What now for Petrodollar Economies ?

In recent years nothing has threatened the sanctity of petrodollar economies like Saudi Arabia, than the growth of shale gas production and mass application of renewable energy technology. The simple economic model of sustaining on export surpluses is turning out to be unsustainable at current crude oil prices. This not only affects basic budgetary decisions but also cover and overt funding of political movements. And this has led to a series of cascading impacts, which cannot be reversed.

When Saudi and other OPEC countries embarked on a strategic approach to destroying the shale gas producers, no one doubted their ability to strike a death blow on the nascent industry. The short-term response of the markets and shale industry did not hint a different outcome either.

The assumption was that OPEC countries will be able to sustain at sub-optimal prices till the shale manufacturers shut shop and they can return to an ideal market where they could recover all losses incurred in the past. It did work in the short term and OPEC countries and large petroleum companies used it as an opportunity to cut overheads, downsize and reduce the cost of production too.

But then two unprecedented events shattered the strategy they deployed, the end of Iranian economic apartheid and unprecedented decline in shale gas production costs. The first one created demand supply imbalances that led to further decline in already low crude prices and the latter led to the failure of a price war strategy. Today the market is aware of increased production capacities by countries willing to supply at lower prices both for economic and political reasons. The historic enmity between Saudi and Iran and the distrust among OPEC countries in implementing a consensus led production cut added to the woes. Shale manufacturers with new technological developments are now able to manufacture at far lower prices than earlier expected.

Murphy’s First Corollary, Left to themselves, things tend to go from bad to worse seems to explain what the OPEC countries are experiencing. This becomes more evident when you take into consideration the recent development in the electric car and renewable energy segment. One man’s mission to transform the renewable energy market and reinvent how we perceive electric car has been getting rave reviews. More than ever we are closer to an era of driverless cars running on batteries and solar panels. More and more energy is being captured from advanced solar panels and the latest storage technologies are able to make it a practical and viable alternative to non-renewable energy sources.

So what started as one man’s vision is being emulated by global car manufacturers and the race for a non-polluting transportation alternative is closer than we believe. The scale of production facilities is unprecedented and is turning the notion of economies of scale on its head, making an affordable electric car a real possibility. Clubbing this with the enthusiasm of both developed and developing countries in subsidising electric cars and renewable energy to combat climate change makes the treat to petroleum economies more real.

So between the shale production cost decline, increased supply options for crude and advancement in renewable energy, we might be seeing what was earlier unconceivable, The end of the petrodollar economies golden era. They have come to accept it as a possibility and has initiated social and economic reforms unheard of in the region. Revision of commodity prices earlier subsidised for the masses, introduction of remittance taxes and road maps to introduce VAT and cutting unsustainable welfare policies are few of the latest reforms.