• 4 minutes Will Libya Ever Recover?
  • 9 minutes USGS Announces Largest Continuous Oil Assessment in Texas and New Mexico
  • 13 minutes What Can Bring Oil Down to $20?
  • 16 minutes Venezuela continues to sink in misery
  • 17 hours Alberta govt to construct another WCS processing refinery
  • 4 hours Rage Without Proof: Maduro Accuses U.S. Official Of Plotting Venezuela Invasion
  • 8 hours Paris Is Burning Over Climate Change Taxes -- Is America Next?
  • 8 hours Instead Of A Withdrawal, An Initiative: Iran Hopes To Agree With Russia And Turkey on Syrian Constitution Forum
  • 18 hours Let's Just Block the Sun, Shall We?
  • 9 hours Water. The new oil?
  • 4 hours Storage will in time change the landscape for electricity
  • 2 days Quebecans Snub Noses at Alberta's Oil but Buy More Gasoline
  • 2 days U.S. Senate Advances Resolution To End Military Support For Saudis In Yemen
  • 2 days OPEC Cuts Deep to Save Cartel
  • 8 hours Regular Gas dropped to $2.21 per gallon today
  • 2 days Global Economy-Bad Days Are coming
Alt Text

Oil Prices Crash To 1-Year Lows

Oil prices have crashed to…

Alt Text

Libya’s NOC Won’t Pay ‘Ransom’ For Biggest Oil Field

Libya’s National Oil Corporation said…

Alt Text

Crypto Mining Could Leave This Region Without Power

Authorities in Abkhazia are trying…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

More Info

Trending Discussions

Despite Low Oil Prices, Saudi Arabia Stabilizing Economy

The Saudi economy is stabilizing after the government implemented pivotal reforms in order to address a fiscal and economic crisis because of plunging oil prices.

Over the past two years, Saudi Arabia cut energy subsidies, slashed public spending, and started to look for new ways to raise revenue outside of the oil sector. The IMF forecasts the Saudi budget deficit to narrow from 13 percent of GDP in 2016 to 9.6 percent in 2017. That is a dramatic improvement from the 16 percent deficit the country posted last year.

The improved forecast earned praise from the IMF. “The fiscal adjustment is under way, the government is very serious in bringing about that fiscal adjustment,” Tim Callen, the IMF’s Saudi mission chief, told Bloomberg in an interview. “We’re happy with the progress that’s being made.”

Although Saudi Arabia is running a huge deficit, it does not appear to be an emergency. In countries without huge cash reserves, such a deficit would be a major problem. But Saudi Arabia has hundreds of billions of dollars in reserves, allowing it to coast for a while.

Saudi Arabia did see its credit rating downgraded earlier this year by Moody’s because of the collapse of oil prices. “A combination of lower growth, higher debt levels and smaller domestic and external buffers leave the Kingdom less well positioned to weather future shocks,” Moody’s wrote in May.

But with the deficit-to-GDP ratio falling, the IMF is not concerned. “We would be worried if the fiscal deficit were to remain at the levels it reached last year for another couple of years, because that would mean there will be large fiscal financing requirements,” he said. But the IMF’s Tim Callen said that balancing the budget by the end of the decade should be “doable.” Oil prices should rebound in the years ahead, which should put cash back into Saudi government coffers.

Still, Saudi Arabia is not exactly sitting pretty. GDP growth is still at a moribund 1.2 percent in 2016, with only a modest improvement to 2.25-2.5 percent over the medium-term. That won’t be enough to absorb the bulging population of young people in the country. For decades the government has employed legions of people in the public sector, but the ongoing “fiscal adjustment” – a euphemism for cutting the size of the state – will mean that young Saudis will no longer be able to fall back on cushy government positions. Related: Why The Bear Market Could Be Over In A Flash

That leaves the private sector to pick up the slack. But it may be a struggle to expand the relatively small private sector in a country that has long depended on the state for growth. The state will continue to play a very large role in the economy, and the high levels of social spending needed to keep its population happy means that Saudi Arabia has a rather high breakeven oil price for its budget, even though it produces oil for only a few dollars per barrel. With its budget breaking even at $67 per barrel in 2016, Saudi Arabia cannot live indefinitely with oil prices where they are at today. If unrest hits Saudi Arabia, or even sweeps the region the way it did in 2011 during the Arab Spring, the government will be forced to step up social spending to maintain order. That will put further strain on the country’s fiscal positions.

The longer-term picture is more unclear. Saudi Arabia is in the early stages of a transformational economic plan, which intends to diversify the country away from crude oil as the sole source of revenue. That involves taking a small slice of state-owned Saudi Aramco public, and using the proceeds to invest in non-oil sectors of the economy. Last month the CEO of Saudi Aramco said that low oil prices won’t affect Aramco’s drilling plans or its decision to launch an IPO. But the IPO won’t happen for another year or so, and other investments will take a lot of time, so the country will remain entirely dependent on oil for years at least.

Meanwhile, the near-term strategy for Saudi Arabia boils down to continuing to fight for market share, producing at elevated levels and exporting as much as possible. Saudi Arabia continues to pump at near record levels at 10.5 million barrels per day. Earlier this week Saudi Arabia slashed its prices for oil heading to Asia, hoping to edge out competitors for sales in that region.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage

Trending Discussions


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News