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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