During last month’s OPEC meeting, Saudi Arabia again declined to cut oil production despite the world being awash with oil. The great unanswered question for Saudi Arabia is: How low can prices go, and for how long?

Saudi Arabia’s refusal to reduce oil output shows no sign of abating, but its determination to drive out US shale producers is taking a toll on the kingdom’s economy, recent data suggests. And with the expectation of Iran’s return to global oil markets already undermining fragile prices, Riyadh’s strategy looks increasingly like it might be a gamble with declining odds.

Although the kingdom has substantial reserves, it appears to be burning through its financial war chest at an alarming rate. According to the Saudi Arabian Monetary Agency, foreign exchange reserves fell to $648bn at the end of October from $742bn a year earlier.

Oil prices and OPEC

If OPEC does not compensate for the increase in Iran’s oil exports by cutting oil production, the International Monetary Fund says oil prices could fall between five and 10 percent in the medium term. Energy giant BP estimates that Iran has the fourth-largest proven oil reserves in the world after Venezuela, Saudi Arabia and Canada, as well as the second-largest gas reserves, according to the IMF.

READ MORE: Why is OPEC refusing to cut oil production?

How quickly Iran can ramp up production is up for debate, but a consensus appears to be emerging. Jaap Kalkman, managing partner of Arthur D Little’s global energy and utilities practice, believes that Iran will add between 0.5 to one million barrels a day within a year, while the IMF forecasts an increase of around 0.6 million barrels a day in 2016.

Bijan Zangeneh, Iran’s oil minister, is considerably more bullish about the country’s ability to bolster output but, whatever the figure, it is expected to increase pressure on Saudi’s economy, in which about 90 percent of government revenues are derived from hydrocarbons.

Khalid al-Dakhil, an assistant professor of political sociology at King Saud University, told Al Jazeera that he did not expect Iran’s output to have a dramatic effect.

”Politically, ”Khalid

oil prices to go further down – but remember, Iran is much more than Saudi Arabia in dire need to improve prices, because it is coming out of political and economic isolation.”]

“Politically, I do not see any impact of Iran’s return to the oil market on Saudi Arabia,” he said. “This return could [cause] oil prices to go further down – but remember, Iran is much more than Saudi Arabia in dire need to improve prices, because it is coming out of political and economic isolation.”

At the same time, there are signs that the Saudi campaign against US shale is having an impact. There is mounting evidence that shale production in the United States is beginning to wane, while energy consumption in advanced economies is rising. Elsewhere in the world, major energy companies have shelved a number of projects – a move that will support of prices in the medium term.

Saudi economy

Even so, the IMF predicts that the gross domestic product in Saudi Arabia will grow by only 2.2 percent in 2016, compared with 4.4 percent in Iran.

Eduard Gracia, a principal at the AT Kearney consulting firm, says Saudi Arabia’s decision not to cut production is due in part to the supply-demand dynamics of the global market.

“It only makes sense ‎to cut production if the supply situation is such that a small output reduction results in a substantial price increase,” Gracia told Al Jazeera. “In a situation of global oversupply this may not be the case, so the appeal of a production-cutting strategy is not clear.”

By the end of this year, Saudi Arabia’s budget deficit will reach 20 percent of GDP, according to a December report from Capital Economics. The situation has prompted the IMF to warn that Saudi could exhaust its reserves within five years if policies remain unchanged. Riyadh has responded with cutbacks in spending, and is under intense pressure to reduce expensive energy subsidies.

The IMF estimates that these implicit subsidies cost the government $83bn in 2014, one of the highest totals in the Gulf Cooperation Council countries, second only to Bahrain. Attention is now turning to Saudi’s 2016 budget. It is expected to be one of mostly heavily scrutinised budgets in years, as investors seek reassurance that the kingdom’s finances are under control.

According to press reports, leaked memos from King Salman to the Ministry of Finance in October ordered government entities to stop new infrastructure projects and to postpone purchases of new cars and furniture. Mounting economic uncertainty led Standard & Poor’s to downgrade Saudi’s rating from AA-/A-1+ to A /A-1 in October, with a warning of a possible further downgrades.

The downgrade pushes up the costs of borrowing at a time when government revenues have fallen sharply. There has also been speculation in financial markets about how this could affect the Saudi riyal, with the spread between forward and spot rates recently widening to the highest level since 2003.

However, according to Capital Economics, that scenario would be the last resort, and Saudi has other options that could include tapping into the international bond markets early in 2016 – something it has never done before. Authorities are currently issuing around SAR 20bn ($5bn) of debt per month to local banks, reducing the amount local banks have left to lend to the private sector, according to an estimate from Capital Economics.