While Saudi Arabia scrambles to boost the price of oil without undoing the policy it itself unleashed at the November 2014 OPEC meeting, its economy continues to founder as reported most recently on Sunday. The latest indication of just how pressured Saudi budgets have become as a result of persistently low oil prices, a function of the Saudi strategy to push shale producers out of the market, came moments ago when Reuters reported that Saudi Arabia’s government has decided to curb to some financial perks for public sector employees, according to a live broadcast of the cabinet’s weekly meeting.
“The cabinet has decided to stop and cancel some bonuses and financial benefits,” read a line of text on Ekhbariya TV, as a minister read to assembled ministers and royals, including King Salman, a list of cuts to be made in various grades in the civil service.
A royal decree read on the channel following the broadcast announced a cut to ministers’ salaries by 20 percent and to members of the appointed Shoura Council by 15 percent. The decision comes as low oil prices have pushed energy-rich Gulf Arab states to rein in lavish public spending.
So what are Saudi’s options ? Well, if it wishes to undo nearly 2 years of oil policies, it will have to do one of two things.
It could claim that supply and demand are now in balance, and it’s time for OPEC to manage production again and boost prices. That would stretch the limits of credibility when OPEC’s just published forecasts that rebalancing won’t happen until the second half of next year.
Or, as Bloomberg’s Julian Lee writes, Saudi Arabia could admit to its fellow OPEC members that it had got it wrong. “You can just picture the scene in Algiers:”
Saudi Arabia’s oil minister Khalid al-Falih (rising to his feet): Gentlemen, the Kingdom of Saudi Arabia now realizes that refusing to cut our production to support oil prices in Nov. 2014 was a mistake.
Sharp intakes of breath from the other delegates in the room
Al-Falih: We were wrong to believe that allowing the price to fall would quickly bring an end to growth in U.S. shale oil production and the cancellation of projects to develop new high-cost reserves.
Widespread nodding of heads
Al-Falih (aside, audible only to his team): Even though that is exactly what has happened.
Al-Falih (speaking to the delegates again): We recognize that our decision has cost you all billions of dollars in lost revenue and pushed some of your countries close to collapse. Sorry for that.
As a token of our humility, we will cut our output by a million barrels a day, while you all go on producing as much as you can, raising your output where possible.
We won’t try to follow a policy that seeks to preserve a market for our oil in an increasingly challenging environment, where future demand for the one commodity on which we all depend will be undermined by a surge in rival production, while improvements in energy efficiency and growing environmental concerns shrink the market for oil.
Yes, oil will remain an important fuel for the next 20 or 30 years — which will be more than enough for many of you who have limited reserves — but which is a mere blink of an eye for the rest of us.
No longer will we take a long-term view of oil supply and demand. Instead, like everybody else, we will focus only on the next six months and hope the future takes care of itself.
In short, we will bury our heads in the sand — after all, we have plenty of that too.
Al-Fahli sits down amid stunned silence
As Lee admits, “somehow, I just can’t see it happening. Hopes that a deal will be struck got a lift at the end of last week from rumors about offers the Saudis made to Iran. The reality is that these are no more than words in the wind.”
Which means no deal in Algiers, which means even more “draconian” salary and bonus cuts for Saudi workers.
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