Sample Essay on How Low Price of Oil Affects the Economics of Saudi Arabia

How Low Price of Oil Affects the Economics of Saudi Arabia


Saudi Arabia has been producing oil irrespective of drops or rises in its prices on international markets. Specifically, oil was previously sold for 115 dollars a barrel, but now it is between 40 and 50, and Saudis are doing nothing about it despite pending warnings and gloom predictions. Many people have been questioning the country’s international policies, though they have been echoing sentiments to ascertain that their current activities are aimed at serving long-term economic interests and goals. It has been established that as one of the OPEC countries producing oil, Saudi Arabia is the only member that can produce and supply the commodity to meet an immediate shortage (Carollo 32). Low oil price benefits the entire economy and sectors because the country heavily depends on oil production to meet its economic, social and political interests.

Low Oil Price Effects on the Economy

It has been ascertained that oil is a globally traded commodity which price is determined purely by the forces of demand and supply (Ramady 77). Economists speculate that estimates of trends in the balance between supply and demand are likely to define economic conditions of the countries similar to Saudi Arabia (Ramady 63). Therefore, drop in the price of the “black gold” should not be a worrying trend for the country or its current and future economic situations.

Lower oil prices are beneficial to the local economy since normally, they help it sufficiently because of reduction in the cost of transport. That can be explained by the fact that major manufacturers heavily depend on transportation services to deliver their goods, supplies, etc. Hence, oil price reduction provides a serious boost for them to increase their profitability.

Moreover, consumers, who are part and parcel of the economy, experience a cut in the cost of living courtesy of reduced cost of goods and transport. In light of this, they have higher discretionary incomes that are used to further improve living standards and quality of life. In the event that cost of living is brought down, economists affirm that economy of Saudi Arabia is heading in the right direction.

For that reason, experts have opined that fall in oil prices helps reduce inflation in the country; therefore, a combination of lower prices, more spending power and lower costs of business can help boost economic growth of Saudi Arabia (Ramady 88). This is demonstrated below where a lower oil price shifts SRAS to the right while creating double benefits of more affordable commodity prices and high real output in the process.

Fig. 1. Macro economic impact of falling oil prices. Graph from Tejvan Pettinger, “Impact of Falling Oil prices,”, 17 Sept. 2015, impact-of-falling-oil-prices, Accessed 29 Apr. 2017.

Consequently, a drop in oil prices impacts monetary policy where the Central Bank of Saudi Arabia is able to trade-off between inflation and unemployment. At the same time, banks are in a position to keep interest rates lower without feeling the effect of inflation. Furthermore, low oil value leads to reduction in tax lifting some of the burden from the payers, thereby expanding fiscal policies. To an extent, a fall in oil prices may lead consumers to spend more on other areas of the economy, thereby promoting growth of its related sectors.

The bottom line and what is learnt in this issue concerns rising competition among countries producing oil. In that case, the days of 100 dollars for a barrel are long gone meaning that Saudi Arabia must adjust its production capability to keep up with new challenges. Though, low price comprehensively benefits the economy.


Falling oil prices are beneficial to the Saudi economy, though a number of economists have been contradicting this statement by affirming that many oil producing countries may lose significant amount of revenue (Carollo 45). Unprecedented fall in the value of this commodity may hurt both local and global economies because of possible losses incurred. However, in most cases, the benefits outweigh losses, which can be evidenced by boosting market dynamics of the related oil-producing countries during another “oil crisis”.

Works Cited

Carollo, Salvatore. Understanding Oil Prices: A Guide to What Drives the Price of Oil in

            Today’s Markets. Wiley, 2012.

Ramady, Mohamed A. The Saudi Arabian Economy. Springer, 2010.