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Crude Economics
Saudis Are “Hemorraghing” Cash as Oil Prices Plunge

Saudi Arabia’s foreign reserves are depleting at a staggering pace as Riyadh struggles to balance its budget at current oil prices. The petrostate saw its sovereign wealth fund balloon to three quarters of a trillion dollars last summer, but a bearish oil market now has it running a budget deficit of some 20 percent of GDP. As a result, those reserves have dropped more than $72 billion over the past year, and, as Bloomberg reports, they are expected to shrink even further:

Economists at Jeddah-based National Commercial Bank forecast in a July research note that Saudi Arabia’s net foreign assets will fall to $655.5 billion this year and drop $22.1 billion more in 2016.

The government plans to sell as much as 20 billion riyals ($5.3 billion) of debt on Monday as part of a wider plan to raise 90 to 100 billion riyals before year-end to help cover the deficit, two people familiar with the matter said.

If that happens, government debt would increase to about 7 percent of economic output from less than two percent last year, the lowest ratio in the world, Jean-Michel Saliba, a London-based economist at Bank of America Merrill Lynch, wrote in a research note.

Riyadh has strong-armed its fellow OPEC nations into a strategy of inaction in the face of plunging oil prices this past year, choosing to weather bargain crude prices in the hopes of gaining market share against upstart non-OPEC suppliers (American fracking firms chief among them). The Saudis hoped that low prices would squeeze shale out of business before hitting the petrostates too hard. It was, essentially, a game of chicken of the highest stakes.

But the Saudi central bank itself now doesn’t believe the strategy is working, admitting in its latest financial stability report that “[i]t is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run.” In other words, shale firms have surprised the world with their resilience, and that’s very bad news indeed for petrostates both within and without the cartel.

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  • Jacksonian_Libertarian

    And Saudi Arabia is in much better financial shape compared to the other members of OPEC.

    It is wonderful to have competition back in the oil market. Mankind will benefit immeasurably from this, as modern civilization is founded on the replacement of muscle power with all the other forms of energy of which oil is the most flexible.

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