production in North America, more efficient vehicles, and increasing competition amongst oil-producing countries to supply the rapidly-growing economies in Asia that account for the price drop for the most part.
Ironically, Saudi Arabia is one of the member states of the Organisation of Petroleum Exporting Countries (OPEC) that refuses to cut production to stabilise prices. OPEC is a cartel of oil-exporting countries that account for about 60% of petroleum traded globally. As such, how much or how little of the product it pumps and ships could influence world oil prices significantly.
Back in the Philippines, many Filipinos who see their fuel needs as a household or business cost are rejoicing as the effects of weak oil prices start to be felt on the street. However, with an economy propped up by the remittances of its vast army of OFWs, the Philippines may not be laughing all the way to the bank over the longer term. OFWs have long been seen as a failure on the part of Philippine society to sustain its enormous population on the back of its domestic capacity to create capital and generate employment.
Is the the OFW-funded Philippine fiesta over? Only time will tell. Even if oil prices recover and the music starts again for Filipinos, maintaining OFW deployment as a key source of foreign currency is an unsustainable economic strategy as it levies social costs that are likely to negate the benefits of the remittance flow in the long run.