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Page added on September 24, 2016
Kingdom Comedown: Falling Oil Prices Shock Saudi Middle Class
Mohammed Idrees used to travel to London once or twice a year, but these days the Saudi civil servant is asking his wife and children to cut back on using the family car to save fuel and has installed a solar panel for the kitchen to reduce electricity costs.
For decades, Saudi nationals such as Mr. Idrees enjoyed a cozy lifestyle in the desert kingdom as its rulers spent hundreds of billions of dollars of its oil revenue to subsidize essentials such as fuel, water and electricity.
But a sharp drop in the price of oil, Saudi Arabia’s main revenue source, has forced the government to withdraw some benefits this year—raising the cost of living in the kingdom and hurting its middle class, a part of society long insulated from such problems.
Saudi Arabia heads into next week’s meeting of major oil producers in a tight spot. With a slowing economy and shrinking foreign reserves, the kingdom is coming under pressure to take steps that support the price of oil, as it did this month with an accord it struck with Russia.
ENLARGE The sharp price drop is mainly because of a glut in the market, in part caused by Saudi Arabia itself. The world’s top oil producer continues to pump crude at record levels to defend its market share.
One option to lift prices that could work, some analysts say, is to freeze output at a certain level and exempt Iran from such a deal, given that its push to increase production to pre-sanction levels appears to have stalled in recent months. Saudi Arabia has previously refused to sign any deal that exempts arch-rival Iran.
As its people start feeling the pain, that could change.
The kingdom is grappling with major job losses among its construction workers—many from poorer countries—as some previously state-backed construction companies suffer from drying up government funding.
Those spending cuts are now hitting the Saudi working middle class.
ENLARGE Saudi consumers in major cities, the majority of them employed by the government, have become more conscious about their spending in recent months, said Areej al-Aqel from Sown Advisory, which provides financial-planning services for middle-class individuals and families. That means cutting back on a popular activity for most middle-class Saudis: dining out.
“Most people are ordering less food or they change their orders to more affordable options,” she said.
To boost state finances, Saudi Arabia cut fuel, electricity and water subsidies in December, after posting a record budget deficit last year. It also plans to cut the amount of money it spends on public wages and raise more non-oil revenue by introducing taxes.
But in response to these moves, inflation more than doubled from last year to about 4% now, crimping consumers even more.
The government doesn’t have much choice. Saudi Arabia’s real growth in gross domestic product slowed to 1.5% in the first quarter from the year-earlier period, according to its statistics office, and Capital Economics says data suggest it may have contracted by more than 2% in the second quarter. Much of that slowdown is related to consumer-facing sectors, which have struggled since the start of 2016 as rising inflation has eroded household incomes.
The political stakes for managing this slowdown are high. Saudi Arabia survived the Arab Spring unrest that toppled several autocratic leaders across the region and forced some others to change, largely by offering cash handouts and more government jobs to placate its people. About two thirds of Saudi workers are employed by government related entities.
Besides cushy jobs, such middle-class Saudis also received substantial overtime payments and regular bonuses. At the time of his ascension to the throne early last year, King Salman ordered a hefty bonus payment to government employees.
Such largess is looking like a thing of the past.
Besides cutting state handouts such as subsidized electricity and water, the government also plans to reduce money it spends on public wages to 40% of the budget by 2020 from 45% as part of its ambitious plan to transform the oil-dependent economy. It aims to cut one-fifth of its civil service as well.
Saudis are beginning to speak out about a sense of anxiety about the economy. “I think we are going through a difficult period,” said Emad al-Majed, a Riyadh-based pharmacy technician. “There will be suffering.”
Mr. Majed, who has two children, took a bank loan to purchase an apartment last year, a decision he said made him reconsider his spending habits.
“If you are used to a certain level of spending, how can you be told to limit your expenses and cancel some stuff?” he asked. “It is a good idea, but in practice it will be difficult for so many people.”
Saudi nationals are reluctant to gripe about rising costs, but there is clear discontent, some analysts say. In a region engulfed in political and sectarian strife, Saudi Arabia can ill-afford similar turmoil.
“Discontent so far has been mildly expressed,” said Robin Mills, chief executive at Qamar Energy, a Dubai-based consulting firm. “If the slowdown continues and starts affecting local jobs, that could change.”
For the kingdom’s fiscal position to improve significantly, analysts say oil prices would need to rise to $70 a barrel, up from about $46 now.
Saudi Arabia and the other large producers failed to reach a production-freeze deal in April, but its people are now increasingly jittery over their future. That has made people like Mr. Idrees, the civil servant, more cautious about spending because he sees people like him bearing the brunt of efforts to offset slipping oil revenue.
“I have become more diligent about spending because my view of the future is pessimistic,” he said. “There is a lot of talk about diversifying the economy, but the focus seems to be solely on increasing taxes.”
15 Comments on "Kingdom Comedown: Falling Oil Prices Shock Saudi Middle Class"
Kenz300 on Sat, 24th Sep 2016 11:20 am
Diversify..diversify..diversify….
Having all your eggs in one basket is a disaster waiting to happen.
When times were good and KSA was flush with cash they should have diversified their economy away from SOLE reliance on oil. Seems like wind and solar should be the first choice for energy production in the desert. Instead they used their cheap oil.
Water is always a problem in the desert. Water desalinization plants should be solar powered.
Subsidizing fuel prices led to wasteful use and pushed up domestic consumption levels.
It is time for oil producers and oil consumers to realize that the fossil fuel era is coming to an end.
Climate Change is real and it will impact all of us.
We will see how HOT it gets in the DESERT.
rockman on Sat, 24th Sep 2016 11:27 am
And to think some folks still believe the oil price collapse was intentionally done by the KSA to hurt US shale drillers. This article does a fair job of highlighting the pain brought to the KSA by the lower oil price. More important it proves that the KSA has no control over oil prices…it can only impact its revenue by how much oil it sells. The oil buyers continue to set the price they are willing/able to pay.
The KSA had only one of two options as the oil buyers began to lower the price they would pay. A – decrease production and lose market share to Russia et al that didn’t decrease oil sales. Or B – increase production which, while not supporting higher oil prices, would maximize its revenue.
Given Option A would have resulted in even worse financial problems then the KSA currently faces it really had no choice but go with Option B. Even more important: they have little choice but to stick with that option. Especially since Iran is trying desperately to be in a position to grab any market share the KSA might surrender. Should that gambit play out the KSA would be in even worse financial shape then it is now.
penury on Sat, 24th Sep 2016 11:36 am
I am afraid that the economic reset will affect the rich as well as the rest of us. Just not as much. I would add option C to Rockman’s list. Cut the allowances for the royals and force some of the rest to go to work. Eliminate most f the foreign nationals who do the real work and voila more money for the economy. Shame some pampered natives might have to do work.
paulo1 on Sat, 24th Sep 2016 12:39 pm
The country will tear itself apart before any meaningful change will occur. People have to know how to work before they can actually take it on and make a personal difference.
I remember 30 years ago I had a Somali student worker for a summer employment program at a fish hatchery I used to run. His wages were paid by the Canadian Govt, no less. He was the son of a civil servant. When I finally got down to the nitty gritty of what his extended family actually did for a living there were only two categories for them. They were either civil servants, or students who were paid to go to school. Believe me, this kid did NOT know how to work at all. I used to catch him sleeping in our crew cab at every opportunity. One day, after catching him sleeping for the 100th time I snuck up on the truck and fired my rifle (.30 .30) through both open windows. That, woke him up. After that, he thought I was somewhat crazy and kept his eye out. I have often thought that he and his family were most likely killed when Somalia collapsed.
He never did learn to work, though. It was a foreign concept and was always done by others. I would imagine it is much the same in KSA.
Dredd on Sat, 24th Sep 2016 1:08 pm
It gets worse (Epipelagic Magic);
JuanP on Sat, 24th Sep 2016 1:37 pm
Saudi Arabia has very little water or agricultural soil. With their excessive population level and diminishing fossil fuel reserves their future looks very grim. If I lived there I would get out ASAP.
Anonymous on Sat, 24th Sep 2016 1:42 pm
I wonder if the house of ‘saud’ is starting to think that following the washingdum\Tel Aviv\London axis orders to wage economic war against Russia and Iran was such a good idea after all. Not that they had a lot of choice in the matter, but they could have what little leverage they do have, to resist the empires orders. AND washingdum directs them to start a war in Yemen at the same time. Obstinately to battle ‘Iranian influence’, but that was utter nonsense as well.
Good deal for the uS\uK arms dealers, bad for just about everyone else, including the hapless ‘saud’ puppets and their lazy, indolent ‘middle class’.
Had the ‘sauds’ defied washingdum\Tel Aviv, prices would still have fallen, but I am willing to bet they would have not have fallen as far, and fast, as they have. Then again, the actual markets where oil is traded and sold, are in, yea, Jew York and London, so its still not entirely to what extent the ‘sauds’ could have prevented the empires oil war with Russia, if they had wished to do so. (They didnt-obeying washingdum and Tel aviv is baked into the ‘house of saud’.)
Boat on Sat, 24th Sep 2016 2:02 pm
Anonymous on Sat, 24th Sep 2016 1:42 pm
Do you even have a clue which countries have added the most oil since the glut started? More non information based hate filled drivel. Yo’ non internet expert, google it.
Baptised on Sat, 24th Sep 2016 2:21 pm
I am thinking about moving to California. I would like to work in the picking of fruit & vegetables part of the year, up to my $14,000 limit. Would I be able to work with the other culture as a hard working white guy?
dooma on Sat, 24th Sep 2016 3:24 pm
Kenz, with all due respect, do you know how many solar panels it would take to run a large-scale desalination plant?
More than the Saudi’s could afford IMHO.
Anonymous on Sat, 24th Sep 2016 4:52 pm
No dooma, he does not. He just repeats his same set of canned platitudes endlessly. In this case, the idea that the ‘sauds’ should use solar panels to power desal plants, just sounds good to him. Doesn’t matter what the reality behind that would entail, to him, just sounds good.
Cloggie on Sat, 24th Sep 2016 5:41 pm
Saudi Arabia has very little water or agricultural soil. With their excessive population level and diminishing fossil fuel reserves their future looks very grim. If I lived there I would get out ASAP.
Juan, very few people have the option to “go places”.
makati1 on Sat, 24th Sep 2016 5:49 pm
Cloggie, you are correct. He should ask the current ME ‘immigrants’ trying to go to Europe how easy it was/is. Not to mention the thousands who die trying.
Sissyfuss on Sat, 24th Sep 2016 7:09 pm
Picking fruit will take 7 years to earn $14000. Go get um!
joe on Sun, 25th Sep 2016 7:58 am
SA is more socialist than Venezuela. If the west really believed in free market economics it would have toppled the Saudi Regime long ago. The house of Saud lives because it is unpopular and illegitimate. Unelected, they remain in power by western support only. Even Hamas had to be elected, even the tyrant Erdogan got elected, even Putin got elected, but not the Saudis, they get a pass, and for what?