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Saudi Arabia Looks To Slash Government Spending Amid Oil Price Crash

Riyadh

Even before the collapse of the OPEC+ talks last Friday, Saudi Arabia’s finance ministry had asked government agencies to propose a 20-30 percent cut in their budgets due to the oil price slide, Reuters reported on Wednesday, citing four sources with knowledge of the plans.  

Before the OPEC+ meeting last week, the Saudis were already planning government spending cuts, including via delays in projects and contract awards, as the coronavirus outbreak is dampening the oil demand outlook and weighing on oil prices and on Saudi oil revenues. The Kingdom was also expecting tough negotiations with its now former ally Russia about deepening the OPEC+ production cuts, Reuters’ sources said.  

Now the oil price crash after the OPEC+ break-up and the all-out oil price war between friends-turned-foes Saudi Arabia and Russia makes Saudi budget spending cuts even more urgent, considering the fact that the Kingdom needs oil prices at above $80 a barrel in order to balance its budget and that it has been running widening budget deficits since the previous oil price crash of 2014.

According to Capital Economics analysts, quoted by Reuters, at the current oil prices, Brent Crude at $36 a barrel, Saudi Arabia’s budget deficit will jump to 15 percent of gross domestic product (GDP) this year, compared to deficit of 4.7 percent of GDP in 2019.

The Saudi sovereign wealth fund could help cover the shortfall as oil revenues slump with the price crash and glut on the market, but investments of hundreds of billions of U.S. dollars in mega projects and in the Vision 2030 plan to diversify away from oil could be delayed.

The oil price war will hurt the fiscal revenues of the oil producers in the Persian Gulf, including the Saudis, OPEC’s top producer and the world’s top oil exporter, credit rating agency Fitch said earlier this week, and warned that that a new wave of sovereign rating downgrades could be in the works if the oil slump continues.  

By Tsvetana Paraskova for Oilprice.com

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  • Mamdouh Salameh on March 11 2020 said:
    If the Saudis were planning government spending cuts even before the collapsed OPEC+ talks because of the adverse impact of the coronavirus outbreak on the global oil demand and prices, why on earth are they then planning to flood the oil market with oil leading to price war with Russia and more price slide.

    The last time they flooded the oil market in the aftermath of the 2014 oil price crash, it cost them more than $150 bn in lost oil revenue in one year. This time it could cost them far more in mushrooming budget deficit and delays of major projects and in the implementation of Vision 2030 for the diversification of the economy away from oil.

    They are in effect shooting themselves in the foot to spite the Russians. Wouldn’t be better for them to take a breath and consider mending fences with Russia since they both could calm the jittery in the global oil market and maybe stop the oil prices sliding perilously further.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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