With oil revenues accounting for 41.8 per cent of Saudi Arabia’s gross domestic product (GDP) in 2009, it was no surprise the kingdom’s financial performance was constrained by last year’s weaker oil prices, which averaged $62 a barrel over the course of the year.

The kingdom ran a budget deficit of $11.9bn, while the value of its foreign assets shrank by $48.8bn. An average oil price of $67 a barrel was needed for the kingdom to have balanced its budget in 2009.

Saudi oil production
  Domestic consumption (m b/d) Exports (m b/d)
2009e 1.9 6.2
2015e 2.5 7.0
2020e 3.3 7.0
2025e 4.3 7.0
2030e 5.5 7.0
M b/d = million barrels a day, e = estimates
Source: Jadwa Investment

The government predicts another budget deficit this year of $18.6bn, after unveiling its largest ever budget for 2010, with total expenditure projected at $144bn – a 14 per cent increase in spending from $126bn in 2009 – designed to continue the public spending stimulus to the kingdom’s economy.

Spending boost

The 2010 budget provides a significant boost to Saudi’s projects sector, with $69bn of investment in new and existing projects, representing a 16 per cent increase from last year. There are also double-digit spending increases for key areas of the economy, including healthcare, transport, telecoms, and the power and water sector.

But the scale of development in Saudi Arabia is raising concerns over the kingdom’s rising oil consumption, which will start eating substantially into its export capacity. As the country expands its industrial base, much more of its oil production is being consumed domestically.

Saudi Arabia is going to have to rely on continuous oil price increases of about $5 a barrel every year

Brad Bourland, Jadwa Investments

Of the 12.5 million barrels a day of oil produced in 2009, 1.25 million barrels were used to meet residential and commercial power demand, according to the Saudi water and electricity ministry.

The kingdom’s oil consumption jumped 16.4 per cent in August 2009, compared with August 2008, because of an unprecedented surge in the burning of crude, according to the Paris-based International Energy Agency (IEA). The IEA has increased its forecast for Saudi Arabia’s domestic oil consumption to 2.8 million barrels a day this year.  

Riyadh is working to redress this shift in the balance of oil usage and oil exports. In 2009, the government announced it would invest $100bn over the next five years on oil and gas exploration and production, as well as on a raft of new refineries.  

Meanwhile, Saudi’s oil minister Ali al-Naimi, says the kingdom plans to increase gas output by 40 per cent over a four-year period to 2014. Increasing the production of gas will allow it to be used as feedstock for power plants and industry in place of oil.

Given the number of projects both planned and under way in Saudi Arabia, economists are increasingly concerned that any rises in oil production will be consumed domestically. 

“From 2010, according to forecasts from the IEA, the US Energy Information Administration and Opec, Saudi Arabia cannot guarantee significant increases in oil export volumes,” says Brad Bourland, chief economist at Saudi-based Jadwa Investments.

So to offset the stagnation in its oil revenue, Bourland says crude prices would need to rise – not something that Saudi Arabia can directly control.

Price correlation

“To satisfy its growing spending plans, Saudi Arabia is going to have to rely on continuous oil price increases of about $5 a barrel every year,” he says.

“Oil prices have risen from $2 to $80 a barrel over the 40-year period from 1970-2010, or an average of $2 a year. In this context, continuous increases of $5 a year seem unlikely.”

The increase in domestic energy use is also worrying given that the government sells its oil internally at only $5 a barrel. State-owned Saudi Aramco, the largest oil company in the world, estimates the kingdom spends about $8bn on fuel subsidies a year. 

The demand for oil is being compounded further by Saudi’s inefficient power plants and shortage of gas. For example, in 2008, oil accounted for 59.7 per cent of primary energy demand, followed by gas at 40.3 per cent.

The increase in domestic consumption of oil is being driven further by a growing population and a rise in car ownership as a result of rapid economic growth. The kingdom’s per capita electricity consumption is forecast to rise by 19 per cent by 2013. 

As the lifeblood of the economy, the projected decline in oil export revenues in the coming years poses a serious concern for the kingdom’s future growth. The performance of the economy moves far more closely in correlation with the price of oil than the government would like to admit.