Is Saudi Arabia Digging A Hole For Its Economy?

When one exports oil and little or nothing else, low oil prices in a marketplace of sheikhs can’t be good:

The Saudis had hoped their pump-and-dump strategy would flush out high-cost North American oil producers, and also hurt rivals Iran, Russia in the bargain. Certainly, OPEC’s move has spread pain liberally across the global energy landscape. In the process, however, the Saudi government has been unable to shield its own economy from the headwinds despite an ample fiscal cushion.

Compared to other oil exporters, the kingdom has the wherewithal to survive a period of lower prices, says Paul Gamble, senior director at Fitch Ratings, who spent six years in Saudi Arabia as an economist. “But I am sure they are not comfortable with this price level,” Gamble said in an interview. Last week, Fitch cut Saudi Arabia’s credit outlook to negative.

The kingdom is certainly running through its reserves quickly, burning as much as US$68 billion, or nine per cent, of its war-chest of foreign assets within six months.

“If they want to have some of these reserves as a longer-term savings fund then they would naturally cut down spending, because at the moment they are spending far more than they are receiving in oil revenues,” Gamble said.

Still, the world’s largest oil exporter has US$668 billion in foreign assets, and recently issued bonds worth US$9 billion to plug a looming US$97 billion budget deficit, said to be the largest in its history.

To protect its reserves, the kingdom is also reportedly seeking advice on cutting its budget for next year — a sign that it expects a lower-for-longer oil price environment.

  • glasnost

    Digging a hole?

    I’d say yes. But alas, I majored in Mathematics not Economics.

  • dance…dancetotheradio

    What bank wouldn’t lend them money after their reserves were gone?

    • Camels, as some might say.


    • Millie_Woods

      I agree. Don’t read too much into that ‘downgrade credit outlook to negative’ statement. The US federal government is $19 trillion in debt (which will never be re-paid) and their credit outlook is positive. Just another load of economics horseshit were supposed to believe.

  • Ron MacDonald

    It started digging a hole shortly after the oil started flowing by encouraging its citizens to sit around with their finger up the arse doing nothing.

  • UCSPanther

    Foresight doesn’t appear to be a strong trait in House Saud.

  • Brett_McS

    Cutting it’s budget. So fewer Mega-Mosques in towns with no Muslims next year?

  • Norman_In_New_York

    With sanctions on Iran about to expire, the amount of oil on the market will turn into a torrent. Meanwhile, American drillers are upgrading their technology to make fracking more efficient and therefore cheaper.

    • Brett_McS

      And also fracking is essentially a mechanical process that can be turned on and off, and is therefore more flexible than traditional drilling.

  • tom_billesley

    Saudi Arabia has a commodity to market. It’s not what I’d call an economy.

  • Let’s do the math – the desert ragheads had spent 9% of their war-chest reserves in six months to cover the shortage. That means that they have reserves that would last roughly 5 years after one day the oil is gone. That may give the royals enough time to escape to the Bahamas, the rest of the guys will form another “refugee” wave to Sweden and England.

    • Oh, jolly good!

    • Millie_Woods

      The house of Saud’s luck will run out long before their oil. I see jihad in their future.

      • I still believe that they are a little bit smarter than Kaddafi and will take off before the hell breaks loose. Of course, nobody knows how far they’ll be able to go.

        • Millie_Woods

          Places that used to be safe havens aren’t so safe anymore.

  • pdxnag

    They can make a reasonable profit with 15 dollar a barrel oil. Anything more than that they can still convert it to jihad.

  • pdxnag