Saudi Arabia Still Struggling with Falling Oil Prices


Saudi Arabia has not been this hard hit from falling oil prices since 1998. The country’s breakeven oil price where it can balance its ever burgeoning budget is around $100 a barrel, but the steady decline in price to around $40 while not a crisis just yet, is hurting its economy.

Falling Stocks, Falling Riyal

Being stubborn could be the key to its future distress as the country has refused to cut production to lift prices as it continues to try to muscle out shale oil industry in the U.S. and elsewhere. Now, due to oil prices being equally as stubborn and remaining low, economists are already forecasting a budget deficit of nearly 20% of GDP, and the International Monetary Fund is already predicting its first current account deficit in over a decade. This is causing the government to use its extensive reserves to shore things up while its stock market falls affecting the neighboring markets at the same time.

Maintaining the Budget

While Saudi Arabia went through a similar scare seventeen years ago, the main difference today, is that the cost of maintaining the state as the main employer and supporting the extravagance its citizens are accustomed to, has increased significantly.

To compound the issue, it has not done nearly as much as it could to expand alternative sources of revenue despite being one of the richest countries in world. In Saudi Arabia, gasoline costs 16 cents per liter as it is subsidized by the state, and there are no personal income taxes aside from the religious zakat.

What is becoming increasingly obvious is that some changes will have to be made, such as freezing the expansion of two mosques in Mecca or taxing the wealthy, both of which, for now, are unthinkable. The latest attempt to curtail the budget expenses is the formation of a new economic council headed by Deputy Crown Prince, Mohammed bin Salman, which could help make the changes needed, provided it moves quickly enough.


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