By Andy Tully
Saudi Arabia increased its exports of oil during October, shipping out more crude than it had in the previous four months, aggravating a supply glut that has severely depressed oil prices and revenues to oil producers.
But the desert kingdom reportedly is working on a strategy to rework its economy in part through spending reforms and privatizing state-owned industries in an effort to weather what it sees as a temporary drop in oil’s value.
Crude exports from Saudi Arabia rose from an average of 7.111 million barrels per day in September to 7.364 million per day in October, according to the latest data from the Joint Organizations Data Initiative (JODI), which monitors the oil industry. The report said this quantity was the most oil exported from Saudi Arabia since June and 7 percent higher than in October 2014.
It was Saudi Arabia that persuaded OPEC in November 2014 not to lower its production ceiling from 30 million barrels a day to help shore up oil prices, and, on Dec. 4, 2015 to dispense with a ceiling altogether. This has been an effort to keep prices low enough temporarily to reclaim market share from rivals such as Russia and the United States, with higher-cost production technologies.
This has led to some financial pain for OPEC countries. Not only are less affluent OPEC members such as Venezuela hurt by the lower oil prices, but even rich Gulf States, including Saudi Arabia, began to feel the pinch almost immediately and revise the projected revenues of their budgets for the fiscal year 2015.
And on Oct. 30, the U.S. financial services company Standard & Poors (S&P), citing a “pronounced negative swing” in Saudi finances due to lower oil revenues, cut its rating of the Saudi sovereign debt to A+/A-1 from AA-/A-1+, and said its outlook for Saudi Arabia remains negative.
To help the kingdom weather these financial troubles, Mohammed bin Salman Al Saud, Saudi Arabia’s deputy crown prince, has drawn up plans to shake up the kingdom’s economy, Reuters reports, citing two anonymous sources from Saudi private financial and business sectors.
Overall, the plan, likely to be announced next month, would shift authority for Saudi economic policy from the Finance Ministry to Prince Mohammed; the new Council of Economic and Development Affairs, of which Prince Mohammed is the chairman; and the Ministry of Economy and Planning.
The current market turmoil has created a once in a generation opportunity for savvy energy investors. Whilst the mainstream media prints scare stories of oil prices falling through the floor smart investors are setting up their next winning oil plays. Because of reduced oil revenues over the past 18 months, the Riyadh government has an annual budget deficit of more than $100 billion, which has led it to cash out more than $90 billion in assets to help it pay its bills. The International Monetary Fund (IMF) has warned Saudi Arabia that such a practice can’t be sustained for more than a few years.
So Prince Mohammed has decided that the government must spend more cautiously, allowing the Finance Ministry to finance new initiatives only with the consent of the prince’s Council of Economic and Development Affairs.
One effort would be to privatize state-owned, non-oil enterprises to help encourage economic growth and reduce government spending. As an example, already the country’s government-run civil aviation department has said it plans to privatize airports and air transport services next year.
Another target of reform would be subsidies for water and electricity, which cost Riyadh billions of dollars and primarily benefit rich Saudis. Under restructuring, Reuters’ sources say, they would cost less and benefit low- and middle-income Saudis instead.
Possibly most important, Prince Mohammed would look for ways in which the kingdom would diversify its source of revenue. IMF figures say Saudi Arabia gets 80 percent of its revenues from oil.
Whether such reforms will take hold is an open question, given Saudi Arabia’s past resistance to economic change. But Prince Mohammed is just 30 years old, far younger than many Saudi political leaders of the past, and appears to have many years to put his imprint on his country’s economy.
By Andy Tully of Oilprice.com