Saudi Arabia Makes Energy Cuts in Preparation for Lower Oil Prices

The Saudi monarchy plans to overproduce oil to maintain market-share, but the state will have to make cuts to compensate for the supply glut, according to Arabian Business. The government will lower government projects to 840 billion riyals in 2016, a step back from the 975 billion riyals seen from 2015, and it will slash 15 percent of the 2015 GDP. Authorities will also increase prices for such necessities as fuel and water.

The Saudi monarchy plans to overproduce oil to maintain market-share, but the state will have to make cuts to compensate for the supply glut, according to Arabian Business. The government will lower government projects to 840 billion riyals in 2016, a step back from the 975 billion riyals seen from 2015, and it will slash 15 percent of the 2015 GDP. Authorities will also increase prices for such necessities as fuel and water.

Countries that rely on oil are suffering immensely, but Saudi Arabia is in the best position to withstand the low energy climate because of its vast reserves. A low-priced oil market will hurt the Kingdom in the short-term but will ultimately prove beneficial in the long run as competitive markets suffer.

For instance, North American producers struggle to remain afloat, and the Russian government struggles to meet budget obligations while suffering under the thumb of Western sanctions. OPEC nations are not immune from the price dip, and even though poorer countries such as Venezuela begged the Saudis to cut production, energy officials have refused to budge thus far.

Saudi Aramco head Khalid al-Falih signaled that oil production will continue at current levels, but the Gulf nation anticipates demand surpassing supply in 2016. Until then, the Saudis will have to make cutbacks, but priority spending is a main problem. The monarchy has chosen to spend capital on stadium projects and other extravagances rather than hospitals and schools, and many Saudis remain left behind as they contend with social service reductions and higher prices.

The days of lacking tax revenue and lavish spending will end, but leadership must tow a delicate line in not implementing drastic changes that will upset the public. With that, King Salman’s government is using low oil prices to push certain reforms, which include getting more people to join the labor force and revamping the private sector.

Diversification is another strategy, but it has not been as successful as anticipated, and leaders pose the risk of alienating people who rely on a substantial amount of oil revenue. Overall, many of the reforms made over the past decade have not panned out, and oil will remain Saudi Arabia’s cash cow for the foreseeable future. Although Salman is an absolutist monarch, certain factions within the monarchy seek greater power, and Salman’s political head remains on the chopping block if political and societal instability ensues.

In exchange for unwavering loyalty to the monarchy, the government provides certain perks in the form of social services and well-paying government jobs. Not all Saudis have benefited from the social contract, but planners have changed certain labor laws to favor Saudi workers instead of foreigners. The state rather than private companies hire most Saudis.