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Financial analysts have warned Saudi Arabia and the Gulf states - the world's largest oil-exporting countries - against depending on oil as their only source of revenue. They argue that volatility in oil prices should prompt these countries to diversify their revenues and end their complete dependence on oil.

Although Saudi Arabia has yet to officially reveal the price of oil it used to calculate its annual 2015 budget, financial analysts told al-Araby al-Jadeed they believe the kingdom set an oil price close to current levels of $58 to $60 per barrel. This will put financial pressures on the budget, and mean it may have to draw down some of its foreign exchange reserves.

Saudi Arabia predicts a 145 billion riyal ($39 billion) deficit in its budget this year, due to the declining price of oil. Oil revenues account for 90 percent of the kingdom's total budgeted income.

Saudi Arabia's budget this year is a record 855 billion SR ($228 billion) while its total revenues are estimated to be 715 billion SR ($190.7 billion), a drop in income of more than $88 billon, compared with 2014, as global oil prices fell sharply over the past six months.

If oil prices continue to fall, Saudi Arabia may run a large budget deficit next year, the International Monetary Fund (IMF) has warned.

The IMF urged the kingdom to limit spending and discontinue some high-cost projects. However, Saudi officials have belittled the impact of this deficit, arguing the kingdom has about $750 billion in foreign exchange reserves built up over the past ten years from its oil revenues.

Oil to hit $40 a barrel?

Speaking to al-Araby, financial analyst Fadel al-Bouanin said Saudi Arabia would face a major crisis if oil prices continued to fall and reached $40 per barrel.

This would mean the oil revenues of the kingdom would barely be enough to cover staff wages and basic operational expenses, he said.

"Allegations that Saudi Arabia estimated oil prices in its 2015 budget at $80 per barrel are baseless, this figure is highly exaggerated," he said.

If oil prices continue to fall, Saudi Arabia may run a large budget deficit next year.

Bouanin said the 2015 state budget assumed an oil price of around $60 per barrel.

He pointed out that Saudi Arabia would face a crisis if revenues fell below its fixed budget costs, which are wages and basic operating expenses, and account for around 60 percent of the budget, roughly 500 billion SR ($133 billion).

"A serious crisis will develop," he said. "Saudi Arabia sells around 7.4 million barrels every day. If oil prices drop below $40 per barrel, the Finance Ministry won't be able to pay for wages and basic operational expenses and will have to draw down its foreign exchange reserves."

Bouanin explained these reserves were not held in cash reserves the kingdom could draw down at will, adding that some reserves are medium-term bonds which the kingdom cannot swiftly convert into cash.

"What matters here is that we are dealing with foreign exchange reserves invested in US treasury bonds," said the analyst. "So if the United States faces a financial crisis like 2008 and is unable to meet its financial obligations, what will happen to those reserves?

"We will be in trouble as long as we rely on oil as our only source of revenue. If the Saudi economy does not diversify its exports and revenues, it will remain at risk, as oil revenues cover 90 percent of the budget."

This situation made a financial crisis more likely, he said, as oil prices remain unstable.

Government spending

Bouanin said that if Saudi Arabia were to discontinue various development projects due to oil prices, its economy would be significantly affected - as the Saudi economy relies heavily on government spending.

The government could boost the economy without additional spending, he said, but only when it leads the private sector by initiating major private sector industrial and developmental projects financed by bonds and sukuk (Islamic bonds), as has happened in Dubai.

He said it was important for the government to consider a privatisation model to help curb its annual spending: "The government is able to privatise some sectors that drain its resources, such as airports, water and Saudi Airlines."

He said he assumed the government was capable of making huge revenues outside of the oil sector through the Saudi ports on the Red Sea and the Arabian Gulf, but it first needed to privatise those ports to oversee trade operations.

A difficult scenario

Economist Abdullah al-Barrak said that it was very unlikely oil prices would fall to extremely low levels, because Saudi Arabia based its 2015 state budget on an oil price between $58 to $61, a price that allowed the kingdom to continue its investments.

"Could oil prices fall to $30 per barrel? This is unlikely according to most estimates," he told al-Araby. The worst-case scenario is $40, the most likely $66. Optimists said oil prices will settle at $83."

If oil prices drop below $40, the government will have to draw down its foreign reserves to pay its employees wages.

If prices fall as far as $30 a barrel, Saudi Arabia will face financial crisis. "But if this happens, all oil-producing countries will be in trouble, not just Saudi Arabia," added the economist.

"The main problem lies in the inflated wage bill, which has reached 50 percent of the budget," said Barrak. "The rest of the expenses remain under control, such as operational costs and maintenance fees. One should also keep in mind that most of this wage bill is allowances and can be cut."

Barrak emphasised this scenario was unlikely, even in the event of a new war in the region.

A conservative policy

Global oil production is currently 94 million barrels per day, with the largest surplus coming from the United States.

Asked why Riyadh didn't simply cut production to prevent a drop in prices, the Saudi oil minister replied: "Why don't you ask the United States, the world's largest oil-producer, to do so? Why is only Saudi Arabia asked to decrease oil production?"

Shale oil companies have increased their production sharply over the past four years, and this has pushed international oil prices down.

"Only four years ago, shale oil was only 350,000 barrels per day," said Barrak. "Today, however, its production has hit three million barrels. Some shale oil companies used to produce 40,000 barrels per day, but are now producing 450,000 barrels, half the quantity produced by Libya."

But the economist said falling oil prices were not always a bad thing. "Ten years ago [in Saudi Arabia], inflation rates were much lower - and if oil prices drop further, the cost of living will fall to its previous levels, mainly in the real estate sector."

He added that, in the Saudi economy, everything was linked to oil. When oil prices fell, other prices would fall accordingly, he claimed.

"The real-estate market has increased for ten years beause of the increase in the price of oil, and that has led to its current high value," he said. "With declining oil prices, the real estate market is set for a crash."

He estimated property prices would decrease dramatically on the back of falling oil prices, paralleling the sharp drop in the stock market.

"The market could have fallen further had it not been for the reassuring statement made by Saudi Finance Minister Ibrahim al-Assaf," he said.

This is an edited translation from our Arabic edition.