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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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