Saudi Arabia, Oil & A Looming Budgetary Crisis
By admin August 12, 2015

184029546.0.0.0Saudi Arabia faces a budget deficit of 20% of GDP as the barrel of Brent crude oil is currently selling for less than $50. This is worrying for the country as oil accounts for roughly 90% of Saudi Arabia’s revenue and about half of its exports.

The country’s revenue fell by 8% of GDP (or $82 billion) in 2015, prompting the IMF to forecast budget deficits in the country through 2020 amid weak outlooks for future oil prices. Up until now the Saudi government has been using its foreign currency reserves which had been built up to $700 billion. Now the government has announced it will raise $27 billion by selling bonds.

Nevertheless Saudi Arabia is adamant that it will not curtail its oil production despite the decline in price as it wishes to maintain its share in the global oil market, while also hoping for high-cost producers like US shale firms would lose profitability and go out of business.

By maintaining current production levels Saudi Arabia hopes it will drive down oil prices to levels that will make it difficult for shale producers to maintain operations and profitability. However, Saudi Arabia’s policy is not working because U.S. shale producers found new ways to extract oil cheaper.

Although the number of fields declined, the production output per field increased. Oil industry experts believed that U.S. shale producers will be able to reduce their costs by 45% this year. The US is producing more oil that it has done for four decades and its shale sector has shown great resilience despite Saudi Arabia’s attempts to crush the emerging market.

Saudi Arabia’s budget deficit has also been exacerbated by its increased assertiveness in the Middle-East which has spiked its military budget to 17% of GDP. In Yemen the Saudi military has been at war with Houthi rebels for over 4 months, while in Syria Saudi Arabia has been giving support and patronage to islamist rebels opposed to the Assad regime.

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