Saudi Arabia's reliance on high oil prices courts disaster
Numerous risks face the kingdom's finances, with a collapse in the oil price a real possibility
Saudi Arabia is just about the only energy producer so far unaffected by the shale revolution.
Yet despite appearances, Saudi Arabia's financial and oil market strength is brittle. Saudi policymakers must successfully deal with a series of problems by the end of the decade.
Individually, each of the problems should be easy to manage, but in combination they could amount to a "perfect storm" that presents the kingdom's leaders with the most difficult challenge since the collapse in oil prices in 1998.
Saudi production of crude oil and other liquids hit a record 11.7 million barrels per day last year, according to the US Energy Information Administration.
Government oil revenues amounted to 1.14 trillion riyals (HK$2.36 trillion), up from 670 billion riyals in 2010 and almost double the figure included in the budget, according to the International Monetary Fund.
While other energy producers have been hit by growing competition from shale, Saudi Arabia has benefited from output problems affecting the North Sea and other Opec members, which have kept prices above US$100 per barrel and enabled the kingdom to increase its market share.
North American shale production is expected to continue adding about 1 million barrels per day to oil supplies over the next several years.
Beyond that, massive shale formations in Argentina, Russia, South Africa and in several other countries could go into production on a significant scale by the end of the decade. And large oil and gas finds in deep water off the coast of Brazil and Africa are also likely to start producing by 2020.
Gradual normalisation of relations between the United States and Iran and the relaxation of restrictions on Iran's oil exports could add back 1 million to 2 million barrels per day into the global market. Iraq also has ambitious plans to continue growing its output and challenge Saudi Arabia's market share.
The string of supply disruptions across Nigeria, Libya, Algeria, South Sudan, Syria and Iraq has balanced the oil market and kept prices firm, despite shale, as the EIA explained in a note published in September. But each disruption is also a potential source of new supply if it is eventually resolved.
And Saudi Arabia's own growing energy needs threaten to cut the amount of oil available for export.
"Domestic energy consumption is likely to continue to rise sharply in the absence of policy reforms," the IMF said. "Saudi Arabia has one of the highest levels of energy consumption per capita in the world and one of the lowest prices.
"Low energy prices are one of the ways that oil wealth is distributed to the population. International experience with energy price reform suggests that such a policy adjustment will need to be well planned, phased and clearly communicated to the population and businesses."
If domestic energy consumption continues to grow at current rates, it would reach more than 20 per cent of output by 2018, up from 16 per cent at present, the IMF said.
Finally, in common with other crude producers, Saudi Arabia faces a challenge from cheap natural gas. Train companies, truckers, ship owners, logistics operators and gas producers are all making a push to use more cheap liquefied or compressed natural gas as a transport fuel, displacing diesel.
While the probability of any one of these developments may be low, so many trends point in the same direction that Saudi policymakers are likely to face a significant challenge.
Lower oil prices, reduced exports or both remained the biggest risks to Saudi Arabia's financial position, the IMF said.
"The projected increases in the production of unconventional oil in the United States and Canada and the recovery in production in Iraq and Libya could result in a lower path for oil production in Saudi Arabia than assumed … or a larger drop in oil prices," it said.
Despite efforts to diversify the Saudi economy over the past two decades, oil still accounts for 80 per cent of export revenue and 90 per cent of the country's budget revenue.
The IMF complimented the Saudi authorities for reducing short-term volatility in expenditure and prudent budgeting.
Nonetheless, Saudi Arabia needed an oil price of more than US$80 per barrel to balance its budget, it said, and the break-even price had increased by almost US$50 per barrel in the past five years.
In effect, Saudi policy depends on a continuation of high prices and high volumes. Neither is guaranteed, as Saudi policymakers are only too aware.