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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