Saudi Arabia’s mission to blow everyone out of the oil market isn’t over yet.
The country’s policy of pumping so much oil that prices stay too low for competitors to make profit has led to losses at big oil companies, suppressed inflation globally and even seen Saudi Arabia’s own sovereign debt downgraded.
And it has no plans to stop.
The chairman of Saudi Aramco, the state’s oil company, told the Financial Times: “There have been no conversations here that say we should cut production now that we’ve seen the pain.”
“The only thing to do now is to let the market do its job,” said Khalid al-Falih.
The Opec oil producing cartel, of which Saudi Arabia is a key member, decided against cutting production targets last year, letting the price fall from around $US100 to less than $US50.
Here’s the Brent crude oil price, a benchmark for oil, over the past two years:
At the time Saudi Oil Minister Ali al-Naimi said the policy was aimed at defending market share and shoving less-efficient oil-producing countries like Russia, who need oil up at $US100 to make money, out of the market.
“It is also a defence of high efficiency producing countries, not only of market share. We want to tell the world that high efficiency producing countries are the ones that deserve market share. That is the operative principle in all capitalist countries,” al-Naimi said in an interview cited by the Financial Times last year.
Saudi Arabia isn’t immune from the pain of low oil prices. The country’s sovereign credit ratings were cut to “A+/A-1” from “AA-/A-1+” by credit rating company Standard and Poor’s.
In a release, S&P said a “pronounced negative swing” in Saudi Arabia’s fiscal balance prompted the downgrade.
Over the 10 years ending in 2013, S&P noted that Saudi Arabia’s budget surpluses — or money available after all government expenses had been met — averaged about 13% of GDP. This situation, however, has changed rapidly as the price of oil has crashed, and in 2015 Saudi Arabia is expected to see a budget deficit equal to 16% of GDP.
“We knew that it was going to be painful but the extent of the pain went beyond our expectations,” Falih said in the Financial Times interview. “The market has overreacted as it typically does in such down-cycles.”
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