More news on the impact of low oil prices, Saudi Arabia edition

The foreign reserves in Saudi Arabia look something like this in 2015. Image courtesy of
The foreign reserves in Saudi Arabia looked something like this in 2015.  Likely to continue for several more years. Image courtesy of

It is rare I can find two articles in one newspaper edition that tell a story so well when you put them together. Check check out the Wall Street Journal on December 24:

OPEC Report Suggests Oil-Price Rebound, Supply Cut / Prices to rise to the $70 a barrel in 2020, $95 a barrel in 2040, cartel predicts.

The subtitle tells the story: OPEC expects prices to rise very slowly climbing only $14 over the next seven years and another $25 over the following 20 years. That would suggest the following:

  • $37 – Brent crude on Wednesday
  • $70 – 2020
  • $95 – 2040

Their forecast of worldwide demand:

  • 92.8M bopd – now
  • 97.4M bopd – 2020

Some other of their forecasts. Oil supply from Canada and US:

  • 17.3M bopd – 2014
  • 19.8M bopd – 2020

Um, that is not much of a slowdown.

Shale oil from US:

  • 4.4M bopd – 2016
  • 5.2M bopd – 2020

Umm, that is not even close to what OPEC had in mind.

Keep in mind that extremely bleak long-term forecast for oil prices.

Possible impact on Saudi national budget

Saudi Budget Expected to be Squeezed by Low Oil Prices / Kingdom may be forced to slash spending, cut benefits for public. Very low prices are likely to force the government to cut the extensive benefits poured out to its citizens. Heavy subsidies provide artificially low-priced energy and food.

The reason that $37 a barrel price hurts so much is because the national budget was put together assuming the oil prices would be something in the range of $100. That is what the Saudi’s need to balance their national budget and keep the huge subsidies flowing.

Several stats illustrate the pressure on the Saudi government.

  • Oil revenues produce about 90% of all government revenues.
  • Oil produces about 40% of the country’s gross domestic product.

Just do some calculations in your head – what does the budget surplus or deficit look like if the price behind 90% of government revenue drops from around $100 to around $40.

Do a quick calc in your head to guess the impact if 40% of the GDP is based on something that has dropped about 60% in the last year and is expected to slowly recover over the next 10 or 20 years.

There will be horrendous budget pressures for quite a few years to come.

Foreign reserves

Imagine the change in dynamics when it becomes possible to calculate a burn rate for a major OPEC producer.

Article gives this information for the Saudi foreign reserves:

  • $746B – end of August 2014
  • $648B – end of October 2015

That is a $98B drop in 14 months. Annualized that is an $84B drain per year.

On a straight-line basis, with the massive volume of assumptions necessary to make such a calculation, that gives a burn rate of 7.7 years for the Saudi foreign reserves.

Unless something dramatic changes, the Saudi foreign reserves will be all gone in under eight years.

Now, keep in mind the new OPEC forecast that oil may go to $70 over the next 14 years. Their foreign reserves won’t last that long.

Put those two articles together. I’ll guess there has been a lot of sweating in the national budget office in Saudi Arabia in the last 8 or 10 months. Oh, probably a lot of sweating in a lot of other budget offices around the Middle East too.

Forecast deficit for 2016

12/28 – Wall Street Journal – Saudi Arabia Announces 2016 Budget – Budget for Saudi Arabia is to spend 840B Saudi riyals in 2016 compared to 975B in 2015. That is a 14% drop in spending. Revenue is expected to be 514B riyals in 2016 compared to 608B in 2015.

That is a deficit of 326B riyals in 2016.

Here are those numbers in table form, measured in Saudi riyals:

  • 2015 –  2016 – % chg
  • 608B – 514B – (15.5%) – revenue
  • 975B – 840B – (13.8%) – spending
  • 367B – 326B – (11.2%) – deficit

At today’s conversion rate of US$0.27 to one Saudi riyal, those numbers in US dollars would be:

  • 2015  –  2016
  • $164B – $139B – revenue
  • $263B – $227B – spending
  • $  99B – $  88B – deficit

With foreign reserves of $648B at the end of October, I’ll guess reserves will be $631B at the end of 2015.

Deficit of $88B would leave reserves of $543B at the end of 2016. That is a burn rate of 7.2 years as of January 1, 2016.

Some actual and budget numbers

The U.S.-Saudi Arabia and Business Council provides some comparison information in their previous announcement: Saudi Arabia’s 2015 Budget Maintains Strong Spending, Diversification Initiative.

Here are the 2014 actuals and 2015 budget from that announcement combined with the 2015 estimates from above, all of which are expressed in US dollars:

  •  14 act – 15 bud – 15 est
  • $279B – $191B – $164B– revenue
  • $293B – $229B – $263B– spending
  • $  14B – $  39B – $  99B – deficit

That shows a severe drop from 2014 actual income to 2015 budget to 2015 actual. Spending was planned to be cut $64B in 2015 but only cut $30B, likely due to the war with Yemen and a need to sustain social spending. Deficit blossomed from $14B in ’14 to $99B actual in ’15.

Putting all the four sets of data together shows the following relationships, all expressed in US dollars. The amounts are then shown as a percent of 2014 actual revenue. What that calculation allows is a picture of the percentage changes:

 14 act  15 bug  15 est  16 bud
        279         191         164         139  revenue
       293        229        263         227  expense
      (14)       (38)       (99)       (88)  deficit
100% 68% 59% 50%  revenue
105% 82% 94% 81%  expense
-5% -14% -35% -32%  deficit

Revenue is ’16 is 50% of ’14, or a drop by 50%. Expenses are 81%, or only a drop of 24% from 105% in ’14. The ’16 deficit is 32% of the ’14 revenue.

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