Saudi Arabia’s financial reserves and its sovereign wealth fund provide a buffer, but the cushion is smaller than it was in 2014. With a much higher fiscal breakeven level, Saudi’s public finances are already under strain. According to Abu Dhabi Commercial Bank, if government spending is not adjusted, a price of $35 for Brent crude would push Saudi Arabia’s budget deficit from an estimated 6.4% to about 15% of gross domestic product (GDP) this year. A prolonged volume/price war will jeopardize the country’s economic modernization program and could weaken Mohammed bin Salman’s grip on power as the Saudi populace grows disaffected.
Though the U.S. is the world’s largest energy producer, its diverse economy makes it less vulnerable than Russia and the Middle East. But Oxford Economics estimates that a sustained $30 plunge in oil prices would shave off 0.2% of U.S. GDP due to reduced investment in the shale sector. The crash in oil prices could prompt a wave of defaults among producers with weak balance sheets and credit ratings.
Economic weakening can lead to civil unrest. The slump of recent years has already bred that sentiment across commodity-driven economies like Iran and Russia. The dual shocks of a price war and COVID-19 will be another litmus test of their political systems, especially for those with less fiscal room. As we went to press, the oil price had pared some of its recent losses amid renewed hope for talks between Saudi Arabia and Russia. We are hopeful this brinkmanship will be resolved before it leads to a price war none can afford.
Carl R. Tannenbaum is executive vice president and chief economist at Northern Trust. Ryan James Boyle is a vice president and senior economist within the Global Risk Management division of Northern Trust. Vaibhav Tandon is an associate economist within the Global Risk Management division of Northern Trust.