Saudi crown prince started an oil price war. How long can he afford it?
- In response to Russia’s refusal to curb production to support oil prices, Saudi Arabia aggressively cut its prices and ramped up production
- The attempt to win back market share could leave a massive hole in the kingdom’s economy, denting the crown prince’s ambitions to overhaul it
If oil prices fail to recover and stay at less than half the amount Saudi Arabia needs to balance its budget, the economy – and the crown prince’s ambitions to reform it – may be among the biggest casualties. The energy sector accounts for about 80 per cent of the kingdom’s exports and two-thirds of its fiscal revenue.
Should Brent crude remain at US$35 a barrel without an adjustment in spending, Saudi Arabia would run a deficit of nearly 15 per cent of economic output in 2020, while its net foreign reserves could run out in about five years unless it uses other funding sources, according to Abu Dhabi Commercial Bank.
Goldman Sachs forecasts this year’s fiscal shortfall at almost 12 per cent, boosting the government’s financing requirement by US$36 billion for the year.
“Saudi has accumulated significant reserves that will allow it to see through a prolonged period of low prices, but this may come at a cost,” said Tarek Fadlallah, chief executive officer of the Middle East unit of Nomura Asset Management in Dubai. “The cost is the money that might otherwise be used to help the economy diversify.”
Oil markets had the biggest plunge since the 1991 Gulf War on Monday after the disintegration of the Opec+ alliance pitted Saudi Arabia against Russia, which refused another round of production cuts to prop up crude prices.