The effects of oil price on the Economy of Saudi Arabia

Document Type:Research Paper

Subject Area:Economics

Document 1

Over the years, Saudi Arabia has come to depend a lot on oil exports to sustain its economy and government expenditure. The over dependency on the performance of oil exports has left the country vulnerable in the event of changes in the price of oil. The change in prices of oil translates into inflation of Saudi Arabia and that affects foreign exchange and returns of income tax which are determined by the Organization of the Petroleum Exporting Countries (OPEC). These two are the major drivers of country's economy. In the past few decades, changes in prices of energy have had many effects on the economy of Saudi Arabia. Since the World War II, energy price shocks have played a major role in the dampening of many economies.

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These oil shocks have caused many financial problems for many economies. The effects on the economy often to include increasing the prices of goods and services, harming the GPD, and the balance of payments in Saudi Arabia. These effects need to be reduced in the future through developing solutions that deter energy price shocks. Oil price shocks have a significant influence on the performance of Saudi Arabia's economy. A rise in the prices, as discussed above leads to a decline in output of oil in the country but in another light, it also leads to an improved domestic currency status. The opposite of this is true because a fall in oil prices leads to a decline in the profitability of the business.

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The fall of oil prices means that oil producers such as Saudi Arabia will collect less income tax from its citizens than they would before in the event where oil prices were higher. That means Saudi Arabia experienced a decline in tax returns. The decline is high and heavily felt since oil exports contributions make up a significantly large percent of taxes. The prevailing low oil prices prompted a suggestion by Saudi Economist, Fahad Bin Jumah for the government to go slow on unnecessary and wasteful subsidies. The Saudi society, once accustomed to extravagant consumerism due to the cultured easy money that have no choice but to drastically cut on subsidies. There exist a direct link between the prices of oil and the performance of exchange that largely depend on the oil.

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The effect of this is that the currency of Saudi Arabia appreciates in value while that of oil importing countries fall down. The appreciation in value is determined. The CEO, Aramco, the leading oil company in the country concluded that the company might suffer demand shocks if there will be no improvement in the supply level of oil. The increase in demand has majorly been due to the global economic growth. Consequently, the domestic market of Saudi Arabia has increased its demand for petroleum to run both business and other life sustaining activities. The increased demand has left the country struggling to close the gap between low supplies, diminishing reservoirs and increasing demand. Failure to close the gap might lead to disruptions in running of businesses that are highly reliant on oil as their form of energy domestically.

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