Does anyone give a shit about the numbers? At below $50 per barrel, Saudi Arabia burns roughly $20 billion per quarter. Let your ‘industry experts’ tell you “it only costs them $6 per barrel to get the oil to market,” and that may be true, but it is irrelevant. Basically, all of the Government revenues come from one place, Saudi Aramco the national oil company. They have one product to sell and that’s it. End of story. Those funds must pay for all their citizens – most of whom don’t work – and all their social programs (including an ongoing war on Yemen and bribing corrupt politicians across the globe. The most conservative estimate of these costs amounts to roughly $85 per barrel. Now, if I am aware of these facts one would think that so too, are the Saudi officials, and the mainstream media. But that doesn’t seem to be the case.
No sooner did Saudi Crown Prince Mohammed Bin Salman (“MbS”) get anointed the future new King of Saudi Arabia this week than the headlines started screaming about what a great reformer he will be and how nice for the youth and future of Saudi Arabia. This headline really knocked my socks off:
First Test for Saudi Arabia’s King-in-Waiting: Fixing the Economy
This is from Nicolas Parasie of The Wall Street Journal on June 22nd. And don’t just take my word for it. Here’s the link, read it for yourself.
Fixing the Economy –are you fucking kidding me — he’s the one who broke it!!! All the horrifically awful decisions on behalf of Saudi Arabia over the last four years – he’s the architect. The headline comes complete with a picture of the 31-year-old and follows up with a serious erosion of the WSJ’s credibility. I didn’t used to be such a skeptic but the reality is that the Saudis pay for play and this is no exception. So, let’s look at the reality behind Prince MbS, the newly anointed future king of the house of Saud.
Who ordered the 2016 beheading of the Shia cleric Sheikh Nimr al-Nimr? — Mohammed Bin Salman (“MbS”). And for those keeping score, on that same day, he also beheaded 46 others, setting the single day beheading record for the last 35 years in the House of Saud.
Who, according to Amnesty International, started the war in Yemen and has caused over 4,600 civilian deaths and over 8,000 civilian injuries? Once again, the handy work of MbS.
And now for the money shot – who made the decision in November of 2014 to flood the oil market and crater the price of oil? You guessed it, MbS. He was in charge of the energy ministry it was his call and his plan. That is a fact Jack!
Now stay with me because this is where the numbers really start to matter. Saudi Arabia had roughly $700 billion in the bank when MbS crashed the price of oil in November, of 2014. They are now down to $500 billion. In six and a half years, they will be at $0. But it will actually take even less time than that. You see, the Saudi currency, the riyal, is pegged at a fixed rate to the US $. “Give us 3.5 riyals and we will give you one U.S. $” says the government of Saudi Arabia. That fixed peg is predicated on an ever growing supply of U.S. dollars in exchange for oil and never contemplated the current situation.
When the fixed exchange rate on the riyal is broken, the currency will go into freefall, inflation will skyrocket, and Saudi citizens will be have their savings decimated in a single moment.
This is what happens when you have a fixed exchange rate and you can no longer afford to give up your U.S. dollars for your bullshit currency. How did one of the wealthiest countries on the world start their descent on the road to financial ruin? One guy – Mohammed Bin Salman! MbS.
So, when your coffers are depleting at a rate of about $18 -$20 billion per quarter at sub $50 oil you are only going to be able to hold that peg for so long before others see the zero balances headed their way:
”thanks for the fistfuls of riyals Mohammed but I’ll take the 50 Mercedes you parked out back and some gold instead sure throw in the camels too.”
Now this genius “business reformer” is going to reform/fix the Saudi economy by bringing diversification. That’s his plan. And perhaps in another post I’ll walk you through his extensive top-shelf education and work experience that qualifies him for this transition. Spoiler alert: he has none. No Western education, no business career. None. Zip. Zero. — His sole credential is all-time champion of the lucky sperm club. Now, the funding for the economic diversification starts with the sale of 5% of the nation’s only real business and their national treasure: Saudi Aramco.
Time to look at that. Let’s assume that it is even possible to have an IPO of a company that has an 89% tax rate and exists in a country ruled by Sharia law. (I believe the whores /bankers at Goldman Sachs when they see a trillion-dollar valuation will find a way to get the deal done…can you say fees on fees on fees. (a 4% underwriting fee on $75 billion that’s $3.0 billion –yowzah! You can just smell the NetJets cards being thrown around the office over at GS…but I digress.) The press has whispered a $1 trillion-dollar valuation and the Saudis have said $2 trillion. Let’s assume the answer is in between. (it doesn’t matter anyway) and thus you get an IPO of 5% of $1.5 trillion dollars or pre-fees $75 billion to run your country’s new economy reformation program. Nice money, but there’s just one problem.
Ever since MbS single-handedly flooded the oil market and crashed the price he is losing that amount every 9 to 12 months!!! It is nowhere close to enough money to kick start anything other than a re-order on a few yachts and some Eastern European harem fill-ins. But the press is swooning over him and you should ask yourself, why? I have my thoughts – please gather your own we can meet back here and discuss another time.
Last point. The press is certain that oil prices are dead and we are going to be in a permanent glut situation. It can’t be. If MbS has even one adviser that has a stitch of integrity (or a calculator) he will be told the truth — pull at least a million barrels of oil off the market or face certain destruction. And by destruction I’m talking your own head meeting the sword. Here is the math for you, MbS. And, you’re welcome.
Saudi production: 10mm barrels a day
Saudi breakeven oil price $85 per barrel <– this is the most generous assessment of the social costs for Saudi Arabia.
Current oil price $45 <– roughly
Shortfall $40/barrel at 10mm per day over 365 days is an annual hole of $146 billion.
Let’s cut that in half to be super conservative: $73 billion — which lines up nicely with the depletion rate of the sovereign funds over the last 3 years. You have $500 billion currently — that is a best-case scenario of 6 – 7 years but you don’t actually have that much time because very soon it will become apparent that you don’t have a viable plan and you are spending the wealth of the nation for your own ill-conceived plan that simply doesn’t work. Iran knows this fact as do some other enemies of the Saudis. I don’t know how this will play out but I do know that if MbS keeps the oil price down here (and he can) it’s his head, literally, and the wealth of his nation and a Middle East conflagration the likes of which we haven’t seen in our lifetimes. And as the great Robert Friedland says “you will need to stand on a ladder to see the price of oil”. Good luck to all of us.