• 4 minutes Tariffs to derail $83.7 Billion Chinese Investment in West Virginia
  • 9 minutes Battle for Oil Port: East Libya Forces In Full Control At Ras Lanuf
  • 17 minutes Kaplan Says Rising Oil Prices Won't Hurt US Economy
  • 19 hours Kaplan Says Rising Oil Prices Won't Hurt US Economy
  • 3 hours Battle for Oil Port: East Libya Forces In Full Control At Ras Lanuf
  • 4 hours Saudi Arabia turns to solar
  • 14 hours Could oil demand collapse rapidly? Yup, sure could.
  • 2 hours Russia's Energy Minister says Oil Prices Balanced at $75, so Wants to Increase OPEC + Russia Oil by 1.5 mbpd
  • 8 hours Corruption On The Top: Netanyahu's Wife Charged With Misuse of Public Funds for Meals
  • 14 hours Gazprom Exports to EU Hit Record
  • 3 hours Saudi Arabia plans to physically cut off Qatar by moat, nuclear waste and military base
  • 14 hours OPEC Meeting Could End Without Decision - Irony Note Added from OPEC Children's Book
  • 19 hours China’s Plastic Waste Ban Will Leave 111 Million Tons of Trash With Nowhere To Go
  • 10 hours U.S. Withdraws From U.N. Human Rights Council
  • 12 hours What If Canada Had Wind and Not Oilsands?
  • 13 hours "The Gasoline Car Is a Car With a Future"
  • 1 day EVs Could Help Coal Demand
  • 7 hours EU Confirms Trade Retaliation Measures vs. U.S. To Take Effect on June 22
  • 13 hours Sell out now or hold on?

Saudi Non-Oil Growth Caught In The Oil Price Bust Vicious Circle

Saudi wanks

While Saudi Arabia has started taking austerity measures to counter the falling revenues of its heavily-oil-dependent economy, the kingdom’s non-oil private sector growth slowed down in October to its lowest pace since record-keeping began in August 2009.

The non-oil sector’s Purchasing Managers’ Index (PMI) dropped for a second month in a row to a record low, and production and new orders increased at their smallest rates since record-keeping started.

Feeling the now serious sting of the low price of oil—its main cash cow—Saudi Arabia has started to introduce cost-cutting measures such as cutting perks and allowances for the public sector, which employs around two-thirds of working Saudis. Aside from being largely unpopular, it’s likely to further reduce the purchasing power of households, resulting in even more economic slowdown.

The oil-rich kingdom is also seeking to diversify revenues away from oil, but that’s not a quick solution, and until this transition happens, Saudi Arabia’s economic growth, oil or non-oil, is tightly tethered to crude oil prices.

Saudi Arabia, OPEC’s de facto leader, now needs oil prices greater than just stable. They need prices to be higher than current levels, and as such, Saudi Arabia is expected to cut something off the record oil output it had reached in the summer.

Still, after the peak summer demand season ended, the Saudis could simply scale back to a level that is seasonally appropriate—a level they plan on anyway—and wrap it up with a bow and gift it as a ‘sacrifice’ for fellow OPEC members—and for the markets, who would probably temporarily respond favorably to a small cut, even if it mirrors regular seasonal cuts.

Related: Oil Continues To Crash After EIA Reports Biggest Inventory Build In 34 Years

Unfortunately, with the growing camp of the members who are pleading exemption in OPEC’s production cuts - the latest being Iraq – Saudi Arabia may need to deepen cuts if it wants to convince the cartel it is ready to take one for the team.

According to Bloomberg estimates, in the worst-case scenario, the Saudis might need to cut 1 million bpd, which is not very likely.

Last week the market was caught by surprise by reports that Saudi Arabia and its Gulf OPEC producer allies had signaled that they would be ready to cut their near record crude oil production by 4 percent.

The Saudis will likely do some cutting, but it’s unlikely they will lower their oil output to two-year-lows.

By Tsvetana Paraskova for Oilprice.com

More Top Reads From Oilprice.com:



Join the discussion | Back to homepage

Leave a comment

Leave a comment

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