Saudi economy to get boost from gasoline prices

By Ovunc Kitlu

NEW YORK (AA) – Due to low crude oil prices, Saudi Arabia’s economy is expected to get another boost from retail gasoline prices, the second in a year, to mitigate its budget deficit.

The Kingdom cut subsidies in January to raise domestic gasoline and diesel prices by 50 percent. The world's largest crude exporter is now preparing for another hike of 30 percent that could come before the end of the year.

"I think it's a part of an economic plan," Michael Lynch, president of economic consultancy Strategic Energy & Economic Research (SEER) in Massachusetts, told Anadolu Agency.

"Probably the new leadership is partly undoing the previous government's decision to let prices drop sharply. But, they also recognize that some of the subsidies they have are unsustainable and economically inefficient," he said.

Since June 2014, when crude prices began falling from $115, Saudi Arabia refused to cut production, resulting in four inconclusive OPEC meetings to mitigate the decline.

Prices fell below $30 a barrel in January, hurting OPEC and non-OPEC producers, and the Kingdom's economy that is highly dependent on oil revenues.

The Saudi economy had a budget deficit of $98 billion last year, due to low oil prices, forcing Riyadh to cut $57 billion in spending this year, and it used $180 billion from its financial reserves.

The IMF warned in October 2015 the Kindgom’s financial reserves could be drained in five years.

Under pressure from low prices and a growing deficit, Riyadh changed strategy. In September, it began supporting a potential OPEC production cut.

After more than two years of low oil prices, the organization finally decided Nov. 30 to lower its output by 1.2 million barrels per day (bpd), while the cartel's heavyweight agreed to carry most of the burden by lowering its production by 486,000 bpd.

"Partly, the pain that they have felt is one reason they decided to work with other countries and stabilize the prices," Lynch said.

"OPEC and non-OPEC countries like Russia suffered enough pain that they finally were willing to make a serious effort to cut production. If you went back a year ago, you would find a much less willingness to cooperate," he added.

With the new strategy, Saudi Arabia is expected to increase its revenues that will create breathing room in the next six months while the OPEC deal takes effect. Crude prices recently went above $50.

Apart from the deal, the Kingdom needs to consider long-term investments that would lower its over-reliance on oil.

"I think there is a desire to make Saudi Arabia less dependent on oil revenues. In the short-term, they are aiming to boost their revenues to have money and in order to diversify their economy," Lynch said.

He pointed to the Kingdom's plan to offer shares of its state-run oil company, Saudi Aramco, to the public.

"The decision to sell shares in Saudi Aramco is certainly a major policy shift since it is the crown jewel of the Saudi economy," he said.

The world's largest oil producing company's IPO is estimated to be valued at around $2 trillion, which means selling 5 percent of its shares would raise $100 billion.

That would also draw foreign investment to the Saudi stock exchange, Tadawul, and more importantly, to the country, which has an ambitious 2030 vision.

Deputy Crown Prince Mohammed bin Salman laid out the "Saudi Vision 2030" in April that plans to end Riyadh’s over-dependence on oil revenues by 2020.

The plan seeks to diversify the Kingdom's economy and grow a $2 trillion sovereign wealth fund, the world’s largest, to be used in a post-oil era.

"We don't yet know if Saudi Arabia is taking the first couple of steps in a long journey or if it's going to be a glacial progress," Lynch said.

"I think, in five years, we will see theeconomy very different," he added.