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Saudi Arabia suffers from plummeting oil prices, as US Republicans chafe MbS over production gamble

MbS has been criticised for his risky oil strategy [Getty]

Date of publication: 18 March, 2020

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Saudi Arabia is bracing for an economic downturn as oil prices plummet due to the coronavirus pandemic.

Saudi Arabia is bracing for a coronavirus-led economic dip on top of possible austerity measures as crude prices go into free fall, as Republican Senators sent a letter to Mohammed bin Salman over his decision to increase oil production. 

Huge losses are expected after the Arab world's biggest economy shut down cinemas, malls and restaurants, halted flights, suspended the year-round umrah pilgrimage and locked down the eastern Qatif region - home to around 500,000 - in a bid to contain the deadly virus.

The top crude exporter also faces plummeting oil prices, which slipped below $30 a barrel this week for the first time in four years, on the back of sagging demand and a price war with Russia.

Adding to the chain of events are the recent arrests of King Salman's brother and nephew, which triggered speculation of political instability amid the government's public silence on the royal purge.

"It's crisis time," said a Saudi government employee, explaining why he had begun converting part of his salary into US dollars and gold coins.

"Everything is unpredictable and we should be ready for the worst."

The central bank has shrugged off fears that plunging oil prices were straining the kingdom's currency, pegged for decades to the US dollar.

Thirteen Republican senators sent a letter urging Saudi Arabia's Mohammed bin Salman to reverse a decision to increase oil production.

The letter, sent to the crown prince on Monday, said, "the added impact of unsettled global energy markets is an unwelcome development" at a time when countries across the globe are fighting the COVID-19 pandemic.

"Senior Saudi government leaders have repeatedly told American officials, including us, that the Kingdom of Saudi Arabia is a force for stability in global markets. Recent Saudi actions have called this role into question," the letter read.

Spending cuts

Many government workers fear cuts to state allowances are coming despite rising living costs.

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Some Saudis also worry that recruitment in the public and private sectors will freeze, with unemployment already running high.

Meanwhile, Saudi students are worried that government scholarships for overseas education will take a hit.

The finance ministry has instructed government bodies to submit proposals to slash this year's spending by 20 to 30 percent, the economic consultancy Nasser Saidi and Associates said in a research note.

"This will likely take the shape of postponed projects and delays in awarding contracts" among other economising measures, the note said.

The kingdom is now preparing budget scenarios in which crude prices could drop as low as $12-$20 per barrel, according to the Energy Intelligence Group.

"Public confidence depends on government spending and oil sentiment - both are down," said a consultant advising a Saudi ministry on a major project.

"We don't know if we will have our jobs tomorrow."

The once free-spending OPEC kingpin has instructed Saudi ministries that they need to account for "every penny" they spend, the consultant added.

Several Riyadh hotels - many of them empty amid falling tourist numbers - have been forced to send their staff on unpaid leave.

But providing some support, the health ministry has booked multiple Riyadh hotels to quarantine people after the coronavirus scare, according to several staff and guests who were forced to empty the properties at short notice.

The oil crash follows the crude exporter's decision to hike production from April and offer the biggest price cuts in two decades, in retaliation for Russia's refusal to tighten supply as the virus saps demand.

Saudi Arabia has shrugged off criticism that the move could bankrupt its oil-producing rivals, indicating it was no longer willing to play the role of "swing producer" that bears the burden of stabilising the markets.

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