In 2015 the average price of crude oil was $49 a barrel and Saudi Arabia lost 25% of its gross domestic product or one hundred and fifty billion dollars. So far in 2016 the average price of crude oil is $29 a barrel and Saudi Arabia could stand to lose another hundred billion dollars. However, their actions hardly seem like a country who the International Monetary Fund (IMF) has quoted as saying, “if oil prices stay in the $40-$50 a barrel range Saudi Arabia will be bankrupt in 4 to 5 years”.
Before Saudi Arabia could be bankrupt most of the rest of the 12 oil producers in the world would have long since been in bankruptcy. Some OPEC nations like Venezuela are on the verge and are expected to go into bankruptcy by the end of 2016. The battle over a world domination of oil has four players, Saudi Arabia, Iran, Russia, and the United States. Weaker OPEC nations going into bankruptcy creates market share opportunities for the four major powers. The greatest threat to Saudi Arabia, in reality, is the United States not Iran or Russia, as many would say.
Saudi Arabia is the largest producer in OPEC and because of the volume it pumps it has the greatest amount of influence on the other 12 members of OPEC. If Saudi Arabia wants to do something by and large the other OPEC nations follow suit. The attack by Saudi Arabia on the American fracking industry, starting in November 2014, had the objective to destroy the American oil industry. At the end of 2015 the rig count from Baker Hughes was 1,600 rigs in production. By April 2016 the rig count was down to 440. The rig count is the number of rigs actively drilling for oil or gas in a country. For the same period of time Baker Hughes reports that the number of active rigs in Saudi Arabia went from 115 to 6.
Declining rig counts indicates that the flow from existing wells is sufficient to meet demand not only for today but also for an extended period of time. Given the significant declining revenue, one has to ask why Saudi Arabia is jeopardizing its country by possibly driving it to the verge or into bankruptcy. Think of oil as cocaine, the OPEC nations have been on a high by controlling the world economy by increasing or decreasing the flow of crude oil. The United States is just like the drug enforcement agency, by isolating the drug user away from the drugs. The American oil industry, in a very short period of time, has made America energy independent; and, now that it has the ability to export unlimited amounts of crude oil, America will become an even greater challenge to the dominance of Saudi Arabia and OPEC.
Recently the leaders of Saudi Arabia have announced a scheme that would transfer the oil assets of Aramco into a public entity that the Saudis say is worth $2 trillion. It appears that the intention is to sell 5% of Aramco. The proceeds of the sale will be used to transition the Saudi economy away from oil. The key architect of the diversification plan, Deputy Crown Prince Mohammed bin Salman, said that if it works Saudi Arabia “can live without oil by 2020”.
What they are proposing is the setting up of a sovereign wealth fund and then they’ll do a public offering initially of 5% of the fund. I think Salmam is mistaken about the ease in which the world will buy the 5% stake. I think investors may well be reluctant to make an investment in Saudi Arabia where at any point in time the government could take control, they’ve done it before and they could do it again. The second and much bigger point is how you change the culture and the attitude of the people in four years. Much is been written about the strict nature of sharia law enforcement in Saudi Arabia. The diversification into other businesses is going to require talent that may not currently exist in the Saudi economy. That will mean Saudi Arabia will have to go out into the world and recruit perhaps non-Muslim individuals in order to assist the government and making the change. I believe it will be difficult for the Saudi government to maintain the Islamic traditions, and the life and culture will have to be driven with a western attitude in order to succeed.
One other factor that will affect the change is the Wahhabi sect in the Muslim faith. Some have suggested the Wahhabi is the most radical sect in the Muslim faith and perhaps the most violent. The Wahhabi may fight the propose change and create additional turmoil that would restrict non-muslims from coming to Saudi Arabia and working. Under normal circumstances the transition of a government from one direction to another can be difficult, but for Saudi Arabia it could be catastrophic. The turmoil created by this change may in fact be the catalyst by which Iran becomes the leading force in the Middle East. As the American government seems to be leaning more towards Iran and away from Saudi Arabia in terms of balancing the power, the turmoil currently existing in the Middle East maybe dwarfed by what is about to come.
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