Implications of the Oil Price Slump on Saudi Arabia

19.01.2016.

It would be impossible to avoid the news of the fall in oil prices at the moment. It seems every day the papers report a new low for the barrel price of crude oil; and the rapidity of the drop is almost as shocking. Many oil producers are postponing planned projects as their profitability plunges. Job cuts are being made and developing countries will suffer as expected investments are delayed or shelved altogether. And the glut continues to grow.

So how will this affect Saudi Arabia and what are the wider implications for the Middle East and beyond?

The fact that lower oil prices are affecting even the fabulous wealth of the house of Saud is reflected in the austerity budget launched late last year.  Subsidies and lavish public spending have been curtailed and Saudi deputy crown prince Mohammed bin Salman, in an interview with the Economist, revealed that the Saudi government is considering selling shares in government-owned Saudi Aramco and/or its downstream assets through an IPO.  As well as generating income from private investors this will allow the Saudi regime to make income projections: vital for planning for the future.

It is obvious that for Saudi Arabia austerity could mean not just a tightening of the belts for its citizens but a resurgence of the political unrest that marked the first Arab Spring.  The improving relationship between the USA and Iran could leave the Saudis more isolated particularly if they crack down on any social unrest with the same hard-line force as in the past.  And the lifting of sanctions on Iran further threatens oil prices if the Iranians produce oil in the quantities they have previously stated.  Religious tensions between the Shia and Sunni Muslims in the region are also heightening the geopolitical differences between these two governments.

One way the Saudis could avoid this is to find ways to diversify their economy away from oil.  They have been talking about this since 1970 but without making much actual difference.  However the latest generation of Saudi leaders is vowing to bring in these changes and is actively seeking ways to encourage private investment and a diversity of industries.  US companies Mars Inc. and Dow Chemical Co. are both involved in new ventures in the country and the government also aims to build new “economic cities” where private investors can benefit from modern infrastructure and cross-collaboration.

Russia too is losing out in revenue from oil and Russian government officials have already announced plans to cut federal spending by up to 10%.  Speaking on 13th of January in Moscow at the annual Gaidar Forum on economics, Russian Prime Minister Dmitry Medvedev said Russia must prepare for a worst-case scenario in its economic outlook.

Another loser closer to home is Scotland’s oil industry and by extension Scottish pro-nationalists who have looked to oil to provide a viable income for an independent Scotland.

Of course it is not all gloom and doom.  For consumers in the UK and EU lower oil prices mean lower prices for petrol and, once the pressure on the utility companies increases, for domestic fuel too.  And for manufacturers lower prices mean higher profit margins.

But with OPEC members bitterly divided and unable to reach any agreement about whether cutting production unilaterally would even work, 2016 looks like it’s going to be another rocky year for oil producers.

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