Reasons for Saudi Arabia to resist oil deal in Algeria

Baku, Azerbaijan, Sept.15

By Aygun Badalova - Trend:

While the slowdown in Saudi Arabia’s economy has prompted the authorities to soften their opposition to a deal to freeze oil output, there are several reasons, including ongoing tensions with Iran, to think that the Kingdom will be hesitant to sign up, Jason Tuvey, Middle East Economist at the British economic research and consulting company Capital Economics believes.

“Saudi officials seem to have eased their opposition to a deal with other major producers to freeze oil output in an attempt to boost oil prices. Higher oil prices would reduce the pressure on the Kingdom’s finances – the country’s large twin budget and current account deficits stood at 15 percent and 8.3 percent of GDP respectively last year – and provide scope for the pace of austerity to be slowed,” Tuvey said in the report, obtained by Trend.

However, Tuvey believes that a deal to freeze output would not be a game changer in terms of the Kingdom’s finances.

Oil prices would need to rise to $70 per barrel (from $47 per barrel at present) to significantly improve the Kingdom’s fiscal position – even with an output freeze, that seems unlikely to happen, according to Tuvey.

“In any case, the country’s strong balance sheet and the progress already made with fiscal consolidation mean that the authorities already have some room to ease the pace of austerity,” he said in the report.

Tuvey believes, agreeing to freeze oil output would be an enormous loss of face for policymakers.

“Since oil prices started to fall in mid-2014, the Kingdom has refused to bow to pressure from smaller producers to take action in order to pump up prices, with the authorities concerned that a short-sighted agreement could undermine the country’s long-term position in the market. In fact, the Kingdom has increased output in an attempt to protect its market share,” he said.

“Moreover, Deputy Crown Prince Mohammed bin Salman has, through the launch of the National Transformation Plan, staked his reputation on weaning the Saudi economy off oil. Shifting tack on oil policy would be an outright admission that the strategy to squeeze out high-cost producers has failed and would severely undermine the credibility of the government’s diversification efforts,” he added.

Finally, according to Tuvey, “there’s still no love lost between Riyadh and Tehran”.

“There were tit-for-tat exchanges between the two countries in the run up to Eid al-Adha and Saudi Arabia would be reluctant to agree to any action that could directly benefit its regional rival,” Tuvey said.

The informal OPEC meeting will be held in late September in Algeria. It is expected that the talks on oil production freeze will be held between OPEC and non-OPEC countries.

The meeting will take place at the fringe of the International Energy Forum in Algiers from 26-28 September.

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