Biggest Ever Saudi Economic Overhaul Suggests It Is Bracing to Withstand Long Term Low Oil Prices

by Ship & Bunker News Team
Tuesday April 5, 2016

Any remaining hope that Saudi Arabia was committed to revitalizing global oil prices was dashed during a recent five hour interview with Bloomberg News, when Deputy Crown Prince Mohammed bin Salman outlined massive economic strategies that will, if enacted, spread the pain of the low prices amongst the general populace.

Said to be the biggest economic shake-up since the founding of Saudi Arabia, the strategies include more steps to restructure subsidies, and value-added taxes and levies on energy and sugary drinks as well as luxury items.

A revenue-generating program similar to the U.S. Green Card system that targets expatriates in the kingdom is also being discussed, but the capper of Salmon's ambitious overhaul is his plan, reported in Ship and Bunker last week, to sell a stake in Saudi Arabian Oil Co. on the stock exchange and create the world's largest sovereign wealth fund – which would presumably make the kingdom more reliant on investment income than oil within 20 years.

In a bid to improve conditions in a nation where youth unemployment is among the highest in the world and economic growth will slow to 1.5 percent this year, the Saudi government began raising fuel and utilities prices last year; however, much more restructuring is required, since Saudis pay no income tax and no plans to impose such a tax are being considered.

While it's unclear how effective - or feasible - Salmon's restructuring would be, it seems to indicate that the nation is preparing for low oil prices - and by extension low bunker prices - for the long haul.

Salmon's remark during the Bloomberg interview - that his country will not agree to any oil production freeze unless Iran and other major producers do so - lends support to the idea that the country is fortifying itself rather than participating in a scheme that many critics have lambasted as unlikely to happen and ineffective if it does.

Bloomberg states that Salmon's plans "would bring the kingdom closer to the rest of the world, where governments rely on charges to fund spending," and Mohammad bin Abdulmalik Al-Sheikh, the Saudi minister of state, says another proposed economic initiative, that of obtaining money loans through international banks, is necessary "to prepare ourselves for the future to make sure that when we actually go to the markets and we really need the money, the markets, the investors, the financial institutions already know us." 

Saudi Arabia has flip-flopped on the issues surrounding an output freeze ever since it was first proposed last year, and as late as November the nation's minister for petroleum and mineral resources said it would cooperate with all oil producing countries to help stabilize the oil market