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Page added on October 14, 2015
Saudi Arabia needs to get to grips with cheap oil
MONEY is the glue that holds Saudi Arabia together. To maintain a loyal citizenry and counter radicalism, the kingdom’s rulers pamper their subjects with lavish benefits and cushy government jobs. In times of uncertainty, such as during the Arab spring, workers are handed pay rises and bonuses. The last big payout, after the coronation of King Salman in February, cost more than most governments spend in a year.
Such largesse, along with wars in Yemen and Syria and aid to states such as Egypt, has swelled public spending. Oil-rich Saudi Arabia is used to big bills. But for the past year the kingdom has aimed to keep the price of oil low by increasing production in an effort to undermine rivals and gain market share. As the price has collapsed, so too has government revenue, some 90% of which comes from the sticky stuff. The result is a budget deficit that is expected to exceed 20% of GDP this year.
There are now creeping signs of parsimony in the once-spendthrift kingdom. Since July Saudi Arabia has borrowed some $15 billion from its citizens through local bonds, its first issuance of debt since 2007. While more borrowing is expected, the government is also “working on cutting unnecessary expenses”, said Ibrahim al-Assaf, the finance minister, in September. A leaked memo purportedly from King Salman to Mr Assaf hints at urgency. Dated September 28th, it instructs all ministries to stop new projects and stop buying cars, furniture and equipment.
The government has not confirmed the authenticity of the document, but analysts think it reflects the royals’ concerns. The trajectory of Saudi finances is alarming. Government spending has quadrupled since 2003, raising the break-even price for oil—at which the government can balance its books—to over $100 per barrel. With the actual price sitting at around $50 per barrel, big deficits are expected well into the future. The shortfall “is too large to pretend that it’s business as usual”, says Simon Williams of HSBC, a bank.
The kingdom’s wealth gives it some capacity to absorb the fiscal shock. In the past year it has burned through over $70 billion of its foreign reserves, but it still has over $650 billion left. Public debt, which was around 100% of GDP in 1999, is now a paltry 2%. “It has plenty in its armoury to withstand the situation,” says Jason Tuvey of Capital Economics, a research firm.
Drastic measures are therefore unlikely. Analysts do not expect Saudi Arabia to levy new taxes, although the Gulf Co-operation Council, of which it is a member, is mulling a region-wide value-added tax. Nor is it expected to relax fuel subsidies, as other Gulf states have, or cut the public payroll, though fewer jobs may be created.
During the oil glut of the 1980s, Saudi Arabia slashed capital spending, while leaving politically sensitive handouts largely untouched. Although the IMF has advised the opposite approach—maintaining capital spending and cutting handouts—the kingdom looks set for a repeat. It is said to be reviewing plans for new infrastructure and may delay or scale back some projects. It has trimmed plans to build 11 new football stadiums. Next year’s budget, due in December, will show if the government has really turned thrifty.
Fixing the economy will take more than counting pennies, though. The government can no longer create enough public jobs for new workers, so more are pushed into the private sector. But these “Saudisation” efforts, such as setting quotas for hiring nationals by private companies, have made little progress. Expats still hold most private-sector jobs, which often demand more and pay less than government work. After a crackdown on illegal foreign workers in 2013, Saudis did not want many of the unskilled positions left open. Companies, meanwhile, complain of too few qualified workers because the schools teach mostly religion.
For over 40 years the government has tried to boost the private sector and diversify the economy. But while the non-oil sector has grown in recent years, diversification is “a bit of a mirage”, says Mr Tuvey. Much of the growth has occurred in industries that depend on oil (eg, petrochemicals), rely on cheap energy or are supported by the government’s oil-fuelled spending. Oil still accounts for an overwhelming share of the country’s export earnings and nearly half of GDP. The pain of lower prices will be felt widely unless adjustments are made.
11 Comments on "Saudi Arabia needs to get to grips with cheap oil"
rockman on Wed, 14th Oct 2015 3:06 pm
The Saudis have as grip on the situation as possible: responding to lower oil prices they are producing as much as practical to max their revenue.
Hello on Wed, 14th Oct 2015 4:32 pm
It seems strange. If they cut down to 5Mb you would think it’s enough to double the price to 100$ worldwide, keeping their revenue the same while conserving resources, material and manpower. What’s not to like? Contracts?
ghung on Wed, 14th Oct 2015 4:43 pm
“After a crackdown on illegal foreign workers in 2013, Saudis did not want many of the unskilled positions left open.”
Sound familiar?
makati1 on Wed, 14th Oct 2015 8:34 pm
Hello, the world cannot afford $100 oil. They know that. It’s called contraction and is the permanent economy now.
Economic growth has ended, just like in humans at about age 25. From the high energy point on, it is shrinking, just as your body does. Most of us end up inches shorter than we were at age 25. So do economies that rely on net energy growth to grow. Those days are over. The Great Leveling has begun.
Boat on Wed, 14th Oct 2015 10:04 pm
The Saudi’s produce 11 mbps and change out of 93 mbpd. How could they be responsible? Why don’t the other 82 mbpd countries cut their production. The US produces over 10 mbps and so do the Russians. This is capitalism folks, your not supposed to collude to set prices.
GregT on Thu, 15th Oct 2015 12:43 am
The Saudis are still making twice as much money as they were a decade ago when oil prices were still relatively cheap. Of course they will continue to produce flat out. Every barrel that they produce is still being bought at historically high prices. This isn’t rocket science people.
GregT on Thu, 15th Oct 2015 12:48 am
“This is capitalism folks, your not supposed to collude to set prices.”
“You’re” Boat, not “your”.
How fucking stupid are you? You’re like a sad comedy of constant errors. It’s painful listening to you.
MrNoItAll on Thu, 15th Oct 2015 1:50 am
Saudi Arabia is playing the end of the age of oil game just like all other major world governments. SA royals can’t possibly be stupid enough to miss the fact that this whole dog and pony show called the “global economy” is coming to a screeching halt. Only distinguished members of the elite “Clueless Masses” club think that SA’s actions fit within the rationale of ongoing BAU. From what I can tell, Boat is a card-carrying member of that elite club. What we all need to keep in mind is that the financial elites rule the world — banks, governments, militaries, the works — and the financial elites due to their tightly integrated finances around the world especially in top GDP countries are all running plays from the same play book. The goal is to confuse and deceive you, but just up until the moment that they don’t need your belief and faith in “the system” anymore. Little people have always been expendable, mere pawns in the big power games, and that is as true today as it ever was, just on a much grander global scale. If you’re buying all the SA hype generated, such as this article, then you’re missing the entire big picture, and woe unto you.
rockman on Thu, 15th Oct 2015 6:40 am
Hello – “If they cut down to 5Mb you would think it’s enough to double the price to 100$ worldwide, keeping their revenue the same while conserving resources, material and manpower. What’s not to like? Contracts?” As Mak points out the key factor would be demand at that higher price. Remember the demand/supply dynamic doesn’t change that fast. So the KSA cuts 5 mm bopd and over the next few months prices start pushing back to $90/bbl. But as prices rise some oil importers can’t afford that higher price and consumption drops, let say, 5 mm bopd. But now the KSA is selling half much oil as before at almost twice the price, right? Wrong: they are EXPORTING and selling much less then 50% of their former volume. Remember the KSA doesn’t export 100% of their production: they internally consume the better part of 1 BILLION BBLS OF OIL per year. And then add in the question of how long the oil consuming economies can sustain those higher prices? That $90/bbl price might slide to $70/bbl…maybe less.
Remember when oil prices boomed in the late 70’s the world slide into recession. The KSA reduced their production significantly and oil prices still fell to 30% of the boom price. Then the KSA, in order to increase their revenue, opened up their wells and drove the price of oil down to almost 10% of the boom peak price. This entire cycle took about 10 years to manifest itself. And then as the global economy recovered with the help of lower oil prices it still took several more years for prices to recover even to just 30% of the boom price. The KSA lost $BILLIONS by cutting production and still didn’t come close to pushing the price back up to the boom level.
The KSA hasn’t forgotten that very expensive lesson.
Boat on Thu, 15th Oct 2015 6:53 am
Greg @ oil historic high prices, like lol at a recession during growth. Really, where do you come up with this stuff.
shortonoil on Thu, 15th Oct 2015 8:54 am
“Oil-rich Saudi Arabia is used to big bills. But for the past year the kingdom has “aimed to keep the price of oil low” by increasing production in an effort to undermine rivals and gain market share.”
The kingdom has “aimed to keep revenue as high as possible” because the price of oil is low! These clueless idiots are never going to figure it out? Saudi Arabia is not setting world oil prices, they are responding to them just like every other producer in the world.
Stuck with broken Econ 101 models that a “bright clam” could find contradicts with, they are searching for a Bogey Man to blame for the oil conundrum. Price is going down, and demand is not responding? The fact that they are trying to measure oil with an elastic ruler (the dollar) has never occurred to them as maybe not the best idea. We’ll try to keep the world informed as these augers of the imperial realm continue to throw their darts, and cast the necessary spells. In the mean time the price of oil will continue its long term downward trend. This will continue to perplex these high priest of to the holy dollar. After Saudi Arabia has completely collapsed they can then blame the low price on the latest recognized petroleum devil. Maybe the phase of the moon?
http://www.thehillsgroup.org/