“A few years ago I would buy a television set and a video for each of my servants. Now I buy one and let them all watch it together.”
Saudi government official, 1985
Monthly Price of Brent (“global” oil) per barrel since 1977:
Where are we going? To how oil can create a sick economy.
(Dutch) Disease Symptons
When King Salman ascended to the throne last year, he decreed a bonus for all government employees. The problem is that 90 percent of the Saudi labor force is employed by the government. The king’s bonus cost the government 88 billion riyals ($23.5 billion). Combine the Saudis’ generous social welfare spending with its plunge in revenue because of cheap oil and you wind up with a looming fiscal calamity. Their 2015 deficit was $98 billion.
One Saudi response has been to cut its gasoline subsidy. Consequently the price of a liter of gas (1 liter = .26 gallons) has popped by 50 percent from .60 riyals (16 cents) to .90 riyal (24 cents). Compared to a U.S. $1.69 a gallon average for regular, they pay $.92 a gallon. (Isn’t it interesting how the price per gallon is converging when the 2014 spread was approximately $3.47 to 60 cents.)
In Venezuela, with continuing oil revenue declines and government policy catastrophes, the budget crisis arrived long ago. Now though the headlines indicate they will cope with an electricity shortage from their nationalized power grid by turning off shopping mall power for several hours a day.
Unless they can provide their own power, 100 shopping malls will have to close from 1-3 p.m. and 7-9 p.m. Saying the evening hours were the best for business, retailers protested. For dining establishments it had to be a nightmare. One restaurant co-owner said, “We can’t just turn off the fridges for half a day.”
Our Bottom Line: Dutch Disease
Oil exporters’ dependence on the oil industry is a reminder of what a commodity boom can do to an economy. Essentially, that commodity takes over. It eliminates other industries, boosts government revenue and social welfare spending. When the boom turns to bust, there are no replacement industries to fill the void, government money dries up and the source of consumer spending and incomes contracts. It happened in the Netherlands during the 1960s and ’70s (hence the name Dutch Disease).
Though not nearly as sick as Venezuela, Saudi Arabia also is suffering from an attack of Dutch Disease.