Saudi economic shake-up shows it is planning for cheap oil

Due to these low prices, 9 out of 13 OPEC member states including Saudi Arabia, Iraq, Iran and Kuwait announced deficits in their budgets for next year making it impossible for some countries to continue spending in light of oil prices fluctuating around $36 a barrel.

Saudi Arabia spends a big chunk of its cash on doling out generous benefits for its citizens, including cheap fuel.

Saudi Arabia is arguably to blame for hurting its own economy because it is a “swing producer”, meaning it produces so much oil that it can shift prices depending on how much of the product it releases to the market. “In the past the country has spent lavishly on health, education and infrastructure in hard times knowing that oil prices will be supportive”, said Asim Bakhtiar, head of research and investment advisory, Saudi Fransi Capital.

Abu Othman, a 63-year-old motorist, said that despite the increase, petrol prices remained “reasonable”.

Authorities announced increases to the prices of fuel, electricity and water as part of a plan to restructure subsidies within five years. Lines at the gas stations were getting long on Monday night and many stations are shutting down, according to residents in several Saudi cities.

The Saudi government has been digging into its large foreign reserves, built up during years of higher oil prices.

Like Alberta, Canada’s top oil producing province, today the desert kingdom is talking about diversifying government revenue and minimizing the pain of budget cuts on those with lower incomes.

The government will consider domestic and worldwide borrowing to finance the deficit. In one of the strongest signals that the kingdom will stay the course despite the impact on its finances, Saudi Aramco’s chairman Khalid al-Falih said it could outlast others. “We realize prices are variable, and we have the capability to fund our budget under different pricing scenarios”. “The 2016 budget is the first budget in more than 10 years that is based on an oil price of less than US$50 a barrel for Brent”. “We don’t see any changes to Saudi Arabia’s oil policy – in the context of oil production”, said Amrita Sen, chief oil analyst at consultancy Energy Aspects.

In the first budget under King Salman bin Abdulaziz al-Saud and his son, Deputy Crown Prince Mohammed bin Salman, Riyadh said the budget came “in light of the decrease in oil prices, the economic and regional and worldwide financial challenges – where global economic growth has declined from its previous level – and the lack of stability in some of the neighbouring states”.

Government spending reached SAR 975bn in 2015, 15 per cent more than expected, further squeezing public finances.