What would the oil price floor be ?

Saudi Arabia is facing a budget deficit this year of up to 20% of GDP, according to the latest International Monetary Fund (IMF) projection. With the current oil prices, as a matter of fact all GCC governments have to borrow in the capital markets with the Saudi state trying to claw back unspent money as finances tighten.

Advertisements

Difficult times in the Gulf

GCC v IMF

We have just heard that Saudi Arabia’s Finance Ministry has kept the country’s projects on hold for the 2015 4th quarter, reportedly tightening the launch of new projects.

According to Arabian Business, some well informed sources close to the KSA government said that the Minister “told government departments not to contract any new projects and to freeze appointments and promotions in this year’s fourth quarter”.

Saudi Arabia is in effect, facing a budget deficit this year of up to 20% of GDP, according to the latest International Monetary Fund (IMF) projection.

As a matter of fact, with the current oil prices, all GCC governments have to borrow in the capital markets and plough as little money as they can in their banking systems.  Doubts are consequently, being felt as to how the region’s lenders will support their sovereigns’ growing funding needs.  This is because basically, all Gulf sovereigns funds and banks are somehow linked to state owned lending structures.  At the same time, these banks are under pressure to buy the sovereign debt that is currently developing.  Doing so however, means these funds have to manage themselves but to also have an immediate effect of ‘mopping up local liquidity’ as put by a senior capital markets banker in London.

In the meantime, the Saudi state has launched operations of trying to claw back unspent money as finances tighten with ministries being told that if unspent money of a project is uncovered, this must be sent back to the Treasury.  This is how the Saudi’s finance ministry is telling government bodies to recuperate money that was allocated in this year’s budget.

Administrations employees, businessmen and ordinary people around the country, are preparing for a period of relative austerity as the finance ministry asserts more control over the country’s expenditures.  The country has nevertheless respectable net foreign assets that remain at around $655 billion in August, according to the latest official figures.  And were it not for the two reasons that however could cause some concern, the country would not have trouble seeing this period through.

These are the present and future lavish packages of bonuses for state employees, pensioners together with other handouts with the accession of a new King on the country’s throne and the other would be the military campaign in Yemen may cost it several billion dollars this year, military analysts estimate.

In other areas, government spending already appears to be slowing.  Contracts of some big projects are picked off the national budget.  Sources at the ministry of water and electricity said it had awarded no new projects these past four months despite their earlier tendering this year. Some said the projects were not cancelled but only postponed to 2016.

Meanwhile, plans of stadiums development around the country was scaled down, a contract to buy high-speed trains cancelled, and the expansion of an oilfield was slowed well informed agencies reported.

That leaves infrastructure projects and other state investment as the area likely to feel the brunt of spending cuts. Projects such as the $22.5 billion plan to build a Riyadh metro system will not be cancelled, but they could be delayed or temporarily reduced in scope, while second-tier projects may be shelved indefinitely.

Most expect this pattern to continue into next year with the government expected to further “rationalise” spending on salaries and allowances of the numerous functionaries and other employees despite possibility of the outright cuts having a bearing on political sensitivities.

Would $70 oil floor be the panacea?

Saudi Arabia, OPEC’s de facto leader, has shown practically no interest in returning to a strategy of supporting prices with non-OPEC big producers ruling out any production cuts.  Furthermore, most analysts say attempting to set a price range is futile, or that the $70 price is unsustainably high, or both.

The mechanism as to how to get there, the question above is an open one whether the various producers would agree that $70 is the right goal for all concerned.  At that price or higher, the U.S. shale oil production would very much remain active but not at not the floor is set at $10 or lower, the whole Gulf would have to cope with difficult times.

How Much Longer Can The Oil Age Last?  

By Gaurav Agnihotri

Posted on 8 May 2015

History has been so fascinated with oil and its price movements that it is indeed hard to imagine our future without oil. Over the last few months, we have witnessed how oil prices have fluctuated from a 6 year low level of $42.98 per barrel in March 2015 to the current levels of $60 per barrel. It is interesting to note that, in spite of the biggest oil cartel in the world deciding to stick to its high production levels, the oil prices have increased mainly due to falling US crude inventories and strong demand. However, the current upward rally might be short lived and there may yet be another drop in the international oil price when Iran eventually starts pumping its oil into the market at full capacity, potentially creating another supply glut. In these endless price rallies, it is important to take a holistic view of the global energy industry and question which way it is heading. Are the dynamics of global energy changing with current improvements in renewable energy sources and affordable new storage technologies? Can the oil age end in the near future? Will we ever stop feverishly analysing the rise and fall of oil prices? Or, will oil remain irreplaceable in our life time?

Further reading is at the above mentioned website.

 

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s