The Middle East has always been a national security issue for the Americans. Control over the Gulf’s oil guarantees them global leadership. And for exercising that control, they have a number of controlled “allies” in the region. In the 1970s, the “allies” were Iran, Saudi Arabia and Israel. Later, Iran turned into an enemy and the Americans used that factor for tightening their grip on the other two. In the same way, they used the factor of Saddam Hussein’s Iraq and are now using the factor of ISIL.
Economy is the basis of that control and Saudi Arabia is its key target due to its vast oil reserves and high influence in the Muslim world.
The two pillars of Saudi Arabia’s economic welfare are oil and religious sites. For many years, the Americans helped the Saudis to solve their economic problems. And even though they have created a lot of problems for the Saudi economy over the last decade, the countries remain close partners.
As of 2014-2015, Saudi Arabia’s estimated reserves totaled 268.3 billion barrels of oil (the second biggest reserve) and 8.235 trillion cubic meters of gas (the sixth biggest reserve). The Saudis have almost 1/5 of all oil and gas reserves. The reserves are controlled by Saudi Aramco, the world’s largest oil company. Oil exports account for 45% of Saudi Arabia’s GDP, 90% of export earns and 75% of budget revenues.
According to the U.S. International Trade Administration, in 2015, Saudi Arabia’s exports to the United States exceeded $22 billion. But in 2008, the index was as high as $54.8 billion. In 2015, the United States’ imports to Saudi Arabia exceeded $19.7 billion against $9 billion in 2009.
The fall in Saudi exports to the United States is due to a cut in Saudi oil supplies, while the rise in U.S. exports to Saudi Arabia is due to a growth in arms and vehicles deliveries.
According to the U.S. Energy Information Administration, in Sept 2016, Saudi Arabia was the second biggest supplier of crude to the United States after Canada. The Saudis supplied 1.124 million barrels a day out of total 8.173 million barrels. That is, they had 1/8 of the United States’ crude imports. Financial Times warns that they are losing that share but instead they hope to enlarge exports to Southeast Asia. In 2013, supplies to the United States accounted for just 15% of their total exports, while the share of Southeast Asia was as big as 68%.
As of today, in trade with the Americans, the Saudis have fallen behind the Israelis, who, in 2015, exported goods worth $24.4 billion and imported goods worth $13.5 billion.
In May 2013, the Saudi authorities began to suspect that shale gas production in the United States was a big threat to their oil industry. And in 2015, they faced a slump in oil prices.
Now, the Saudis can extract no more than 12.5 million barrels a day due to current market trends. OPEC’s deal has obliged them to keep their output within 10 million-12 million barrels a day.
In order to be able to produce as much, they will have to spend more money on offshore projects far in the Gulf. And if they continue developing their infrastructure and transport as quickly as now, by 2030, they will consume more oil than they will export unless they change their energy mix. Well aware of this, they are planning to redouble their gas production and to develop nuclear energy. By 2040, they are going to launch 16 nuclear power plants. They already have two desalination units using nuclear energy instead of oil.
The question is why the Americans are reducing the imports of Saudi and other Middle East oil. They started this process in the 1990s, when they put a ban on Iranian oil. The Saudis’ reorientation towards China and Japan will hardly put an end to the Americans’ hegemony in the region as for supplying oil to Asia, the Saudis use the routes controlled by the U.S. navy. So, the Chinese will hardly be able to beat the Americans in this war and if persistent, may well face the Japanese’ fate of 1941-1945. The Chinese are wise and are building alternative routes but the problem is that their new Silk Roads run via Central Asia, a region that is very much vulnerable to Islamic threats.
So, we can give only hypothetical answers to the question why the Americans no longer want to buy Saudi oil. They may be punishing the Saudis for sponsoring international terrorists or may be trying to gain more control over their policies by pressuring their economy. This may as well be part of their general plan to cause chaos in the Middle East. Their goal may also be low oil prices as a way to help them to transit to new technological schemes. Low prices will stimulate economic growth in the real sector and will help them to overcome the global crisis. And the final version is that the Americans are getting ready for a big war for global hegemony, where for victory they need to have stable oil supplies in own territories and disrupted oil supplies in the territories of their enemies.
And now let’s see what economic consequences this will have for the Saudi economy. In 2011, in order to avoid the risk of an Arab Spring, the Saudi authorities carried out large social projects to improve housing conditions and infrastructures, to raise public wages, to enhance education opportunities and to reduce unemployment. But it was a heavy burden on them as their oil revenues were low.
In 2016, the budget deficit made up $86.9 billion or 12.6% of GDP. In 2015, the index was 15%. If in 2017 oil prices stay within $43-50 per barrel, the deficit will shrink. Officially, in 2017, it is expected to go as low as 7.7% of GDP.
Though having $660 billion in reserves, the Saudis have $166.1 billion in debts. The national debt is not very big even though in 2014, it tripled to $38 billion or 5.8% of GDP. In 2018, it is expected to grow to 23% of GDP, in 2020 it will amount to 30%. In order to have a deficit-free budget, the Saudis need a price of $60 per barrel. And this is why they were the authors of OPEC’s output cut deal. Now all of their forecasts are based on $60 price but if the price fails to reach this level, the Saudis will have to sell more bonds and to borrow more money.
Now that their oil revenues are shrinking, the Saudis are trying to stabilize their budget. In 2016, they issued government bonds worth $17.5 billion. This year they may do the same and to earn $15 billion as a result.
In 2015, in order to cover the budget deficit, the Saudis took $60 billion from the national reserves and issued new domestic bonds. In 2018, they are going to impose a VAT. This year they cut their construction and social costs by $20 billion but kept military costs unchanged.
The Saudi authorities are keen to further control their oil reserves. In 2016, they announced a plan to sell a stake in Saudi Aramco and to use the money to diversify their economy.
But though well aware that the United States’ economic policy is the key threat to their future, they can hardly do anything to make the Americans change it.
EADaily’s Middle East Bureau