It’s common knowledge that the economy is a fickle mistress and the touchstone of any government, dictating its policy, finances and ambitions. This tenet has become more significant in our day and age, whether a country is among the very poor, the average or the formerly rich oil producers. This is an adequate frame of reference from which to observe and analyze the Persian Gulf petro-monarchies
Saudi rulers adopted an ill-conceived policy to steeply lower the price of oil and provide the country with a global monopoly. This policy has unleashed a frenetic campaign to bolster the financial, political and propagandist aims of terrorists in Syria and other countries, an adventure evidently inspired by the blazing sandstorm that has sparked a war against fellow Arab country Yemen and offers no easy way out. The huge sums spent to burnish Saudi Arabia’s global image, along with feckless expenditures on the royal court, are forcing the Saudis to ponder not merely belt-tightening but the imminent collapse of their economy. According to IMF estimates, Saudi Arabia’s treasury will be depleted within five years if the global oil price stays around $50 per barrel over that period, and this year it faces a deficit of 20% of GDP. Saudi Arabia cannot balance its budget unless the price of oil is at least $106 a barrel, IMF analysts have determined. Tim Cullen, the chief of the IMF mission in Riyadh, said that “the fall in oil prices is leading to a substantial reduction in the kingdom’s export and budget revenues.”
In July, Riyadh began to dip into its reserves. As of August 2014, they fell from $740 billion to $ 654.5 billion in one year, according to the country’s central bank. As a consequence, a bond issue was announced for the first time since 2007, and the bonds were bought by Saudi banks. In July, talk was of a $4 billion intake. It was later revealed that Saudi Arabia is banking on receiving up to $27 billion by the end of the year. However, the bond yield is not helping the kingdom maintain its high level of government spending. In September, Barclays predicted that if the oil price holds at $50, the Saudis’ gold reserves will last until 2019 if spending continues at the current pace.
In September, Finance Minister Ibrahim Al-Assaf acknowledged that many domestic projects will have to be abandoned. A case in point was the halt placed on construction of a world-class shipyard. A memorandum signed in 2013 outlined a huge shipyard where offshore drilling platforms and various maritime vessels were to be developed, assembled and repaired. Problems arose most likely because of the yawning budgetary hole that opened as a result of oil prices. According to official statistics, the deficit this year will be about $39 billion. However, these data contradict IMF estimates, which say the number could reach $130 billion.
At that time Al-Assaf also announced that budget expenditures will be slashed, primarily in education, health care and infrastructure projects, which include the new shipyard.
As a result, Saudi Arabia risks losing its status as a catalyst for developing regional offshore oil production. Recently, the Abu Dhabi National Oil Company (ADNOC) announced plans to invest $25 billion over the next five years to develop production on the continental shelf of the United Arab Emirates. That will raise the shelf’s proportion of the UAE’s overall output to 50% by 2018. In other oil-exporting countries, the average share of such production is 30%. So in three years, crude oil output in the UAE will increase from 2.8 million to 3.5 million barrels a day.
Other Gulf countries that are pursuing sound policies and not rushing headlong into assorted escapades (Kuwait and the UAE, for example) are much better shielded against low oil prices, the IMF said. That’s largely because their budgets are not tied as much to the cost of energy commodities. Kuwait can balance its budget with oil at $49 a barrel, the UAE at $73. In addition, both countries have amassed huge reserves. For example, IMF experts forecast that the UAE can live comfortably for 30 years at an oil price of $50 per barrel.
Saudi rulers seem to have begun to seriously think how to escape a fiscal crisis caused by low global oil prices. They are carefully studying the possibility of increasing energy costs in the country, Oil Minister Ali al-Naimi said.
Domestic energy prices in Saudi Arabia are among the lowest in the world due to the fact that they are state-subsidized
The fall in oil prices and the budget contraction are forcing Saudi Arabia to delay payments to government contractors, Bloomberg reported, citing unidentified sources. According to them, some contractors involved in infrastructure projects have not been paid for more than six months. Also, Saudi officials are negotiating a lower price on contracts already signed. Experts say financial constraints may slow the implementation of important projects such as the construction of the Riyadh subway, which is estimated to cost about $22 billion. The lack of funds may affect the pace of job creation. “It’s hard to resist spending when oil is expensive, but curtailing investment when the price falls is a very difficult task,” said HSBC Holdings senior economist Simon Williams. “However, you still have to do it anyway because otherwise the budget deficit will be too large to ignore and pretend that nothing is happening.”
With that in mind, the International Monetary Fund urged Saudi Arabia to kick its oil addiction. That was the message from IMF Managing Director Christine Lagarde after talks with King Salman bin Abdulaziz Al Saud and Finance Minister Ibrahim al-Asaf. Lagarde said Saudi leaders ought to diversify the economy as quickly as possible. In particular, the IMF suggested that the country speed up reforms that will stimulate private-sector employment. So far, Lagarde said, Saudi Arabia has coped with its financial problems thanks to large foreign exchange reserves, but those will not last forever.
New difficulties are in store, though. At the beginning of December, the annual OPEC summit will determine member countries’ strategy for the coming year. Several experts believe that a reduction in output would act as a subsidy for producers with high costs, for example, the United States. However, other OPEC members, like Venezuela and Algeria, are urging production cuts to raise oil prices. Member countries pump out 31.57 million barrels per day, and Saudi Arabia accounts for 10 million barrels of that total all by itself. The price of oil has fallen from $105 per barrel in the summer of 2014 to below $50 today.
Mohammed bin Hamad al-Rumhi, Oman’s oil minister, blamed OPEC and kingpin Saudi Arabia for depressing global oil prices through its policies. He sharply criticized OPEC and referred to oil production levels as “irresponsible.” “This is a commodity, and if there’s an additional million barrels a day, you just destroy the market,” he said. “We are vulnerable; we are running into problems. And we’re talking about this crisis as if it were an act of God. Unfortunately, I don’t believe that. I think we have created it ourselves.” Oman is not an OPEC member. Al-Rumhi was speaking at a conference in Abu Dhabi, and his remarks came on the heels of a speech by a high-ranking official from the UAE’s oil ministry who urged OPEC to maintain current production levels.
It will be interesting to see what difficulties lie ahead for this once-wealthy country whose royal voice was heeded by the power brokers of this world. But now the situation has changed dramatically, and the reason can be found in the missteps made by the royal house, which simply lost its way in the global arena. And so it is that the world’s press is writing about the power struggle taking place in Saudi Arabia. The French newspaper Boulevard Voltaire has a good handle on the situation, writing that “Riyadh is now witnessing a fight for supremacy. Radicals are calling for jihad against infidels, and the Wahhabi royal family is being confronted with the tension of differing generations’ conflicting attitudes. No one knows who will eventually manage to gain the upper hand.”
Viktor Mikhin, corresponding member of the Russian Academy of Natural Sciences, exclusively for the online magazine “New Eastern Outlook.”