Whenever the oil market stumbles, blood freezes in the veins of the Saudi economy. After all, oil accounts for more than 90 percent of our country’s revenue. It is just scary to realize that in April of last year prices were hovering over $110 a barrel, dropping now to around $45 a barrel.
However, contrary to recent reports and analyses, it is not the time to start panicking yet, but it is indeed a challenge we all have to face and work together to overcome. It is not that we are facing such a situation for the first time. Back in 1998, we had to face a similar situation. The Financial Post remembered a quote by Khalid Alsweilem, the former head of investment at the Saudi Arabian Monetary Agency (SAMA): “It was a very scary moment, and luckily at that point, oil prices started going up. Not by design, by good luck.”
We definitely need more than luck now, as the situation is different this time around. The economy has expanded by five times since then, the government is spending much more on education, energy and infrastructure. We are surrounded by hot zones of struggles and directly engaged in a form of war on our southern borders.
The first signs of the Saudi response became apparent in the form of drawing from its reserves and then issuing bonds for the first time in eight years.
In addition to that, the country is considering slashing spending by almost 10 percent in the upcoming budget. The effects of such a cut might not be apparent in our daily lives but it is expected that some public projects could witness some delays or even a cancellation in the foreseen future.
The International Monetary Fund (IMF) has forecast a staggering run of budget deficit that amounts to around 20 percent of the GDP — Much larger than the 14.2 percent gap that it had predicted in May and the biggest deficit since at least 1999, according to Arabian Businesses. The IMF is also recommending a tighter control on the country’s growing wage bill, reconsidering some of the government’s subsidies especially on fuel and electricity, and bringing in more non-oil revenues through taxes.
Along those lines, Saudi Arabia through the OPEC is still keeping oil production high despite the low prices in an attempt to keep market shares steady.
This tactic is yet to show a conclusive outcome, while the drilling of North American wells has slowed in recent months, existing wells have continued operating according to CNBC.
“It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought,” the Saudi Arabian Monetary Agency said in a recent report. “This requires more patience on OPEC oil producers and a willingness to maintain steady production until the demand catches up with the current supply levels.”
With all these fears, speculations and plans, the topic of diversifying sources of income has bounced back to the front with full force. We have been depending on oil for so long and lost many opportunities to build new aspects of our economy along the way. It is a tough time, not a crisis, and such turmoil should work as a reminder to start our efforts to chalk out new plans and take new initiatives to overcome this total dependence on oil.
