Saudi Arabia’s Gambit to Boost Oil Prices

oil pumps across Saudi Arabia

Saudi Arabia is playing a high-stakes game.

It comes down to money and power.

The country’s budget deficit is out of control. It has grown to roughly 15% of gross domestic product, thanks to lower oil prices. To solve the problem, Saudi Arabia has been cutting subsidies for citizens on basic needs, such as electricity.

But the people aren’t happy.

Officials seem worried about a potential uprising — one which would threaten the ruling royal family’s power. That’s why Saudi leaders are supporting numerous wars across the region. It’s also why they are looking at a large expansionary budget next year. One, of course, which would reduce the risk of a potential uprising.

But, given the lower oil-price environment, is that possible? If it is, where’s the cash going to come from to pay for all the spending promises and wars? And what does this have to do with crude oil’s future?

I’ll explain…

The race against the clock

The Kingdom raised more than US$20 billion from bond sales in September. The cash helped ease the budget shortfall.

But it wasn’t enough.

That’s why the Kingdom’s crown price arrested more than 500 citizens. Mohammad bin Salman detained some of the richest and most powerful royals and government officials.

MarketWatch reported on 7 November:

The Saudi government is aiming to confiscate cash and other assets worth as much as $800 billion in its broadening crackdown on alleged corruption among the kingdom’s elite, according to people familiar with the matter.

Several prominent businessmen are among those who have been arrested in the days since Saudi authorities launched the crackdown on Saturday, by detaining more than 60 princes, officials and other prominent Saudis, according to those people and others.

The country’s central bank, the Saudi Arabian Monetary Authority, said late Tuesday that it has frozen the bank accounts of “persons of interest” and said the move is “in response to the Attorney General’s request pending the legal cases against them.”

There’s a lot more to the story than corruption. In fact, corruption has little to do with it. Salman saw an opportunity to consolidate power. There was also an easy US$800 billion for the taking.

Salman now has about US$1.2 trillion in the kitty. That should help prevent a revolution and secure his regional power ambitions. Both are vital to carrying out his ‘Saudi 2030 Vision’. The 32-year-old Crown Prince wants to turn Saudi Arabia into the next Dubai. The oil era is over — electric and hydrogen fuel cell cars are the future. 

Can the Kingdom restructure the economy before the clock runs out?

No one knows. But, with one of the world’s largest petroleum fields and about US$1.2 billion in reserves, Salman has bought himself a bit more time. Nonetheless, the country urgently needs to reduce its reliance on oil. It provides three-quarters of state revenue. The clock is ticking…

According to the International Monetary Fund, last year, Saudi Arabia needed an oil price of US$96.60 to break even. This year it needs an average oil price of US$73.10 to break even. That won’t happen.

To break even next year, Saudi Arabia needs oil prices to stay above US$70 per barrel.

I believe there’s an extremely low chance of oil prices staying above that level, let alone hitting it. That is, unless a major war breaks out in the Middle East. That’s why Saudi Arabia appears to want a bigger war in the region to drive crude prices sharply higher. The oil price has surged during every major war fought in the region.

Riding the oil-price boom

I believe, if Saudi Arabia and Iran were to go to war, it would drive a bull market like no other. I wouldn’t rule out US$100–$200 per barrel oil. Now, if that happens, you’ll want to have plenty of exposure to oil stocks.

But it might take some time before we see a full-on confrontation. As such, oil prices may have peaked for now.

Or not.

Either way, when we see a major confrontation, crude oil is likely to boom. That’s why now is the time to start preparing for the worst-case scenario. You can start by checking out what I believe to be the best oil stock on the ASX today.

For more details, go here.


Jason Stevenson,
Editor, Resource Speculator

Jason Stevenson

Jason Stevenson

Analyst at Markets & Money

Jason Stevenson is Markets and Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options.

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Not sure about this statistic “…US$1.2 billion in reserves…”? Maybe you meant 1.2 billion barrels or maybe US1.2 trillion in reserves.
Also – I thought Saudi Arabia had a low cost of extracting oil from their lands? Why is the breakeven price US$73.10 per barrel?

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