Saudi Arabia’s oil dilemma

 

Current trends in the global energy market don’t look good for Saudi Arabia. First, the International Energy Agency projected in November 2012 that the United States will surpass the Gulf petrogiant as the world’s top energy producer by 2020. Then, last week, it revealed that North America, buoyed by the rapid development of its unconventional oil industry, is set to dominate global oil production over the next five years. These unforeseen developments not only represent a blow to Saudi Arabia’s prestige but also a potential threat to the country’s long term economic well-being — particularly in the post-Arab Spring era of elevated per-capita government spending.

But if the kingdom’s outlook is decidedly bleak, its official response has been muddled. Within a period of just five days last month, two senior Saudi Arabian officials laid out starkly different versions of their country’s oil production plan.

 

With no revenues from personal income tax and 40 percent of its 28 million citizens under the age of 15 — not to mention a male population that is mostly employed in the bloated public sector — Saudi Arabia is heavily dependent on oil revenues to provide cradle-to-grave social services to its people.

All this is to say that in order for Saudi Arabia to guarantee its economic viability, it must ensure that the breakeven price of oil — the price per barrel it needs to balance its budget — matches the country’s fiscal needs. This breakeven price — the “reasonable price” or, as the Saudi Arabian euphemism has it, the “fair price” — has risen sharply in recent years. “In 1997, I thought 20 dollars was reasonable. In 2006, I thought 27 dollars was reasonable,” Naimi explained in March. “Now, it is around $100 … and I say again ‘it is reasonable.'”

According to the Arab Petroleum Investments Corporation, the breakeven price is currently $94 per barrel, less than the current spot price for Brent crude. (Iran needs oil to be at $125 per barrel to break even, which explains the feud between Iran and Saudi Arabia within OPEC.)  But absent deep political reforms that create new sources of income, the breakeven price will surely grow. According to Riyadh-based Jadwa Investment, one of the world’s most important knowledge bases on Saudi Arabia’s economy, by 2020 the breakeven price will reach $118 per barrel. At this point, the Saudi Arabia Monetary Agency’s cash reserves will begin to drain rapidly and the breakeven price will soar to $175 a barrel by 2025 and to over $300 by 2030.

A system in which oil consumers are forced to pay a rising “reasonable price” per barrel in order to fund Saudi Arabia’s ever-growing fiscal obligations is unsustainable, especially in a time when most cash-strapped countries are looking for ways to reduce their own fiscal obligations. As the world moves gradually toward more reasonably priced methods of powering vehicles, the kingdom would do well to drill into the brains of its people — and that includes women — as vigorously as it drills into the ground.

via To Drill or Not to Drill – By Gal Luft | Foreign Policy.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s