Tuesday, October 4, 2011
You might imagine that the last decade has been pretty kind to Saudi government finances and you'd be right. The graph above comes from a report on the Saudi government budget from Bank Saudi Fransi and shows government revenues and expenditures in billions of Saudi riyals (the riyal is pegged to the US dollar at 3.75 riyals per dollar). The huge explosion in revenues as a result of the 2005-2008 oil shock is clear. Two things have happened as a result. The first is evident above - the government spends vastly more money than it did a decade ago. The second is that the government has all but eliminated the national debt:
A lot of the spending has gone for new infrastructure: capital investment is up almost 10X over the decade:
Clearly the party is not over in Saudi Arabia! No doubt this has a good deal to do with why the country didn't experience material instability during the Arab Spring.
My main interest here is to understand what oil price is now required to keep the Saudi budget in balance. Of course, given the low debt, the country certainly doesn't have to balance its budget every year (and didn't in 2009) but will likely want to keep oil prices high enough to do so most of the time. To examine this, let's look again at the graph from above of expenses and revenues:
The 2011 forecasts by Bank Saudi Fransi were prepared before King Abdullah announced an additional 500 billion SR in social spending in the spring, which is large compared to the existing budget. However, it's unclear how much of this spending will occur in 2011 since much of it is being allocated for construction of housing, hospitals, and schools. I'm guesstimating about 200b SR, so that henceforward government expenses are going to be around 800b SR - and probably climbing further if oil prices will allow.
To understand the relationship between government revenues and oil prices I took the product of Brent oil prices and Saudi annual production according to BP and plotted that against government revenue according to Bank Saudi Fransi. This is rough, of course, since the country sell a range of oil products, generally at a discount to Brent, and not all oil revenue goes to the government. Still, we get a pretty decent straight line that it seems like we can probably make reasonable inferences from:
Thus 800 bn SR in goverment revenue requires about 1150 bn SR in this Brent-approximate oil revenue. If we assume that going forward Saudi Arabia will be able to match the highest recent year of production (2005) then that requires a Brent price of at least $75 (on an annual average basis). If you compare that to recent prices:
You can see that the prices of 2005-2006 and earlier are unlikely to be seen again, and if a European financial crisis breaks out and drive prices down to the late 2008 level, that will be a huge buying opportunity. However, Brent is currently around $100 and may still have room to fall before triggering a Saudi reaction.