Oil States Burn Billions As Global Axis Of Power Shifts

  • Date: 17/08/15
  • Robin Pagnamenta, The Times

Saudi Arabia is burning through its foreign reserves at an unprecedented rate as it struggles to cope with plummeting oil prices and the soaring costs of waging war in both Yemen and Syria.

The price of oil sank to below $50 a barrel last week, the lowest in six years, draining Gulf states of their spending power — but hitting Russia and other producers harder still. Venezuela and Nigeria face bankruptcy, and there are fears that the collapse in the oil price could trigger a seismic shift in the global balance of power.

Saudi Arabia took $2 billion a week out of its foreign reserves between the end of September 2014 and June 2015, with King Salman, who came to power in January, unleashing an intensive military onslaught against Iranian-backed Houthi rebels in Yemen and funnelling arms to opponents of President Assad in Syria. Saudi Arabia’s monetary agency put its foreign reserves at $672 billion at the end of June, down from $746 billion in September 2014.

“It’s coming down fast,” David Butter, an energy expert at the Chatham House think tank, said. Evidence of that, he said, was Saudi Arabia’s decision to borrow $5 billion in the sovereign bond market last week, the first time in eight years it has had to do that.

The world’s top oil exporter and the de facto leader of the 12-nation Opec cartel, Saudi Arabia has shown in the past that it is prepared to use oil money to quell social unrest. It was able to nip Arab Spring protests in the bud by paying off demonstrators and spending $130 billion to raise salaries and boost social spending.

Many observers believe that Saudi Arabia has brought the oil crisis on itself by refusing to curb production to drown out competition from fracking by the US. As a result, the price has fallen from $104 a barrel a year ago to less than $50 now, and the effect is reverberating around the world — from the slums of Caracas to the battlefields of Syria and Iraq; from the Russian Arctic to the Pearl River Delta in China.

On the plus side, a lower oil price has boosted the world economy by diverting consumer spending away from energy costs. “The world’s consumers will be much better off, especially the poor, who spend a higher proportion of their income on energy,” said Leif Wenar, at King’s College London, the author of Blood Oil. “Big importers such as India, China, Japan and many developing countries will be winners. It should help growth and cut the cost of basic goods.”

In Venezuela, which has the world’s biggest oil reserves, the opposite applies. The country is spiralling into hyperinflation and crime is rising amid rising fears of a possible debt default — all of which could bring an end to the presidency of Nicolas Maduro as early as December, when parliamentary elections are due to be held.

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