Saudi Arabia is World’s largest oil exporter. It is the richest oil producing Muslim country in the World. Falling oil prices have profound implications for Saudi Arabian budget and its economy. This economic phenomenon may prompt Saudis to diversify its revenue profile to avoid complete dependence on oil exploration.
From 2010 to mid- 2014, oil prices in the international markets had been fairly stable, at around $US110 a barrel. By early 2015, oil prices have plunged to $US60 a barrel. On 21 January 2016, prices fell as low as US$27.88 (AUD 42.47) a barrel for the first time since April 2004. Forecast for oil price is US$30 a barrel in the next 12 months. Oil prices have fallen about 75% in the past 16 months.
There are 3 dominant reasons for this free fall of oil prices: a weak demand from many countries, mainly China, due to sluggish economic growth; surging US production of shale oil and oil cartel Opec’s determination to maintain current level of production.
Saudi Arabia is the most influential member of the Opec and it could support oil prices by cutting its own production but shows no sign of abating. In 1980s, the Kingdom reduced its output to boost oil prices with little impact but adversely affecting the Saudi Arabian economy. Perhaps, Saudis might intend to create competitive pressures on the emerging US shale oil and gas industry which has a higher cost of production compared to Opec producers. This crowding out might lead to higher market share for Saudi Arabia in the long run.
The current record low level of oil prices will almost certainly lead Saudi budget into red. The Kingdom’s budget deficit will reach 20% of GDP as it estimated oil prices to be around US$60. Oil revenue accounts for 90% of Saudi Arabia’s total budgeted income. Saudi officials argue that it can afford to be in deficit for years as it has a foreign exchange reserves of about US$750 billion as of September 2015 built up over the past 10 years from its oil revenues.
IMF urged Saudi Arabia to limit spending and discontinue certain high-cost projects. Standard & Poor’s downgraded the Kingdom’s credit rating from AA-/A-1+ to A/A-1 in October 2015. In the same month, King Salman issued an ordinance to Ministry of Finance to stop new infrastructure projects and postpone purchases of cars and new furniture.
The Kingdom of Saudi Arabia needs to diversify economic activities and revenue generations. The Kingdom will be at budgetary risks if it does not reduce reliance on oil revenue which is exhaustive in nature. It should initiate programs to spur private enterprise to create jobs and incomes for Saudis to maintain their current standard of living. Capital intensive industries and Islamic tourism would provide opportunities for the economy.
The Kingdom should off load budget outlays through privatizing government owned businesses such as ports on the Red Sea and the Arabian Gulf; airports; Saudi airlines and public utilities. These measures would create a platform for transitioning Saudi Arabian oil based economy into an industrial economy.