We all know that Saudi is a huge oil exporter and is influential in dictating oil prices. D
Currently, oil prices are at all time low of US$50/barrel (versus $100/barrel not too long back). So have you considered why don’t Saudi cuts its oil production to prop up oil prices and its own export revenue?
1. Consolidating Market Share
As one of the biggest oil producers in the Middle East, Saudi has the financial power to flex and last through this oil glut. As oil prices continues to fall, this will cause unproductive producers in other countries to go bankrupt, causing supply to fall in the mid-term. Saudi producers can then take over these failed producers’ market share and benefit when oil price recovers.
2. Surrounded By Hostility
Imagine your neighbourhood is convulsed in war and revolution, and you have seen apparently stable regimes in Tunisia and Egypt swept away, while your own vassal state of Bahrain is on the verge of civil war. Syria has fallen into a free-for-all that has no good outcome – either your enemy Assad prevails, or your enemy Isis prevails. And Isis is not confining its ambitions to Iraq and Syria, but now attacking your northern border posts.
So what is the best outcome against such hostility whom also controls oil production? Starve them financially by artificially keeping oil price low. With no oil money, these hostilities will eventually wither out – Iran has been moderating its efforts in nuclear negotiation.
3. US Dwelling Commitment In The Middle East
Traditionally, the United States and Saudi are known to be BFFs. However as of recent, the Obama administration has shown (at least until very recently) a marked interest in drawing down US security commitments to the Gulf, Israel and Europe, while pivoting to Asia. Saudi can no longer count on the US to defend its own vested interest in the Middle East. So with this oil glut, this presents the perfectly opportunity for Saudi to wrestle out his hostilities in the Middle East financially (they will have no $$ to pursue aggression).
So what implications does that have for Singapore? In short, we believe that oil price in Singapore is going to remain subdued in the short to mid term due to the global over supply of oil. We also believe that imported inflation in Singapore will remain low for the entire of 2015 due to low oil prices (Singapore mainly imported raw materials like oil). At such, we believe that MAS is not likely to further strengthen the S$ to combat the non-existing imported inflation which always haunted Singapore.
In our small Economics Group Tuition in Singapore, we often use interesting real life examples like these to relate them to your Economics learning in school! Find out how you can learn more effectively with us!