The heads of most of the world’s major oil companies have been meeting in Beijing and, according to the chief executive of China National Offshore Oil Corporation, they are of the opinion that the price of oil is going to continue to fall to $40 a barrel. The last time it was as low was four years ago. It is an interesting hypothesis. Yet for all their expertise, they are no more likely to be right than the average man in the street. The fact is that no one knows where the price will go. Earlier this year the brightest and best in the oil industry were predicting $200 a barrel, which never happened. Some suggested a yet higher figure. Even the few genuine visionaries who in the spring were saying that a recession was on the way and that the price would drop as a result thought that it might go down to no more than $100 a barrel. But here we are today with oil teetering toward $50 a barrel. Who is to say that it will not drop even below $40? There are predictions that it will hit $35 a barrel. Hypothesis though the $40-figure may be, it will have results - because budgets have to be prepared and, for oil exporters, they have to be based on an expected average annual oil price.

This is the time of year when finishing touches are being put to the Saudi budget. With 85 percent of government revenues still coming from oil exports, it cannot have been easy doing the sums with the price acting like a bungee jumper. The $40-prediction from the oil companies is bound to send the planners back to their computers.

Historically, Saudi budgets have been based on extremely conservative estimates of the price of oil. The 2006 budget, drawn up in late 2005 when the price hit almost $70 a barrel, was based on an assumed $35 a barrel. Last year’s budget was based on $42.50 a barrel (the actual price at the time of planning being almost $70 a barrel); this year’s on $45 a barrel (drawn up when the price was around $90 a barrel). The result has been awesome budget surpluses, far higher than projected. This year, despite the falling price since the summer, will be no different in that respect. For half the year, prices were way above the assumed figure; despite the drop, they are still above it. But there is a clear challenge here for next year’s budget planners. Does the government stick to its traditional formula of basing revenue on an oil price assumption that is around half the probable real figure or does it continue its mission for growth and hope that the present decline is short-lived?

The present difficulties of Iran and Venezuela which budgeted expenditure on maximum oil prices and need at least $100 a barrel to pay for their plans provide a warning not to be too ambitious. But Saudi Arabia enjoys one thing that Iran and Venezuela do not. It has more than sufficient reserves built up over the past few years to subsidize any revenue shortfall. It can continue to work on revenue estimates based on oil price assumptions that are half what is expected (which would mean projected revenue slashed from the 2008 budget’s SR450 billion to less than SR300 billion) and yet still plan for growth. It would be surprising if it does otherwise.