Saudi Arabia Is Very Finished

Sometimes video scripts come easy. 6 years ago I predicted that Saudi Arabia as we know it would be done by 2030. Today I double down on that by addressing the most common objection to the idea I have gotten by far. A week or so back someone tweeted at me that Saudi Arabia was safe because people will always need oil. Within five hours of receiving that tweet I had this script written and ready to go. The world doesn’t have to give up on oil to end the Saudi royal family. We just have to use like 5-10% less of it. In today’s video I describe this simple, under acknowledged economic point, with graphs and the results of a real world experiment that Covid was generous enough to hand us in 2020.

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Video Transcript after the jump…

So you guys know the funding of the Saudi Royal Family depends on the price of oil, not the consumption of oil, right? For seven years now I have been loudly pointing out that the current Saudi system will be done by 2030. A standard response to this is to point out that my claim is ridiculous, because Saudi Arabia will be pumping oil for the rest of the century. Well, I actually agree that the oil will probably still be pumping, but the key question isn’t whether oil is being produced. It’s how much money the Arabians are getting for that production.

Every petro-state has two break-even prices. The first is the cost of production. Arabia is likely to be one of the last places on earth that produces oil because it is one of the cheapest places to take it out of the ground. Estimates vary, but as long as oil prices are above 10-12 dollars a barrel, you can still make money off of Arabian oil. Now Saudi Arabian oil is a completely different story. It’s a lot more expensive to pay for all of those wealthy princes, their palaces and their Potemkin cities. It takes even more money to bribe the other 35 million Arabians to continue to allow the Saudi system to exist. The real break even price for the Saudi Arabian system is currently estimated to be around $75 dollars. Now I have to give Saudi Arabia, and I guess even Crown Prince MBS a lot of credit. They proved me wrong. Over the past seven years they have cut down on that break even price enormously. With the imposition of a sales tax, a dramatic cut in the numbers of foreign workers, expanded participation of women in the workforce and other reforms, they got the breakeven price down from the low hundreds to 75 dollars. The problem is that for most of the past decade, the oil price has been well under 75 dollars.

2022 was an amazing year for oil producers. Russia, the world’s third largest petro-state became an international pariah and prices skyrocketed! But have you noticed where global oil and gas prices started and ended the year? It was an eleven month wonder, but oil prices are back down in the high 70s and they will eventually go much lower.

2022 definitely gave Saudi Arabia the flexibility necessary to pay off some of the past decade’s debts, cover up the failure of many of its big tech industry bets, and dump more money into NEOM, but it also destroyed an incredible amount of world oil demand, in 2022, and in future years as well.

Now, when I made my first “lower for longer” oil price prediction back in 2016, I wasn’t thinking about demand at all, I was talking about supply. I thought electric vehicles were a joke back then. My expectation back then was that Saudi Arabia was screwed because oil was just available in too many places. High prices in the 2000s had sent exploration and innovation into overdrive, and the dream of the 1970s had been achieved. New supply from Texas to Guyana meant OPEC’s pricing power was over, and whether it took a week or a decade and a half Saudi Arabia’s system was finished too.

What I did not expect was Covid, or the rampaging global adoption of electric vehicles. Now please note. I am not saying that electric vehicles will end all oil consumption. They absolutely won’t. But they don’t have to do that to end the current Saudi system. They just have to drop world oil demand by like 10%, maybe less.

Remember how I said that oil prices were too low to meet Saudi Arabia’s break even price over the whole last decade? Saudi Arabia had to take on serious debt, introduce new taxes, and take insane risks like handing their country over to a 30 something. Well all of that was just a too much oil supply issue. Every year until 2020, the world’s demand for oil went up relentlessly. And the price was still too low for Saudi Arabia. In 2020 worldwide lockdowns led to a crash in demand. And the world’s desire for oil has not gotten back up to those 2019 numbers since. Not in 2020, because of Covid. Not in 2021 either because of Omicron. And not in 2022 either because of Chinese lockdowns and the Russia price spike.

Now all energy analysts, this one included, expect that we have not yet reached peak oil demand and that the 2023 figures will finally beat the 2019 numbers. But we all expected that in 2021 and 2022 as well. Didn’t happen. Let’s take a closer look at what happened in 2020.

Covid Lockdowns had a massive, massive effect on the world economy. But a surprising number of oil related things had to keep happening. Goods had to be shipped, plastic had to be made, and the US, the world’s biggest market, really only shut down for a month or two. So oil demand across all of 2020 fell less than 10%. And the price plummeted. People actually paid other people to take oil off their hands in March of 2020. Averaged across the year, the price was below 40 dollars a barrel, so about half of what Saudi Arabia needs to sustain itself. Again, demand for oil just went down by less than 10%, temporarily, and the average price of oil across all of 2020 fell down to about half of Saudi Arabia‚Äôs break even price.. The Saudi system still has the savings necessary to keep going at that low price for a year or two, and after 2022 the Saudi savings cushion is a lot bigger. But that 2022 price spike killed 2022 demand. And forced a lot of countries to make some big decisions.

You know the skeptics are probably right. Electric cars may never replace all internal combustion engines. Or if they do it will take decades. But how about 10% of oil based cars? Or 25%? Just 10% would represent a Covid Lockdown sized bite out of oil demand. And it wouldn’t be temporary. It would be permanent.

China has planned to build hundreds of nuclear power plants for a while now, but recent tensions over Taiwan have put this plan into overdrive. In 2022 a quarter of the new cars sold in China were electric. Nuclear powered EVs represent a lot of automotive fuel that will never be purchased. Thanks to 2022 price surges, on December 22nd, Japan reversed its ten year old antinuclear policy. It’s reopening old plants and will build new ones. It’s a little behind China on the electric cars, but it will catch up. Peak oil demand may or may not be here yet, but it’s coming.

Remember, prices were too low for Saudi Arabia across the 2010s when oil demand was surging. In the 2020s demand is going to go down or at least remain flat. Oil suppliers are now going to have to start competing for markets. The US will force more and more of its allies to buy their oil and gas exclusively from the United States and Canada.

Arabia will always have China though. Even if they go 100% EV Chinese chemical factories should be buying Arabian oil to turn into plastics well into the next century. Note I do not say Saudi Arabian oil.

Because the price that China will pay for oil by the end of the decade will be way too low to support a Saudi Arabia. Even at prices as low as $30 dollars a barrel, the Arabian people can pump oil and still make amazing profits. With that kind of money they can support massive investments in their country and probably even a reasonably generous welfare state. What they will no longer be able to support is the obscenely expensive luxury good that is the Saudi Royal family. This is the endgame folks. By 2030. Saudi Arabia as we know it is finished.