Saudi Arabia’s government privately begged international banks for a loan of $10 billion Wednesday.
The government of Saudi Arabia sent a private invitation to various banks to discuss the loan, according to anonymous sources cited by Reuters. Calls by Reuters to to the Saudi finance ministry and central bank seeking comment went unanswered.
Oil, which accounts for 90 percent of the Saudi government’s revenues, is incredibly cheap right now, causing serious financial problems in Saudi Arabia. The Kingdom needs the price of oil to be at $106 a barrel, according to analysis by Bloomberg Business last year. The price of oil is hovering around $30 a barrel.
Saudi Arabia expects a budget deficit of $140 billion— roughly 20 percent of its economic output. When compared to 2013’s surplus of $48 billion, the fiscal outlook for the Kingdom looks so dim that the International Monetary Fund (IMF) warned the country they could deplete their fiscal reserves within five years. The Kingdom’s credit rating was downgraded in early February.
[dcquiz] Despite the financial problems, Saudi Arabia has continually increased its production of oil, which is keeping the price low. The Saudis are keeping prices low to defend their share of the global oil market from the rising American oil industry and because cheap oil hurts their political rivals in Iran. The Kingdom has continued increasing oil production over the objections of the Organization of Petroleum Exporting Countries (OPEC).
The cheap oil Saudi Arabia is currently providing has many surprising side effects for the United States, but it hasn’t hurt the American oil as much as the Saudis would like.
American oil companies are simply more flexible than their Saudi competitors, because American firms are smaller and more responsive to changing market conditions. In the United States, lead times between investment decisions and production are measured in weeks, in Saudi Arabia, they’re measure in years. Additionally, innovative American technologies such as smart drill bits, dissolvable drilling plugs, hydraulic fracturing and horizontal drilling are rapidly cutting costs for American firms.
If oil prices rise again, American firms will be well positioned to rapidly increase production again.
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