It feeling lonelier and lonelier in the death-before-reforms camp. Take it away, WSJ:

Saudi Arabia on Monday unveiled plans to cut expenditures and sharply raised domestic fuel prices as the world’s top oil exporter attempts to cope with a new era of cheap crude prices.

After years of spending its massive oil wealth to bolster the local economy and provide subsidized energy and other utilities to its 30 million people, a steep decline in oil prices has forced the kingdom to reassess these plans.

On Monday, officials said the government ran a record deficit of nearly 367 billion Saudi riyals ($98 billion) this year, or about 15% of gross domestic product, as low oil prices suppressed revenue, pushing it to cut planned spending by 14% in 2016 amid expectations that income from oil sales will remain under pressure.

Shortly after unveiling the budget for 2016, Saudi Arabia increased domestic fuel prices in a move that suggests that the government is willing to adopt some difficult measures as it deals with cheap oil.

A cut in subsidies risks a backlash in the kingdom as its citizens are accustomed to cheap energy and other utilities.

Hat tip: Agramonte.

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  1. Interesting to note that Saudi Arabia is regularly accused of driving oil prices down by increasing pumping to in turn drive fracking out of the field. Is it a canard or are they shooting themselves in the foot?

    • Neither. They have a medium-term strategy to drive high cost producers out of the market by bringing down prices in the short term to grab marketshare. That implies short-term costs. They’re willing to face them.

      • It remains to be seen if that works. The Saudis might drive some of those producers out of the market but this would probably lead to a consolidation of the fracking facilities under fewer but more powerful companies in the West…and meanwhile other alternative sources of energy will keep emerging…very slowly but relentlessly. Oil producing countries’ margin of possibilities is shrinking;

        I wonder if Maduro will try to force the National Assembly to do something unpopular about petrol prices…somehow. It is just a legislative branch but that doesn’t matter in Venezuela’s psyche. I am sure he will try to pass the hot potato to them in one way or the other (he or rather the real people behind him)

  2. I’m in South Texas and last week was discussing with a client about the impact on his business of the low oil prices. He told me that his son is a truck driver for one of the large oil companies (oil, fracking, water and sand are moved by trucks). Anyways, his son has been sent home over a year ago and is receiving half of his pay. They are renewing this agreement every 6 months.

    I was surprised by this as it clearly points to mayor oil seeing this as a temporal dip.

    • It should be further noted that the Marcellus and Utica shale deposits have yet to be fully explored. Exploration in both have come to a screeching halt. The deposits, however, are enormous. All the gas/oil guys are excited as to what may yet come. They will re-start the fracking process as oil prices start to climb above 60 or 70. The gas potential for both is beyond belief, but they have also discovered some serious oil deposits as well. Pennsylvania could wind-up as a future Saudi Arabia in energy reserves.

      • That is correct, although there are still companies, like Antero Resources in WV, leasing everything in sight. They are still betting on the future.

  3. I don’t buy the theory that Saudi Arabia is doing this to drive high cost producers out of market, it doesn’t make much sense because as soon as they achieve their goal, and oil price start soaring again, fracking will be just as attractive to invest again too, and high cost producers will be back in the market as fast as they left, bringing oil price down again. The ‘strategy’ would have been fruitless in such case. The fracking divisions of oil companies are not being destroyed, they are solely on stand-by, what is being destroyed is OPEC’s power to define oil price, that has been mortally wounded, even more because fossil fuels are losing importance every year. OPEC is a sinking ship. And Saudi Arabia increased oil pumping in order to not lose market-share, that was explained by several Saudi authorities.

    And with these reforms I think that Saudi Arabia just throwed in the towel. They have given up. They wouldn’t do such long-term drastic reforms that can even destabilize their very own power and kingdom just to hurt temporarily some fracking companies and drive them off the market for one year or two.

    • The strategy is meant to both stop fracking as well as stop other renewable methods from developing. It is a short, medium, and long term play and I don’t think they are planning to let the cost go up much further ever again. Given how much oil they have, it is better to make $40/barrel on all of it, then make $60 a barrel on half of it (which would happen if they let it sit at the higher price too long). That is why they are reducing their domestic subsidies as they realize they will bankrupt the country if they don’t…

      Both the PSUV and opposition need to realize that the oil boom is now officially over and will probably never return again…the only thing to do now is become more efficient in production of oil and begin diversifying the economy… The longer they wait, the more difficult it will be to get out of the hole they are now already in…

  4. Well the Saudi have better things to do with their dwindling revenues than subsidize local consumption of fuels. They have a mission to bomb Yemen into Oblivion and Colonize Bahrain etc. One must evaluate expenditures judiciously in times of low oil prices !

  5. It is hard to conjure up much more than the image of a people having to spend a little more in order to go nowhere to do nothing.

  6. High oil prices increase investment in oil (thus oil production) even if production costs are high and discourages technological efforts to develop other greener energy sources and reduce consumption , by hiking production to reduce oil prices , the Saudis are from an economic point of view , discouraging new investment in costly to produce oil , hitting present and future production and at the same time making the development of new technologies that save on energy or allow for the production of greener sources of energy less economically attractive. There is of course the environmental factor which in fact is (when push comes to shove) not that divorced from economic considerations as pols might loudly proclaim . The intent is to maintain a supply demand balance that keeps prices at a lower range than in the past but that effectively might extend the life of the oil business in the future !! Its an intelligent long term strategical move…..time will tell how effective it is.

    Cutting subsidies is easier for a government which is headed by an absolute monarch and still commands the use of billions in saved resources to provide for its population !!

  7. The Saudis aren’t just trying to discourage fracking/greener energy alternatives, but recognize that oil sold now is better than oil in the ground not sold later, as global warming increases, and greater sanctions are placed on carbon emissions worldwide, just as greater incentives will be introduced to accelerate development of green alternative energies. The Paris Accord is a good start, but there are estimates that even if the world’s developed economies were to reduce immediately new carbon emissions to zero, the lesser-developed economies, principally India and China (2400 new coal-fired electricity plants to be constructed in the next 15 years, for example), which have not firmly agreed to emissions targets, would still emit enough additional carbon to result in an increase in world temperatures of at least 2.5-3.0 degrees Celsius by the year 2100; and, there are those who say this increase is too low. Most scientists now agree, as many of the world’s species are dying off at alarming rates, that the future of humanity itself is at stake due (among other things) to global warming.

    • You may want to cross check your new coal palnt figures. Tata Power in India just cancelled a large coal llant project and will build utility scale solar in lieu. Solar costs keep coming down to boot and so will the cost of storage.

      • Thank you, you’re right, there are 1000 coal-fired power plants planned between China and India over the next decade. The point is that 65% or so of carbon emissions come from the developing world, which is not likely in the near-term with a non-binding agreement to slow their development by adopting more costly/less-efficient non-carbon producing sources of energy. This is particularly important for the Chinese Communist Party, already faced with slowing economic growth, and whose very existence into the future could be endangered if growth were to slow too much.

  8. If it is indeed certain that high oil prices are not coming back, how is the Bolivarian Revolution going to solve this? Isn’t that a good question?

  9. I think the Saudis are very astute geopolitically and this domestic effort indicates that Saudi Arabia are in for the “long haul”.

    Saudi Arabia has always been the swing producer in OPEC since it’s formation. When OPEC production exceed it’s quota, the Saudis would cut back oil production, and likewise, when production was below quota, the Saudis increased their production.

    They have historically used oil as a geopolitical tool to great effect and this has served their self-interest as well as their allies’.

    The current worldwide oil glut is a situation where in the past, the swing producer would typically cut back production to reduce the oil glut and maintain prices. However Saudi Arabia in the past has used their huge oil production capacity to protect their self interest as well as to kill several birds with the same stone.:

    1) Increase market share
    2) Punish overproducers both inside and outside of OPEC
    3) Punish those who would harm them by cutting their oil income (Iran, Russia, Yemen, Syria)
    4) Help their allies
    5) Stabilize western economies, where they are heavily invested
    6) Protect the long-term viability of their resource
    7) Drive high cost producers our of the market (U.S.-Canada tight-oil, ultra-deep water (Brazil susbsalt, GOM, W. Africa Offshore), Arctic ( US, Russia)

    An interesting case in point of how they used oil as geopolitical tool is in 1986.

    At this time Saudi Arabia was producing about 4.5 mmbopd, and the oil price was hovering around $25-28/bbl.

    Eastern Europe was in the throws of open insurrection and Russia was belligerently trying to put down this dissent. Poland was experiencing Perestroika, and other E. European countries were looking on with interest to see what the Russian response might be and if such a movement would be for them also. President Reagan was working with Pope John Paul II regarding a solution to the revolt in Poland.

    At this time, Russia was producing ~12.5 mmbopd and received 85% of their hard income from hydrocarbon exports. The Russian population was also experiencing food shortages.

    The U.S. was developing and testing their “Star Wars” weapons system, which pushed Russia into an expensive “Star Wars” arms race with the U.S.

    In Early 1986 president Reagan convinced the Saudis to increase their oil production in order to drop the price of oil and hurt Russian hard Currency income. Saudi Arabia increased production to 10.5 mmbopd, and the oil price immediately dropped to below $10/bbl. This created a “Guns or Butter” situation for the Russians, they could either fight the “Whak-A-Mol” Poland/Eastern Europe insurgendy and develop a “Star Wars” program or harvest wheat in the Ukraine. But not both. The Russian finally chose the wheat, which brought about Glasnost, and ultimately the liberation of large chunks of Eastern Europe.

    The present worldwide oil glut was not only created by the innovation of the “tight oil revolution”; but the Saudis were also in part responsible by ommision because they did not cut back their production to stabilize the oil supply to maintain the higher prices.

    The cascading events in the current glut have accomplished all of the above listed (1-7) effects for the Saudis; but even better, the precipitous drop in oil prices has stopped the Chavismo movement in it’s tracks.

    Feliz Navidad y Prospero Año Nuevo

  10. Yes but again there’s a ‘snag’ with the data (on how many new coal plants are being rolled out in China/India)> I can’t vouch for India (haven’t seen the data) but in the case of China, many of these new coal fired power stations will simply replace less efficient old ones. The key in China is not climate change, its the political will to obtain a different public good: clean air. So don’t expect coal demand to start rising in China anytime soon, thanks to a combination of: new nuclear build (one of the most ambitious -India about to follow suit), large scale hydro, new coal for old coal switch adn yes, renewables (note big hydro and big nuclear are the ones really making a dent in emssions so far).


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