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Crude Economics
Saudis Feel the Squeeze

Saudi Arabia spent 5 percent of its massive rainy-day fund in February and March, the largest two-month total on record for the petrostate. Low oil prices and bonuses for pensioners and government workers cost the central bank $36 billion in foreign assets, the FT reports:

The central bank’s foreign reserves have dropped by $36bn, or 5 per cent, over the past two months, as newly crowned King Salman bin Abdulaziz al-Saud dips into Riyadh’s rainy-day fund and increases domestic borrowing to fund public sector salaries and large development projects.

The latest data show Saudi’s foreign reserves dropped by $16bn to $708bn in March, driven by public sector bonuses paid by King Salman after he assumed power in January. This follows a fall of $20bn in February. Saudi Arabia has spent $47bn of foreign reserves since October.

The new king has also promised bonuses to those in the military fighting Houthi rebels in Yemen, a politically motivated decision that will further drain the country’s sovereign wealth fund. This comes at a time when bargain crude prices are expected to raise the Saudi budget deficit to nearly 15 percent of its GDP this year.

Saudi Arabia’s foreign reserves still exceed $700 billion, so Riyadh can still stomach low prices for the time being. The rest of OPEC isn’t nearly as well prepared, however, and many of the cartel’s members have taken to publicly agitating for production cuts as a way to push crude prices upwards. So far the Saudis have resisted these calls, preferring instead to weather the low prices to compete for market share, but that tune may change if they have to continue to burn through their foreign reserves.

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  • Jacksonian_Libertarian

    If we assume an $18 billion a month draw on their reserves, Saudi Arabia’s $700 billion will last 38 months or 3 years 2 months. This is assuming the price of oil remains where it is and doesn’t fall even further, which is highly possible as OPEC is pumping record amounts and the US will produce more this year, and the world’s economy is 6 years into Great Depression 2.0 and doesn’t need more oil.

    • GS

      – A wrong assumption. Even in the days of “Arabian Nights” an incoming ruler had to distribute largesse to the military and the upper officialdom, to buy some loyalty. Old traditions die hard. The regular drawdown rate is much lower, as that 18B/mo includes this one-time expense.

      • Kevin

        Makes sense. He also needed to payout to buy loyalty during the recent reshuffle.

        He needs to watch out though if the rest of the family thinks he’s too profligate – remember the Mad King Ludwig of Bavaria whose relatives deposed him because they feared he was squandering the family patrimony. If Yemen turns into an expensive stalemate that drains the royal coffers they may decide new leadership is needed.

        As for the future price of oil – if I was certain about it I wouldn’t be telling you lot, but buying (or selling) a boatload of futures contracts. 🙂

  • Andrew Allison

    TAI’s commentary on the oil price imbroglio has been, and remains, disappointing. As if the insistence that US shale producers are the target of the Saudi’s maintenance of production were not ridiculous enough, the suggestion in this latest post that 2.5%/mo of the Saudi rainy-day fund represents a squeeze is in conflict with previous posts that point out that they can afford low prices for much longer than their fellow-members of OPEC. As previously commented, this is a very interesting squeeze play — the other members are going to run out of money before the Saudis. This week’s hijacking by Iran of a ship in the Straits of Hormuz suggest that the message has been received.

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