Saudi Arabia may go broke before the US oil industry buckles. If the oil futures market is correct, Saudi Arabia will start running into trouble within two years. This would be excellent news for free democracies, as there will be less money for extremist Sunni Mosques and Madrassas and Sunni Terror organisations as well as Sunni client States.
Saudi Arabia and other Sunni Gulf States jumped on Tiger’s back to frighten ‘Living Day Lights’ (Arabs are no 007 Bond film material) out of the US Shale producers by increasing production to drive the oil price down last year. Now they cannot just get off quickly. So either they lose billions of Dollars in revenue or lose all credibility and power at a fast speed. The Saudi king Salman and his young son prince Mohammed cannot afford to look ridiculous, so Saudi forex reserves will go down and borrowings up. it could lead to friction within the house of Saud, as other ‘branches’ of the family try to position themselves for more power, leading to changes in the power structure, at the cost of prince Mohammed.
Oil prices dominate business news currently as weak Chinese demand accelerated the fall in addition to spectre of Iranian oil coming to market.
Goldman Sachs in a client note called for Brent oil to fall to $45 a barrel by October ( Brent price on 21 August was US$ 45.34) indicating that the global crude market is currently oversupplied by at least two million barrels a day, up from 1.8 million barrels a day in the first half of the year. Oil prices are likely to remain low for about at least 4 years, due to the changed character of the global oil geopolitics, since the price came down from US $ 100 for Brent oil.
Before that oil prices were high due mainly to limited OPEC supply, which resulted in the development of shale energy from new technology in the US. This transformed the USA, from being an importer of oil into a net exporter in short period as high oil prices resulted in commercial production. But the technology was developed in relation to prices with a cost of $60 per barrel. Saudis expected that if prices fall, shale oil wells will shut down and the companies will be out of business. The plan did work initially. Oil companies reported drop in profits. Number of wells producing shale oil came down and Oil companies shelved large projects, deferring $200 billion of investments.
But despite lesser wells running, oil production in the US will be more in 2015 than in 2014. This was something few in the industry including Saudi’s had imagined. John Hess of Hess Corporation stated that shale producers have lowered their costs to such an extent that their average break-even price for a barrel of US crude is now little over $40, down from $60. Further, technological advancement in drilling led to more oil being produced from the same well. This is where OPEC miscalculated and have got stuck.
Now the Saudi’s are seeking $27 billion in debt via issuance of bonds. Oil constitutes 90 per cent of Saudi’s revenue and it needs a price of $106 per barrel to balance budget. Saudi Arabia has an illegitimate ( not elected ) Government and has to bribe its people, army, public sector employees and clerics to stay in power, so its expenses can not be reduces significantly. Actually its exploding population means more cash outflow further increased by Yemen type misadventures. Saudi Forex reserves have already gone down form US $ 732 Bn in 2014 to US $ 672 Bn in June this year. Either it borrows lot more or observes Forex reserves disappear like mirage in desert.
Once the OPEC dictated unjustified high oil price to importers and now refreshingly the boot is on the other foot. Oil exporters are desperate to sell oil to large importers like China, Japan, India, Korea etc and have to offer special discounts. When the Iranian oil comes in the market, Japan, India and others will increase imports from Iran to pre-sanctions level at a competitive price and Saudis and others will have to match the prices to keep market share. You ain’t seen nothing yet Pardner, as US shale gas rough necks are saying, as they want to put pressure on the Saudi led OPEC now, with indirect assistance from more Iranian oil next year. Recently UAE invited the Indian Prime Minister Modi for two day visit with red carpet treatment to ensure that UAE has access to large Indian economy both for energy exports and investments, as India is now the fastest growing large economy in the world, as slowing Chinese economy is experiencing hard landing. Iran, Saudis, Iraq, African countries etc are competing for the Indian ( and other large importers’ ) energy market share.
IMF has also pointed out that the budget deficit of Saudi Arabia will touch 20 percent in the present year. Reducing the country’s outlook to “negative”, S&P had said “We view Saudi Arabia’s economy IS NOT diversified and IS vulnerable to a steep and sustained decline in oil prices.”
Saudis and other OPEC nations and the US shale oil businesses are producing more oil to increase their income due to low oil prices. The state-of-art shale oil technology will ensure that if oil prices increase at all other wells which have been closed down will also add to the supply. The US producers have added drilling rigs for a straight fourth week in spite of the oil prices at nearly 6 year low mark. For large net importers like China, Japan, India, Korea, etc this competition for markets reduces the oil import bills by many billions a year.
Sunni Saudi Arabia is yesterday’s power and the West, especially the UK, was behind the reality curve. Now, one step at a time, the West is moving towards neutrality between Sunni and Shiite Islamic sects, as the nuclear deal with Iran has been worked out by President Obama despite Saudi and Israeli objections. The geopolitics of oil has changed after the US virtually becoming self-sufficient in totality and Uncle Sam does NOT now depend on Saudi oil. The UK Foreign Secretary Hammond was in Iran on 22/23 August with a large business delegation for potential business and to re-open the British Embassy there. Other European Ministers and business delegations also have been to Iran.
The Western and other free democracies have realized the present and real danger from global Sunni Islamic terrorism and are gradually getting more united to confront Sunni terror where ever it projects its evil and barbaric influence. The US defense department has informed the Congress that Pakistan is still supporting Haqqanis and other Pakistan based terrorist groups that attack Afghanistan and the military aid to Pakistan may be stopped. Afghanistan has accused Pakistan of supporting terror groups for cross border attacks in Kabul etc with a view to cement position of Pakistan’s stooge Mullah Mansoor, who is opposed also by other Taliban sections and terrorists, as well as mainly non-Pashtun people of Afghanistan, known as ‘Northern Alliance’ opposed to Pakistani influence. This confirms the trend in democratic countries not to tolerate Sunni Islamic Islamic terrorism for more peaceful World. Now the West also knows that any Iran sponsored negative acts are confined mainly to Islam’s sectarian war in the Middle East.