IT IS HIGHLY likely that somewhere within the impenetrable mass of nepotism that is the Saudi Arabian government, someone is on the verge of losing their job.For years Saudi Arabia has been the world’s most powerful exporter of oil – moving 8,865,000 barrels per day in 2014 – and effectively controlling OPEC, the oil-producing trade bloc set up in the 60s to counter Western market dominance. Therefore, it may come as a surprise that the Saudis are consciously responsible for causing the recent slump in oil prices that has seen a drop from $107 per barrel to a mere $44. When an American shale oil boom saw the market flood with American shale in early 2014, the poorer OPEC countries petitioned to cut OPEC production in order to stabilise the market. Their pleas were universally rejected by the Saudi government.
Instead oil minister Ali al-Naimi opted to drive up Saudi production so that OPEC actually began exceeding their annual targets. The idea was to severely devalue the oil market in order to bankrupt American shale producers, maintaining OPEC dominance, while relying on their notorious wealth to ride the fiscal storm. Aware of the House of Saud’s fabulous riches, most financial observers nodded along.
But the mood has changed. The Saudis are now paying for their hubris in hard cash. Their folly has had drastic implications for the Saudi economy at a time when the desert nation’s finances are already over-stretched. In order to secure his place on the throne, King Salman meted out huge bonuses to public officials when he took the crown earlier this year, on top of a vast recent increase in military spending.
Currently engaged in expensive bombing campaigns against IS and Yemen, the Saudi defense budget has expanded 17 per cent in the last couple of years, bringing it up to a massive 10 per cent of GDP. Collectively this leaves Saudi with a hefty list of receipts which are costing the country an astonishing $82bn per year. That’s nearly twice the GDP of Serbia; quite a hit for a country that is used to running surpluses. The royal family are even reported to be considering foreign loans.
King Salman will not be hitting the panic button quite yet – Saudi Arabia still has foreign currency reserves of $660 billion – but he will be unwilling to deplete the massive financial supplies that he was left by his predecessor over what is effectively misplaced pride. America has been hit as well with its shale producers decrying OPEC but out of these two oil-producing ‘allies’, the House of Saud is looking far more likely to blink first, and heads will probably roll when they do.