If ever there was an example of digging one's grave, Saudi Arabia's decision to open wide its oil taps could count as one. The stream of actions over the last few years - intensification of engagement in Yemen, upping the ante with Iran, blockade of Qatar, murder of Jamal Kashoggi, recurrent internal crackdowns including within the royal family itself, vanity projects like NEOM and ill-thought out economic diversification attempts, and now this even as the world grapples a coronavirus - cannot but not raise questions about the maturity of leadership in the most important Arab country.
David Fickling points to the challenge faced by the Gulf economies from the low oil prices. On a purely commercial terms, the cost of recovery of Gulf oil, especially Saudi, is so low as to support very low oil prices.
No one can produce oil as cheaply as Saudi Arabia: It takes just $2.80 to get a barrel out of an existing Saudi Arabian Oil Co. field, compared with about $16 for Exxon Mobil Corp. and more than $20 for Rosneft PJSC.
But that calculation does not take into account the fact that oil surpluses finance their budgets too, and it requires high oil prices. This graphic captures the overall breakeven cost for different countries.
Sample this about the likely impact on the large horde of financial resources accumulated by them,
Take the net financial assets held by Saudi Arabia’s government — central bank reserves, plus sovereign wealth fund assets, minus government debt. These declined to just 0.1% of gross domestic product from 50% over the four years through 2018 as crude plunged from levels of around $100 a barrel at the end of 2014. The kingdom is now likely to be a net debtor for the foreseeable future, even if prices rise back above $80. Over the same four years, net financial assets held by the six Gulf monarchies fell by around half a trillion dollars, to around $2 trillion, according to a study last month by the International Monetary Fund. Even if peak oil demand doesn’t hit until 2040, that remaining sum could be depleted by 2034, according to the Fund. Oil at $20 a barrel would run it down even faster, emptying the coffers as soon as 2027. With oil prices in the range of $50 to $55 a barrel, Saudi Arabia’s international reserves would fall to about five months of import coverage as soon as 2024, according to an IMF report last year. That should be a deeply alarming prospect, bringing the kingdom within months of an unthinkable balance-of-payments crisis and the abandonment of the dollar peg, which has underpinned the global oil trade for a generation. Yet the prices we’re now seeing make this look almost like an optimistic scenario.
The fiscal positions, represented by the average non-oil primary balance of the GCC countries, stood at a deficit of 44 per cent in 2018, highlighting the magnitude of reliance on oil.
This is the projections about financial wealth of different GCC countries under the benchmark assumption of $55 per barrel (the average price between 1967 and 2018).
In the aftermath of the 2014 oil price shock, many Gulf countries introduced excise and value added taxes and made their first serious attempts at fiscal consolidation. This will have to be deepened and also broadened to include direct taxes. It is no longer a matter of choice, but of timing and that too in the foreseeable future.
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