Saudi Arabia set to cut billions from its budget

They explained this policy shift by stating that they wanted to defend their market share and didn’t want customers buying oil from other sources.

There are key differences between 1986 and the oil market today.

The government can not afford to introduce severe cuts in its fiscal policy as any decline in government spending will slow down the economy as a whole.

It took top spot in April this year and even before that was behind only the United Sates.

“China continues to announce more direct stimulus to fix [its] economy and the [European Central Bank] said it will expand quantitative easing if needed to drive growth and inflation”, said Kirk McDonald, senior analyst at Argent Capital Management-factors which buoy the outlook for energy demand.

The South American OPEC member’s basket, which includes crude oil and refined products, trades at a discount to other benchmarks because of its higher content of heavy oil.

But demand is an important element. It recovered a bit and then fell by almost 40% from the level it reached at about the same time (in June) that the Chinese stock market began its sharp decline. Flights of fancy maybe but at some stage someone will blink and current problems in China may be a precursor to action from Opec, an unholy alliance maybe but stranger things have happened… There are plenty of them around, notably the eurozone. Crude accounts for about 90 percent of total export value and around 80 percent of total government revenue.

Iranian authorities assert that once sanctions are lifted, the country could double exports within two months. A steady slide in the value of the rupee against the dollar erodes some of the gains from falling oil prices.

“Saudi Arabia is called upon to make swift and dramatic cuts in production“. In fact, Saudis have downplayed the impact of lower prices on their country, asserting that the kingdom has the financial wherewithal to withstand lower oil prices.

Economists at Deutsche Bank have done a similar analysis and extended it to a few more countries. So there is no reason for them to stop drilling for oil and supplies just increase even more.

Saudi Arabia still has a $668 billion sovereign wealth fund, despite burning through an estimated $68.0 billion since the plunge in oil prices started.

“I just cannot understand how this low price can sustained investment in high-cost oil areas, someone somewhere must be losing his shirt”, former OPEC secretary-general Ali Jaidah told a closed conference in 1988. “This is the result of a set of changes in the sector and world energy consumption”, the expert said.

Saudi Arabia sold $5.33 billion (20 billion riyals) of debt on earlier this month and said it would issue further sovereign bonds, as it tries to close a budget deficit caused by the collapse in oil prices. While it may seem more expensive to keep them on, it will cost the oil and gas industry much more in the long run if its best and brightest are working on other projects.

There are strains which came into the open in some countries with the Arab Spring and which are present across the region.

Saudi Arabia’s strategy could yet be vindicated.

Venezuela is another stark case.

Flash-forward 30 years and the world is awash in cheap oil.

Russian Federation is another big oil producer, which has reserves to draw on.

Iran is a rather different story.

Major global oil companies and leading independents have all announced sharp cuts in their exploration and production budgets which should in theory translate into lower production over time.