Saudi Arabia: a kingdom in collapse

11 March 2016 6:42 pm

Low oil prices and regional instability directly threaten Saudi Arabia’s survival. Basically, the collapse in oil prices has created a financial situation that is untenable for the Saudi regime. Saudi Arabia is not in dire straits at the moment; it has sufficient reserves to sustain the country for a few years. But when these reserves do run out, it will collapse.

The Saudi economy is dependent on oil which, according to Forbes, should fall to around $30 once the empty nature of an OPEC-plus-Russia production freeze is understood. Over-supply and the weakness of the world economy could push prices well into the $20s.

What happens to Saudi Arabia’s budget deficit if oil falls into the 20s?

As reported here, CNBC looked at the country's finances back in August , when oil swung between $48 and $41 a barrel. It had fallen a long way from its highs of $65 a barrel a few months before. At the time, CNBC estimated the Saudis would be broke in August 2018, yet that was based on oil at $40 a barrel and before the Saudis cut public spending.

Saudi Arabia would have just three to five years of reserves and borrowing available at $30 oil. The Saudi Arabia Monetary Authority (SAMA) acknowledges that the country ran a deficit of 21.6% of GDP in 2015—a quantum leap from 3% the prior year. The International Monetary Fund predicts that within five years, Saudi Arabia will have used all of its cash reserves, and so will become bankrupt. And that was last year when oil was around $50 a a barrel.

Saudi Arabia faces immense budgetary pressure before 2020 and that could tear the place apart. That was unimaginable just 3 years ago.

The bottom line is that Saudi Arabia also needs lots of money for foreign policy.

Saudi Arabia has positioned itself as an enemy of Iran. Neither side is powerful enough to wage war on the other. So instead, they wage various (and very expensive) proxy conflicts throughout the region. When rebels rose up in 2011 against the Iranian-backed regime of Bashar al-Assad in Syria, Saudi Arabia saw an opportunity to deal a crippling blow to Iranian power in the region. The Saudis used their oil wealth to back rebel groups, most of which are to varying degrees jihadist, in order to attack the Assad regime.

The second challenge is the rise of jihadist groups which Saudi Arabia helped create through its involvement in Syria and its sponsoring of hardline Islamic schools throughout the Muslim world.The most significant of these groups is the Islamic State (IS). At this point, IS is behaving much like a state and has declared a caliphate in large parts of Syria and Iraq. The Islamic State’s ideology is a direct challenge to Saudi Arabia. IS is competing with the Saudis for leadership of the Arab and Muslim world.

But Saudi Arabia will run out of reserves by 2020. The Saudi regime was built on oil and money, and neither is there in the long run to sustain the regime. It is hard to imagine how the financial meltdown Saudi Arabia is facing won’t trigger political upheaval

We can expect more dissent in the Saudi royal family. Also, there will be looser controls over the Saudi religious establishment, which could help boost the legitimacy of groups like Islamic State and al-Qaeda. We might also see civil war in the kingdom, leading to the breakup of the country into small states, If that happens, we can expect a long battle for control of Saudi oil fields and infrastructure. Israel will be confronted with new potential enemies as a result of the possible destabilization of the West Bank as well as in neighbouring countries like Jordan and Lebanon. And of course there will be disruption to oil supplies affecting sectors such as transportation, tourism, and trade.

And global stock markets will gyrate. The result: greater investor insecurity, and periods of extreme volatility. Saudi Arabia is the world's problem.