JEDDAH: Saudi Arabia occupies a strategic position in the global oil market. By virtue of this status, the Kingdom is thus expected to play an effective role in boosting price stability by leaving the markets less reliant on high-cost, speculative investments.

The expectation is all the more as the current oil cycle has once again demonstrated the central importance of price stability. What is more, the recent price swings have led to substantial cutbacks in investment.

It is widely acknowledged that the strategic perspective of Saudi Arabia and the GCC is helping to ensure that continued investment is taking place in some of the largest and most competitive oil fields around the world.

After all, Saudi Arabia has every strategic incentive to cultivate the oil sector as a central driver of economic development across a range of activities.

Saudi Arabia remains an important powerhouse of the GCC and broader Middle East economy. It has continued to support economic activity through countercyclical spending at home and continued efforts to develop connective infrastructure across the region. Beyond the GCC, it has been instrumental in supporting economic activity in countries such as Egypt. 

These highlight the increasing global significance of Saudi Arabia and further validate the Kingdom’s inclusion in the G-20.

In the context of being one of the fastest growing G-20 countries in recent years, how it can support the global economy with its stabilizing role in the world oil market is one of the major points of discussion among economists and researchers.

In fact, Saudi Arabia has helped to cause a sharp decline in the price of oil by no longer acting as the buffer between demand and supply but by continuing to increase production and defend its market share as oil prices fell.

This has put strong strain on other oil exporting countries like Russia and Venezuela, says Jaap Meijer, managing director, equity research at Arqaam Capital.

“However, as the implicit cost of low prices is becoming very severe for the Kingdom with an expected budget deficit hitting almost 20 percent, and as the effect on US shale oil production has not been too significant, we believe Saudi Arabia is now more keen to cooperate with other non-OPEC members to stabilize oil prices like it cooperates with OPEC,” Meijer said.

Saudi Arabia has historically been the swing producer; and until recently, when the US took that title because of shale, the Kingdom has consistently utilized its swing producer status to expertly manage the oil market, says Akber R. Naqvi, executive director, Al-Masah Capital Management Ltd.

Through various market cycles and economic crises, Saudi Arabia has used its position within OPEC to influence demand and supply and the corresponding oil price, he said, adding that after the 2008 crisis it was the Kingdom’s initiative in cutting production that allowed oil to recover from the lows of $40 and go back above $ 120.

“OPEC itself can be a difficult organization to understand and although it acts like a cartel, many of its members carry fiery independent streaks; it usually comes down to Saudi Arabia to control the ranks and provide a unified force to the outside world, which relies on OPEC to manage responsibly its considerable influence on the global economy,” he said.

Saudi Arabia is mindful of the global recovery efforts and does its part to provide stability in oil prices as per the needs of global markets.

According to Raid Madiyeh, senior sales trader at SAXO Bank, Saudi Arabia is a key player in the global oil market, accounting for more than 16 percent of global oil reserves.

The Kingdom has been able to scale up its production quickly because of its high spare capacity of more than 2.7 million barrels a day, which accounts for more than half of global spare capacity.

This enables Saudi Arabia to play a key role in the global oil market and contribute positively to global economic stability and growth.

Saudi Arabia has been well-cushioned from the negative headwinds of the currency declines of other emerging markets as a result of its prudent currency policy.

At the level of the International Monetary Fund (IMF), Saudi Arabia plays a pivotal role through its historic presence and its more recent past in helping bring financial stability and support when needed with its multiple partners.

The IMF also has acknowledged Saudi Arabia’s role as an important source of financial assistance and remittances for many developing countries.

In fact, global economies are more interconnected today than even 15 years ago and as a major oil producer Saudi Arabia continues to play an important role. However, it has not been easy for the Kingdom while performing this role.

Asim Bukhtiar, head of Research and Investment Advisory, said: “The Kingdom is facing challenges as well and must calibrate oil policy to suit its own economic objectives.” He said that some tough decisions expected to be made in the year ahead will reflect policy-makers’ thinking on the direction of oil prices.

Saudi Arabia is mindful of the global recovery efforts and does its part to provide stability in oil prices as per the needs of global markets.

Saudi Arabia has been well-cushioned from the negative headwinds of the currency declines of other emerging markets as a result of its prudent currency policy. At the level of the IMF, Saudi Arabia plays a pivotal role through its historic presence and its more recent past in helping bring financial stability and support when needed with its multiple partners.

Equally important is the Kingdom’s stabilizing role in various regional economies and emerging markets. In this context, Saudi Arabia has provided generous financial support to countries in the Middle East region.

About what stabilizing role Saudi Arabia can play in regional economies and emerging markets, Meijer added: “We expect government spending to increase this year on special bonuses to public sector employees and the continued military conflict in Yemen, though spending may come down next year. Saudi Arabia will need to only slowly adjust its fiscal policy, at the risk of a material slowdown in GDP growth. The Kingdom’s support may also be needed to stabilize the situation in Bahrain and Oman.” 

Madiyeh added: “In the recent past, Saudi Arabia has continued to help balance the global oil market, which has an important impact on the regional and emerging markets economies. The key point here is that Saudi Arabia has the ability to quickly scale up or down its production.”

In the face of supply interruptions in other countries or demand surges, Saudi Arabia has responded by increasing its production to help balance demand and supply in the oil market. Up until the end of 2014 Saudi Arabia oil production has remained broadly unchanged despite the drop on oil prices. This was helped by a strong fiscal position which helped Saudi Arabia to manage periods of lower oil production. This has helped to avoid further deterioration of oil prices and helped to avoid negative impacts on regional economies, Madiyeh added.

According to the Global Competitiveness Report 2013-2014,  Saudi Arabia remains rather stable with a small drop of two places to 20th position overall. The country has seen a number of improvements to its competitiveness in recent years that have resulted in more efficient markets and sophisticated businesses.

High macroeconomic stability (4th) and strong, albeit falling, use of ICTs for productivity improvements contribute to maintaining Saudi Arabia’s strong position in the GCI.

As much as the recent developments are commendable, the country faces important challenges going forward. Health and education do not meet the standards of other countries at similar income levels. Although some progress is visible in health and primary education, improvements are being made from a low level. As a result, the country continues to occupy

low ranks in the health and primary education pillar (53rd).

Room for improvement also remains on the higher education and training pillar (48th), where the assessment has weakened over the past year. Labor market efficiency also declines, to a low 70th position, in this edition.

As the regional representative on the G20, Saudi Arabia carries opportunity and responsibility for the future — opportunity as it opens its markets to outside investors and continues its efforts to diversify from an oil dependent economy to a more diversified model while responsibility because its pace of growth has an impact on the regional levels of modernization, economic growth and employment.

“The more integrated Saudi becomes with the global economy, the greater its role will become in establishing this region as an economic heavyweight,” he added.

Meanwhile, Francisco Quintana, economist at Asiya Investments, observes that the decision of the US central bank to keep rates unchanged reflects the poor state of the global economy.

With China decelerating more rapidly than expected, Japan sliding back into contraction and Europe failing to deliver strong growth, world’s GDP is falling closer to 3 percent, a level that traditionally indicates recession in some parts of the world and destruction of employment globally.

“This macroeconomic context has a very straightforward impact in Saudi Arabia,” Quintana said.

The global weakness implies low oil prices, he said, adding that Saudi Arabia will not enjoy the sort of expansion witnessed in the last few years anytime soon.

The good news for the rest of the world is that the policy stance adopted by Saudi Arabia over the last year will prevent the world from plunging into recession.

“It does not matter whether the decision was taken to hurt American shale producers from the market or out of pure altruism, but cheap oil is permitting millions of businesses across the world to stay afloat. The one thing that the Kingdom can do to help the world is to keep pumping,“ Quintana added.

As much as the recent developments are commendable, the country faces important challenges going forward. Health and education do not meet the standards of other countries at similar income levels. Although some progress is visible in health and primary education, improvements are being made from a low level. As a result, the country continues to occupy

low ranks in the health and primary education pillar (53rd).

Room for improvement also remains on the higher education and training pillar (48th), where the assessment has weakened over the past year. Labor market efficiency also declines, to a low 70th position, in this edition.

Reform in this area will be of great significance to Saudi Arabia given the growing number of young people who will enter the labor market over the next several years. More efficient use of talent — in particular, enabling the increasing share of educated women to work — and better education outcomes will increase in importance as global talent shortages loom on the horizon and the country attempts to diversify its economy, which will require a more skilled and educated work force. 

Last but not least, although some progress has been recorded recently, the use of the latest technologies can be enhanced further (41st), especially as this is an area where Saudi Arabia continues to trail other Gulf economies.