Saudi Arabia's troubled economy could bring down ruling House of Saud

[Daneshmand]

Saudi Arabia's troubled economy could bring down ruling House of Saud | Business News | The Independent

Economic View: The collapse of the global oil price since the summer of 2014 has destroyed the Kingdom’s public finances

The smoke from the Middle Eastern firestorm ignited by Saudi Arabia’s execution of a prominent Shia cleric has served to obscure the Kingdom’s economic crisis. On Wednesday, the US Secretary of State John Kerry launched a frenetic round of telephone diplomacy to attempt to persuade leaders in Saudi Arabia and Iran to step back from edge. But in the medium term, it might well be the economic crisis that matters more.

The collapse of the global oil price since the summer of 2014 has destroyed the Kingdom’s public finances – hardly surprising given it relies on oil sales for 90 per cent of state revenues. The Kingdom’s budget deficit for 2015 ballooned to 15 per cent of its GDP.

The IMF estimated last year that Saudi Arabia needs a global oil price of around $106 (£72) a barrel to balance existing levels of expenditure with revenues. On Wednesday the price dipped below $35 a barrel and shows no signs of recovering – with a glut of Iranian supply expected this year after the sanction-lifting deal between Tehran and Western powers.

To cover its deficit, the Kingdom has been selling its stock of foreign exchange. Reserves worth $746bn in August 2014 have now fallen to $646bn. The IMF predicted last year that it would run out of foreign exchange reserves in just five years.

The Kingdom has finally taken corrective action. Last year it issued debt for first time and in December it unveiled an “austerity” budget. But austerity is a relative concept; Saudi citizens pay no income tax. Petrol and energy are dirt cheap, thanks to state subsidies. The Saudi government’s savings were dominated by cuts in planned building projects.

Many argue high welfare spending is needed to keep a lid on tribal dissent. Saudi also has a potential generational powder keg to worry about. Youth unemployment is high, with almost a third of 15 to 24-year-olds out of work. And with almost half of Saudi’s 31 million population under 24, the potential for unrest if living standards are squeezed is obvious.

Amid the cuts, defence spending been protected. It has been growing strongly ever since the 2011 Arab uprisings as Saudi anxiety over rising Iranian influence in Syria, Lebanon, Iraq and Yemen has grown.

The currency is the most exposed financial pressure point. Some warn that the Saudi riyal’s three-decade-old peg with the US dollar will come under unbearable pressure if it continues to lose foreign exchange reserves at the current rate. Other oil producers such as Azerbaijan and Russia have had to abandon their pegs since the oil price collapse. Traders have been selling the Saudi currency short in expectation of a rupture.

There are doubts over economic strategy too, with rumours of a government rift over the long-standing policy of maintaining the Kingdom’s oil production to keep the oil price low and to push high-cost American shale oil producers out of business. The policy is unpopular with Sunni allies in Oman, Bahrain, Kuwait and the UAE.

There is uncertainty about who is calling the shots – and where things are going. The veteran head of the oil ministry, Ali Al-Naimi, is due to retire. He is a technocrat, not a Saudi royal family member. But there is chatter that he could be succeeded by Abdulaziz bin Salman, one of King Salman’s sons – whose brother, Mohamed bin Salman, 30, is already seen as the real power in the Kingdom.

“You might see oil markets getting worried that ruling family politics could start to impinge on oil decisions,” argues Jane Kinninmont of the Chatham House think tank. “What is it that keeps their relations with the US on such a harmonious basis? It’s the perception that they are responsible players in the international oil market – that they’re not going to go back to the 1970s and use oil as a weapon.”

Losing US support would be an economic catastrophe – one that could consume the House of Saud.

 

[Daneshmand]

From the article:

Losing US support would be an economic catastrophe – one that could consume the House of Saud.

This has already occurred. Saudis are losing US support. The fall of house of saud is inevitable now. Just a matter of time.

 

[Pandora]

From the article:


This has already occurred. Saudis are losing US support. The fall of house of saud is inevitable now. Just a matter of time.

Fall of house of saud means losing multi billion dollar investments and billions saved from cheap oil from saudis. You are dellusionall if you think they will withdraw support for house of saud. US can never find better puppets as democracy will destroy their support in saudi arabia. Take example of egypt and you will see how much they favour democratic governments. Dictators and monarch are the best puppets out there.

 

[500]

Foreign-exchange reserves:

Saudi Arabia - 635,535 mln
Iran - 109,000 mln

Net debt as % of GDP:

Saudi Arabia - surplus 52.725%
Iran - 1.214 %

Foreign-exchange reserves per capita:

Saudi Arabia - 20,634 $
Iran - 1,401 $

GDP per capita:

Saudi Arabia - 20,139 $
Iran - 5,048 $

Inflation rate (2014):

Saudi Arabia - 2.7%
Iran - 17.2%

 

[الأعرابي]

If someone could find me an Iranian that doesn't suffer from a severe case of SaudiPhobia & unlimited retardness I'll give him 10 thousand dollars in cash.

 

[waleed3601]

if a troubled economy could bring countries down Pakistan would've collapsed on itself 5 months from when Zardari took oath as president in '08.
house of saud will only fall when the saudi people themselves revolt and choose to overthrow their oppressive and authoritarian system. but unfortunately, the house of saud made sure there is no place left for that, because i dont think the pompous petro dollar rich upper and elite class of ksa has a bit of taste for rebellion, and the middle classes have been suppressed to such an extent i doubt they're aware of what basic human rights even means.

 

[BLACKEAGLE]

Saudi Arabia Hangs Tough on Oil in Fight for its Future

• by Cyrus Sanati

• @beyondblunt

December 4, 2015, 1:56 PM EST

It has the money and the patience to see the latest plunge in oil prices through to the bitter end.


Saudi Arabia isn’t going to cut and run – at least not anytime soon.

The Kingdom has both the money and the patience to see the latest plunge in oil prices through to the bitter end, and it won’t be pressured by its “allies” in Opec or in the West to abandon its plans to reshape the oil markets. For the Saudis, this fight goes beyond price and is considered critical to securing oil’s future in the energy industry for decades to come.

Saudi Arabia’s decision on Friday to refrain from production cuts at the Opec summit in Vienna comes as oil prices hover near five-year lows, at around $40 a barrel. Oil is cheaper in real terms now than at just about any time in recent memory, as the supply on the market continues to vastly outstrip demand. Saudi hinted that it would consider cutting production (and letting prices rise) only if it secured commitments from Russia and the rest of its Opec allies that they would follow suit. Since none of the parties is willing to do that, Saudi is going to stay put.

To be sure, things could be a lot worse. Saudi still has 2.6 million barrels a day of spare oil production capacity at its fingertips. That’s more than twice the amount of oil it unleashed on the market last summer when it decided to deliberately crash the oil price. By holding those barrels back, Saudi is sending a message that while it wants to see oil prices weak, it isn’t suicidal, either.

Saudi Arabia stashed a great deal of cash away during the most recent oil boom and currently holds foreign reserves equal to its GDP—and that’s after accounting for the nearly $80 billion worth of reserves it spent this year propping up its currency and filling in budget holes. That number is equal to around 20% of the nation’s GDP, which means that even if the country froze spending, did nothing to boost revenue, and fought an all-out currency war, it could deal with oil prices in the $40 to $60 range for at least the next five years.

But this year was seen as particularly taxing to Saudi Arabia’s budget deficit, so subsequent budget shortfalls aren’t expected to be as shocking to the bottom line. Indeed, if oil prices averaged around $63 a barrel and the country took some menial steps to alleviate its budget gap, S&P estimates that the Saudi budget shortfall would shrink to around 5% of GDP by 2018.

Furthermore, it is important to note that the Kingdom is no stranger to budget deficits. While it has posted budget surpluses each year for the last 15 years starting in 1999, it also posted some nasty deficits every year from 1983 to 1998. During that time, the country fell back on the large amount of reserves it earned during the oil boom of the 1970s and early 1980s to make ends meet. The country was able to finance the first Gulf War (50% of its GDP in 1991) and still had plenty of money left over to fund massive infrastructure projects while keeping the royal family in designer clothes and Rolls-Royces.

So why are the Saudis willing to go through all this pain? They officially say it is about “protecting market share,” but U.S. oil producers believe the Kingdom is deliberately trying to destroy them. Shale oil drillers in the U.S. spend as much as 10 to 15 times more than what Saudi Arabia spends to extract a barrel of oil. With the great majority of the world’s new oil supply over the last five years coming from these high-cost shale fields in the U.S., it makes sense that Saudi Arabia would want to shut them down. By holding back production, the Kingdom was in effect financing the expansion of an inefficient competitor inside one of its biggest markets. The more the U.S. produced, the more the Kingdom had to cut to maintain prices.

Last summer, with U.S. production continuing to rise unabated, as oil demand growth in both China and the Western world fell, the Saudi government felt it had no choice but to act. Before it opened the flood gates, Saudi’s oil minister, Ali Al-Naimi, tried to get Opec and other large oil suppliers, namely Russia, to share the burden of making cuts to normalize supply and demand—but none was willing to budge.

“Despite our important position in the oil market and the clarity of our objectives, market fluctuations are inevitable,” Al-Naimi said in an April address on the state of his nation’s economy. “The challenge is to restore the supply-demand balance and reach price stability. This requires the cooperation of non-OPEC major producers, just as it did in the 1998-99 crisis.”

Al-Naimi was referring to the Asian economic crisis, when oil prices collapsed to around $10 a barrel. Oil prices may need to fall to that level in real terms before we see any cooperation again. The Saudis don’t want to drive oil prices down that low, but it can hang for much longer at those levels than Russia, Iran, and, certainly, U.S. shale producers.

This wasn’t the first time the Saudis dumped crude on the market to crash oil prices. It did the same thing in 1985, when high oil prices led to an explosion in oil production outside the Middle East, threatening the dominance of the Kingdom and the Opec cartel. The excess oil held prices down for more than a year, putting an end to the “Dallas” and “Dynasty” oil boom of the early 1980s.

The experience of the first half of the 1980s was still in our minds. At the time, we cut our production several times. Some OPEC countries followed our lead, and the aim was to reach a specific price that we thought was achievable. It didn’t work. In the end, we lost our customers and the price. The Kingdom’s production dwindled from over 10 MMBD in 1980 to less than 3 MMBD in 1985. The price fell from over $40 per barrel to less than $10. We are not willing to make the same mistake again. —Saudi oil minister, Ali Al-Naimi

But for Saudi Arabia, this goes way beyond simply taking out one of its competitors. It is about securing its future.

Despite years of trying to diversify its economy, Saudi Arabia is still a one-trick pony, with oil accounting for around 90% of export earnings, 80% of government revenues, and 40% of GDP. The vast majority of the country remains a lifeless desert where humans were really never meant to live. The Bedouins were nomadic for a reason; they needed to eat food and drink water.

So it is safe to say that without oil, much of Saudi Arabia’s population would probably flee for greener pastures. While the city of Jeddah, which is located on the Red Sea, as well as historical sites, like Mecca and Medina, would surely survive such an event, other cities, namely, Riyadh, the Saudi capital, which lies smack dab in the middle of the desert, would turn into ghost towns.

There is a persistent fear within the Palace that oil could someday be rendered obsolete. While the Kingdom could withstand a few years of low oil prices, it would be toast in a world where oil was worthless. But is that even possible? Sheikh Yamani, who was Saudi Arabia’s oil minister from 1962 to 1986, thinks so. He told the Telegraph in an interview back in 1999:

Thirty years from now there will be a huge amount of oil—and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.

So is oil going to be obsolete in 15 years? Probably not, but the fear hangs over the Palace like a dark cloud. A decade of consistently high oil prices has affected the elasticity of oil in major consumer nations, like the U.S. Oil consumption growth started to level off in the last few years, as price-sensitive consumers conserved and sought alternatives. Much of these consumption changes were structural in nature, meaning that demand had been permanently destroyed.

This trend isn’t limited to the Western world. In China, diesel demand fell in 2013 and 2014, after rising at an average rate of around 8% annually in the previous decade, according to the International Energy Agency. The rise of cheaper alternative fuels, namely natural gas, was blamed for the decrease, causing the IEA to cut almost half a million barrels from its 2019 oil demand forecast for the country.

How long would it take for oil to become obsolete if solar powered cars become the norm or if natural gas prices continue to trade at a significant discount to its oil energy-equivalent? The Saudis don’t want to take the chance to find out.

The U.S. has long-been called the “Saudi Arabia of coal.” It has enough to power the country for decades, some even say centuries. But new technology, tougher environmental regulation, and cheap natural gas has made coal practically worthless. Now the U.S. is sitting on a bunch of rock. Saudi Arabia fears high prices will make oil just as useless, so it will do whatever it takes, sell it at whatever the price, to make oil competitive. If that means oil staying at $40 a barrel, so be it.
Saudi Arabia Hangs Tough on Oil Production in Fight for its Future - Fortune

 

[Sipahi]

Both of em should concentrate on their respective economies rather then proxy wars.

 

[oprih]

Oil price is still going down, saudi's economy is already dying I don't think it will survive 2016.

 

[bozorgmehr]

If someone could find me an Iranian that doesn't suffer from a severe case of SaudiPhobia & unlimited retardness I'll give him 10 thousand dollars in cash.

Oh you peaceful arabs never hurt a fly!!! It was the Incas who launched a war of conquest against us for 8 years in 1980s... And it's the Samoans who claim different parts of Iran... And it's the Tutsis who continually fan the flames of religious bigotry by targeting shias... And it was a fat walking lizard who was begging Americans to cut the head of Iran....

It's not easy to have ruthlessness and cowardice as part of the same mentality... But you lot seem to have done it.....

 

[Daneshmand]

Oh you peaceful arabs never hurt a fly!!! It was the Incas who launched a war of conquest against us for 8 years in 1980s... And it's the Samoans who claim different parts of Iran... And it's the Tutsis who continually fan the flames of religious bigotry by targeting shias... And it was a fat walking lizard who was begging Americans to cut the head of Iran....

It's not easy to have ruthlessness and cowardice as part of the same mentality... But you lot seem to have done it.....

He is not an Arab. He is an Israeli. But it really wont matter. Saudi Arabia and Israel are allies.

if a troubled economy could bring countries down Pakistan would've collapsed on itself 5 months from when Zardari took oath as president in '08.
house of saud will only fall when the saudi people themselves revolt and choose to overthrow their oppressive and authoritarian system. but unfortunately, the house of saud made sure there is no place left for that, because i dont think the pompous petro dollar rich upper and elite class of ksa has a bit of taste for rebellion, and the middle classes have been suppressed to such an extent i doubt they're aware of what basic human rights even means.

The reason you are forgetting is to do with people's expectation. Pakistanis have always been poor so the state survives since people do not revolt even if economy is a bit tight. Saudis are used to luxury and enormous subsidies. And their political system is dependent on a tacit tribal agreement under which there would be no taxation in return for no political representation of the people. If they tax people now, the people will want to have political representation which means the fall of house of Saud.

 

[bozorgmehr]

He is not an Arab. He is an Israeli. But it really wont matter. Saudi Arabia and Israel are allies.

Makes sense! Have you noticed a violet turn on the part of Israeli propaganda in favor of the Saudis. All the Zionazi pundits in the US are suddenly Saudi Arabia's ardent supporters....

Our very own Hasbara account, member 500 seems to be in a focused overdrive as of late.... The concentrated effort is hard to miss....

 

[Daneshmand]

Fall of house of saud means losing multi billion dollar investments and billions saved from cheap oil from saudis. You are dellusionall if you think they will withdraw support for house of saud. US can never find better puppets as democracy will destroy their support in saudi arabia. Take example of egypt and you will see how much they favour democratic governments. Dictators and monarch are the best puppets out there.

I fully agree with you that the Saudis have been excellent puppets. But the rest you do not know what you are talking about. It is estimated that house of Saud has invested couple of trillion dollars in United States. It is Saudi money that has been invested in West not other way around. Do you really believe United States is going to play honest and return that much money to house of Saud? Really?

In the days of mob, when you gave too much money to the mob for safe keeping, and then some day, you went back to mob and asked for your money back, it was more profitable for the mob to kill you than to give your money back. House of Saudi is screwed. They know it too. That is why they wanted to make a coalition of robotic slave canon fodders who will defend house of Saud and take their orders from Riyadh. House of Saud failed. Their days are numbered.

Makes sense! Have you noticed a violet turn on the part of Israeli propaganda in favor of the Saudis. All the Zionazi pundits in the US are suddenly Saudi Arabia's ardent supporters....

Our very own Hasbara account, member 500 seems to be in a focused overdrive as of late.... The concentrated effort is hard to miss....

Oh, yeah. Israeli posters day and night are defending the Takfiris and Isis on every thread in this forum. Saudi Arabia and Israel are allies. Even their supporters in US congress are the same people. The senator or congressman who supports Saudi Arabia is also the one who is a supporter of Israel:

Saudi Arabia Provoked Iran To Cover Economic Woes, Analysts Say

US Senate Armed Services Chairman John McCain, R-Ariz., in the wake of the executions, released a statement supporting Saudi Arabia as "one of America's closest and oldest partners" and condemning Iran's reaction to the executions as "outrageous and dangerous."

 

[HAIDER]

What will happen if Iran pump its share of market ? . Is it expected. Because, it bring down the oil prices on coupon rate. Once the sanction gone, what next ?. If Iran flood the market and bring the oil price to 15 dollar a barrel, then see the magic in gulf....lolzz....

 

[Daneshmand]

What will happen if Iran pump its share of market ? . Is it expected. Because, it bring down the oil prices on coupon rate. Once the sanction gone, what next ?. If Iran flood the market and bring the oil price to 15 dollar a barrel, then see the magic in gulf....lolzz....

If that happens, it is a good thing. If oil stays low, Saudi Arabia will hemorrhage massively and dies of exsanguination. Iran on the other hand has been used to living with sanctions and almost no oil income anyways. It is a battle of wills now. Saudis are dependent on oil income for everything from imported labor to imported baby sitter to imported weapons to imported food and protection by foreign powers. They have no chance to survive.