Low oil prices claimed another scalp earlier today with Saudi Arabia forced to adopt harsh budget-saving measures at the risk of triggering social unrest.
The most controversial move will be an increase of up to 50% for high-grade unleaded gasoline, but there will also be increases in the cost of water and electricity, two essentials which have traditionally benefited from government subsidies.
The changes were revealed in the kingdom's 2016 budget which has been hit hard by a 23% fall in oil-sales revenue which has, in turn, led to a blow-out in the deficit to an economically-disturbing 15% of gross domestic product.
Not Broke, Yet
No-one is saying that Saudi Arabia, the long-term king of the world's oil industry, is going broke - but the drift towards a financial crisis cannot be ignored.
Decades of living comfortably on high oil prices have come to an end for Saudi Arabia and other "petro-states", precisely as was predicted more than five years ago in what remains the definitive research paper into the effects of the U.S. discovery of technologies to extract natural gas from rocks long-considered impervious and uneconomic -- shale gas.
It was back in May, 2010, that an energy specialist at Houston's Rice University, Amy Myers Jaffe, joined the dots which connect large volumes of U.S. shale gas with low gas prices and the political upheaval that would inevitably follow in countries such as Saudi Arabia.
Predictions Come True
"Not only will the shale discoveries prevent a (natural gas) cartel from forming, but the petro-states will lose lots of the muscle they now have in world affairs, as customers over time cut them loose and turn to cheap fuel produced closer to home," she wrote.
It's taken time for those predictions to come true, and not all of them have, including a prediction that renewable sources of energy such as solar and wind would struggle in an era of cheap gas and oil whereas the same sort of technology breakthroughs which made shale gas a winner can now be seen benefiting renewables.
Saudi Arabia and its fellow petro-states are now stuck between a rock and a hard place. Damned if they cave in and cut production to try and achieve higher prices for their oil and gas exports because higher prices will simply see mothballed high-cost oil re-start, and damned if they don't cut because low prices are killing their subsidy-bloated budgets.
Deepest Cuts So Far
Yesterday's budget cuts announced in Riyadh were the most far-reaching by any petro-state since the world oil price collapsed last year.
The cuts, while telegraphed over the past few months by the Saudi Arabian government are the latest reaction to low oil prices with earlier steps including the issue of bonds on the international market for the first time in eight years and delays to public projects.
The core problem for Saudi Arabia is that 90% of its revenue is oil-dependent, flowing from an estimated daily export of seven million barrels of oil.
With oil markets glutted, and with more oil on the way courtesy of Iran boosting exports and the U.S. returning to the export market there does not appear to be much chance of an oil-price recovery for some time.
As Amy Myers Jaffe wrote so perceptively in 2010 shale gas will: "thwart petro-suppliers that try to empower themselves at our expense. Market competition is the best kryptonite for cartel power".
