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Crude Economics
Saudis Burn Through Foreign Reserves

Riyadh is burning through its massive trove of foreign reserves at a breathtaking pace, reportedly withdrawing between $50 and $70 billion over the past six months to help pay off its widening budget deficit. Saudi Arabia’s military involvement in Yemen is pressuring its budget, and, of course, cheap crude has dramatically changed the petrostate’s fiscal outlook. Bloomberg:

“Foreign-exchange reserve depletion, rather than accumulation, is the new reality for Saudi Arabia,” Jason Tuvey, Middle East economist at Capital Economics, said in an e-mailed note Monday. “None of this should come as much surprise,” given the current-account deficit and risk of capital flight, he said […]

While foreign-exchange reserves could sustain the country for years, analysts have said that using them to avoid further cost-cutting could put its credit rating at risk. The Saudi government, so far, has been short on specifics on how it will reduce spending, though planners are said to be considering measures long viewed as off-limits or unnecessary, including phasing out fuel subsidies and investing in renewable energy.

Saudi Arabia’s breakeven oil price—the price at which it needs to sell its crude in order to balance its budget—is estimated to be somewhere in the range of $105 per barrel, but with the market flooded with new sources of crude, the likelihood of a significant rebound from current sub-$50 levels seems slim.

The Saudis have strong-armed OPEC into following a do-nothing strategy in the face of the price plunge, choosing to endure the bargain prices and fight for market share instead of cutting production to set a price floor, as the cartel has done in the past. Riyadh has committed itself to a high-stakes game of chicken with upstart U.S. shale producers, hoping the high cost of fracking will make American companies blink first. There are signs of strain everywhere you look in the U.S. shale industry, but, as this story shows, the costs are mounting for the Saudis as well, and the IMF warned that the Saudi budget deficit could balloon to 20 percent of GDP this year.

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  • Brett Champion

    I’d say that levying some taxes on the population would be a way to reduce or eliminate this budget gap (Saudis, I believe, pay no income, profit, or sales taxes), but I highly doubt the al-Sauds want to do that. If they start taxing people, then, who knows, those people might actually start demanding some accountability from their rulers.

  • Andrew Allison

    Sigh. There’s absolutely no evidence that US shale producers are the target. The latter produce sweet crude, the Saudis sour. It’s all about market share for the latter.

    • CapitalHawk

      This is how the media megaphone works – ignore any criticism or questions and just keep blasting the same statement again and again and again. Eventually enough people will believe it.

      • Andrew Allison

        Of course, but one hopes for better from TAI.

    • ImperiumVita

      It seems likely to me that there is not one single target. US producers are a plausible target considering that there is a global market for refined petroleum products regardless of the type of crude. Russia is a plausible target which the Saudi’s may be seeking to discourage from active support of Assad, Russia’s budget also depends on high oil prices. Iran is a third plausible target as the regional rival of Saudi Arabia. While it is likely that Iranian supply profits post sanctions are on the Saudi’s minds, if the target was solely Iran, the Saudi’s started way to early.

      There may also be other factors, but these I see as the main three.

      • Andrew Allison

        You may be right, but I somehow doubt that there’s any objective other than maintaining market share. Whilst there may be a global market for petroleum products, it’s constrained by the ability of refiners to process them The topic is whether the Saudis are targeting US shale producers, and given the negligible imports of light crude and inability of US refiners to process the US production the answer should be obvious.

        • f1b0nacc1

          Given the nature of the oil market (it is a standard commodity, can be shipped anywhere, and is pretty much indistinguishable as to source), your point is very strong. The Saudis might like to use their oil to undercut the Iranians, the Russians, and (possibly) the Shalies (in that order), but first and foremost, it is about maintaining market share and keeping control (such as it is) of the market.
          To cite that great bit of wisdom from “The Godfather”….”It’s nothing personal….just business”

  • Jacksonian_Libertarian

    Cartels work great as long as the demand keeps up, and competitors are a minor share of the market, this isn’t the case at the moment. It looks to me like OPEC is going to collapse. The Saudi’s aren’t interested in keeping it alive any longer. I think because they prioritize their enemies in Russia and Iran over the Cartel. It looks like they think they can live off their sovereign wealth fund for several years, drill more wells so they can increase production and reduce the drain on the fund, as well as gain market share from their enemies and other OPEC members who are in reality competitors.

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