Saudi Arabia’s Vision 2030 has already been discussed here, see:
However, this article, based on a lengthy interview with Prince Mohammed bin Salman, Saudi Arabia’s 31 year old Deputy Crown Prince and Defense Minister, provides an unusually candid look at the Kingdom’s economic problems:
- “Saudi Arabia’s economy will probably expand 1.5 percent in 2016, the slowest pace since the global financial crisis, according to a Bloomberg survey, as government spending—the engine that powers the economy—declines for the first time in more than a decade. The state still employs two-thirds of Saudi workers, while foreigners account for nearly 80 percent of the private-sector payroll.”
- “During the oil boom from 2010 to 2014, Saudi spending went berserk. Prior requirements that the king approve all contracts over 100 million riyals ($26.7 million) got looser and looser—first to 200 million, then to 300 million, then to 500 million, and then, Al-Sheikh says, the government suspended the rule altogether.”
- “there was roughly between 80 to 100 billion dollars of inefficient spending” every year, about a quarter of the entire Saudi budget.”
- “Last year there was near-panic among the prince’s advisers as they discovered Saudi Arabia was burning through its foreign reserves faster than anyone knew, with insolvency only two years away. Plummeting oil revenue had resulted in an almost $200 billion budget shortfall—a preview of a future in which the Saudis’ only viable export can no longer pay the bills, whether because of shale oil flooding the market or climate change policies. Historically, the kingdom has relied on the petroleum sector for 90 percent of the state budget, almost all its export earnings, and more than half its gross domestic product.”
For more on the state of the Saudi economy, see: Can Saudi Arabia’s bold reforms cure growing financial woes? By Michael Stephens
The Saudi decision to let oil prices fall further has led some observers to suggest that they have abandoned their traditional position as swing producer allowing the US to take over that role because of its increasing shale oil production. Although shale oil is more expensive to extract, its not as expensive as often thought, with the cost in the $40s/barrel rather than over the $80/barrel mark.
“The question is, what price level will be low enough to slow U.S. production growth?” Torbjoern Kjus, an analyst at DNB ASA, Norway’s biggest bank, said by phone. “What price will get U.S. growth to slow to 500,000 barrels a day from this year’s rate of 1.4 million barrels?”
Only about 4% of U.S. shale production needs $80 or more to be profitable, according to the Paris-based International Energy Agency. Most production in the Bakken formation, one of the main drivers of shale oil output, remains profitable at or below $42 a barrel, the IEA estimates. The agency expects U.S. supply to increase by almost 1 million barrels a day next year, with increasing flows to international markets.”
This led to the onset of a new era in the history of oil production, a 4th era with a US swing producer.
Perhaps. Saudi Arabia still has far more surplus capacity, and production costs at or below $10/barrel…..
Its also worth noting that many have also argued that the Saudi’s willingness to accept low oil prices has been driven by their desire to punish Iran, which traditionally has wanted higher prices. well today the Iranian government and the Iraqi government -which is very close Tehran- cooperated with Saudis by cutting their prices to Asian markets.
Note the interconnection of oil prices, the US dollar and political instability in Greece.
“Global oil prices on Monday collapsed under $50 for the first time in more than five years on the strong dollar, plunging equities, demand worries and plentiful crude supplies.
The renewed slump came as the Dow index stood down more than 200 points and European equity markets lost more than two percent on fears of a Greek exit, or so-called Grexit, from the eurozone.”
The Saudis want low oil prices? The Saudis have “trashed the market” before. It’s all about market share. If the price goes low enough, shale oil become less profitable (US shale in particular). That leads to less investment in high cost oil production and if the plan works, fewer competing producers.
“The upshot? Shale oil output is much more sensitive to falling prices than Saudi oil, and the market is beginning to work its magic. Although the U.S. rig count remains well above the level of a year ago, it saw its biggest drop in two years this week and has declined in six of the past nine weeks. And it’s expected to drop sharply next year.”
It’s not good for Canadian tar-sand oil or deep-sea production either. The US is not happy, Canada is not happy, and you can bet Iran is not happy because while they are not into shale or tar-sands, they need the price as high as possible.
For more background, see:
Is a secret ‘oil war’ raging?