Monday, January 4, 2016

Saudi Arabia may need a new strategy to fight low oil prices

The Saudi strategy of trying to stave off forever the shale gas and oil revolution may not work. If you look at Saudi Arabia’s response to the low oil price, they’ve reacted to this shock as if it’s temporary rather than permanent. The main lesson is that this shock is permanent, it’s not transitory, therefore you have to adjust to it rather than just financing it. 

While in the short run you want to finance this shock by spending more, over time you have to cut government spending, you have to cut government employment, cut subsidies and transfers to the private sector, otherwise you’ll have unsustainable public debt over time.