In June 2014, a barrel of Brent crude — the main benchmark of the international oil market — sold for $115. Today, less than two years later, the price is $45 or less. Not surprisingly, that collapse has been a massive shock to Saudi Arabia and the Gulf oil sheikhdoms, which rely on oil for some 85 percent of their revenue. And what they need to realize is that, unlike past price declines, this one will not be transitory.
This "new normal" for oil reflects new realities: China's economic growth — and so its demand for oil — is bound to be lower; the world's energy efficiency will increase, not least because of commitments made in December at the Paris conference on climate change; and disruptive innovation is making shale oil and gas, along with renewable energy sources, far more competitive. With the return of Iran, Libya and Iraq as major oil exporters, low oil prices must surely be both inevitable and enduring.
Saudi Arabia and the other Gulf states should not let this crisis go to waste. They now have a perfect opportunity finally to undertake comprehensive economic reforms. Their aim should be a new development model that frees them from dependence on hydrocarbons. The fiscal buffers from past oil revenues can provide the six countries of the Gulf Cooperation Council (GCC) with short-term relief. But they must use that window to launch the structural reforms needed to achieve sustainable economic growth, macroeconomic stability, and the sound and equitable exploitation of their oil and gas reserves.