Can Saudi Arabia Survive With Oil Below $60?

Tyler Durden's picture

Submitted by Gregory Brew via OilPrice.com,

With the OPEC production deal holding, at least for the moment, questions have now arisen over how prospects look for the cartel’s biggest producer. It’s been a strange few years for the Kingdom of Saudi Arabia, as its endured budget deficits for the first time in its modern history, stagnation in oil prices and rising competition from other OPEC members and the American shale boom. Recently, talk has centered on the Saudi monarchy’s glimpse of the future: the Vision 2030 plan, whereby it hopes to diversify its economy and end its dependence on the mercurial oil and gas market. But can the world’s biggest oil producer and OPEC’s de facto leader pull it off?

In the short term, Riyadh will continue to feel the pain of lower-than-normal oil prices. The growth outlook for Saudi Arabia has been slashed, as the International Monetary Fund (IMF) announced on January 16 that the world’s largest oil producer would see its GDP grow by only 0.4 percent in 2017. The estimate comes on the basis of the continued low price of oil, but more importantly on the country’s slashed oil production: as a result of the recent OPEC production deal, Saudi Arabia has agreed to keep its production level at or below 10 million bpd. This has resulted in a cut in its growth outlook, down from 2 percent in October, according to Bloomberg.

This comes after anemic growth in 2016, where GDP expanded by only 1.4 percent. If oil prices stabilize, and the country’s economic forecast improves, GDP will likely expand by 2.3 percent in 2018.

The official Saudi response decried the IMF’s results as overly conservative. A government spokesman declared that Saudi growth would be “north of 1 percent,” citing the anticipated investment in renewable energy and a stimulus packaged the Saudi government was planning for the private sector, according to Bloomberg.  

The Saudi leadership had been pivotal in the campaign to bring about an OPEC cut, after resisting production deals for years. The stakes were raised this year, as draining cash reserves and a resistant American energy sector convinced Riyadh that cuts were needed to boost prices. The cuts have come, surprising many analysts, and the OPEC deal looks set to hold at least for the time being.

Along with the cuts to production, the Saudi government looks to cut spending. The 2017 budget, the most detailed in the country’s history, lays out a series of measures for stabilizing state finances, which plunged into deficit in 2016 as a result of the crash in prices. The state is the largest employer and spender in the Saudi economy, which is largely built on the oil and gas industry. Cuts to construction projects and social programs, estimated at around $20 billion, will help to balance the budget. The deficit in 2016 was around 12.6 percent, down from 2015’s budget deficit of 15 percent, and if prices stay where the Saudis expect them to, between $50 and $43 per barrel, the budget gap in 2017 will be smaller still. The official Saudi estimate has the deficit amounting to 7.7 percent of GDP in 2017.

The current fiscal forecast is based on the National Transformation program (NTP) which aims at a balanced budget by 2020. The plan, also known as Vision 2030, was announced in 2016 and is intended to diversify the Saudi economy away from petroleum. The largest single component in the Saudi economic sector, the massive state energy company Saudi Aramco, is to be privatized, and its assets used to develop the country’s manufacturing, tourism and other sectors.

Gestures towards building investors’ confidence in the Saudi economy have included last year’s $17.5 billion sovereign bond sale, the largest such issue in history and a move which attracted bids totaling $67 billion, according to Bloomberg. Looking ahead, the Saudi government is expected to raise another $15 billion on international markets this year, boosting debt levels as high as 30 percent of total GDP by 2020. It is hoped that by then the budget will be back in surplus, likely spurred on by further sales of Saudi Aramco.

Investors are spurred on by the attractive Saudi rial-dollar rate, the continued strength of Saudi oil production (which has shown no signs of slowing down), and the clear interest within the current Saudi government in serious financial and economic reforms. This should make it easy for the Saudi state to raise all the funds its needs on international markets. 

But that’s in the short term. Borrowing can only cover budget deficits for so long, and growth in the non-oil economy will have to be kick-started if the Saudi vision can be realized. The problem is that Saudi non-oil prospects aren’t great, with the non-oil economy on the edge of recession pending the release of some Q316 data. Government borrowing an increase in contracts in 2017 should boost non-oil growth from 0.2 percent to 0.8 percent, hopefully reaching 1.9 percent in 2018, according to CPI Financial.

Public debt will grow from 1.6 percent in 2014 to 23 percent in 2018. This is still a historically low rate for a country the size of Saudi Arabia, but the growth in debt could have investors alarmed and scare markets away from accepting more and more Saudi debt, which looks likely to fund continued growth past 2017.

So, while the Saudi forecasts are upbeat, and Saudi rhetoric around oil prices remains buoyant and hopeful, storm clouds are hovering on the horizon for the oil kingdom. Should the Vision 2030 plan succeed, and the country pivots away from oil and gas, fostering non-oil growth and a balanced budget in the next five-to-ten years, it will have justified Saudi enthusiasm. But oil remains the most important component in the Saudi economic picture, and the assertions of the 2017 budget and future forecasts are based on the assumption that oil prices will climb back up to $60 by 2018. Should that increase fail to occur, and the Saudi treasury continue to sell off more bonds and accumulate more debt, things in Riyadh could get more unstable.

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trumpala's picture

The Saudi morons are shooting their own feet trying to hit Russia and Venezuela on behalf their US buddies.

StychoKiller's picture

Aside from oil & gas, just what does S.A. have to offer the World?  Camels?  Sand?

Overdrawn's picture

Institutionalized pedophilia, oppression of women, 'honor killings', genital mutilation, beheadings, corruption.  

About time that place was turned into glass, we would all be a lot safer.

Chris Dakota's picture

Hanging people by cranes letting swing for days in public.

devil country

Nemontel's picture

Saudi Arabia is hopeless. They will not succeed in diversifying their economy. They simply don't have the human capital necessary.

http://www.truthjustice.net/politics/the-tragic-consequences-of-forced-e...

Itinerant's picture

Left unmentioned is that most real work is done by slave labor brought in from outside the country....

Privyet_Jet's picture

The houthis will get to Riyadh by 2020

Dubaibanker's picture

This is what Saudi is doing that is not being publicized.

Saudi has hiked import duties as follows immediately:

*F&B : upto 500% - from flat 5%.

*Fertilizers: 140% - from 5% to 12%.

*Chemicals: 400% - from 5% to 20%.

*Consumer goods like tissues, soaps, health care etc: 200% to 400%- from 5% to 10-20%.

*Building materials like gypsum, paints, door & electrical accessories, electric cables etc : 140-200%-from 5% to 12-15%

Previously Saudi has hiked airport fees, water and electricity, visa fees, petrol and now has extra fees on having dependents!

Higher customs duties for 193 products - immediate effect 

 

dogfish's picture

The Saudi's original target date for a production cut was 2019 when they figured that the US shale oil boom would realy start to exaust.

PhiPhi's picture

Nice find, so this is how they think they will increase non-oil revenue, by huge tariff hikes?  Let them get on with it I say it should be amusing.

new game's picture

the good dr krugman needs to be hired as growth consultant, debt for growth- make saudi arabia great again!

Offthebeach's picture

Print bonds and have Saudi Fed Reserve buy them. After all, the Saudis only owe it to themseves....

Escrava Isaura's picture

Can Saudi Arabia Survive With Oil Below $60?

No.

But Canada, Venezuela, and shale for the propagandist and ignorant can, right?

 

neidermeyer's picture

But Canada, Venezuela, and shale for the propagandist and ignorant can, right?

****************

The workforce in the USA isn't 100% imported like in S.A. and our business mix isn't one product deep.  So yes we can survive but the Oil and Gas sector will hurt.

Dubaibanker's picture

Saudi has employed every single consulting firm in the world like Mckinsey, Bain, BCG, KPMG, Deloitte...you name it, they got it. I hear one or two entire buildings are working with every single department of the Govt simultaneously.

Everything is under "transformation".

But the biggest risk is to keep the hundreds of princes happy (almost all of them are against the new Crown Prince Salman) while just last week they had 2 terrorists roaming in Riyadh who were shot while stealing the police cruiser! :)

Saudis have lost a lot of land to the Yemenis on the eastern side that is oil rich, in Najran etc and almost weekly dozens of Saudis and their vehicles are being incinerated!

Today, Syria signed multiple contracts with Iran. Now Iran has Syria and Iraq in it's lap on one side and Afghanistan, ex-Soviet nations including Russia and China on it's other side and the rise of Iran has been cemented (thanks to Obama) with a direct loss to all the nations on the other side of Hormuz (who are all Sunni while Iran is a rising Shia power with 80m poeple and strengthening it's partnerships with all it's neighbours except the Sunni states but Oman).

All US destroyers are out of the region for the first time ever (has to be some reason after 40 odd years) until USS Washington returns mid year or later, if at all. UAE has been sending troops to guard the Strait of Hormuz last weekend.

Saudis and others have started a new Golden Arrow operation alongwith UAE and other nations last weekend.

US had to fire warning shots last week on Iranian boats.

Something is really cooking....post Trump, things could get VERY interesting anytime.....

waterwitch's picture

Any artillery pieces being set up on the Musandam peninsula? Clogging the Straits of Hormuz with a few oil tankers would do wonders for oil prices!

Dubaibanker's picture

This was 6 days ago.....

No one is saying what's happenng.....but something is indeed happening. This news is HUGE!

Yemeni and UAE troops head north
CNONC's picture

I seem to be falling behind in my awareness of gulf events.  I used to read Al Hayat daily, but it seemed to become a propaganda rag some years ago.  What regional news source do you reccomend? 

Dubaibanker's picture

Couple of them actually. As is now normal, have to read several to get a perspective.

www.gulfbusiness.com

http://www.al-monitor.com/pulse/home.html

This is good because it was banned by several GCC countries: http://www.middleeasteye.net

http://www.arabnews.com

https://www.almasdarnews.com

https://www.alaraby.co.uk/english

Nothing like an Iranian view on the GCC with a heavy dose of reality: http://www.presstv.ir

There are several Iranian sites that give great news....This is just 1 more: https://www.tasnimnews.com/en

Media is dying in the GCC....7days a popular real paper shut in UAE last month after a decade or so......The oldest Arab newspaper collapsed after 42 years last week.....more expected to close in Lebanon amid many firings.....Egypt has gone wild with suppression just like GCC.....Bahraini media and Al Jazeera also under suppression.......it's sad times for the Middle East with so much suppression of reality in such a short span of time that too across the entire GCC....

Hope this helps....Cheers!

BabaLooey's picture

Excellent Dubaibanker!

Thanks for those links.

Dubaibanker's picture

Always a pleasure to share knowledge and carefully curated links! :)

shovelhead's picture

That should be helpful for building a robust non-energy sector.

Dubaibanker's picture

I wish! But impossible!

They have no local universities creating doctors, lawyers or engieners! All workers are foreign except Oman who are now under economic pressure and more are leaving than coming to the extent of 5 times more exits than 1 persons coming whereas it always used to be 1 leaving and upto 2 coming. It's a mass exodus of expats.

There is almost zero manufacturing across GCC. A few random things get made but mostly for exports by foreigners. 

All food except some random bread, milk and some veggies, are imported. All cars, consumer goods, doctors, engineers, tech workers, construction workers, plumbers, electricians, car mechanics, cleaners, drivers, maids, retail sales persons i.e. almost everyone is imported.

Tourism and trade kept them alive but for 4 reasons is dead:

1. ISIS and 4 civil wars in Yemen, Syria, Iraq and Afghanistan. This is horribly bad for trade and tourism and airlines and banks of the region at the same time.

2. Major trade and tourism bans and friction with Iran. Zero trade with Iran with whom everyone is trading or investing into from the West to the East but NOT the GCC so they are losing their best friend (of Dubai) to everyone but themselves due to the geo-politics and Shia-Sunni issues.

3. Strong dollar and all regional and global currencies have plunged between 40% at minimum (in CAD and AUD) to 300-350% maximum (in Angola and Nigeria etc.) hurting trade and tourism at the same time for Dubai and all others who are pegged.

4. Oil is in it's 32nd month of price decline above 50% which is UNPREDECENTED in 116 years of oil history. This has collapsed their entire economies in the GCC. They have borrowed heaviliy in the last 1-2 years and become the largest debt issuing nations. But after that what? De peg? Accept non dollar for oil? Unrest? Bank and other collapses? 

Aside from a few banks, few hotels, few conference centers, they have not much to offer to most. On top many countries who are Shia have been banned. 

GCC economies are marketing at a very high rate due to which they should burn out soon as the tourists realise since last 2 years that hotels, restuarnts are shutting while all purchase items are almost 50% more costlier than even Lonodn and upto a dozen nationalities are banned in various countries....it's a mess, plain and simple...

I don;t believe this can be resolved isnce their consumption is too low, so it makes any manufacturing unviable from the get go, as majority must be exported and because costs are so high hence that too becomes unviable, they are doomed if they build and they are doomed if they don't!

root superuser's picture

You dont need to travel to S.A. for genital mutilation. There is plenty of it going on in US.

Arnold's picture

I'm glad the guy on the right has his trigger finger in the 'ready' position.

Scrubbing Bubblez's picture

Lots of goat and camel fucking man-boys!

neidermeyer's picture

Housed in nice condo's where they have nothing to do all day but rape the (imported) maid and dream of blowing up whitey while they await their next welfare check from the petro dollars.  What a depressing place to live.

JRobby's picture

Death

Corruption 

Stifling Opression

Prehistoric Thinking

 

shovelhead's picture

Relax.

The Dems are gone from the White House in a few hours.

Chris Dakota's picture

They will kill themselves.

Evil always has the opposite affect of it's intent.

PrivetHedge's picture

Saudi/Israel are a pair, both zionist.

They were formed together for that reason - the corruption of Judaism on one side and Islam on the other.

Baal's gift to the world..

Benjamin123's picture

Really most countries in Asia and Africa gained their independence around the same time, from late 40s to early 70s. Anti colonialism or something. India, Rhodesia, Vietnam, Algeria, etc.

thunderchief's picture

God willing,  hell no!

Fuck these evil SOB's and their Walmart, Wahabist Islam.

These assholes have turned mecca into a las Vegas casino attraction..

Yeman,  Syria,  Iran..etc,,says... F.U... Ryhad. 

GunnerySgtHartman's picture

I still say that the Saudi government will be overthrown within 5-7 years, perhaps as little as three years if oil prices tank into the $30 range and stay there.  My only concern is that Iran will step into the void left by the collapse of the Saudi government.

Wulfkind's picture

Escrava is right.  The rest of the oil producing world's oil companies cannot survive either on 60$ or less oil unless through injections of capital from the credit markets.

By 2030 EVERY SINGLE SHALE OIL PLAY IN AMERICA WILL BE TAPPED OUT.  That is to say.....they will be economically unfeasable to drill baby drill by 2030 unless the price of oil is well over $100.  And even then the output will have fallen drastically until they are COMPLETELY tapped out.

And there will be NO alternative except deep water and that will NOT be ecoomically feasable short of $100 dollars or more.

And this will come at a time of Peak Old Farts in the systems which will have COMPLETELY drained Social Security, Medicare and Medicaid, VA, Disability, etc.

2030....and the years leading up to it are going to be VERY interesting indeed.....and not just for Saudi Arabia

Grandad Grumps's picture

They hold those swords like cheese knives.

Curiously_Crazy's picture

Oh they can. Bet your bottom dollar they can.

They can go low low low... all the article provides is intellectual masturbation.

Wulfkind's picture

No...they cannot.....not for long.  They are already spending money ass over tea kettle to the populace to keep them from rioting and choppping off their heads and using them for street soccer matches.

That's the WHOLE point of their Vision 2030 plan.  They know what oil experts have known for years......their great oil fields are drying up.  The amount of water they are injecting into them is MASSIVE.  That is a SURE sign that they are getting near the bottom.

Aussiekiwi's picture

I hope Saudi Arabia goes broke, it has used its oil wealth for corrupt means worldwide for decades.

29.5 hours's picture

The Saudis will survive and prosper. They have hired top-notch financial advisors from Wall Street.

Benjamin123's picture

On the short term sure they can survive. Wait until their population balloons to 100 million and their exports fall due to depletion and internal consumption. Saudi Arabia is a slow motion train wreck.

They'll go the way of Egypt. In two generations.

Offthebeach's picture

The ll just cross the lake into Europe and demand their benefits.

Benjamin123's picture

Europe will be marred by lebanon style civil war by then.

bIlluminati's picture

By 2035, the Kingdom of Saudi Arabia won't be: a kingdom or Saudi. And Arabia will have the same influence on the world scene as Indonesia.

SillySalesmanQuestion's picture

Snort. Methinks the author is writing a propaganda piece for the American Petroleum Institute.

Curiously_Crazy's picture

+1

They quote bloomberg, bloomburg again, reference *there own site* and reuters. All quality sources of information as we know. Then we get a link explaing gov cutting back on gov expenditure. I mean really.. WTF... this is a good thing no?

I hate the Sauds as much as most on this site but for fucks sake. Read between the lines.

Widespreadpanic's picture

Fuck the Saudi's
How is the 911 lawsuit coming?