Saudi-based investment advisors Jadwa have issued a stark warning about the long-term fiscal future for Saudi Arabia as the world’s swing oil producer, saying that the Kingdom’s fiscal break-even price on a barrel of oil will reach a hugely uneconomic $320 by 2030.
The detailed report, called “Saudi Arabia’s coming oil and fiscal challenge”, explains that while for the next decade, Saudi’s position is secure, the country’s fiscal position is set to deteriorate unsustainably unless massive changes in energy consumption and generation are achieved.
“We estimate that the breakeven oil price required to balance actual government revenue with actual government expenditure will not rise above $100 per barrel (for Saudi export crude) until 2017 and will stay below $120 per barrel until 2021,” states the report. “Since prices seem likely to be close to this area for the period, it appears that Saudi Arabia has about a decade where it will only need to run relatively small budget deficits that would not dent foreign assets too greatly”.
However, from a combination of burgeoning domestic demand, declining production and massive central government expenditure will see Saudi running budget deficits from 2014 that will become “severe” by 2020. Strong oil prices will ally with a sharp rise in foreign assets to allow the Kingdom to maintain its budget surplus through the next three fiscal years but the non-oil balance has largely deteriorated, given its heavy reliance on crude sales.
By 2025 Saudi Arabia would need $175 per barrel to balance actual revenues to expenditures, and by 2030 the breakeven price would reach in excess of $320 per barrel. By then oil export volumes would be around 1.5 million barrels per day lower than domestic oil consumption.”Preventing this outcome requires tough policy reforms in areas such as domestic pricing of energy and taxation, an aggressive commitment to alternative energy sources, especially solar and nuclear power, and increasing the Kingdom’s share of global oil production,” says the report.
Jadwa believe such high oil prices will be unlikely as the world shifts to gas as the hydrocarbon of choice for power generation, and oil’s role in the energy mix is increasingly foccussed on automotive fuel.Â
“Oil is also in its twilight years for industrial uses, resulting in oil being primarily a transportation fuel. Should oil lose a significant part of the global market for transportation fuels,” says the report “the economic results for Saudi Arabia would be devastating”.
As previously reported, increasing domestic demand – spurred by high population growth and increasing per capita energy consumption – remains a considerable challenge. Jadwa extimate that Saudi will be burning 6.5 million barrels per day of its own crude by 2030, at a time when oil production is likely to have plateau or be in decline.
The massive rise in domestic consumption will be mirrored throughout the GCC, as giant heavy industry, petrochemical and infrastructure projects continue to be a drain on locally produced energy.
“The Middle East, traditionally viewed as an oil exporter, is now an important consumer of oil as well, with oil consumption growing by an annual average of 300,000 barrels per day per year over the past five years. This growth carries very important and worrisome implications in the case of Saudi Arabia,” says the report.
Saudi is currently burning crude at both ends, increasing its domestic usage dramatically and spending revenue aggressively on capital expenditure and disbursements – including a recent $130 billion domestic spending plan – to the population in the wake of the Arab Spring. A litre of petrol in Saudi is subsidised down to $0.16, and a barrel of crude for power generation costs only $3.
Jadwa says the Saudi government can take far-reaching action to avoid a fiscal catastrophe. ‘The rapid worsening of government finances can be avoided if the trajectory of the current trends of oil production, domestic oil consumption and government spending are altered,” the report states. “Saudi Arabia could curtail the growth in domestic oil consumption with adjustments upward to local energy prices, fulfillment of its plans to develop nuclear and solar powered electricity plants, and a series of energy conservation measures”.
“Government spending growth rates could be gradually lowered, given the many years of fiscal cushion that lie ahead. Changes to taxation policies could strengthen non-oil revenues”.
“Finally, the Kingdom could find ways using its strength within Opec to try to bring its share of global oil production out of the gradual decline it is currently experiencing”.
Whether Saudi can bring about such seismic changes is unclear. The high oil price, pressure to appease the population with high public sector salaries, and the changes needed are incredibly radical for a conservative state to contemplate.
One thing is for sure: kilometre-high towers are unlikely to be the solution.
