DW: Saudi Arabia Hit by Low Oil Prices, Faces Difficult Decisions

Douglas-Westwood, an energy business strategy, research and commercial due diligence services provider, commented in its latest edition of DW Monday that low global crude prices have hit Saudi Arabia hard. With a considerable budget deficit, Saudi has been forced to begin borrowing from capital markets – $4 billion in July. The kingdom is highly reliant on oil – accounting for more than 90 percent of budget revenues. Cuts have not been made to capital expenditure and Saudi has engaged in an expensive conflict within Yemen. Consequently, the decision to ride out lower prices has put a huge strain on finances – the IMF (International Monetary Fund) estimates $50 oil will lead to a deficit of ~$140 billion (20 percent of GDP) this year. Plugging holes in the budget with bond issues is the clearest sign yet that the kingdom is feeling the pinch, the question is, how long can it continue?

At least for the time being, there seems to be room for more lending, with plans to raise $27 billion by year end. Debt levels have been dramatically reduced since the late 1990s when borrowing reached 100 percent of GDP (prior to July’s bond issue, debt was 1.6 percent of GDP). At present, liquidity does not seem to be a problem with local banks easily absorbing bond issues. However, further borrowing into 2016 and beyond could prove problematic. Predicted rises in global interest rates over the coming years may make borrowing unattractive, forcing further withdrawals from the country’s foreign reserves. If current oil price trends continue, these reserves could fall to $200 billion by 2018 – 70 percent less than pre-crash levels.

Where does this leave the country? Maintenance of oil output has secured market share and proved devastating for US onshore drilling. However, with a “bathtub” shaped recovery a very real possibility, Riyadh may be forced to make a number of difficult decisions regarding domestic subsidies and expenditure in order to reduce a potentially crippling budget deficit.


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TL Shields  |  August 28, 2015
Too True... Shale producers are desperately pumping all they can, and that only makes the overall picture worse while depleting their own reserves. When they have to write down all those PUD production figures that they have been inflating their balance sheet with, the banks will have to step in and kill them. It is going to be blood bath come next spring.
p2s2  |  August 28, 2015
Idealogy and business never mix
Fred Czubba  |  August 24, 2015
Interesting ,however I think that American Shale producers have an even greater problem related to their debts and their shareholders. Saudi Arabia has a much lower production cost point. We need to realistically look at the price of oil and let the market make its way.( Economics 101)