Inflationomics

Another Consequence of Declining Oil Prices?

You may have heard that Saudi Arabia has just brought a halt to its experiment of growing wheat in the desert.  In other words, they are about to stop turning their oil revenues into locally-grown subsidized food and water for themselves and other Arab countries.  Instead, they will begin importing food grown elsewhere.

It all began in 1970, with expanded water subsidies. Consequently, Saudi Arabia’s population exploded.  Continued subsidies were required, not only for water, but also for food to keep the growing population happy.  The problem with these subsidies was that the population grew to a size beyond the food the country could produce without the subsidies. (Cheap food and water allow people to feed more mouths; i.e., have more babies.)  Now, they are forced to continue with their food and water subsidies by buying food from other countries or risk social upheaval.  Unfortunately, energy and food subsidies have been common among the oil-producing countries of the Middle East and northern Africa.

Everything went along fine in Saudi Arabia (except for the depleting water supply) until 2008, with its wild oil price swings, and even after that through 2014, when oil prices started their decline to around $40-$50 per barrel.  Now that prices are so much lower, it’s taking more oil to purchase the same amount of food…and Saudi Arabia’s oil supply isn’t growing any larger, and they are beginning to run budget deficits.  I can’t help but wonder how much longer before Saudi Arabia is forced to cut back on its food and water subsidies?

Cutting back on food subsidies does two things: 1. It reduces the number of jobs available to Saudis working in agriculture (or the number of immigrants hired from foreign lands).  Where will they find employment?  Or will they prefer to remain unemployed and on social welfare?  The oil industry is becoming more mechanized and computerized all the time.  No new unskilled labor needed there.  2.  It reduces the amount of food available at subsidized rates…less food, more incentive to go elsewhere and a declining birth rate.

The real problem, in my opinion, will occur when there is a disruption in grain production in a country from which wheat is imported, now that Saudi Arabia won’t be growing its grain locally any more.  It could be Russia.  You know Russia will stop exporting its wheat and allow people in the Middle East to starve or emigrate…to Europe.  Alternately, the oil prices could stay depressed for an extended period of time.  This, too, would put financial pressure on Middle Eastern oil-producing countries.

Is it any wonder that the richest Middle Eastern countries aren’t doing much to help Syrian refugees?  They could very easily be next in line to see a flood of their own people become refugees in foreign lands.  Perhaps they are becoming more cost conscious about growing food in the desert and saving up their money to address the REAL crisis which could happen at any time.  In short, most of the oil-producing countries in the Middle East and northern Africa are poised to export people as soon as there is some sort of oil, water, or food crisis…or war.

Robert F. Sennholz

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