Oil News: Plunging Oil Prices Blow $38.6 Billion Hole in Saudi Arabias Budget

By Markets Fool.com

The nearly 50% plunge in crude oil prices is having an impact across the globe. One of the more notable impacts is the big gap between revenue and expenses that are projected in Saudi Arabia's 2015 budget. The kingdom, which had enjoyed a budget surplus every year since 2009, now looks to end the year with a $14 billion budget shortfall. That shortfall is expected to balloon further to $38.6 billion next year, according to the country's recently approved 2015 fiscal plan. However, after building up $736 billion in reserves thanks to years of high oil prices, Saudi Arabia can afford to run a deficit next year.

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One big hole
Oil is the backbone of the Saudi Arabian economy, as well as its state budget: All but $30.7 billion of the country's $190.7 billion in projected revenue is expected to come from oil next year. That$736 billion reserve was also derived from oil.However, plunging oil prices demonstratethe downside to Saudi Arabia's dependence on this resource,as the nation's income is only expected to cover 83% of its projected expenses in 2015.

Nonetheless, Saudi Arabia's budget is set to hit a new record in 2015 as expenses are expected to rise 0.6%. About half of those expenses would likely cover public wages, which the country doesn't plan to cut because it needs to maintain the peaceamong the kingdom's nearly 20 million citizens. The public sector is the country's primary employer, and the Saudi government wantsto avoid the public outcry that would come from wage cuts, which could easily boil over as it has in many other Middle Eastern nations.

A problem of its own making
Saudi Arabia's budget shortfall is a problem of its own making. The country, which is a leading voice in OPEC because it produces a third of the cartel's oil, has opposed cutbacks in OPEC output. That decision exacerbated the fall in oil prices, as there had been a general consensus that OPEC would support oil prices of roughly $100 per barrel.

However, the decision to stand pat on production was made for strategic reasons. OPEC wants to maintain control over the oil market, and that hegemony became endangeredas surging U.S. oil production had the potential to turn America from apetroleumimporter to anexporter. High oil prices spurred investment in expensive U.S. oil plays. By removing the floor that had held up oil prices, OPEC could deal a severe blow to American oil companies by removing the key ingredient to production growth. The plan seems to be working: American oil companies are slashing spending plans and projecting slower production growth.

Investor takeaway
Years of high oil prices helped Saudi Arabia build a huge war chest. It is now using these reserves to bridge the gap in its own budget, which it is creating by engaging in an oil price war with its new rival. Only time will tell how long Saudi Arabia will be willing to live off of its accumulated reserves, but it doesn't appear willing to concede any ground just yet. That being said, most other OPEC members are not in the same fiscal shape, so a time might come when the cartel decides its price war has the potential to hurt more than just its new rival. Already, the cries for a production cut seem to be growing louder as oil prices keep falling.

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The article Oil News: Plunging Oil Prices Blow $38.6 Billion Hole in Saudi Arabias Budget originally appeared on Fool.com.

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