(The author is a Reuters columnist. The opinions expressed are
his / her own.)
By John Kemp
LONDON Nov 11 Saudi Arabia is just about the
only energy producer so far unaffected by the shale revolution.
Yet despite appearances, Saudi Arabia's financial and
oil-market strength is brittle. Saudi policymakers must
successfully deal with a series of problems by the end of the
Individually, each of the problems should be easy to manage,
but in combination they could amount to a "perfect storm" that
presents the kingdom's leaders with the most difficult challenge
since the collapse in oil prices in 1998.
Saudi production of crude oil and other liquids hit a record
11.7 million barrels per day in 2012, according to the U.S.
Energy Information Administration (EIA).
Government oil revenues amounted to 1,144 billion riyals
($305 billion), up from 670 billion in 2010 and almost double
the figure included in the budget, according to the
International Monetary Fund (IMF).
While other energy producers have been hit by growing
competition from shale, Saudi Arabia has benefited from output
problems affecting the North Sea and other OPEC members, which
have kept prices above $100 per barrel and enabled the kingdom
to increase its market share.
"Saudi Arabia has been one of the best-performing G20
economies," the IMF concluded at the end of its annual Article
IV consultations with Saudi authorities in May and June. "In
recent years, the government has smoothed oil price volatility
and built significant (fiscal) buffers," the Fund found.
Surplus budget revenues have been applied to reduce
outstanding debt to less than 4 percent of GDP and build
deposits at the central bank of 58 percent of GDP, sufficient to
cover 20 months of spending.
A large proportion of the oil receipts has been invested in
international financial markets. Net foreign assets of the Saudi
Arabian Monetary Agency (SAMA) are projected to reach $730
billion this year, almost double the 2010 level, according to
the Fund, enough to finance more than three years of imports.
Secure in its indomitable financial position, Saudi Arabia
has been projecting its influence throughout the Middle East and
North Africa with increasing determination and independence.
In the past two years, Riyadh has played an increasingly
high-profile role in regional diplomacy: helping put down a
rebellion in neighbouring Bahrain, providing balance of payments
support to Egypt's military-backed government, supplying arms
and money to opposition fighters in Syria and marshalling
support for a tough line on Iran over the nuclear issue.
Irritated at the direction of U.S. policy in the region,
Saudi Arabia last month dramatically turned down a seat on the
UN Security Council.
North American shale production is expected to continue
adding around 1 million barrels per day to oil supplies over the
next several years.
Beyond that, massive shale formations in Argentina, Russia,
South Africa and in several other countries could go into
production on a significant scale by the end of the decade. And
large oil and gas finds in deep water off the coast of Brazil
and Africa are also likely to start producing by 2020.
Gradual normalisation of relations between the United States
and Iran and the relaxation of restrictions on Iran's oil
exports could add back another 1-2 million barrels per day into
the global market. Iraq also has ambitious plans to continue
growing its output and challenge Saudi Arabia's market share.
The string of supply disruptions across Nigeria, Libya,
Algeria, South Sudan, Syria and Iraq has balanced the oil market
and kept prices firm, despite shale, as the EIA explained in a
note published in September. ("Global crude oil supply
disruptions and strong demand support high oil prices") But each
disruption is also a potential source of new supply if it is
Saudi Arabia's own growing energy needs threaten to cut the
amount of oil available for export. "Domestic energy consumption
is likely to continue to rise sharply in the absence of policy
reforms," the IMF noted.
"Saudi Arabia has one of the highest levels of energy
consumption per capita in the world and one of the lowest
prices," the Fund observed. "Low energy prices are one of the
ways that oil wealth is distributed to the population."
"International experience with energy price reform suggests
that such a policy adjustment will need to be well planned,
phased and clearly communicated to the population and
If domestic energy consumption continues to grow at current
rates, it will reach more than 20 percent of output by 2018, up
from 16 percent currently, according to the Fund.
Finally, in common with other crude producers, Saudi Arabia
faces a challenge from cheap natural gas. Train companies,
truckers, ship owners, logistics operators and gas producers are
all making a push to use more cheap liquefied or compressed
natural gas as a transport fuel, displacing diesel.
While the probability of any one of these developments may
be low, so many trends point in the same direction that Saudi
policymakers are likely to face a significant challenge.
Lower oil prices, reduced exports or both remain the biggest
risks to Saudi Arabia's financial position, as the Fund noted.
"The projected increases in the production of unconventional
oil in the United States and Canada and the recovery in
production in Iraq and Libya could result in a lower path for
oil production in Saudi Arabia than assumed ... or a larger drop
in oil prices," according to the IMF.
Despite efforts to diversify the Saudi economy over the past
two decades, oil still accounts for 80 percent of export revenue
and 90 percent of budget revenue.
The Fund complimented the Saudi authorities for reducing
short-term volatility in expenditure and prudent budgeting.
Nonetheless, Saudi Arabia needs an oil price of more than
$80 per barrel to balance its budget, according to the Fund, and
the breakeven price has increased by almost $50 per barrel in
the past five years.
In effect, Saudi policy depends on a continuation of high
prices and high volumes. Neither is guaranteed, as Saudi
policymakers are only too well aware.
The IMF identified a large and prolonged downturn in oil
prices (or by extension, volumes) as a low-probability but
high-consequence event for Saudi Arabia in its risk assessment
The Fund considered two scenarios in which oil prices
declined and determined that Saudi Arabia's financial reserves
would last until 2021-2025 even if it did not adjust spending,
which is a considerable safety margin.
Saudi Arabia could endure quite a long period of reduced oil
revenues by running down its balances. Nonetheless, it would be
risky to put the buffers to the test as confidence would start
to ebb long before they were exhausted.
The challenge is to achieve the long-promised economic
diversification while minimising the impact of higher energy
prices on poorer members of society.
The unemployment rate among Saudi nationals is already as
high as 12 percent, and demographics threatens to add another
1.6-2.0 million people to the labour force in the next decade.
"Within the labour market, Saudis are primarily employed in
the public sector, (while) non-Saudis dominate the private
sector," the Fund noted.
Policymakers are working to improve the competitiveness of
Saudi nationals in the labour market through education
improvements, "aiming to raise the productivity of Saudi workers
and their ability to access high-paying private sector jobs".
Employment quotas and a de facto minimum wage for Saudis
working in the private sector are all designed to boost private
But the bottom line is that Saudi policymakers must display
exceptional leadership successfully to adjust to increasing
competition from other energy producers and rising internal
energy consumption at a time when the economy requires major
(editing by Jane Baird)