FOCUS: Saudi Arabia's foreign policy puts oil price recovery at risk
| Date | 01 January 2018 |
| Published date | 01 January 2018 |
| DOI | http://doi.org/10.1111/oet.12545 |
FOCUS
Saudi Arabia’s foreign policy puts oil price recovery at risk
Faced with low economic growth and rising levels of
government debt, Saudi Arabia needs higher oil prices.
Growth and government borrowing are largely a mat-
ter of economics. Oil prices, on the other hand, are also
a political matter. As a short-term response to low oil
prices, the Saudi s have brought together a group of coun-
tries comprising 14 members of OPEC, plus 10 from
elsewhere, t hat have agreed to reduce their cr ude oil pro-
duction by 1.8 mn bpd. is arrangement is due to end
on December 31, 2018: and may even unwind earlier.
e fear in Riyadh is of a disorderly end to the deal as
several participating countries increase exports rapidly
in an attempt to take market share from other members
of the group, with the resu lt that oil prices fall, negat-
ing the whole process of production cuts. Saudi Arabia
is pursuing a foreign policy that is designed to prevent
this from happening; but it is a high risk move and may
well fail.
Economic constraints
e fall in global oil prices since late-2014 has led to a
decline in Saudi government revenues and a rise in bor-
rowing in orderto fund government spending, leading to
a record budget decit of $98bn, or 15% of GDP. Since
then, the decit has fallen and is ocially forecast at
$52 bn for 2018, or about 7% of this year’s expected GDP
[1]. While this is an improvement on2015, it still me ans
that the government will miss its target of bringing its
budget into balance by 2020. e date has now been put
back to 2023: even that could proveto be over-ambitious,
since it assumes an 80% increase in oil revenues by then.
In order to achieve this, oil production w ill have to
rise by about 1 mnbpd and global crude prices must go
up to $75/bbl. is year’s budget forecast is based on pro-
duction of 10.1 mn bpd and an oil price of about $60/bbl
for Brent, according to Riyadh-based Jadwa Investment
[2]. e production level is slightly over Saudi Arabia’s
allocation under the OPEC/non-OPEC production d eal
of 10.0 6 mn bpd, althoug h the kingdom may have some
leeway on this, since it was producing slightly below that
level during much of 2017 (see Table A).
Borrowing by the Saudi government since 2014 has
hadacumulativeeectonthekingdom’spublicdebt,
which is estimated at $148 bn, or 21% of GDP [1]. Part
of the borrowing has b een used in an attempt to stim-
ulate the economy, which last year shrank by 0.5%. e
Table A
Saudi Arabia: Oil Prole, 2017
Proven Reserves 266.5 bn bbl∗
Reserves Remaining 60.8 years†
(mn bpd)‡
Production
Crude Oil 10.0
NGL 1.9
Total 12.0
Production Capacity§
Total 12.5
Consumption
Total 4.0
Net Exports
Total 8.0
∗As of 1.1.17
†Based on 2017 estimated production
‡Including half the Neutral Zone
§Crude oil only
Totals rounded
Source: (Reserves) Oil & Gas Journal;
(Other) Saudi/Oil press
government hopes to keep borrowing under control this
year by raising a number of consumption taxes and
reducing subsidies on domestic fuels and electricity. It
also expects to benet from higher prices for its exports
of oil as a result of this year’s production agreement. Oil
revenues this year are ocially forecast at $131bn: a rise
of just under $14 bn, or 12%, over 2017.
ere is also the prospect of an infusion of funds
from the proposed sale of about 5% of the national oil
company, Saudi Aramco, this year via an initial public
oering (IPO), which could net the government some
$100 bn. e precise amount depends, in no small way,
on both global crude prices at the time and the markets’
expectations of prices following the IPO. e Saudis
therefore have a number of reasons to desire rm and
rising oil prices and thus to avoid a disorderly end to
this year’s production pact. It is on all thisthat the Saudi
government is now focusing its foreign policy.
Looking outwards
eachievementofastrongandstableoilpriceis
being approached from two directions, w hich supply
the principal strands of Saudi Arabia’s policy in relation
to its oil-exporting neighbors. e rst of these is the
formation of close alliances with nearby oil producers,
© 2018 John Wiley& Sons Ltd
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