By Georgi Kantchev and Summer Said (October 3rd, 2015)

Article Summary

Russia is aggressively pumping oil from its wells at a rate of 10.74 million barrels a day. Saudi Arabia will continue to pump oil and gas at a rate above 10 million barrels a day, which has continued to fuel the significant drop in oil prices. Oil prices have dropped > 50% since July of 2014. Supply outpaces demand globally by approximately 2 million barrels a day. The IMF expects the Saudi government will run a budget deficit of 19.5% of GDP. Last year the Saudi government’s deficit was 3.4% of GDP.

The increase in the global supply of oil has left nations such as Venezuela and Nigeria, who are dependent on oil revenue, flailing to keep their finances in line. The depreciation of the ruble has left oil companies in Russia a better margin buffer than American-based shale companies. The level of output Russia is expected to produce this year was last seen at the end of the Soviet Union.

Analysis

Russia and Saudi Arabia are launching a type of economic war against the greater global economy (despite the detrimental effects this will have for their own economies). This is aiding a global slowdown in demand, since oil and gas contribute to the production of goods. As oil prices fall oil companies begin pulling back on investments. Specifically, American shale companies have shut down and laid off thousands. Offshore drilling companies have had their own layoffs to deal with as their margins shrank abruptly. This has ripple effects in industries that produce materials for the maintenance and construction of oil rigs. With Russia and Saudi Arabia oversupplying the globe with crude, businesses in the industry are forced to downsize drastically.

America needs greater independence from oil producing nations. These nations are the true achilles heel to America’s economic stability. Investments in alternative sources of energy by the government would placate the effects the Russians and Saudis are having on America’s future growth.