When you live by the price of crude, it follows that you also die by it. That’s what the oil-soaked kingdom of Saudi Arabia is experiencing, and a new report from Wood Mackenzie shows that of all of the Middle East’s petrostates, it’s the Saudis that are suffering the most as a result of the collapse in crude prices over the past 29 months. The FT reports:
Despite its tendency to laud its huge fiscal buffers and low debt levels, the [Saudi] kingdom, which is the world’s largest crude exporter, is among the most oil-dependent nations in the Middle East. It will have to endure the sharpest economic slowdown of the region’s biggest oil producers for years to come, [a new report from Wood Mackenzie] said.
The kingdom’s gross domestic product will slow from an annual average of 5 per cent in the five years to 2015 to 1.9 per cent by 2020, underlining the depth of the slowdown…The protracted oil price slump has created a ballooning budget deficit and a currency collapse, forcing Saudi Arabia to slash spending, implement austerity measures and raise its international debt to fill a gaping hole in its public finances. […]
Saudi Arabia endured the largest fall in oil revenues as a proportion of total government revenues when oil prices slumped, and it is depleting its cash reserves at a rapid pace. Iran’s dependence on oil, meanwhile, is the lowest of all five of the Middle Eastern economies.
According to this new report, the Saudis fiscal deficit is now equivalent to a whopping 20 percent of the country’s GDP, and goes on to show that if Riyadh wants to balance its budget this year, it would need oil prices to hit $92 per barrel.
Barring some major supply disruption, that’s not going to happen. Oil prices are currently trading at exactly half of the reported Saudi breakeven price, and even the most optimistic readings of the effects of a potential OPEC production cut later this month only predict prices rebounding to somewhere in the range of $65. And let’s not forget that if and when that happens, hungry American shale companies will be pouncing on the opportunity to ramp up their own output, necessarily denting the impact of OPEC’s cuts.
So what does all of this mean? For now and the foreseeable future, Saudi Arabia is going to continue to run an enormous budget deficit, and will be forced to dig deeper into its rainy day funds in order to cope with today’s new oil market reality.