Author`s name Lyuba Lulko

Saudi Arabia falls first on the battlefield of oil war

Saudi Arabia could not stand the declared level of competition with Russia and the United States. The Kingdom was the first to surrender in the oil war for the market. 

Saudi Arabia fails to stand competition

On Monday, May 11, Saudi Arabia announced that it:

  •     tripled its VAT, having raised it to 15%,
  •     reduced spending on large investment projects by about $26 billion,
  •     canceled the allowance for natural persons to bring their income to the level of the living wage, which has been effective in the kingdom since 2018. This allowance cost the budget about 13.5 billion dollars a year,
  •     obliged Saudi Aramco to further reduce oil production under the OPEC+ deal in June of this year by another 1 million barrels per day - up to 7.5 million barrels per day.

After the collapse of the first OPEC+ deal in March, the Saudis quickly increased their total production to 12 million barrels with a view to quickly gain an additional market segment. The trick did not work, and oversupply against the backdrop of declining demand in the midst of the coronavirus pandemic caused oil prices to collapse with futures sliding down into the negative zone. The new OPEC+ deal began to operate on May 1 of this year, and it provides for a reduction in oil output for all parties.

“We are facing a crisis that the world has never seen in modern history, a crisis full of uncertainty,”  Mohammed Al-Jadhaan, Saudi Minister of Finance, acting Minister of Economy and Planning said.

“These measures that we have taken today, no matter how tough they are, are necessary and useful for maintaining comprehensive financial and economic stability,” he added.

The price of $30 per barrel will not save Saudi Arabia

Despite efforts to diversify the economy, the kingdom still largely (at a greater extent than Russia) depends on oil revenues to replenish the budget, which is calculated from the price of $80 per barrel.

Currently, the price of Brent crude fluctuates at around $30 per barrel, and experts do not predict its rapid growth due to the global economic crisis. The kingdom lost billions in revenue from the suspension of Muslim pilgrimages to the holy cities of Mecca and Medina, which were closed to visitors because of the coronavirus pandemic.

As a result, in the first quarter of 2020, government revenues decreased by 22% compared to the same period last year, and the budget deficit reached $ 9 billion. Revenues from oil exports decreased by 24% compared to the same period last year.

According to Moody's rating agency, Saudi Arabia's foreign exchange reserves will drop to a level lower than $375 billion in late 2021, compared with $488 billion at the end of 2019.

Gennady Shmal, chairman of the Union of Oil and Gas Producers of Russia, told Pravda.Ru that the Saudis had very large social programs for their budget. The low oil price became a very serious problem for them, and they are interested in raising the cost of a barrel to at least $60.

"Probably, such a price would be good both for them and for all others," said Gennady Shmal.

The way out, the specialist believes, is to reduce production. “The Saudis realized that they need to work on this together with everyone, and this is what they do now." According to Gennady Shmal, there will be no serious increase in oil prices until companies resume their pre-crisis normal operation, and until the Chinese economy goes up again.

Saudi Arabia has severe domestic problems

Note that behind the facade of authoritarian stability, Saudi Arabia hides many problems. Saudi Arabia’s direct costs for the Yemeni campaign amount to $6-8 billion a month, let alone the fact that the kingdom continues buying tons of weapons from Western partners.

A high level of unemployment among the youth (32%), the Sunni-Shiite confrontation within the country and in oil producing regions in particular, widespread corruption and bureaucracy, low labor productivity – all these aspects add more fuel to the fire of the crisis that Saudi Arabia has found itself in. Saudi Arabia could not withstand the declared level of competition either with the United States or with Russia or with both countries together and was the first to surrender in the “oil war” for the market.