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Even The Saudis Need To Borrow To Survive Oil Price Slump

Even The Saudis Need To Borrow To Survive Oil Price Slump

The collapse in oil prices is draining the Arab Gulf countries of much needed revenue.

To be sure, the major oil producers in the Persian Gulf are not exactly facing a fiscal crisis in the way that some weaker oil producing countries are, such as Venezuela or even Russia, but they are still hurting as revenues decline.

In fact, even the world’s most important oil producer is struggling. Saudi Arabia plans to raise $27 billion by the end of 2015 from the bond markets, a sign that low oil prices are draining government coffers. Even though Saudi Arabia has a massive stash of foreign exchange and can produce oil more cheaply than almost anywhere on Earth, the fall of oil prices by more than half since last year is still taking its toll. Related: Global Oil Supply More Fragile Than You Think

And even though Saudi Arabia can produce oil with incredibly low costs, it still needs oil prices in the range of $105 per barrel for its budget to break even. That is because the government has high spending levels on social programs, obligations that were stepped up following the turmoil of the Arab Spring in 2011. Related: Don't Expect An Oil Price Rebound This Side Of 2017

Foreign exchange reserves are falling, likely sitting at around $672 billion right now, down from a peak of $737 billion in August 2014. The government drew upon these reserves to maintain spending levels.

The new bond issuance will take some pressure off the country’s fiscal reserves while still allowing for consistent levels of spending. Related: EPA’s Clean Power Plan Tougher Than Expected

Saudi Arabia is not alone – other Gulf countries are tightening their belts. The United Arab Emirates recently moved to scrap fuel subsidies, deciding instead to link domestic fuel prices to market rates. Gasoline sold for around 50 cents per liter in the UAE when it was subsidized, compared to around 84 cents per liter in the U.S., according to Bloomberg. Subsidies had cost the state-owned oil company around $1 billion per year. And on the whole, the UAE spends around $29 billion in energy subsidies each year.

If Saudi Arabia is looking for revenues, it too could probably find some in its energy subsidies. The oil kingdom spends $106.6 billion in energy subsidies every year.

By Charles Kennedy of Oilprice.com

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