Its vital foreign exchange reserves of today around $620bn are disappearing at an alarming rate, and could finally evaporate in just over two years if oil remains at $30 a barrel for a protracted period, international oil analyst Leo Drollas said.
For an economy that requires a breakeven annual average oil price of $106 a barrel, a sub-$30 pricing regime makes for a chilling scenario.
The kingdom is bleeding cash, to the tune of $96bn in 2015, with a likely similarly large budget deficit this year, figures that dwarf the previous largest deficit in 1996 of around $25bn. As a result, it had to issue $26bn of new debt last year.
“It still has about $620bn of net foreign assets, but unless oil prices recover, these reserves will not last for very long,” said Drollas, former director and chief economist at London’s Centre for Global Energy Studies.
He cited US shale data from North Dakota, just over 10% of US total production, to show that despite Saudi Arabia’s efforts to flood the market, US shale producers have held firm.
In the state, oil production stood at around 730,000 barrels per day (bpd) in January 2013. It peaked in the first quarter of 2015 at over 1.2m bpd. As of December, it was still well in excess of 1.1m bpd, a telltale sign that Saudi pressure on shale producers was not having the desired effect.
Since the US also continues to produce substantial quantities of conventional oil, which are less technically challenging or expensive to recover, the figures indicate the size of the Saudi predicament.
At a price of $30 a barrel, Bimco past president, Philip Embiricos, also an event speaker, estimates that the annual Saudi budget shortfall would be $277bn, a figure which, if held constant, implies that its foreign reserves would last 2 years and 2 months. At $20 a barrel, the shortfall would be $314bn.
“The Saudis are on the horns of a dilemma. If they cut back, with or without OPEC, shale production will rise again. If they continue to fight for market share, they will have to change drastically their spending habits,” Drollas said.
He believes they may have already blinked. “It's the deficit which continues, and these very low prices which have perhaps grown it. It's the measures they've taken to combat this problem. They can do so much, but you have to worry about what effect it will have on the population.
“The Saudi regime has to tiptoe through this minefield.”
He said acceleration in the rise in global commercial stock cover from the beginning of 2014 onwards was associated with the collapse in oil prices. “By the end of 2016, cover will have stopped rising and oil prices should stabilise,” he said.
Even at an average annual price of $60 per barrel, the budget shortfall would $168bn, implying only three-and-three-quarter years of foreign reserves coverage, according to Embiricos’ data.
Drollas said Saudi production today did not exceed 10m bpd. “They need to just ease another 400-500,000 bpd to make things move. It wouldn’t take much. I can’t understand what the Saudis are doing.”
He says things have never looked bleaker for the House of Saud. “Saudi Arabia is between a rock and a hard place.”
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