The nearly 50 percent plunge in the price of oil during the past six months is expected to leave oil-rich Saudi Arabia with its first budget deficit since 2011 and the largest in its history.
The budget, announced on Dec. 25, will include spending during fiscal 2015 of $229.3 billion, higher than in 2014, despite revenues estimated at only $190.7 billion, lower than in the current fiscal year. That would leave a deficit of $38.6 billion.
Oil prices have been dropping since June because of a market glut, caused in part because of prodigious oil extraction in the United States from shale formations.
Related: Saudi Arabia Ready For $20, $30, $40 Oil
As a result of this glut, OPEC was urged to cut production levels at its Nov. 27 meeting in Vienna in an effort to shore up prices, but wealthy members of the cartel, led by Saudi Arabia, decided to keep production at its nearly two-year-old level of 30 million barrels a day.
Saudi Oil Minister Ali al-Naimi has since explained that the OPEC strategy was to reclaim market share. Fracking has made the United States, once the cartel's largest customer, nearly self-sufficient in oil. But fracking is expensive, and many believe it can't be profitable if the price of oil falls much below its current level of around $60 per barrel.
Oil is the principal, if not the only, resource in Saudi Arabia, so it's clear that the price of oil has a strong influence on how the country's annual budget is drawn up. Different analyses, however, provide different answers to how Riyadh has forecast the commodity's value. Four of these reports say the Saudi budget is predicated on oil averaging $55 to $63 per barrel in 2015.
One, from the Saudi investment bank Jadwa Investment, said the budget shows that the kingdom expects its oil exports to average $56 per barrel in 2015. Monica Malik, the chief economist at Abu Dhabi Commercial Bank, agrees, putting Saudi oil expectations at $55 per barrel.
The National Commercial Bank, the largest financial institution in Saudi Arabia, said the Finance Ministry expects a price of $61 per barrel. And Emad Mostaque, an oil strategist at Ecstrat, which consults for emerging markets, said the kingdom expected a price of $63 per barrel.
Related: Did The Saudis And The US Collude In Dropping Oil Prices?
One particularly knowledgeable analyst is John Sfakianakis, the former chief economic adviser to the Saudi Finance Ministry. He told the London-based Arabic-language newspaper Asharq Al-Awsat that the budget is predicated on oil prices that are appreciably higher, averaging about $75 per barrel in 2015 while keeping production steady at 7 million barrels per day.
"What happened is a surprise to some extent, for amid this huge decline in the price of oil, the majority of people believed that the Saudi budget would base its projected revenues on $60 per barrel," Sfakianakis said.
"When Saudi Arabia bases its projected oil revenues for next year on $75 per barrel, it is sending a strong message to the market that it expects oil prices to rebound next year," Sfakianakis said.
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com More
Comments
Why do people keep repeating this nonsense? We produced somewhere around 9MB/day in 2014. We consumed somewhere around 18MB/day. How does that qualify as "nearly self-sufficient"??? Yet you hear this myth repeated constantly. Yes, production has increased dramatically in the last four years in the US, but self sufficient? Dream on.
Massive number of foreign migrant workers who sent remittances to their home countries and those nations who depend on them will be severely impacted
the end of the Petrodollar.
I guess 4.88 QUADRILLION DOLLARS is hard to live on.
Boy! What a curl world!
In the mean time, I'm enjoying the low gasoline prices.
Just what are Saudi Arabia, and the other 'oil rich' states of the Middle East going to do when the gushers finally run dry. And they will. Someday.
They'd better get their houses in order now, and figure out some other way to pay for the excesses of their 'royalty', and to provide for their people. Poor people are angry people.
This won't end well.
It is probable the Saudi's see what is coming at them and are trying to slow the trend by reducing financial incentive.
"This brings up an interesting point.
Just what are Saudi Arabia, and the other 'oil rich' states of the Middle East going to do when the gushers finally run dry. And they will. Someday.
They'd better get their houses in order now, and figure out some other way to pay for the excesses of their 'royalty', and to provide for their people. Poor people are angry people.
This won't end well."
Well, they have lots of money tied up in sovereign wealth funds, stocks, banks and other investments which will keep them afloat for a long time. Oil wont dry up anytime soon, if anything another 100 years.
The Arabs have 80 years of oil at recent production rates. If they want to sell most of their oil before AGW shuts down oil markets, they need to increase their market share. They can do that by pumping more oil. Pumping more oil is how they can collect more total oil revenue.
I project that Wal-Mart will get an opportunity to streamline North Dakota refining and distribution of Natural Gas and gasoline. This will produce a permanent retail price for gasoline, beneath 50cents a retail gallon. Likewise Natural gas. Then, the fringe utilization of these natural resources will become the issue and again, Wal-mart wil be the delivery mechanism. This is going to be the long-term mechanisn for American prosperity.