A Saudi billionaire investor has sounded the alarm over the potential impact of falling oil prices on the Gulf kingdom’s economy.
In an open letter to Saudi ministers posted via Twitter, Prince Alwaleed bin Talal al-Saud expressed his “astonishment” at comments made by Ali al-Naimi, the oil minister, who reportedly played down the impact of oil prices falling below $100 a barrel. Prices have since fallen below $88 a barrel, or a quarter since June.
Prince Alwaleed, noting the kingdom’s 2014 budget was 90 per cent dependent on oil revenues, said belittling the impact of lower prices was a “catastrophe that cannot go unmentioned”.
The prince expressed similar concerns last year over the rise of shale oil, which, with weakening Asian demand, has contributed to the rapid slide in oil prices – despite geopolitical uncertainties in Iraq, a major producer.
His public broadside against the veteran oil minister came as analysts said the Gulf members of Opec, the oil producers’ cartel, led by Saudi Arabia, seem prepared to drive down oil prices to retain market share and fend off the threat of rising US production, despite the risks to their hydrocarbon-dependent economies.
“Saudi thinking has to be that lower prices are not so bad and Gulf states can cope, either by cutting spending or dipping into reserves or borrowing,” said Robin Mills of Manaar Energy Consulting. “$100 a barrel is too high – you get weak demand growth, so maybe if it cools off to around $80, the shale boom cools off and you get more reasonable demand.”
Gulf oil producers, most of which have large cash reserves, seem to be betting that the short-term pain of declining oil revenues from lower prices will close off competing supplies and revive the lowest global oil demand since 2009.
Oil prices are reaching levels that, if sustained, threaten the ability of some Gulf states to meet domestic spending commitments, forcing a drawdown on reserves or debt issuance.
Saudi Arabia needed an oil price of $89 a barrel in 2013 to balance the budget, up from a “fiscal break-even” of $78 a barrel in 2012, according to the International Monetary Fund.
But Riyadh’s regional political rivals, such as Iran and Iraq, as well as other Opec members such as Venezuela, have much higher fiscal break-evens.
“In the short term, the Gulf Co-operation Council economies have the financial resources to maintain spending plans,” said Masood Ahmed, the IMF’s regional director. “Should the drop in oil price last over a longer period of time, fiscal policy adjustment would become imperative.”
The Gulf states have weathered low prices before, building reserves through the global financial crisis when in 2009 prices briefly slumped to $34 a barrel. At the turn of this century, Saudi Arabia was dealing with oil prices at $10 a barrel, and public debt ballooned to 100 per cent of gross domestic product.
In August, Saudi central bank reserves reached $747bn, the equivalent of more than three years’ budgeted spending.
Riyadh would only have to draw on net assets of more than 100 per cent of gross domestic product if oil stayed at $80 a barrel for almost a year, said Emad Mostaque, a strategist at Eclectic Strategy.
But rising Gulf government spending has never been more important politically. Sunni jihadis are marauding through Iraq and Syria, just a decade after al-Qaeda launched a domestic insurgency in Saudi Arabia, raising concerns about the government’s ability to deliver broad-based prosperity.
Saudi Arabia unleashed a $160bn spending plan in 2011 as unrest swept through the region, including violent protests on the streets of Yemen, Bahrain, Oman and Kuwait. Large capital expenditure and welfare spending have since underpinned strong economic growth.
“Spending from reserves or borrowing is simply not sustainable,” said Farouk Soussa, chief Middle East economist at Citi.
The IMF is urging all Gulf states to rationalise massive subsidy programmes, which outpace per capita spending on health and education, and bolster economic diversification and job creation efforts.
But depriving pampered populations of this support would come at a high political cost, given longstanding social compacts that trade loyalty for generous welfare.
Economists also worry that even a slight cut in capital spending will puncture the Gulf’s mood of economic exuberance, thereby damping growth.
“The implications for sociopolitical stability of an austerity drive in the Gulf are significant,” Mr Soussa said.
Letter in response to this report: