After nearly a decade of oil prices averaging over $70 per barrel, you’d imagine that OPEC members would be swimming in money. But through some astonishing feats of financial ineptitude they seem to have blown the windfall. Even the wealthiest member, Saudi Arabia, appears to be hitting up capital markets for a loan. A recent report in Reuters pointed out that Saudi Arabia is about to borrow $6-8 billion. What’s more, six oil-exporting nations in the Gulf region plan to borrow $20 billion. How on earth did they get in that state, and what does that mean for the world?
Part of the problem is a penchant for garishness like gold Ferraris, which don’t grow on trees. It takes a prodigious amount of wasteful thinking to even come up with the idea. That sort of speed in the hands of talentless wastrels may keep the Wrecked Exotics website in operation, but after a while the cost of these escapades has to add up.
It’s not news that these countries blow a lot of money on extravagant wealth, but the amount is staggering. OPEC has produced more than 30 million barrels per day for the past 10 years, a time when the price has averaged $75/barrel , for total revenues of over $8 trillion. That buys a lot of Ferraris.
This begs the question then of what Saudi Arabia is doing borrowing $8 billion, or contemplating an IPO for Saudi Aramco. These are the marks of a country that finds itself short on cash as bizarre as that may seem. Saudi Arabia was recently reported to have financial reserves of about $600 billion, which sounds like a lot but as noted in the linked article Saudi Arabia burned through $115 billion of reserves in 2015. At that rate reserves would be gone in 5 years, which is a remarkable scenario considering the wealth that was generated for that country in the past half century.
So what’s going on? It’s sometimes hard to guess at a country’s true macro drivers, no matter how much we love to speculate. Unless we are actually billionaire rulers of a rich, autocratic, one-dimensional, religiously-torn powderkeg of a country it’s not likely we’ll emulate their thought processes. However, some of these signs are too obvious to ignore and should help indicate some probable scenarios.
First of all, any nation that has $600 billion in net foreign assets and starts borrowing has some sort of a funding problem. Borrowing doesn’t mean that they’re broke or can’t afford expenditures, but it does mean that the capital can’t necessarily be readily accessed. So much of Saudi Arabia’s assets may be in illiquid investments that can’t readily be turned into cash.
Second, the huge rig count that has only marginally increased production indicates that Saudi Arabia has shot its bolt in trying to crush high cost global oil developments, and that there is no spare supply capacity. It also indicates that Saudi Arabia has to stretch much farther to maintain this production level. That indicates the end of an era and the need for a global recalibration. SA has always indicated it has plenty of spare capacity, even as that alleged amount continued to shrink as a portion of global consumption. An alleged supply cushion of 2.5 million barrels per day is material when the world consumes 50 million b/d, not so much when it consumes 94.
The high rig count also indicates that Saudi Arabia is now succumbing to the natural decline rates that affect every other oil basin. That factor had been hidden before because of Saudi Arabia’s insistence that it could raise or lower production at will. The fact that they are drilling at record levels indicates that they certainly can’t raise production when they want, though they of course are still able to reduce it.
Another macro factor that may be at play is the possibility that we are moving away from fossil fuels towards greener energy. That notion may seem like the dream of a starry-eyed simpleton when one considers the rate of global consumption growth (oil demand is still growing), however eventually fossil fuels will give way to greener energy forms. It’s inevitable; oil is becoming too difficult to find on a global basis (of which, remember, US shale deposits are a fraction) so regardless of ideology it will become a necessity. Perhaps Saudi Arabia is flooding the market, crushing competition, and setting the stage for one last massive price spike before we all go green, all the while providing enough cash for several generations of Saudi princes to roll around in.
Who knows. The fact remains though that Saudi Arabia’s behavior indicates that significant changes are afoot, for better or worse.
Read more insightful analysis from Terry Etam here