Sample Solution

This graph, created on November 23rd, 2018, demonstrates how the precipitous drop in oil also has a correlation to the murder and dismemberment of Jamal Khashoggi in the Saudi Consulate on October 2nd, 2018 (Blokland). Previously, oil was at a 2018 all-time high trading at a peak of $76 a barrel in early October. On exactly October 2nd, oil prices began to plummet, resulting in US crude oil trading at $51 a barrel. Since changes in production affect the price of oil on a medium and long term basis (as there is not enough time to get the oil into the system), what we see is trader volatility. Production changes can’t affect the price of oil that quickly, so when there are more sellers than buyers in a specific market, that stock’s price will drop, revealing that this massive selling of oil futures by energy traders is related to the perception of Middle East instability.

In their 2018 break-even oil budget, Saudi Arabia has one barrel placed at $74.4 USD (Khan). Therefore, some would claim that the drop to $52.2 USD per barrel would be detrimental to Saudi Arabia. In some ways, yes; however, for a country that claims to have $48 billion sitting in foreign reserves, the disproportionate budget-to-revenue ratio only creates a shift in where they place their money, an example of this being a slowing of government-funded construction of cities on the coast, not a stop (Wald). Even when below their budget, Saudi Arabia still has access to imports such as food and other important resources for their citizens and government. This is due to their political leverage as the controller of world oil, foresight to stock up on foreign reserves, purchasing power of companies in other industries in an attempt to diversify exports, as well as their massive investments in other countries such as the United States; this sets them apart from other OPEC countries such as Venezuela who do not have cash flow or political influence, and therefore, cannot feed their population as Dutch Disease has practically rotted their domestic currency,