Gulf kingdom has few options beyond sticking with a strategy to defend its market share - no matter how low prices sink
Low oil prices have pushed top exporter Saudi Arabia to hasten difficult economic reforms and cut spending on popular benefits, but it has few options beyond sticking with a strategy to defend its market share - no matter how low prices sink.
A return of Iranian crude to the market after sanctions were lifted may now plunge prices to new lows after a 19-month drop of 76 percent that caused Riyadh's $54 billion fiscal surplus in 2013 to swing to a $98 billion deficit last year.
Saudi Arabia's reduced economic circumstances are already obvious in government spending cuts and a first rise in subsidised petrol prices for a decade, but Riyadh's new rulers, King Salman and his two heirs, show no sign of changing course.
Khaled al-Falih, chairman of state oil company Saudi Aramco, reinforced the stance again on Thursday when he said the kingdom could withstand low crude prices for a "long, long time" and that it would not act alone to support the market.
It means other oil-producing nations and investors in shale and traditional energy firms should not expect the kingdom to ride to the market's rescue, nor should private Saudi companies dependent on high government spending.
When the 2016 budget was announced in a glitzy TV studio in December, the minister responsible shed the gold-trimmed camel-hair cloak worn by important Saudis for formal occasions in an effort to project an air of austerity and hard work.
Belt-tightening is difficult in a country where the ruling dynasty's mandate for power comes not from votes but largesse, though some officials have hinted they saw the low oil prices as an opportunity to pass reforms they regarded as long overdue.
Some drivers queued to fill their tanks on the cheaper petrol before prices went up in late December, but those approached by Reuters appeared sanguine about the change. How they may cope with new forms of parsimony - fewer new government jobs or student scholarships, for example - will become evident in coming years.
But whether austerity provides useful cover for economic change, or is regarded as a threat to the kingdom's brittle social order, the reality of today's oil market means Riyadh has little choice but to endure its reduced circumstances.
In times past when prices sank, Saudi Arabia would leverage its unassailed position as the world's main exporter to orchestrate cuts in output by the Organization of the Petroleum Exporting Countries (OPEC) and defend the market.
That would no longer work. The past 15 years of high prices were driven by rocketing Chinese demand and a high political risk premium thanks to Middle East wars threatening crude flows from the world's most energy-rich region.
But facing an anaemic Chinese economy and abundant flows of shale oil, OPEC has lost its clout. Saudi Arabia's ruling Al Saud know that if they cut to defend prices, other producers will likely fill the gap with little impact on the market.
They believe that if they are unable to gather non-OPEC countries to join the cartel in a wider output cut - widely regarded as a dim prospect - they have no option but to wait out higher-cost producers.
It has led them to what, in the oil world at least, is an epochal change in policy, abandoning their position as a so-called swing producer that would raise or lower output as required to balance the market, and instead defend market share.
Hanging over them, senior princes and policymakers said in a private gathering attended by Reuters last year, is a failed 1980s attempt to prop up prices with unilateral Saudi output cuts, from which neither their market share nor fiscal balance recovered for two decades.
They now believe low prices alone can stabilise the market by re-stimulating demand and shutting out other producers, including upstart shale companies whose investment in new wells is already starting to flag. Brent crude at around $28 a barrel or lower - the cheapest since 2003 - may hasten that.
"If prices continue to be low, we will be able to withstand it for a long, long time," Aramco boss Falih said at the World Economic Forum in the Swiss resort of Davos on Thursday.
"If there are short-term adjustments that need to be made, and if other producers are willing to collaborate, Saudi Arabia would be also willing to collaborate," he added. "But Saudi Arabia will not accept the role by itself of balancing the structural imbalance that is happening today."
The most potent test of Riyadh's patience will be its ability to cut spending without causing enough public hardship for citizens to start questioning the underlying social contract that allows the Al Saud to rule without popular participation.
The need to show Saudis that they get a fair share of oil wealth caused the Al Saud to delay planned fuel price rises in 2011 for fear they might trigger Arab Spring-style protests. Instead it went on a $110 billion public spending spree.
It has promised to keep spending on big infrastructure projects needed to secure future economic growth, but there are signs it may pare back even these, with more modest stations being proposed for Riyadh's new metro, for example.
Meanwhile, it hopes to shunt some of the burden of employment from the state on to private companies, with a vigorous quota policy aimed at replacing cheaper foreign workers with Saudis and pledges to cut red tape in the country to encourage private-sector growth.
Whether that will work - given that private-sector growth is tied closely to state spending - will define Saudi Arabia's economic future, and may determine whether it will eventually revert to its past policy of trying to defend oil prices.
The massive kitty that Riyadh has accumulated over the past decade will give the government plenty of time to cushion the blow of cheap oil, however. Since the crude price started to fall, the central bank has been running down its net foreign assets at an annual rate of about $105 billion.
But it still had $628 billion at the end of November, suggesting it could continue paying the government's bills and supporting its currency for several more years without reserves falling to levels that most economists would consider dangerous.
Its public debt of 5.8 percent of gross domestic product (GDP) at the end of 2015 is comparatively small too: Britain's is 89 percent and Germany's 71 percent.
Even though the International Monetary Fund estimates its debt will jump to 44 percent of GDP in 2020 to cover budget deficits, a rapid increase, it would not be high by international standards.
Top officials have said the government will benefit from $400 billion of underused state assets, from land to minerals resources, in coming years. That may also help Riyadh delay the crunch point and allow it to maintain a strategy that prolongs low oil prices.For all the latest energy and oil news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.