Saudi Arabia has proven oil reserves of 266 billion barrels and a current estimated spare production capacity of 2.7 million barrels a day.
With uncertainties about the global oil market outlook stemming from the strength of the global recovery, the path of US oil production and the extent of supply outages in other countries, the importance of this role need not be overemphasized.
The current period of low oil prices clearly serves as a reminder of the temporary nature of the hydrocarbons wealth of the GCC economies.
They underscore the need to tackle the long-term structural decisions that must be made to lay the foundation for sustainable growth on the basis of a diverse economic structure.
Brent crude was stuck below $97 a barrel having hit its lowest in 26 months recently. It is, however, important to bear in mind that the volatility in oil prices is nothing new.
Some of it right now is likely to be purely seasonal in nature. Moreover, whatever the challenges of the market today, the world still needs oil in growing quantities.
And the marginal cost of extracting it is going up in a way that is likely to make any price correction temporary in nature.
Saudi Arabia’s economy has grown very strongly in recent years, benefiting from high oil prices and output.
Nonetheless, it is clear that the long period of high oil prices has fueled government spending growth and created expectations, which must begin to be tackled.
Even if oil prices rebound, there is a need to begin to restructure government spending and reduce the dependency on the government-led growth paradigm. In that sense, a price correction may serve as a welcome reminder of the need to tackle these issues.
Saudi Arabia’s economy is heavily dependent on oil, which accounts for around 90 percent of fiscal revenues and 80 percent of current account revenues.
Although large and growing buffers are strong at present, providing macroeconomic policies with scope to respond to shocks, they can temper the impact of swings in oil revenues. This could ultimately lead to creating a more diversified economy posing a likely challenge despite the Kingdom’s vast oil resources.
According to the International Monetary Fund, the Saudi government is making considerable efforts to lay the groundwork for further diversification by upgrading infrastructure, strengthening education and skills, boosting access to finance for SMEs, and improving the business environment.
Even granting all this is true, the resultant challenges and the manner in which they could be overcome will need to be analyzed in their entirety.