How Could Saudi Arabia Benefit from a Global Economic Recovery and Political Tension in Europe?

Global oil prices are on an upward trend thanks to economic recovery in the US and Europe and political tension between Russia and Ukraine. This is good news for Saudi Arabia, one of the largest oil exporters globally, as revenue for the state budget grows. In addition, rising oil prices could support the diversification of Saudi Arabia’s economy while politics could open up new markets in Europe.

Economic Recovery and Tension in Ukraine Put Upward Pressure on Oil Prices

Global oil prices have continued to show an upward tendency since March 2014. The price of Brent crude stood at nearly US$110 per barrel in May, while futures for June rose to nearly US$109 per barrel. Growth can be attributed to economic recovery in the US and Europe, while tension between Russia and Ukraine and possible military intervention have also had an influence.

Europe Brent Spot Price

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Source: Euromonitor International from national statistics

Saudi Arabia Benefits from Rising Oil Prices

Saudi Arabia, one of the largest oil exporters in the world, is expected to benefit from rising oil prices. Increasing oil revenues will boost its state budget and aid economic diversification.

The breakeven point for Saudi oil producers is US$90 per barrel of crude oil. The Ministry of Finance projects that budget revenue will amount to SR855 billion in 2014, similar to budgeted expenditure. However, a more realistic scenario is that state expenditure is more likely to reach SR960 billion in 2014, with rising oil prices thus helping it to balance its budget.

Increasing oil revenues will allow Saudi Arabia to accelerate diversification of its economy over the long term. Its current dependence on oil makes it highly vulnerable as oil accounts for 80-90% of state revenues. Nevertheless, plastics and polymers, metals and the motor vehicle industries in Saudi Arabia could gain an additional boost if extra revenue from oil is invested in diversification.

Rising Production Volumes and Secure Future Demand

Saudi Arabia took several measures to stabilise oil prices in the past and is expected to increase oil extraction if prices continue to rise significantly above US$100 per barrel. In April 2014, Saudi Arabia produced 9.7 million bpd of crude oil, although Saudi’s oil minister reassured customers that the country has sufficient capacity and will increase production if needed.

In such a scenario, Saudi Arabia would benefit from rising production of oil, with this bringing in additional income. Such a strategy could also provide benefits over the long term. Oil refiners and end consumers of refined oil products have adapted to crude prices hovering around the US$100 per barrel mark. Thus, price stability would secure oil’s position in the global energy mix.

New Opportunities in Europe Might Arise

In 2013, Saudi Arabia exported more than 90% of its oil and gas production, with Japan being the largest export destination. However, new markets might open up as political relations between the EU and Russia turn frosty. Leading economies in Europe have expressed a desire to reduce their reliance on Russia, which accounts for 30% of the EU’s crude oil imports. In turn, Russia is seeking new partners in Asia to reduce its dependence on Europe.

Such a situation leaves plenty of room for manoeuvre for Saudi Arabia. As of 2013, Saudi Arabia accounted for around 6% of European oil imports. However, possible competition from Russia in Asian markets and a supply gap in Europe would provide opportunities for Saudi oil in the more profitable European market. Saudi Arabia could increase its share in Europe by raising exports to the Netherlands, where Saudi Aramco owns shares in an oil terminal. Additionally, France could be another potential market for Saudi Arabia given close cooperation between Saudi Aramco and the French giant Total.

Export Partners (% of Oil and Gas Production 2013)

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Source: Euromonitor International