Why has Saudi Arabia released so much oil for sale that prices for that have dropped so fast?

Ask an Economist
Question: 

Why has Saudi Arabia released so much oil for sale that prices for that have dropped so fast? Does that country have a lot of debt? Does it relate indirectly to the economic slow down in China?

Answer: 

Currently, Saudi Arabia’s foreign exchange reserve is about $600 billion. Saudi’s oil export is about 8 million barrels per day, or about 2800 million barrels per year. At $100 per barrel, their revenue from oil exports would be about $280 billion.

To sustain their current consumption habit and military spending, they need $100 per barrel.

Since the oil price tumbled down to about $30 per barrel, their oil revenue is only $80 billion per year. And this low oil price is likely to be sustained for a few years, if not for a decade. At this rate, Saudi’s foreign exchange reserve would last about 3 years (600/200 = 3). It appears Saudis would rather dump oil now than reduce their consumption.

No, it is not related to China’s slow growth (about 7%) in China. If such growth had occurred in the US, any president would try to get credit for it.

Tags: