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Kingdom reinforces its stance re: OPEC

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Saudi Arabia’s decision not to cut development spending in its 2015 budget, despite a sharp fall in oil revenue, indicates that the kingdom will resist pressure from other oil producers to reduce output in order to force prices upwards – as Gerald Butt reports.

When OPEC oil ministers met in Vienna at the end of November the expectation was that they would agree on joint action to trim output in order to stop the decline in global oil prices. This was certainly the hope of a number of OPEC member states, not least Iran and Venezuela, two countries facing difficult economic conditions. The lead, of course, would have to be taken by Saudi Arabia, the world’s largest oil producer. In the past the kingdom has been willing to adopt this role – but no more.

Saudi Arabia’s view now is that any cut in production would have to involve action from all major oil producers – OPEC members, plus big players like Russia. Achieving this kind of consensus proved impossible.

The problem is that with demand for OPEC oil shrinking as the north American shale oil and gas industry expands, any cut by conventional oil producers would result in a loss of market share. This would be the case for Saudi Arabia as much as any other state. So, for the time being, the kingdom is determined to sit it out, confident that lower oil prices will dent the economics of the shale industry and that this factor will help boost global prices.

But other OPEC members are likely to become increasingly restive if prices do not recover soon; and they will be urging Saudi Arabia to take action before their economies are damaged further. Iran’s deputy Foreign Minister, Hossein Amir Abdollahian, told Reuters that “There are several reasons for the drop of the price of oil but Saudi Arabia can take a step to have a productive role in this situation. If Saudi does not help prevent the decrease in oil price… this is a serious mistake that will have a negative result on all countries in the region.”

Saudi Arabia itself is confident that it can survive a period of lower oil prices, given its vast financial reserves. Public debt in the kingdom today is the equivalent to 1.6% of GDP, compared to 100% of GDP a decade and a half ago. It is also in a strong position to borrow money if it needs to. Thus the Saudi decision to increase spending in the 2015 budget and press ahead with development plans.

But not all Saudis are happy with the government’s decision. What happens, some ask, if prices are still low in a year from now? By not taking action to stem the decline, the kingdom will have lost billions of dollars of potential revenue. At the same time, Iraq’s oil exports are rising fast and if sanctions were lifted, then Iran would be back in the top league of exporters too, putting yet more oil into an over-supplied market

Critics of government policy point out that the kingdom has huge financial commitments. It has to meet the needs of a fast-growing population and to pay the wages of civil servants – an item that accounts for around half of the government’s spending each year. On top of this Saudi Arabia is providing financial help to it key allies, Egypt and Jordan, and helping to pay for the needs of Syrian refugees. With the threat from Islamic State as high as ever, cutting all these financial commitments is not an option.

So, one can expect the pressures to grow on the Saudi authorities, from both inside and outside the kingdom in the months ahead to initiate a cut in OPEC production. But in the short term at least, Saudi Arabia looks determined to resist those pressures.

Gerald Butt, a former BBC Middle East correspondent, is an analyst and author on the region.

 

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