First, let’s break down the simple economic numbers: the budget for next year sees spending at roughly 230 billion USD with expected revenues to only bring in 191 billion USD. This is the first projected budget deficit for the Kingdom since 2011 and the largest ever announced. But the reality of the Saudi welfare state and its own globalization strategies in terms of the world market show this to be much ado about nothing in real terms. Saudi society is built upon a massive welfare system for native Saudis. This has always been so. But given the non-democratic nature of the Saudi political system, it is not far-fetched or problematic for the government to cut back or tighten its belt if need be should a deficit ever become too problematic. Which of course leads to perhaps the most obvious and logical point as to why the Saudi Arabian government isn’t phased by this deficit despite even some of its own native economic forecasters being concerned: it has HUGE cash reserves which it rarely ever has to tap into. This time it intends to tap them so as to not move against its firm decision, for now, to not tamper with oil production.
So what is the bigger picture? Why tap the reserves? National security, regional hegemony, and long-term economic positioning explain most of it. With this one simple move of maintaining the barrel ceiling Saudi Arabia is basically outflanking regional and global challengers and also satisfying its main consumer ally (and banking on this ally’s own greed and gluttony, to be frank). On the regional level a low price on oil per barrel is an extreme hindrance on Saudi’s main challenger, Iran. There is no doubt that Saudi Arabia enjoys keeping Iran in check and does not wish to see the wanna-be regional hegemon ever truly compete for supremacy in the region. Keeping world oil prices low does this quite succinctly and efficiently, without even having to engage in any verbal or diplomatic animosity with the Shiite Republic. In addition, even though the United States is such a close economic and political ally, this decision is clearly aimed at destabilizing, at least for the time being, the massive technological and financial investment being pushed in the States with shale oil and natural gas as alternatives to Saudi energy dependence. When the price per barrel remains so low, these ‘alternative’ industries in America, which are still most of the main ‘traditional’ oil producers seeking to diversify future earnings potential, have no choice but to cash in on the opportunity and refocus on its traditional industrial models. This slows down advancement in alternative fuels and repositions the Saudi-American energy juggernaut back into a place of primacy.
So the simple willingness on the part of Saudi Arabia to carry a budget deficit next year and tap into mammoth cash reserves for the first time in quite a while has the dual effect of checking any Iranian economic/political advancement into what Saudis feel is their natural region of influence AND capitalizes on American industries’ own natural greed for short-term profit enlargement, even when that might be to the detriment of long-term economic fuel independence. When you get to play both adversary and ally to your own long-term benefit, without violence or hostility, it is really quite illogical to anticipate any decision beside the announcement made the other day out of Riyadh. Keep in mind that this $39 billion deficit is matched against a present reserve of over $750 billion. A one or two year hit to sustain a one or two decade energy dominance is a fair trade, wouldn’t you say?
One might be inclined to wonder why the United States would not be able to see this for what it is and strive to convince or cajole its own native industries to maintain passionate progress for alternative fuels and long-term economic independence. First, it is extremely difficult given the general non-interference policy both Democrat and Republican presidencies have had toward American business development over the last two generations to think any sitting President would dare try to make serious and explicit inroads against such tradition. It is simply political folly, especially when the American stock market continues to climb today to new heights, unemployment steadily slides downward, and the price of gas at the pump has ‘common folk’ literally jumping up and down for joy while filling their cars. But on top of all of these domestic reasons, there is one other significant foreign policy angle that makes this a uniquely American Faustian bargain: the oil price slide has clearly put greater teeth into the American sanctions imposed against Russia, as it has hurt the Russian ruble significantly. Sanctions alone for the first half of 2014 basically had no real impact on the Russian economy and the real lives of Russian citizens. It was only this Autumn as world markets saw the Saudi decision to let oil prices slide that suddenly American sanctions started gaining ‘effectiveness.’ It is a brilliant, if somewhat ruthless, master economic stroke, all hidden within Western media reports of ‘Saudi concern’ and so-called Western bemusement over impending budget deficits. So as you can see, nothing is ever as it seems in the world of high economic ‘political finance,’ especially in the Middle East when it comes to global energy markets. Saudi Arabia is ‘punishing’ itself for one year so as to reward itself for years to come. I imagine the Saudi royal family members will be able to laugh into their gold sipping cups. Just as soon as they stop purchasing new gold cups with their anticipated long-term success and dominance.
Dr. Matthew Crosston is Professor of Political Science and Director of the International Security and Intelligence Studies program at Bellevue University, exclusively for the online magazine “New Eastern Outlook”
