Donald Trump told the New York Times that he would consider cutting off United States oil imports from Saudi Arabia if the country refused to send ground troops to help fight against ISIS. Saudi Arabia is our second largest foreign supplier of crude oil, behind only Canada. I wonder what the economic implications of this decision would be – even further increased U.S. production, defaults in Saudi Arabia? When I saw this headline, my first reaction was to criticize Trump for his failure to respect or even recognize global cultures and nuances. But upon further investigation, Trump may not be suggesting anything that outrageous.
The United States have increased crude oil production in the last decade, almost doubling in 2015 what it put out in 2005. Trump calls this a “tremendous glut” on the market.
With U.S. shale replacing so many foreign suppliers, the market share of crude oil is shifting dramatically. Things are made worse by the decision from OPEC countries and U.S. producers to essentially go their own way, producing rampantly without much regard for what’s actually happening in the market.
But more importantly, U.S. production increases have incredible influence over the economies and governing bodies of OPEC countries. According to Quartz, several OPEC countries can’t balance their budgets when oil is under $45 per barrel. Right now, the average price per barrel of crude oil is $39.91 according to the latest Brent benchmark. The International Energy Agency estimated that per barrel prices would climb back up to the $80 range by the end of the decade if U.S. shale production slowed. But if they do not decrease the volume they’re currently putting out, prices could stay below $50 for the rest of the decade.
So even if Trump is nominated and elected, his decision to cut off Saudi Arabia might not have the effect most would think – we would still have plenty of gas at the pump, and Canada would still be our number one foreign supplier. But that’s not the major concern. We should be more worried about what would happen in terms of OPEC economies if Saudi Arabia were cut off and U.S. production continued to grow exponentially. If we were to rely on Canada and other foreign suppliers, we could see more market stabilization and the possible increase of prices per barrel. But if we continue to attempt crude oil independence and produce independently of foreign supply or domestic demand, we could upset the global economy and possibly send 12 OPEC countries into (further) turmoil. Saudi Arabia said it would be willing to increase its borrowing to 50 percent of GDP in order to keep its market share in oil. The country sold $27 billion in bonds in August of 2015 to help fund their already impressive deficit. The IMF calculates that Saudi Arabia needs $106 per barrel average price in order to reach its deficit “break-even” point.
So how will the global economy react to this shift? What will happen if the United States continues to produce at this level? Will Saudi Arabia have any major effect on our foreign supply?