THE LEVANT – Saudi billionaire Prince Alwaleed bin Talal said he had “a fundamental difference” of opinion with Saudi Oil Minister Ali Al Naimi on the kingdom’s policy not to reduce oil production in the wake of declining prices, but stopped short of demanding the minister’s resignation.
Prince Alwaleed last week said the world’s top oil exporter should start worrying about the recent slide in global oil prices and warned against the negative effect of such a drop on the state revenue.
In an open letter to Oil Minister Ali Al Naimi and other ministers, dated October 13, the chairman of Kingdom Holding said he was “astonished” about comments reportedly made by Al Naimi aiming “to alleviate the substantial negative implications on the Saudi budget and economy due to the big drop in oil prices”.
He was referring to comments made by the oil minister in Kuwait on September 11 where he played down concerns about the drop in oil prices below $100 per barrel.
As the price fell to around $80, Saudi officials briefed oil market participants in New York on the kingdom’s policy, making clear that Saudi is prepared to tolerate a period of lower prices.
In an interview with the Fox Business Network in the US, he reiterated his concerns with the policy being adopted by the Saudi Oil Minister.
“The same minister a few months ago said at $100 the price of oil everybody is happy, the consumer and producers. Well, guess what? Now the price is $80 and we hear nothing out from him…. For Saudi Arabia, 90 percent of its budget is based on oil and you can imagine a $20 collapse causes a major ripple effect on our budget for this year and next year,” the prince said in the televised interview on Tuesday.
“I have a fundamental difference with him but I believe his plan, if the price of oil keeps going down, inevitably Saudi Arabia will have to start touching its strategic reserves and I believe Saudi Arabia should not touch its strategic reserves,” he added.
“I think this is not my call, this is the call of the Saudi government but frankly speaking I believe it is not the matter of whether the minister applies what he thinks or not, it is what the government’s policy is as the minister implements the policy of the government.
“I believe the government’s strategy and policy should be to implement a policy whereby our strategic reserves… almost $800 billion… should be used effectively in a sovereign wealth fund that is active, dynamic and on the move like Norway, like Singapore and like Kuwait,” Prince Alwaleed said.
The global oil benchmark has declined more than 20 percent from a 2014 high in June of $115 per barrel as supplies rose and demand slowed in the United States, Europe and China.
Prince Alwaleed has repeated previous warnings that the Gulf Arab kingdom needed to reduce its reliance on crude oil and diversify its revenues.
His warning may reflect growing concern in private among many Saudis about the impact of declining oil prices on the country’s economy and its dependence on oil revenues.
Over the past couple of years the Saudi government has taken some initial steps to develop the economy beyond oil – for example, liberalising the aviation sector and providing finance to small, entrepreneurial firms in the services and technology sectors.
Al Naimi has said in the past that Saudi Arabia must reduce its reliance on crude oil revenues and develop its downstream industry to shield its economy from international market volatility.
Saudi’s budget breakeven oil price is $86.1 in 2014, according to International Monetary Fund (IMF) estimates.
The average oil price for most of this year is around $106 a barrel, and even the recent drop in oil prices is unlikely to put the kingdom under pressure because of the financial reserves it has built over the years.
The IMF said in a report last month that Saudi Arabia’s state finances could fall into the red next year and the country might start running down its foreign reserves if it did not rein in the growth of government spending.
However, running deficits would not be disastrous for the government. Economists believe that in addition to using its reserves, which could help to maintain spending at current levels for years, Saudi Arabia could easily borrow money from the markets, as most other governments around the world do. State debt fell to 2.7 percent of GDP in 2013, one of the lowest levels in the world.
Lower oil prices will not translate directly into lower real gross domestic product growth, which will slow only if oil production decreases. Also, Saudi Arabia’s non-oil private sector has been booming.
Saudi Arabia’s $748 billion economy, the biggest in the Arab world, is expected to expand by 4.2 percent this year and by 4.3 percent next, according to the consensus of 18 analysts polled by Reuters in late September.