Fallout of the ‘Falling’ Crude Price for Saudi Arabia


The following guest post is courtesy of HiWayFX.

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With more than 25% of the global proven oil reserves and more than 255 trillion cubic feet of gas reserves; Saudi Arabia reported to generate more than 85% of the country’s export revenues from this hydrocarbon wealth for the fiscal year 2013. However in the present scenario wherein the crude oil price declined by more than 70% since mid-2014, unfavourable repercussions are likely to affect the policies of the country.

HiWayFXWith a steep decline in the price of crude spot and futures, a big challenge for Saudi Arabia was whether to stymie the production levels at the ongoing levels or be party to the group of OPEC members (including Russia) in freezing the production levels. To the dismay of Iraq and Russia who had implicitly given a nod for freezing the oil production levels; Saudi Arabia ended any such probability in light of Iran vociferously declining to partner in any such efforts.

At the same time, the ministers of the Kingdom express their confidence in a gradual revival of the crude oil prices from 2016 onwards on the basis of the market estimates highlighting that the production of oil from unconventional energy sources has started to decline. This estimate is also corroborated by the fact that the peak production rate of shale gas bearing fields last for less than a year from the date of commencement of the production and the decline in production rates of shale is as much as 70% from 2nd year onwards.

Another question which the policy makers in Saudi Arabia have been consistently evaluating is that of de-pegging the rial against the US dollar from the current levels of 3.75 rials per US dollar. The Saudi Arabia Monetary Agency over an eleven months’ time period in the calendar year 2015 had already reduced their foreign currency reserves by US$ 100 billion in an attempt to maintain their currency’s exchange rate. However, it can be said that if Saudi Arabia decides to follow Russia who is also the largest holders of the US dollar reserves; Saudi Arabia will also be at the losing end just like Russia was. However, in spite of the foreign currency reserves of more than US$ 616 billion with Saudi Arabia as on December 31, 2015, the foreign exchange dealers have reasons to believe that the currency will need to be de-pegged. It is said that once the free float currency is in practice, the interest rates can be eased by the Saudi Arabia Monetary Agency to promote investments and thus aid in providing the needed stimulus to the economy. In an alternate scenario wherein the rial is pegged against US dollar, the local interest rates in Saudi Arabia will need to mirror the movement of the US Federal Reserve’ interest rates which are likely to continue the increase.

Another important strategy been followed by the kingdom is that of managed multi dependence. According to this policy, Saudi Arabia endeavours to balance its likely revenue generation source from more than a single nation. With this strategy, Saudi Arabia has been actively pursuing a ‘look east’ policy wherein the alternate importers of crude oil such as Japan, China and India are being actively pursued for buying additional volumes of the ‘product(s)’.

Further, the state has plans to improve the quality of oil being sold internationally and has plans to make the oil as pollution free as is practically possible. The kingdom also has ambitious plans for developing renewable energy sources through solar projects. With exhaustive volumes of sand available with the country together with ample sunlight, dry climate and open levelled landmasses, Saudi Arabia is being projected to be a promising site for such large scale capital projects. According to the country’s long term vision document; Saudi Arabia plans to create 54 gigawatts of clean energy capacity in next 25 years.

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Fallout of the ‘Falling’ Crude Price for Saudi Arabia

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