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Crude Economics
Beleaguered Saudis Consider Cutting Domestic Fuel Subsidies

Stocks plunged in Riyadh today as the country’s oil minister acknowledged that the House of Saud is thinking about cutting a popular fuel subsidy. Crunched by cheap oil, the petrostate is looking everywhere for ways to save money, and the regime’s price support for gasoline could be on the chopping block. The WSJ reports:

Asked if the kingdom is considering cutting energy subsidies in the near term, [Saudi oil minister Ali al-Naimi] told reporters in Riyadh: “What you are asking is: is it under study? And the answer is yes.”

Saudi domestic energy prices are among the lowest in the world. The country, the de-facto leader of the Organization of the Petroleum Exporting Countries, is losing potential export revenue by selling oil domestically very cheaply when international buyers pay much higher prices.

The country currently spends around $86 billion a year on subsidies for petroleum products like motor fuel, making a gallon of regular gasoline cost about 46 cents.

Riyadh will point to its sovereign wealth fund, worth nearly three quarters of a trillion dollars, as a tool to help it weather this period of low oil prices. Without that pile of cash, the Saudis wouldn’t be able to pursue their strategy of waiting out this bear market—they’d be forced to concede to the overtures of some of OPEC’s poorer nations and sketch out a plan to cut production and set a price floor to the global oil market.

Instead, the Saudis have kept output up in a bid to compete for market share, but sub-$50 per barrel oil is wreaking havoc on their finances. The IMF believes Riyadh will run a budget deficit worth 20 percent of GDP this year, and if oil prices stay the way they are, the IMF expects Riyadh to deplete its rainy day fund in just five years. Military spending is up as the Saudis wage war against Houthis in Yemen and back rebels in Syria, and social spending has ballooned in recent years to help appease a restive populace—a step many regimes across the Middle East took in response to the Arab Spring. The oil price plunge came at a particularly inconvenient time for the Saudis.

Al-Naimi’s open acknowledgment of the possibility of domestic fuel subsidy cuts is a sign of the times for Saudi Arabia, which finds itself in quite the predicament. Such is the fate of a petrostate in an oversupplied market.

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  • Jim__L

    What odds would people give, for a palace coup by a pro-price-floor prince, within the next year or two?

    Odds that that prince would, further, be pro-Russian?

  • Jacksonian_Libertarian

    These numbers are bad, Saudi Arabia has a $1.616 Trillion GDP, 20% of that is $323 Billion. So if they have $750 Billion in reserve (and they don’t because they have spent huge amounts over the last year) it will only last a little over 2 years at that rate of spending. The 5 year number in this article is dreaming if the 20% number is correct, and even if they stop subsidizing fuel and save $86 Billion per year, it still won’t be enough to get them 5 years.

    • Ellen

      The GDP of Saudi Arabia is around $650-700 billion, measured by the exchange rate of the dollar against the Saudi currency. Their reserves are now down to $650 billion. According to IMF projections, they will run out of money 5 years from now, if they continue to run the current level of budget deficits. The problem is, they cannot cut the budget beyond a certain amount, because 90% of Saudi citizens have no work skills and many of them will be wandering the streets looking to overthrow the government, which means the royal family.

      Essentially, the chickens are coming home to roost. The Saudi way of life will come to an end in the next 5 years, one way or another. Then, everyone will see that it doesn’t pay to be a petro power when you have a backward, illiterate population that hires slave labor to do all the work and just sits and listens to sermons about how superior the Islamic way of life is. It might be superior as long as it can float on a sea of cheaply produced oil that can be sold at $100+ per barrel. At $50-60 per barrel, it quickly leads to bankruptcy, and possibly the end of the country.

      However, no cause to gloat by the Iranians. They themselves are headed for ruin too, for various demographic and economic reasons. They will both go down – both the Sunnis and the Shiites. That is what Shimon Peres used to giddily call, “the new Middle East.”

      • f1b0nacc1

        You are confusing the Saudis and the Iranians with the Sunnis and the Shiites. Saudi Arabia and Iran may indeed be on unsustainable trajectories (I agree, though I might quibble a bit about the time frame), but the polities that they represent aren’t going anywhere. To be honest, I would be a bit more comfortable with state actors (who at least have something to lose) than non-state actors in this ‘new middle east’.

  • Kevin

    The Yemen thing plus whatever happens in the Gulf and Fertile Crescent could gobble up their budget and reserves in short order. Wars are almost always vastly more expensive than expected. If this grows and goes on for long it will upend how the Saudi state funds itself. Not only will it need productive citizens that don’t need subsidies, it will need to levy taxes on them to raise even more revenue.

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