Saudi Arabia must have known that an oil crash was imminent as they severe their three-year-long cooperation to push up oil prices. After two weeks and with almost 4 million barrels per day (bpd) of total promised supply of oil due for the market next month, Riyadh and Moscow are currently tallying up the cost as they adjust state spending.
The two countries, who went from friend to foe, now anticipate sharp declines in oil revenues in the short term, due to the Covid-19 pandemic wrecking demand as well as Brent crude oil barely remaining at USD$30 (S$43.75 ) recently. The Saudi Arabia government approved “a partial reduction in some items with the least social and economic impact” as it announced this week that it will cut government spending by SAR50 billion (S$19.42 billion) which is almost 5 per cent of its budget expenditure for 2020.
Saudi Press Agency reported that Mohammad Al-Jadaan, the Saudi Minister of Finance and Acting Minister of Economy and Planning stated that the approval was “in light of the noticeable development in the public finance management, and the existence of the appropriate flexibility to take measures in the face of emergency shocks with a high level of efficiency.”
Saudi Arabia stated that extra expenditures could be re-evaluated and possibly reduced as the country has adopted “measures to reduce the impact of low prices of oil, and additional measures will be taken to deal with the expected drop in prices”.
According to Reuters’ report last week, with its four sources regarding the matter, Saudi Arabia’s finance ministry had suggested to the government a 20-30 per cent reduction in their budgets because of the oil price decline. As oil prices were three times less than its break-even oil price, Saudi Arabia intends to utilise cash from its sovereign wealth fund to prop up the battered government finances.
To balance its budget, Saudi Arabia requires that oil prices be at USD$91 (S$132.63) per barrel in 2020, with all else being equal.
Fitch stated last week, a day following the oil price crash by 25 per cent, “For countries in the Gulf Cooperation Council (GCC), we estimate that a change of USD$10 in the price per barrel of oil tends to affect government revenues by 2%-4% of GDP.”
Saudi Arabia, which is the global top oil exporter, an OPEC top producer and a GCC member, promised to cut oil price by substantially increasing supply as part of its dramatic shift in its oil price-fixing policies of the last three years. Analysts are not trusting the claim that The Kingdom can adjust to the lower oil prices of today.
Lower government expenditure will cripple projects and the Saudi wealth fund will rapidly deplete if oil prices remain at USD$30 (S$43.72) per Brent barrel. In addition to this, the already-battered private non-oil sector will be damaged further in the short-term.
In achieving the ambitious Vision 2030 plan of Saudi Crown Prince Mohammad bin Salman, the lack of funds poses a long-term damage on the vision. Prior to the oil price crash, the vision was already not panning out well because Saudi investment in “diversifying away from oil” and the promised multibillion foreign investment were not coming to the Kingdom.
Last week, Non-Resident Senior Fellow at Atlantic Council, Jean-François Seznec spoke on an Atlantic Council press call: “I think we are beginning to see that the vision 2030 is not going well.” Mr Seznec noted that tension is rising among the population, even amidst the primary supporters of the crown prince.
“But he [crown price] needs to make a big impact. Now, his big impact is to force the Russians to give up and agree to the cuts, and if at the same time it destroys the U.S. shale industry so much the better,” he added.
Russia is also preparing for an oil price war as it assures markets that it has sufficient resources for six to ten years to compensate for budget shortfalls at USD$25-USD$30 (S$36.44- S$43.73) oil. Russia also promises up to 500,000 bpd higher production.
The lower economic activity, the COVID-19 pandemic as well as the low oil prices that is half the level before the OPEC+ pact was broken by Russia and Saudi Arabia, will also put pressure on Russia’s revenues and budget.
Anton Siluanov, the Russian Finance Minister stated this week that Russia’s revenues from oil and gas will be less by ₽3 trillion (S$55 billion) than planned and budget deficit is incoming for Moscow.
According to analysts, Russia is in a better position than Saudi Arabia fiscally, financially and politically to triumph in the oil price war.
However, both countries will inevitably suffer economic damages, as is the case for the first collateral victims which are the UK’s offshore oil and gas sector, U.S. shale and Canada’s oil industry.
As of now, it is a game of who makes the move first between Saudi Arabia and Russia. The former may have underestimated the demand contraction from COVID-19 and also overestimated their fiscal foundations.