Oil price imperatives

Saudia Arabia, the world's largest crude oil producer and exporter, has projected a 38.6 billion dollar budget deficit for 2015. In the current year, 2014, the kingdom has projected a deficit of 14.4 billion dollars - the first shortfall since 2009. It is relevant to note that over the past decade, Saudi Arabia has over-spent budget projections by 20 percent thereby eating into its still vast foreign exchange reserves estimated at 2.9 trillion riyals (745 billion dollars) by the central bank. The current strong Saudi reserve position is sourced to the high oil prices during the past decade with government revenue from oil accounting for 89 percent of the kingdom's total revenue.
Given the massive dependence on oil revenue by Saudi Arabia, any revenue estimate to enable calculation of the deficit has to have an assumption of the international price of crude for the year. That price, economists are agreed, has been estimated at around 80 dollars per barrel and not around 60 dollars to a barrel that is currently applicable in the market. The reason: Saudi Arabia is confident that the international price of oil will rise - an assertion backed by the 21 December statement by the Saudi Oil Minister: "I'm 100 percent sure prices will go up, they have no other direction but to go up."
As Saudi Arabia is by far the largest oil producer, pumping around 9.65 barrels per day with the second biggest producer, Iraq, pumping no more than 3.35 barrels per day, the price projection implicit in the Saudi budget may convince the market that prices are on the rise. Had Saudi Arabia opted to take the existing international crude oil price while estimating its budget deficit it would have sent a message to the market that the world's largest oil producer projects low oil prices which, in turn, may have further depressed market sentiment. Be that as it may, the Saudi oil price projection is at odds with market survey of 30 economists and analysts who projected Brent to average 74 dollars a barrel next year and 80.30 dollars a barrel in 2016 with crude oil prices likely to bottom out in the first half of 2015 attributable to a slowing down of US shale production finally catching up with a glut due to the November 27 OPEC decision not to slash output. In the event that Saudi oil price projection of 80 dollars a barrel turns out to be an over-estimation for fiscal year 2015 the kingdom has sufficient foreign reserves to be able to buffer the impact on its people.
Statements from Saudi ministers, however, reveal that in the event that revenues suffer due to a lower international price of oil, the Saudi government would reduce expenditures which may fuel a recession with a significant negative impact on the number of jobs held by immigrants, including Pakistani workers, in Saudi Arabia. Remittance income on which Pakistani governments have been increasingly reliant to support the country's balance of payment (BoP) position would decline given that Saudi Arabia accounts for around 29 percent of all our remittance inflows. And needless to add a decline in the international price of oil would also hit the revenue of other OPEC countries, particularly the UAE, where a large number of Pakistani workers are also employed, leading to a further decline in remittance income.
Yet there is likely to be an upside to a decline in the international price of oil. The country's import bill would decline and the need for remittance income to support the trade imbalance would also reduce. A decline in the total import bill may outweigh a decline in remittance income and reduce domestic inflationary pressures as the government passes on the decline by reducing petrol as well as electricity prices. However, for benefits to filter down to the grass-root level the government would have to take appropriate macroeconomic policy revisions, including reducing expenditure and raising revenue through implementing the necessary identified tax reforms.