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Saudi Sorrows
Riyadh Is Reeling from Bargain Oil Prices

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.

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  • Fat_Man

    If they were truly Machiavellian, Saudi and Iran would fight a faux war in the Persian gulf and cut off shipments from there for a few moths. A couple of tankers sunk in the straits of Hormuz would do them a lot of good.

    • JR

      Even then, the biggest beneficiaries will be non-OPEC countries, not least of all because they would be able to say: Hey at least we are not those crazy arseholez over there.

  • CaliforniaStark

    Saudi Arabia is like the spendthrift rich child who inherits a fortunate, and has no sense of fiscal restraint or how to effectively limit spending. Although the Saudi’s are going through the motions of cutting their budget, they still are spending their way into insolvency.
    Worse, they do not understand that fracking and new technology have ended any change of oil prices rising to previous levels. Its going to end ugly.

  • JDogg

    15 of 19. I’m not shedding any tears for them.

  • Ellen

    I agree with all the comments made here. Basically, the Saudis are doomed. As soon as next year, it will become clear that they cannot balance their budget without massive cutbacks in government employment and imposing taxes for the first time on all wage earners. Unfortunately, this will very likely lead to a revolt of certain sectors of the population that are as prone to violence as their Arab counterparts are in other countries: the Shiite minority, militant Wahabis, and young, unemployed men without a future.

    They are faced with an unappetizing choice of bankruptcy without deep spending cuts, or deep spending cuts to forestall bankruptcy leading to social revolution. They deserve it all. Couldn’t happen to a more deserving group of people than the House of Saud. The only question is, who will pick up the pieces when the revolution finally arrives and all 50,000 members of the Royal Family move to Morocco, to a special refuge city built especially for this one family? The fact that they spent a fortune building this city tells me that they are expecting this unhappy end game just as much as all of us are.

    • Kevin

      Taxes are pretty irrelevant as almost all income and wealth comes from oil.

      Thinking about spending – there are basically three baskets: defense and internal security, welfare and subsidies for the commoners and corruption/welfare for the princes and elite. (There’s also basic government like education and infrastructure – I’d put religious spending the the two welfare/subsidy categories.) Cuts to defense and internal security could be dangerous given Iran and jihadis. Cuts to the elite could increase the likelihood of coups as the elite turn on each other to secure the lion’s share of the spoils. Cuts in subsidies and jobs for the boys could increase the likelihood of a revolt.

      • Proud Skeptic

        It would seem that our oil industry has been much more effective in combatting terrorism than has our foreign policy.

  • Proud Skeptic

    Maybe the Saudis can innovate like the Americans did and get that oil out of the ground cheaper. Where is that good old Saudi innovative spirit you hear so much about?

    • CaliforniaStark

      Am curious, can you name any of the innovations resulting from the Saudi innovative spirit? As far as I can tell, it appears they have not yet innovated themselves out of the 13th Century.

      • Proud Skeptic

        Sarcasm, Dude. Sarcasm.

        • CaliforniaStark

          I know, but had to join in.

  • Steve Gregg

    I guess those austerity measures will trickle down to the clients the Saudis fund: ISIS, the Taliban, and Al Qaeda. After all the shooting, it looks like the terrorists will be beat by frackers.

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