opec Countries

Why the Saudi Arabia (and other Gulf countries) don’t cut oil production? What’s in their agenda?

Saudi Arabia convinced its fellow OPEC members that it was not in the group’s interest to cut oil output however far prices may fall. Suppliers from outside the Organization of Petroleum Exporting Countries should cut “irresponsible” output, U.A.E. Energy Minister Suhail Al Mazrouei said in Abu Dhabi yesterday. Even if non-OPEC producers were to offer cuts, OPEC probably wouldn’t follow suit, Saudi Oil Minister Ali Al-Naimi said. The biggest oil producers outside OPEC are the U.S. and Russia.

Oil Production Non Opec countries averages
Oil Production Non Opec countries averages

Oil fell about 20 percent since OPEC chose to maintain its production target at a Nov. 27 meeting, seeking to defend market share rather than prices. The highest U.S. crude output in at least three decades is contributing to a glut that Qatar estimates at 2 million barrels a day.

Hard-hit countries like Iran, Russia and Venezuela suspected the move was a coordinated effort between the oil kingdom and its longtime ally, the U.S., to weaken their foes’ economies and geopolitical standing.

Saudi authorities pledged to curb wages and push ahead with investments next year as the world’s largest oil exporter seeks to counter the effect of tumbling crude prices on the economy.

The government said it expects the budget deficit in 2015 to widen to 145 billion riyals ($39 billion), from 54 billion riyals this year, the Finance Ministry said today. That amounts to about 5 percent of gross domestic product, according to Arqaam Capital, a Dubai-based investment bank.

The Finance Ministry said the government will continue to invest in areas such as education and health care, while exerting “more efforts” to curb spending on wages and allowances, which make up about 50 percent of spending. The kingdom will resort to borrowing and use of reserves to plug the budget deficit, the state-run Saudi Press Agency said, citing Economy Minister Mohammad Al-Jasser.

Projected revenue will drop more than 30 percent next year to 715 billion riyals, while expenditure was set at 860 billion riyals, budget data show. Spending in 2014 is estimated to have been 1.1 trillion riyals, 29 percent higher than target.

During his nine-year reign, King Abdullah, 90, has allocated a record amount of money to raise wages, build roads, industrial centers and airports as he sought to bolster growth and keep political unrest at bay. Government spending has been driven by crude prices averaging above $107 a barrel since the end of 2011. Oil is now trading at nearly half that level, having slumped to its lowest since 2009.

The US output case

Shale-oil production in places like Texas and North Dakota has boosted U.S. output, displacing exports to the U.S. from OPEC members and adding to global oversupply.

But the U.S.’s emergence as an energy rival is testing this foundation in ways not yet widely appreciated, said U.S. and Saudi officials, as have major differences over American Middle East policies.

U.S. oil output is set to reach 9.42 million barrels a day in May, which would be the highest monthly average since November 1972, according to the Energy Department’s statistical arm. Oil companies, while trimming 2015 budgets to cope with the lowest crude prices in five years, are also shifting their focus to their lowest-cost fields, which means extracting more oil with fewer drilling rigs, said Goldman Sachs Group Inc.

Saudi Arabia is taking a risk by letting oil prices plunge, said Arab, American and European officials. Saudi officials have said their economy can survive at least two years with low prices, thanks partly to the kingdom’s $750 billion foreign-exchange reserves. Arab officials believe many less-efficient producers will be driven out of the market.

The move has also exposed cracks inside the Saudi ruling circle. In October, as the oil-price slide accelerated, billionaire Prince al-Waleed bin Talal, a nephew to King Abdullah, castigated Mr. Naimi in an open letter for appearing to shrug off price declines. Belittling the impact, he wrote, “is a catastrophe that cannot go unmentioned.”

Youth Unemployment

The spending spree hasn’t resolved problems such as high youth unemployment, especially in Saudi Arabia, where the rate was almost 30 percent in 2012, according to the International Monetary Fund. Despite total employment growth averaging near 8.5 percent, employment growth for Saudis was 4.6 percent in the years between 2010 and 2012, the IMF said in July last year.

‘Significant Buffers’

Although Saudi Arabia and other Gulf oil producers “are robust and have significant buffers to survive price differences, they could also face difficulties,” analysts say.

“They’re going to have a reduction of their fiscal revenue, which is significantly dependent on the energy sector, and they’re going to be affected via export revenues.”

The economy is estimated to have grown 3.6 percent in 2014, missing the 4.3 percent median estimate of 13 economists surveyed by Bloomberg. Gross domestic product expanded 2.7 percent in 2013, the Finance Ministry said.

The surge in oil prices over the past decade helped Saudi Arabia boost its net foreign assets to a record 2.9 trillion riyals in October, according to central bank data.

Details of Saudi Arabia’s 2015 budget were released Thursday showing how much the oil-dependent country is losing in revenue amid plummeting oil prices. The country says it will not intervene to stem the 40 percent price plunge since June despite the impact on its economy.

nasdaq crude oil
WTI (NYMEX) Price
End of day Commodity Futures Price Quotes for Crude Oil WTI (NYMEX)

The country, which sits on 16 percent of the world’s proven oil reserves, said 2015 spending will rise slightly, to 860 billion riyals ($229.3 billion) despite a nearly 16 percent drop in projected revenue from last year, to $190.7 billion. This leaves the country with its largest deficit ever at $38.6 billion and the first one since 2011 in the wake of a global economic downturn.

Oil as Power Gun

Saudi Arabia’s decision not to intervene to stop falling oil prices has led analysts to speculate the country is using oil as a weapon against Russia, which supports Saudi Arabian nemesis Syrian President Bashar Assad, and the desert kingdom’s longtime enemy, Iran.

“Saudi Arabia is once again using its ‘oil weapon,’ as it did during the 1973 oil embargo, to pressure its political rivals,” New York University journalism Professor Mohamad Bazzi wrote in an editorialpublished this week by Turkey’s Hurriyet Daily News. “But instead of driving up prices and cutting supply, the Saudis are doing the reverse.”

The main reason behind Russia’s currency crisis is that, like Saudi Arabia, its economy is heavily reliant on petroleum exports. And Iran, already suffering from Western sanctions related to its nuclear program, has less economic leverage than Saudi Arabia to weather low oil prices.

“It looks very, very tough [for Iran],” Robin Mills of Manaar Energy Consulting, told Bloomberg earlier this month. “We still might be in for a couple more years of lower oil prices. They’ve got to plan for the long haul.”

Another target is the U.S. shale energy boom the Economist magazine argued earlier this month in its“sheik vs. shale” article depicting Saudis trembling over the rising U.S. production.

 Sources: bloomberg.com, businessweek.com, wsj.com, reuters.com,ibtimes.com, hurriyetdailynews.com, the economist.

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