Saudi Arabia may become bankrupt

Many of these countries are being forced to tap into rainy day funds to weather the storm. “The cuts in cap that we see today will lead to tighter supplies and higher prices in the future”. “We have previously argued that there is no link between rig count and oil production because producers tend to first shut down wells in the least productive regions”. Such divisions were evident at the November 2014 Opec meeting, which reportedly saw an acrimonious (http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11268611/OPEC-Saudi-Prince-says-Riyadh-wont-cut-oil-unless-others-follow.html) end.

However, last month the cartel signaled a possible change of stance, saying it might cut output and is ready to talk to other (non-OPEC) producers.

OPEC held a technical meeting this week with members of OPEC and non-OPEC, including Russian Federation but the officials did not discuss restrictions on crude output or setting a target price range.

Oil prices will stabilise around an average of $55.0 in both 2015-16 before picking up to $60.2 per barrel in 2017 as the supply glut gets gradually eliminated.

Saudi authorities are already planning spending cuts as the world’s biggest oil exporter seeks to cut its budget deficit.

That’s why Saudi Arabia is moving fast to preserve cash. Kuwait, Qatar and the United Arab Emirates have relatively more financial assets that could support them for more than 20 years, the Washington-based lender said.

So, what has triggered the change in behaviour by Saudi Arabia? Hence it generally has a huge spare capacity.

Consequently, these “smaller firms” tend to maximize their output and hence maximize their revenue (as the price is set by Saudi Arabia). This explains the disproportionately large spare capacity of Saudi Arabia in the 12-member organization. The saver countries have little need for immediate cash and have a lower rate of discount.

The condition of the Saudi economy is increasingly the subject of conversation among observers as a result of the breathtaking oil price drop-off.

However, a handful of countries are well positioned to face the storm. Speaking before the forum, Venezuelan President Nicolas Maduro had pledged the country would present evidence on the need to revive prices to US$88 a barrel. Indonesia is no longer a part of Opec.

However, Algeria, Oman, Bahrain, Saudi Arabia, Yemen and Libya are in a for more worrisome situation, with only five years or less in buffers, before they would run into using debt.

There are, of course, inherent sources of conflicts in the above model of savers and spenders. According to the game theoretic framework of Hnyilicza and Pindyck, such an arrangement is likely to sustain for only a few years and saver countries would eventually start demanding a higher share of total Opec output.

Iran may be optimistic but traders say it will certainly accelerate Crude Oil sales rapidly once foreign investment is allowed to return. Indeed, with the cost of getting oil out of the ground in Saudi Arabia seen in the low $20s or less, there is incentive to keep pumping.

Reuters reported this Friday that the price of oil had dropped once more to complete two weeks of decline.

But the downside looms large, with the combination of overproduction, high inventories and weak demand, and the fear that speculators will drive the oil price lower once Iran begins new oil production in the coming year.

The oil price crash in 1986 was very similar to the recent one since mid-2014.

Not even the mighty Middle East can survive cheap oil forever.

“That is their new philosophy”, he added: “The price is curing the problem”.

The latest Credit Agricole Private Banking research report, “Macro Comment – MENA Update”, observes that Saudi Arabia and the UAE continue to witness stable economic activity despite the challenging macro environment. But beyond a point, a fall in prices would hurt these countries, and they would restrict production, wrote Gately.