Saudi Oil Price War Has Backfired, Oil Revenues Have Plummeted

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Saudi Oil Price War Has Backfired, Oil Revenues Have Plummeted

Oil production is the core of the Saudi economy

Earlier this year, Saudi Arabia launched an attack on the oil market, flooding the market with oil in an effort to target Iran’s economy and force Russia to cut production. This caused a large-scale crisis on the oil market which has also inflicted massive losses on the Saudi Kingdom’s economy.

Despite record oil exports in April as Saudi Arabia flooded the market with oil, the value of the Kingdom’s crude exports plunged by US$12 billion from April 2019 levels as the lowest oil prices in years hit revenues.

In April, the value of Saudi Arabia’s oil exports plummeted by 65.4%, or US$12 billion (45.3 billion Saudi riyals), severely affecting the value of the total exports of the world’s top oil exporter, data from Saudi Arabia’s General Authority of Statistics showed on Thursday.

China was Saudi Arabia’s main trading partner for merchandise trade in April 2020, with Saudi exports to China valued at US$1.9 billion (7.16 billion riyals).

The Saudis flooded the market with oil after the collapse of the previous OPEC+ deal in early March, exporting a record 10.237 million barrels per day (bpd) in April 2020, up from 7.391 million bpd in March, according to data from the Joint Organisations Data Initiative (JODI).

The Kingdom’s total oil export revenues for the first quarter of 2020 fell by 21.9% to US$40 billion, mainly due to the fall in Brent Crude prices of up to 60%.

Under the new OPEC+ deal finalized in April, Saudi Arabia is reducing its oil production to 8.5 million bpd in May, June, and July, restricting exports to some customers in Asia, and significantly cutting shipments to the United States. Even though oil prices are now higher than they were in April, reduced oil shipments are set to continue impacting Saudi oil revenues, the main source of income for the Kingdom’s budget.

The International Monetary Fund (IMF) has revised its projections for the Saudi economy downwards. According to the IMF estimates, the Saudi economy will crash by 6.8% this year, compared to an initial estimate of a 2-3% decline, due to the cumulative economic effects of the Coronavirus and the slump in oil prices. LINK

Overall, revenue from oil is expected to generate just $133 billion in 2020 for Saudi Arabia, down 34% from last year and down 58% from its peak in 2013, according to research by Jadwa Investment.

The multiple crises have severely impacted on the construction and tourism sectors. Jadwa Investment estimates that 1.2 million foreign workers, many of whom work in hospitality, tourism, retail and construction, will leave Saudi Arabia by the end of the year.

The slump has also heavily affected the world’s biggest oil-producing company, Saudi oil giant Aramco, which has started laying off hundreds of employees—mostly foreign staff—across several divisions in response to the oil price crash.

Aramco, which employs nearly 80,000 people, has been reducing its staffing annually for several years, but this year’s job cuts are larger than before. Aramco was also reported to have suspended production from offshore oil rigs and postponed a US$18-billion expansion project. LINK

Moreover, as Saudi cities under curfew and with the country’s borders shut, the upcoming hajj pilgrimage in Mecca could be cancelled or substantially reduced. The hajj, which starts in late July this year, has not been cancelled in the 90 years since Saudi Arabia’s founding.

The hajj not only provides the Saudis with immense influence and prestige among Muslims, it also generates around $6 billion in revenue for the government annually. Since early April, Mecca has been under a strict 24-hour curfew. The Grand Mosque there housing the cube-shaped Kaaba, Islam’s holiest site, is closed to the public, and the smaller, year-round umrah pilgrimages have been suspended. To cover the budget deficit, the Saudis have tapped into their foreign assets, which have dwindled from nearly $740 billion in 2014 to less than $450 billion in April. LINK

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