When OPEC made the decision to maintain their levels of oil production, they did not expect such heavy losses themselves. Many have suspected that OPEC wanted to eliminate competition from American-based shale oil producers, and therefore, kept production high in order to lower the oil price. However, OPEC apparently did not foresee certain economic disadvantages that they would incur due to their actions.
Some countries within OPEC, specifically Saudi Arabia, have been experiencing adverse side effects because of their decision to create a glut in supply. Despite the consequences of a dropping oil price, Saudi Arabia has continued to maintain its spending habits, which has caused some issues with their budget. Their budget deficit recently reached $100 billion, and they have been forced into their foreign reserve fund.
There has been a high correlation between the drop in the price of oil and the amount of Saudi Arabian foreign assets that have been lost. This amounts to a nearly $150 billion reduction in the foreign reserve account since January 2014. Additionally, this has caused the nation to begin seeking investment from many American based companies. They also are considering putting Saudi Aramco, the nation’s oil producer, on public exchanges in the hope of raising more capital for the country.
Article written by HEI contributor Timothy McNally.