Budgets no longer just about the price of oil
The answer is simple. It is Saudi Arabia that can influence the oil market individually and through its leadership of the Organization of the Petroleum Exporting Countries (OPEC).
For many years, the Saudi government was dependent on oil sales for its revenue and so the budget was always price sensitive — but this trend is about to change, although gradually.
In the short term, Saudi Arabia will still need oil prices to stay at a reasonable level, as half of the government revenues will be derived from crude. Budget data showed that the dependency on oil for revenues has fallen sharply.
Saudi Arabia is an oil-based economy and it will remain so. But the old beliefs that policy will be based only on one consideration, which is oil prices, may not be the key to understanding how the policy is formulated in future.
Saudi officials are increasingly looking to the broader health of the global economy and the stability of the oil market in the future.
Why is that important? Well, without stability there will not be enough new investments in oil fields and without new investments, there will be a shortage of crude oil and that will lead to high oil prices and a shock to the global economy.
In this regard, even if half of the Saudi government revenues or less will come from non-oil sources, this will not mean that Saudi oil policy will change focus and the stability of the oil market will become less important.
Back to yesterday’s announcement, it seems that Saudi Arabia is building its forecasts for oil revenues next year on conservative assumptions.
First, the revenues next year will not be very high compared to 2017 even as the outlook for oil prices from most players in the market was revised higher in 2018. Riyadh estimates oil revenues will only increase by SR40 billion ($11 billion) next year.
Second, it seems that the Kingdom is factoring in a 12-month extension of the current output cuts deal between OPEC and non-OPEC countries. This would mean that Saudi Arabia would keep exports and production around current levels under the deal.
Third, there might be a great shift in the breakeven oil price.
The Saudi Finance Ministry acknowledged yesterday that oil prices are expected to edge higher if oil market rebalancing continued in the same direction.
But what is really important in all of this is that Saudi Arabia is sending a positive message to the market. That is it is confident in the oil rebalancing efforts — otherwise, why increase spending to a record next year?
• Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” Twitter: @waelmahdi
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