Here's the latest sign of just how huge of a risk Saudi Arabia has been taking
According to The Wall Street Journal, the world's second-largest oil producer is looking for an $8 billion loan from international banks. As The Journal reported, the country ran a record $100 billion deficit in 2015, largely because of the sharp decline in oil prices.
Over the past few months, Saudi Arabia has adjusted to low oil prices by following a strategy that seems primarily aimed at avoiding production cuts.
Riyadh has implemented new taxes, cut funding for social programs, and prepared to sell off parts of Saudi Aramco, the country's multi-trillion-dollar state oil concern. The moves are meant to cushion the long-term effects of lagging oil revenue without requiring any deeper cuts.
At the same time, this new fiscal strategy, along with Saudi Arabia's uniquely low break-even price for oil, allows the country to continue pumping at unprecedented rates. This approach preserves Saudi Arabia's leadership position in determining global production and price and cuts into the oil revenue of Iran, Riyadh's top regional foe - all without seeming to pose any kind of long-term threat to the country's bottom line.
The trouble is that oil is so cheap. And Saudi Arabia's various regional policies are so expensive that the country apparently needs an additional line of funding on top of its various tax increases and sell-offs. Saudi Arabia is looking to borrow substantial amounts of money for the first time in more than a decade, according to The Wall Street Journal, because it's following a set of policies that require a measure of fiscal stability.
Right now, Saudi Arabia is leading a multi-national Arab coalition that's attempting to restore Yemen's internationally recognized government, which Iranian-backed Houthi rebels overthrew in early 2015. The military effort has stalled, and is widely considered to have been a strategic blunder.Saudi Arabia was the world's largest arms importer in 2014 and had the world's third-largest defense budget in 2015. In February, Saudi Arabia held what was reported to be one of the largest military exercises in the country's history. ISIS has attacked Saudi Arabia repeatedly over the past year, while Riyadh is also engaged in a high-stakes military and diplomatic faceoff with Iran that's forced it to essentially purchase the loyalty of some of its allies.
Saudi Arabia is beginning to see the geopolitical limitations of its oil strategy.
The country can afford to produce at a level that's guaranteed to keep prices low. But the cost of covering the country's budgetary needs becomes steeper the longer oil remains in a price trough. And the costs become steeper the longer Saudi Arabia maintains such a confrontational regional stance - a strategy that might actually explain oil's low price in the first place.
NOW WATCH: ISIS is afraid of girls - here's why
- Global stocks rally even as Sensex, Nifty fall sharply on Friday
- In second consecutive week of decline, forex kitty drops $2.28 bn to $640.33 bn
- SBI Life Q4 profit rises 4% to ₹811 crore
- IMD predicts severe heatwave conditions over East, South Peninsular India for next five days
- COVID lockdown-related school disruptions will continue to worsen students’ exam results into the 2030s: study