OPEC oil production dropped to the lowest level in 14 months in December as Saudi Arabia cut its supplies by 4%.
Ostensibly, the production cut was a response to slack demand. But while it’s true that demand is waning, that’s not the real reason the world’s largest oil producer is cutting back.
The truth is, Saudi Arabia is trying to keep oil prices high because it needs to finance a $220-billion shopping spree.
You see, on December 29, the Desert Kingdom said it would increase its spending by 19% in 2013 to $220 billion – the biggest nominal increase in spending since records began.
This is part of a long-term trend that saw the Kingdom’s government spending surge by an average of 12% per year from 2002 to 2012.
So where’s all this money going?
Well, first and foremost, it’s being used to stimulate the economy. Saudi Arabia’s GDP expanded by 8.5% in 2011 – the biggest jump since 1979. And preliminary data suggests the economy grew 6.8% last year, with non-oil GDP up 7.5%.
Last year, the Kingdom spent $54 billion on education and training to get more of its citizens to work, and another $6 billion on scholarships for Saudis studying abroad.
And finally, there are the social programs. King Abdullah pledged a total of $500 billion to social welfare to ward off the Arab Spring that threatened many of the region’s rulers.
Of course, the result of all this spending is that Saudi Arabia now needs oil prices of $85.20 per barrel to balance its budget, compared to $37.60 per barrel in 2008, according to the International Monetary Fund (IMF).
And while the Kingdom is currently turning a surplus, the IMF forecasts those surpluses will shrink in the years ahead, becoming a budget deficit by 2016.
That’s the real reason Saudi Arabia is cutting its production. It’s seeking to preserve high oil prices so it can continue its spending.
Saudi Arabia’s not alone, either.
Countries throughout the Middle East have run up extraordinary budgets and now require oil prices in excess of $90 and $100 per barrel to grow their economies, promote employment and stave off social unrest.
For example, Oman’s finance minister, Darwish Al Balushi, recently told Reuters that his country needs oil prices of $104 per barrel this year to break even on a $33.5-billion spending plan.
In all, countries in the Gulf Cooperation Council (GCC) now rely on oil exports for 80% to 90% of their budgets. And collectively, those budgets rose 19.3% in 2012 to reach $359.1 billion. That compares with actual spending of $301.1 billion in 2010.
Furthermore, aggregate spending among GCC nations is expected to rise by 6% to 8% per year by 2014. Yet the economic effects have been limited, as growth in those countries is expected to slow to 3.6% in 2013 from 5.4% last year.
Clearly, this situation isn’t tenable. And it’s only going to get worse as North America increases its oil output.
Indeed, U.S. oil production rose by 760,000 barrels per day last year – the biggest annual increase in output since the country first began producing crude commercially back in 1859.
It’s expected to climb another 640,000 barrels to 7.1 million barrels per day in 2013. And the National Intelligence Council estimates U.S. oil output will expand to 15 million barrels per day by 2020 – enough to supplant Saudi Arabia as the world’s largest producer.
Not to mention, Canada’s shale resources, which are expected to boost crude oil production there from 3 million barrels per day in 2011 to 4.7 million barrels per day by 2020.
So while Saudi Arabia and other oil-producing countries are doing what they can to preserve their budgets, the government spending bubble in these countries will ultimately burst.
And “the chase” continues,