A gas flame is seen in the desert near the Khurais oilfield, about 160 km (99 miles) from Riyadh. Ali Jarekji/Reuters

What If Oil Doesn’t Bounce Back?

So, what happens to Saudi Arabia’s budget deficit if oil stays in the $30 rather than $50 range? Bank of America Merrill Lynch gives us the following estimates:

Even with a 25% budget cut, Saudi Arabia would have just three to five years of reserves and borrowing available at $30 oil. We note that several respected investment banks are projecting that oil will fall to $20 this year.

If a crisis in Europe or China were to even slightly reduce global demand, $20 oil seems a very real possibility.

A global recession? That would add a perfect storm potential to push oil prices down to levels not seen since the 1970s. Now, we are not predicting this will happen. We’re saying that wise investors must recognize the not insubstantial tail risk of such an event and have their contingency plans already developed.

Bottom line? It is highly conceivable that Saudi Arabia could face immense budgetary pressure before 2020. That was unimaginable just three years ago.

How the Fall of Saudi Arabia Could Lead the World to the Edge of Disaster

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The article was excerpted from the report Saudi Arabia—a Failing Kingdom.