The revenue generated by state-owned Saudi oil company Saudi Aramco accounts for up to 80% of the kingdom’s fiscal budget. The company did not hide its losses, and officially reported a decrease of $22.9 billion in net income in 2019, and there have also been serious spending cuts on development, i.e. on maintaining and increasing production. The report correctly identifies the reasons for these losses, highlighting low oil prices and a reduction in production volumes.
If we analyze this data, it becomes fairly obvious that the Saudis are currently playing a risky game in global oil markets, offering their “black gold” at $25 per barrel. Given Saudi Arabia’s low oil production costs, Riyadh is in a position where it could well lower the selling price even further. But this drop in prices raises a number of very important questions: where will the money come from to bankroll the life of luxury that the Saudis have grown accustomed to? How will they maintain their huge state apparatus and, even more so, their repressive apparatus? And how will they fund the ambitious plans of kingdom’s current de facto ruler Crown Prince Mohammad bin Salman? Where will they get the money for their highly publicized Saudi Vision 2030, which is meant to catapult Saudi Arabia into the 21st century? Where will the money come from to support nearly 10 million foreign workers in the country? After all, if their wages are cut, they will return home overnight. And who will work the oil fields when they are gone? – The Saudis will not work there themselves, as everyone born in the kingdom is born with a silver spoon in their mouth.
The Saudis are already being confronted with all of these questions, and they are not so easy to answer. About a year ago, the Crown Prince detained several dozen princes and government officials in a purge, and “shook” more than $100 billion out of them. But this money has already been blown. And he will not be able to get away with pulling this stunt off again. As a result of these dictatorial measures, the level of dissatisfaction with the current measures among numerous princes has also been growing, and the Crown Prince has only responded by tightening the screws and detaining more people. For example, two senior members of the Saudi Royal family — former Minister of Interior Muhammad bin Nayef al Saud and the King’s younger brother Ahmed bin Abdulaziz al Saud — have just recently been arrested. According to reports from the Associated Press which cite a source in the Kingdom familiar with the details of the case, they were arrested for not supporting Crown Prince Mohammad bin Salman, who has consolidated control of all major levers of power inside the kingdom. According to this source, the decision to arrest members of the ruling dynasty was taken after what was described as an accumulation of behavior that was provocative to leadership. The Associated Press describes the arrests as unexpected, as Prince Muhammad bin Nayef had been kept under close surveillance since being shunted out of the line of succession by the King’s son in 2017, while 77-year-old Ahmed bin Abdulaziz is the King’s full younger brother and is also a senior member of the ruling al Saud family.
Two other unnamed sources interviewed by the Associated Press declined to characterize actions by the two princes as an attempted coup. One source said that the arrests sent out the following message to all members of the royal family: “Stop grumbling” and toe the line, because if Prince Ahmed can be arrested, any prince can and will be. The source explained that Prince Ahmed was seen as a person who other royals could turn to when feeling vexed with the 34-year-old Crown Prince’s current grip on power.
Saudi Arabia’s Crown Prince Mohammad bin Salman, tries to present himself as a supporter of progressive reforms, but according to many international human rights organizations, the Crown Prince uses these activities to distract from political repression and abuse of power. Among other things, he has been accused of having been involved in the brutal murder of Saudi journalist Jamal Khashoggi at the Saudi consulate in Istanbul. The Saudi security services controlled by the Crown Prince are also believed to be illegally spying on citizens, hacking their social network accounts, and taking many other illegal actions.
It is no wonder that these are difficult times for the kingdom, and oddly enough, they have been brought on by the Crown Prince’s highly incompetent and confrontational policy. The steep drop in oil prices occurred when the Saudis, struggling to navigate the global markets, tried to impose harsh conditions on Russia under the OPEC+ deal. Even though Saudi Arabia declared a “full-scale oil price war” after Russia refused to join an OPEC deal, this plan may backfire on Riyadh, writes the geopolitical intelligence platform Stratfor. According to the snapshot given on the Stratfor platform, in trying to force Moscow into making concessions, Saudi Arabia has taken counterproductive measures, overlooking Russia’s serious foreign-exchange reserves, and has also failed to consider its own rather unstable economic situation. “While previously Saudi Arabia hoped to maintain its position and revenues in the oil market by encouraging cooperation between major players,” notes Bloomberg Opinion columnist David Fickling, “it’s now betting that its best prospect is to do the opposite: Engage in a game of chicken with Moscow and the US independent oil industry, and count on being the last player standing.”
As for Russia, the fall in oil prices has dealt its economy a heavy blow, but many global economists stress that Moscow is in a far better position than Riyadh. This is because Russia has been accumulating reserves in its National Wealth Fund since 2017 at any price above $40 per barrel. According to the most recent public data, the fund has accumulated $150 billion and cash reserves of $570 billion. Come what may, these reserves will help soften the blow when prices take a tumble.
On the other hand, the Saudis are facing a scenario where they will not be receiving enough dividends from Saudi Aramco, and will either be forced to finance half of the fiscal budget from their reserve fund or they will have to borrow money from abroad. The second option is looking quite likely, given that the ratio of the country’s debt to GDP is only 26%. However, interest rates may rise due to uncertainties over future oil prices, and also due to the impulsiveness and incompetence of Saudi political decision-makers.
The standoff between Saudi Arabia and Russia over oil prices is having a hard knock-on effect on the US economy, according to the US economists themselves. US shale producers were already in a vulnerable position last year, partly because they had managed to achieve unrivalled success by increasing production on the domestic market. According to a report by Evercore ISI, shale operators have had cumulative negative cash flow of over $280 billion since 2007. US banks and private equity firms, which have financed growth in the shale boom, are starting to ratchet back their support of shale firms as their balance sheets deteriorate. Recent reporting indicates that over $140 billion in debt for the exploration and production sector is in danger of falling into the “junk rating”. If this were to happen, it would also affect associated gathering, processing, and transportation companies, whose total debt amounts to more than $300 billion. Very few American firms can thrive at these current oil prices. A Dallas Federal Reserve Board survey late last year found that 59% of operators in its region need prices of crude at $50 or more per barrel. Yet as of March 12, the West Texas Intermediate (WTI) benchmark was at $30.71.
It is clear that the world is returning to the era of cheap oil. The largest producers are going to up their production, which will result in a long slide in oil price quotations. Experts are now trying to figure out who is most at risk, for whom everything could end in economic disaster, and who will win the price war, increase their share in the international market and become the most influential player. Will there even be any winners in this game?
Viktor Mikhin, corresponding member of RANS, exclusively for the online magazine “New Eastern Outlook.”
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