Even though low oil prices mean Riyadh will earn less hydrocarbons revenue, the authorities are still focused on increasing defence investment and maintaining social spending
For a country producing more than 10 million barrels a day (b/d) of crude, it is little wonder why everyone in Saudi Arabia obsesses about oil prices so much.
Riyadh relies on oil for 90 per cent of its revenues, making the resource the vital cash generator for the kingdom. In short, crude pays for everything and a $10 a barrel fall in prices can mean $29bn less in government coffers based on Saudi Arabia exporting about 8 million b/d of crude.
In June 2014, after three years of triple-figure oil prices, the cost of crude started to drop to the $60 a barrel level where it now sits. This means Riyadh can expect a lot less money to come in 2015 than the average of $300bn from 2012 to 2014.
Lower income
Exporting 8 million b/d for the whole of 2015 would bring in about $164bn based on selling crude at an average of $56 a barrel, a lot less than Riyadh has become accustomed to.
There has been much speculation about how this drop in revenues is going to affect capital spending in the kingdom, especially so now that increasing defence and anti-terrorism spending is looking inevitable.
Revenues will be down on the previous few years, but Riyadh is bolstered by the $736bn of foreign reserves it managed to accrue over the same period. This means many of the key areas for investment will be relatively unaffected. These will include social infrastructure sectors such as education, health and housing.
Defence spending
Defence and police spending are likely to be hiked up and this will mean more capital spending on equipment and manpower as well as increased outlays on the ordnance currently being used on Yemen bombing missions. War is expensive, even relatively small actions such as the Yemen raids.
Low oil prices are affecting some sectors, however, not least the hydrocarbons industry itself. There has been a definite slowdown in new project spending in 2015 and this is extremely likely to continue for at least another two years.
Gas spending seems to have been ring-fenced and there are some essential investments required for the upstream oil sector in order to keep producing at 10 million b/d.
Main casualty
The main casualty will be large-scale downstream projects such as petrochemicals facilities and new oil refineries. Second-phase expansions and huge oil-to-chemicals schemes are looking less and less likely to happen in this decade.
Large infrastructure project spending is also likely to be hit, although many current schemes will see execution phases lengthened rather than being put on hold.
Managing cash flow has become the buzzword for many government ministries and cost savings will be expected across all departments. However, many senior figures in Riyadh think periods of lower oil prices always act as a restraining influence on the more fanciful spending plans and will allow a period of trimming away such excesses.
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