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OilMonster
Crude Oil April 09, 2021 02:28:20 AM

Analysis: Saudi $7 Trillion Investment Goal Puts Spotlight on Oil Prices

Anil
Mathews
OilMonster Author
The fiscal benefits of higher oil prices can outweigh the impact on the economy of lower oil production.
Analysis: Saudi $7 Trillion Investment Goal Puts Spotlight on Oil Prices

OILMONSTER.COM- In order to wean Saudi Arabia off its dependency on crude the kingdom needs higher oil prices.

A multi-trillion dollar spending push designed to diversify the economy’s sources of income will require state companies to cut the dividends they pay the government to boost capital spending, Crown Prince Mohammed bin Salman has said.

It is not clear how much companies like oil group Saudi Aramco - whose $75 billion dividends last year were vital to support state revenues - would cut their dividends, but any reduction would likely need to be compensated by higher oil prices, analysts say.

“If dividends are lowered, a higher oil price would boost Aramco transfers to the sovereign through taxes and royalties instead,” Jean-Michel Saliba, MENA economist at Bank of America, said in a research note.

This leaves crude revenues at the centre of the kingdom’s strategy targeting 27 trillion riyals ($7.2 trillion) in domestic spending by 2030.

The scale of the investment plan means OPEC leader Saudi Arabia may need to curb supply over the coming years to boost oil prices. This was already visible in early 2021 with the kingdom implementing unilateral production cuts and keeping output steady for April, said Monica Malik, chef economist at Abu Dhabi Commercial Bank.

“Saudi Arabia has managed to keep cohesion in the OPEC+ group so far, though there were some signs of greater internal and external pressure to raise group output from May,” she said. OPEC and its allies including Russia are known as OPEC+.

The fiscal benefits of higher oil prices can outweigh the impact on the economy of lower oil production.

A finance ministry spokesman said the kingdom and OPEC+ have immediate and longer term views on maintaining stable oil prices “for the benefit of all concerned”, and will continue to respond to global events and supply and demand issues in line with this objective.

While it is up to the companies participating in the new programme to decide how to fund their investments, the ministry anticipates a range of funding avenues, “of which dividends are one amongst many options including soft loans, debt and other financial instruments,” he said.

Courtesy: www.reuters.com                           

 

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