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Is Saudi Arabia About To Cry Uncle In The Oil Price War?

Oil rig

The Kingdom is struggling with weak GDP growth, higher fees and taxes, and an economy that is unable to pay the dues to its workers, leaving thousands of workers from South Asia with an uncertain future.

When a nation is unable to provide food to its migrant workers, it says a lot about their financial condition.

The oil price crash has forced the oil-rich Kingdom to introduce austerity measures, and delay payments to already cash-strapped contractors.

“It looks like austerity has hit hard and more than we had anticipated, halting construction projects and stopping hiring,” said Jason Tuvey, Middle East economist at Capital Economics, reports the Financial Times.

During the financial crisis in 2009, the government paid companies to help them tide over the cash crunch, however, this time, the finance ministry has cut advance payments from 20 percent to 5 percent, as reported by the al-Hayat newspaper.

"Money is not being paid at the top level," said one banker to the industry. "This has been going on since October, and it is hard to know how long it will go on for,” reported Reuters back in February of this year.

The stranded Indian and Pakistani workers are evidence that things aren’t any better now than they were in February.

Who is the Hardest Hit?

Construction laborers from India and Pakistan are most affected by the Kingdom’s hardships. This group of workers are left without a job, and without basic amenities such as insurance coverage, food, shelter and medical facilities—a situation that has improved after respective consulates stepped in to offer their own citizens aid.

Why Can’t They Go Home?

The laborers haven’t been paid many months of overdue salary and benefits, and most are not sure how and when their dues will be paid to them—if ever. Under the Saudi system, the employer’s approval is needed to obtain the visas, which has left many stranded.

After having toiled for years, the workers also do not want to return home empty-handed, without taking what is rightfully theirs—in essence, workers are left to wonder whether they should cut bait or double down and try to ride it out. Related: Oil Prices Take A Hit As Saudis Report Record Production

“They don’t give us any answers about our salaries,” said Mohammed Salahaldeen, a duct fabricator from Bangladesh, as he stood in a labor camp in Riyadh set up by the Saudi Oger construction company in better days. “After they pay me my salary and benefits, I will go,” reports the Financial Post.

Everything is Just Fine

In a meeting between the India’s junior foreign minister and the Saudi labor minister, Mufrej al-Haqbani, in Riyadh, the Saudi government has agreed to help the workers get their dues.

“Things are not as bad as they have been shown and projected,” the minister said in joint remarks with Mr. Haqbani after their meeting. “Things are very fine. We are in constant touch with all the officials and the various departments of the Kingdom of Saudi Arabia.”

Even other foreign governments are in touch with the both the Saudi government and the construction companies to ensure payment to their workers.

Saudi’s Empty Pockets

Setting aside the Kingdom’s positive outlook, until the Saudi economy reduces its reliance on oil, the situation is likely to get worse before it gets any better. With oil prices reeling close to $42 a barrel, the Saudi economy is likely to run out of cash, according to the International Monetary Fund, as shown in the chart below.

“All oil exporters will need to adjust to the new low oil price,” the IMF warned, reports the Independent. “All” in this case, includes, probably most importantly, Saudi Arabia.

Meanwhile, Saudi Arabia continues its record oil production, reaching 10.67 million barrels per day, up about 120,000 bpd on the prior month—with no signs of slowing. Although this will allow Saudi Arabia to hold onto its marketshare, which they can hardly be blamed for trying to cling to, it will no doubt add to the supply glut, and certainly will not bode well for oil prices in the short term.

And if oil prices continue to languish near today’s lows, it will be years before Saudi Arabia can regain its erstwhile glory.

By Rakesh Upadhyay for Oilprice.com

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Leave a comment
  • Kr55 on August 11 2016 said:
    It does seem like the Saudi's are overplaying their hand. They should know by now they can never kill shale for good. No matter what happens to the companies that own the shale assets, the debt on them can be wiped clean if prices stay low long enough. All that happens is the lenders force the asset sale and some other company gets to buy the asset for pennies on the dollar and the debt is written off. The more that happens, the worse off the Saudi's are in the long run. Also, the longer prices are lower, the more innovations that will be created in shale, bringing costs to produce lower and lower.

    IMO, the best move for the Saudi's would be to throw shale a life line. Let these companies drowning in debt be able to start paying off tiny bits of it, while the lenders remain wary and keep forcing them to keep spending within cash flow. Let the service industry start making a bit of money, hiring more people and then start demanding their fair share of the shale profits, cutting into the producers bottom line.

    There is an ideal purgatory state that a lot of shale producers can be kept in for a very long time. But, if the Saudi's push this policy too far, they will start to force prime assets into the hands of the best run companies where they will be able to be bought dirt cheap.
  • Sukumar on August 12 2016 said:
    What a nonsense, crude oil is up in the market
  • fastrock on August 14 2016 said:
    I pray the day the Saud family needs to herd sheep from oasis to oasis to provide food for their family will occur in my lifetime.
  • Len Mullen on August 14 2016 said:
    Yea! Cheap gas, cheap oil, and less money for terrorists!
  • Douglas on August 15 2016 said:
    A moment of silence for the kingdom.

    Okay, now that is out of the way. Who cares what happens to these ill managed, ill mannered bloated pork chops. They run around the world like they built it and they hate those that created it. The only thing they have is oil that the West has found and then created the uses for the toys they buy.

    My suggestion is to place a tariff on all oil under 60 USD bbl. We will have a lot of supply and we will not be financing the Middle Eastern radicals to fuel their periodic spats of hate and murder.

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