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.