A major oil supply disruption in the world’s largest crude exporter Saudi Arabia is unlikely as the Gulf nation has sufficient financial resources to satisfy public needs and prevent unrest, a French bank said on Saturday.
Credit Agricole said the current turbulence in the Middle East and North Africa showed that markets often overreact to crises, citing the surge in oil prices to their highest level since August 2008.
“If we learned anything during the most recent financial crisis it is that markets can get it wrong. During the recent Egyptian crisis, oil prices spiked over concerns about the transhipment of oil via the Suez Canal….markets today are beginning to price contagion effects spreading from North Africa to, principally, Bahrain. Although it is hard to predict the political outcome in the Gulf island, markets are pricing a premium on the risk of contagion to neighbouring Saudi Arabia,” the Bank said in an article written by John Sfakiankis, chief economist at Banque Saudi Fransi (BSF).
“Aside from making any definite calls on the future outcome of Bahrain, we remain reassuring about Saudi Arabia. The chances of disruption to oil production remain distant as is the likelihood of major unrest.”
It said Saudi Arabia’s ability to carry out “distributive” policies is obvious, particularly in areas that have important social significance.
It referred to the massive $36 billion spending programme announced last week by King Abdullah for housing, education and social welfare on top of a 2011 budget which is the largest in its history.
It said such measures are geared towards citizens through new unemployment benefits that stand to help youths facing double-digit joblessness rates and expansion of social security for lower-income Saudis. Substantial funds are also allocated to writing off the debts of deceased borrowers and prisoners.
The royal order, which includes 19 components, strives to promote job creation, expedite the supply of housing, and improve funding for education, charity associations, cultural and sporting clubs, and professional associations.
“Moreover, Saudi Arabia has the capacity to underwrite similar distributive policies, without resorting to domestic or external financing. Central bank foreign assets (SAMA) were at $444.8 billion as at December 2010 (nearly102 per cent of 2010 GDP), which provides ample fiscal buffers,” Sfakianakis said.
“The package announced last week will be financed from these reserves. Hence Saudi Arabia is forecast to witness twin surpluses (fiscal and current account) as oil prices continue their buoyant performance. Hence, the state has the capacity to tap into its huge deep pockets to support any short- to medium-term emergency spending programmes,” he said.
“We believe that the chance of major unrest within Saudi Arabia is not probable. The economic changes desired and needed are not predicated on calls for a change in the leadership structure.”
Sfakiankis said a cabinet reshuffle in Saudi Arabia is a welcome step towards political refreshment. But he noted that the leadership cannot afford complacency and neglect as events in the wider Middle East necessitate change.
He said events in nearby Bahrain should be closely watched as they could act as a regional “self-reflection exercise” for the political landscape.
“Saudi Arabia’s systemic role in the global oil market is paramount for the world economy. The kingdom’s extra capacity is four mbpd, which can be put on to the market in a short period of time and is more than twice the total current production of Libya,” he said.
“We think that Saudi Arabia’s oil facilities remain under no threat and the country’s oil production will remain uninterrupted. However, the market may think otherwise at some point, should tensions rise further in the Gulf. There is little evidence to lead us to anticipate Saudi Arabia being the next country to face domestic unrest, turmoil, violence and calls for regime change.”
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