Are Low Crude Oil Prices Finally Hurting Saudi Arabia?

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Saudi Arabia held about 267 billion barrels of proven oil reserves at the end of 2014, which is the second largest oil reserves held by a single country. The founder member of the Organization of Petroleum Exporting Countries (OPEC) accounts for roughly 10% of the global oil production and plays a crucial role in the determination of crude oil prices. The Middle East country also contributes a notable portion of the global oil exports and has a sizeable amount of spare capacity, which it can use to maneuver the dynamics of the oil markets. Thus, the country is being viewed as a game changer in the ongoing oil slump.

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The oil industry is a crucial stream of revenue for Saudi Arabia. Oil revenue accounts for more than 80% of the government revenue, and 25% of its GDP. Hence, the country’s economy is highly reliant on the oil industry. Consequently, Saudi Arabia and a few other Middle East countries indirectly initiated the current commodity downturn in their quest to push the North American shale players out of the markets. Though the country was somewhat successful in driving some of the shale players into bankruptcy, the persistently weak oil prices have finally started digging a hole in its own pockets.

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The depressed commodity prices over the last two years have shifted the Arabian economy from a surplus position in 2013 to a heavy deficit position in 2015. Also, if the oil prices do not rebound in the near term, the country will continue to experience a similar magnitude of budget deficit even in 2016. To add to this, Saudi Arabia raised a 5 year $10 billion worth of loan from a consortium of global banks in April this year to replenish its deteriorating oil revenues. Further, the country is expected to launch its first international debt sale in 25 years to raise a sum of $15 billion later this year. Additionally, there are rumors that the country plans to sell some stake in its state run oil company, Saudi Aramco, to create a sovereign wealth fund and reduce its reliance on oil. Moreover, due to the uncertainty involved with the crude oil prices, the credit rating agencies, who have been downgrading the credit rating of a number of oil and gas companies, have also lowered the sovereign rating of Saudi Arabia.

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Based on the aforementioned factors, we believe that the fire that Saudi Arabia had initiated in 2014 has now started to burn its own hands.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Schlumberger Limited

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