RIYADH: Oil-rich Saudi Arabia faces a sticky problem, analysts say. Its economy is barely growing. Its government is spending way more than it receives. And its economic reforms, which would move the country away from reliance on oil, are operating at a snail’s pace. If something doesn’t give, then the government may need to hold “a fire sale”. At least, that’s what one financial firm warns. Even though the kingdom’s plan of action is to steadily ditch its dependence on oil, the primary problem now is the weak oil market. The price of Brent crude oil, which as recently as mid-2014 traded higher than $100 a barrel, now changes hands for around $52. The impact on the Saudi economy has been brutal because export revenue from hydrocarbons (including oil) is more than three times the level of non-oil exports.
The result is that this year the economy is expected to expand a mere 0.1 percent in real, or inflation-adjusted, terms, according to a recent report from the International Monetary Fund. Worse still, there is little the government can do about it. “They can’t get any more money from oil,” said Marcus Chenevix, a Middle East and North Africa (MENA) analyst at TS Lombard in London. “Saudi is stuck with regard to oil production.” How much cash is brought in from crude oil sales is a function of the world price of oil (in dollars per barrel) and the number of barrels sold. And there’s the rub because in reality the state-owned oil company can neither increase production nor charge higher prices. A production increase of the level needed to move the needle on revenue would also be of sufficient size to crush the price of crude oil globally.
Saudi is the second largest producer in the world, pumping close to 3m barrels a day, according to the US Energy Information Administration. Any significant upward move in production could send prices below $40, according to a recent report from TS Lombard. The report also highlights that the country’s cash reserves are set to continue to fall. A drop in the price of oil would only make matters worse and may precipitate “a fire sale of state assets within five years,” the report states. It is an outcome that the country’s leaders will certainly want to avoid. Raising the price charged per barrel of crude sold is out of the question. That’s because oil is a global commodity and the price is set by the market.
