Khobar, Asharq Al-Awsat—Saudi Arabia announced its largest-ever budget on Thursday, with projected spending of 860 billion riyals—5 billion riyals more than estimated spending in 2014—despite a sharp drop in oil prices resulting in a projected budget deficit of 145 billion riyals.
This is the first time that Saudi Arabia has projected a budget deficit since 2011 while this is the largest deficit project in the Kingdom’s history, but just how has Riyadh calculated its projected revenues given the fluctuating price of oil which has slumped by 47 percent this year?
Former chief economic adviser to Saudi Arabia’s Ministry of Finance, John Sfakianakis, told Asharq Al-Awsat that Saudi Arabia is basing its projected revenues on oil prices steadying at 75 dollars per barrel in 2015. The price of oil currently stands at just over 61 dollars per barrel.
“What happened is a surprise to some extent, for amid this huge decline in the price of oil, the majority of people believed that the Saudi budget would base its projected revenues on 60 dollars per barrel,” Sfakianakis said.
“When Saudi Arabia bases its projected oil revenues for next year on 75 dollars per barrel it is sending a strong message to the market that it expects oil prices to rebound next year,” he added.
Sfakianakis said that Saudi Arabia will likely keep oil production steady at 7 million barrels per day (bpd). According to figures compiled by Asharq Al-Awsat based on official government figures, Saudi Arabia produced an average of approximately 7.09 million bpd in 2014, while average oil production in 2013 stood at 7.54 million bpd.
Saudi Arabia is the largest oil producer in OPEC and the estimated price of oil will have a huge effect on the Kingdom’s revenues in 2015. OPEC is maintaining a production ceiling of 30 million bpd despite an oil glut resulting in falling price in a move that analysts say aims to stifle competition from new markets with higher costs, particularly North American shale oil production. While this move will likely succeed in derailing North American shale oil production, analysts are divided over whether oil prices will rebound in the short-term.
However Riyadh previously stated that it is confident that oil prices will rebound in 2015 with global economic growth boosting demand, and particularly after high-cost oil producers are forced to cut back production. Speaking earlier this month, Saudi Oil Minister Ali Al-Naimi said: “I’m 100 percent sure prices will go up, they have no other direction to go but up.”
However not all OPEC members appear so confident. Iraqi Oil Minister Adel Abdul Mahdi informed Asharq Al-Awsat that Iraq’s budget, which was submitted to parliament earlier this week, is basing its projected revenues on a price of 60 dollars per barrel.