Saudi Arabia plays the long game

20 January 2015

While there are worrying developments, reports on the demise of the kingdom’s oil sector are wildly exaggerated

The oil price crash sent shockwaves through the region and western commentators were quick to pounce on this as evidence that $50-a-barrel oil would sound the death knell for Saudi Arabia, the world’s largest exporter of crude.

This is a provocative position and is patently incorrect. The kingdom is arguably one of the very few major oil producers that has kept a cool head in the face of freefalling prices, while all around others floundered.

At the end of 2013, Riyadh forecast government revenues of $225bn for 2014. In reality, it fared better, taking in more than $278bn, but the original forecast proves that lower prices were expected and budgeted for.

By the end of 2014, Riyadh also had $736bn of foreign reserves to cushion the impact of oil price spikes. Hardly the tactics of a government expecting $100 oil in the long term.

However, there are some worrying developments. The oil industry is becoming more open and while much of this new supply is currently prohibitively expensive, it will become cheaper.

This means that the next two years will be extremely challenging for some of the kingdom’s competitors, especially shale oil producers in the US, many of whom could go out of business.

Softening demand in Asia and the Eurozone is also alarming, but all major producers are hoping that the short-term oil price will act as a de facto stimulus to many of these troubled economies.

This perilous situation goes some way to explaining the kingdom’s decision to maintain high oil production. It simply cannot afford to allow others to fill the gaps in the market lower output would present.

Saudi Arabian crude is some of the most abundant and easy to access in the world and the reports of its demise are unfairly exaggerated. But until Riyadh lessens its reliance on exporting crude, there will be a risk of becoming just another player in a pluralist new world order in the global oil sector.  

Follow Kevin Baxter on Twitter: @MEEDKevin

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications