Saudi Arabia - joining the dots: Part 5 - Breakeven, OPEC's downfall

Saudi Arabia - joining the dots is a series of blog entries exploring Saudi Arabia's role in the oil markets with a brief look at the history of the royal family and politics that dictate and influence the Kingdom's oil policy.

Part 5 - Breakeven, OPEC's downfall

The above chart, taken from the Wall Street Journal, paints a grim picture.  It shows the oil price required by the various OPEC members to meet their budgets. As of 10 October 2014, Brent was at USD90/bbl; today it is at USD62/bbl. All the OPEC countries are in the red, and some are in a worse position to handle this low oil price environment than others.

Saudi Arabia, for now, will be able to survive. Others are crying in pain - Venezuela, Iran and as of late, Nigeria as it enters into a period of elections with campaigns funded by oil money and the corrupt paid off with oil money. As an interesting aside, Iran (a Shiite power) blames its neighbour and rival, the Sunni Kingdom of Saudi Arabia for using the oil prices as a political weapon and keeping prices low by refusing to cut production.

After years of high oil prices, Saudi Arabia has managed to amass over USD750bn in reserves. However, it also has a large social programme and a high youth unemployment rate; keeping its citizens content and off the street has been in the aftermath of the Arab Spring. Following the ousting of Egypt's Hosni Mubarak, King Abdullah implemented $130bn in new social programmes including unemployment payments, housing and scholarships for Saudi's to study abroad. 

Most worryingly, Saudi Arabia tends to outspend its budget and the Kingdom will need to run a deficit in a USD50-60/bbl oil price environment.

Saudi Arabia has issued a record budget of USD229bn for 2015, with a 5% deficit forecast. The split is as follows: 25% education, 19% health and social, 7% transport and infrastructure, 7% water and agriculture, 5% municipal and 36% "other priorities". Other priorities is largely composed of military spend, which is of increasing importance with the ongoing ISIS conflict in the region.

Al-Naimi's policy has been to defend market share, to the annoyance of King Salman, at the expense of allowing oil prices to fall. However, with oil prices at their current low levels, Saudi Arabia is chipping away at its massive monetary reserves with an over-inflated and hard to cut back spending programme. This policy (or Al-Naimi) may need to be changed in the absence of an oil price rebound in 2015.