Saudi petrochem industry will adjust to energy price rise: Aramco

Analysts said the plans announced on Monday to shrink a record state budget deficit with spending cuts, reforms to energy subsidies and a drive to raise revenues from taxes and privatisation showed Riyadh was expecting lower revenues.

Saudi economic growth is set to slow further in 2016 after the OPEC heavyweight announced record deficits due to the slump in oil prices, an economic report said today.

Oil prices have fallen by more than half ever since that November 2014 decision, with Brent crude, the global benchmark, trading at about $37 a barrel on Wednesday in London, its lowest level since the 2008-09 financial crisis. Even with that jump, Saudis will pay just 24 cents (0.90 riyals) for a litre of 95 octane gasoline, less than a dollar per gallon.

The sharp increase was a surprise as the finance ministry said Monday that it would implement a “gradual” five-year program aimed at structural economic reform, including fuel price hikes, to improve energy efficiency.

The government said it is anticipating $137 billion (513 billion riyals) in revenue for the coming year, around $26 billion (95 billion riyals) less than the total for 2015. Some OPEC members such as Venezuela have called for drastic action that includes a 5% OPEC production cut to calm the market. “It’s very clear that Saudi Arabia will continue with its oil policy of defending its market share in 2016 as it prepared itself for low oil price environment”.

In one of the strongest signals that the kingdom will stay the course despite the impact on its finances, Saudi Aramco’s chairman Khalid al-Falih said it could outlast others.

The kingdom withdrew more than $80bn this year from its reserves, which stood at $732bn at the end of 2014, and issued bonds worth about $20bn.

The country’s budget deficit – the amount in which expenditures exceed revenue – for 2015 hit a huge $98 billion (£65.7 billion).

USA oil production is already in decline.

“We believe that it is a positive move in the long term as it should help put the kingdom on more stable fiscal footing”, said Jaap Meijer, managing director for equity research at Arqaam Capital in Dubai.

Because of Saudi Arabia’s role as the political leader of the Gulf Arab states and the biggest Arab economy, other Gulf governments are now expected to follow suit as they impose their own austerity programmes in response to the prospect of years of shrunken oil and gas revenues.