Over the past year Saudi Arabia has experienced a perfect storm of factors in its favor. Asset prices in the US economy and elsewhere have gone nuts. Saudi Arabia is a country that owns a lot of stock, land and everything else, so that’s been very helpful. On the oil market front, the most important front there is for Saudi Arabia, they’ve had unprecedented cooperation on the OPEC production slow-down, and a series of competitors have given up millions of barrels a day in production due to sundry wars and dictatorships.
If Saudi Arabia’s ambitious plans for the future were ever going to work, 2017 would have been the year for it. But as this video shows, some of the key metrics that illustrate the hole Saudi Arabia is in haven’t changed much at all. As I said in last year’s video, and as I repeat in today’s video… Saudi Arabia is still finished.
Back when I started doing this channel full time, I put out a series called “Notes From The Golden Age“. Today’s video, on the defeat of OPEC, is a long delayed addition to the series. In the six minutes of the video itself, I just laid out the facts as I understand them: The fact that OPEC did its level best to raise the price of oil, and they failed. If you want to hear more about why that is, and hear some discussion of the revolution in petroleum affairs we’ve experienced over the past five years, you could do worse than this video here.
Put briefly, oil doesn’t cost what it used to. The origin of this development is probably OPEC itself. That cartel drastically reduced the oil on the market on a couple occasions in the 1970s, driving the price through the roof. Much has, quite rightly, been made of the Shale revolution in the United States. A range of technological advances has made oil extraction easier, cheaper, and viable in places that it wasn’t before. This revolution has made US production competitive with Saudi Arabia again, and caused the plummet in prices that started in mid 2014. But the Shale revolution is only the most dramatic cause.
The plummet in oil prices is the result of a range of reactions to OPEC’s obscene market power. An under-heralded one is energy efficiency. We have finally reached a point where economic growth is decoupling from growth in petrochemical use. Some of this is renewables, but more of it is the very, very unsexy business of making cars and air conditioning units run more efficiently. Another reaction to OPEC was the broadening of the search for petroleum. Coupled with Technological advances, a staggering range of countries now produce significant amounts of oil and gas. OPEC has been beaten. They largely did it to themselves.
My roommates went to Coachella this weekend. When they got back I made them talk about Saudi Arabia. They were pretty beat, but it’s still a more useful conversation than you would ever get on Fox News or CNN. The talk is a bit rambling, but it’s super useful. It gave us a chance to enlarge on some of the issues brought up by the videos. It also brings in some of the issues covered by the “Everybody’s Lying About Islam” essay that may not get covered in the videos.
The most important issue that the talk covers is my personal attitude towards Saudi Arabia and Saudi Arabians. It’s important to emphasize that as angry as I am about the US-Saudi relationship, I bear no ill will towards Saudi Arabians. The whole country, even its leadership is caught in a trap. It’s not a trap that’s entirely of their own making. Find out more by reading the essay…
People are good at ignoring the obvious. Saudi Arabia is finished. The 2014 crash in the price of oil has left the ruling family in an impossible position. Since 2014 the country has been burning through around $100 Billion of dollar reserves a year. At that pace, the current regime has got about 4 years left before they can’t meet their obligations. The almost 100 billion in debt (up by a factor of 4 since 2014) that the country is now carrying will accelerate this issue. This problem has been noted of course, but most financial publications have been quick to swallow the Saudi line on the issue.
The problem has been identified, and Saudi Arabia is supposedly taking bold steps to address it. What few are talking about is how inadequate these steps are. This video covers the farcical “Vision 2030” idea that is supposedly going to turn Saudi Arabia into a new Dubai.
What I didn’t get into, because the video was already too long, was the illusion of a Saudi Aramco IPO. Saudi Aramco, the state oil company, is supposedly a multi-trillion dollar company. Selling off the proposed 5-10% of the company would give the Saudi royal family a few more years of runway. It’s not going to work. It may very well go forward, but they are not going to get the money they want. Also, the investment is something that everybody will be excited to look into, but dramatically fewer will want to actually buy.
Aramco is a state-run black box at the moment. Getting money from outside investors would require a high degree of disclosure and re-organization that they are unlikely to be interested in doing. The country is also faced with a couple of Catch-22s. First, driving up the valuation of the company requires driving up the cost of oil. To do this Saudi Arabia has to restrict its supply, which means it would lose market share, and have less funds to deal with its many issues. Second, if they don’t get Aramco up to Western corporate standards, they’ll have to rely on local investors. Those investors have plenty of money, but as the country gets shakier, they will become less interested in investing in Aramco. A great indication of the shakiness of Saudi Arabia would be the country’s needing to rely on local investors to fund the Aramco IPO.
These issues leave me convinced that by 2030 Saudi Arabia will be a completely different country. Unfortunately US policy seems to be that the Saudi money spinner will go on forever. The new administration has been doubling down on the brutal Saudi adventure in Yemen, and seems to want to escalate with Iran. This is crazy.