The Saudis Haven’t Given Up on Oil Yet

Saudi Arabia has a dangerous addiction to oil.

That’s how Saudi Arabia’s crown prince, Mohammed Bin Salman, described the country’s economy in 2016. He was then presenting Saudi Arabia’s Vision 2030, the country’s new plan to diversify away from oil.

The truth is that oil has shaped the country’s economy.

Saudi Arabia is the largest oil exporter in the world. It also has the world’s second largest proven oil reserves, after Venezuela.

Between 2003 and 2013, oil prices spiked from about US$30 a barrel to a high of a little over US$160. While developed nations where battling with high debt, the oil boom meant that Saudi Arabia saw a lot of growth during that period. In 2013, Saudi Arabia’s national debt was only 2.15%% of GDP.

Yet things changed as the price of oil dropped in 2014.

In 2014, Saudi Arabia pushed prices lower in an effort to bankrupt US shale oil drillers. But the plan backfired. Instead, Saudi Arabia lost a lot of money…and started racking up debt. Debt to GDP increased in only three years to 17.2% of the GDP.

US shale is still keeping oil prices down.

According to the World Energy Outlook 2018 from the International Energy Agency:

The shale revolution continues to shake up oil and gas supply, enabling the United States to pull away from the rest of the field as the world’s largest oil and gas producer. In the New Policies Scenario, the United States accounts for more than half of global oil and gas production growth to 2025 (nearly 75% for oil and 40% for gas). By 2025, nearly every fifth barrel of oil and every fourth cubic metre of gas in the world come from the United States. Shale is adding to the pressure on traditional oil and gas exporters that rely heavily on export revenues to support national development.

Yet the Kingdom is not only facing increasing competition from shale drillers, but from renewal energy. The electric vehicle is making a come-back.

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87% of Saudi Arabia’s revenue comes from oil.

With oil prices still at a low, Saudi Arabia will struggle and continue to accumulate debt if it continues to rely primarily on oil. According to a McKinsey Global Institute report, if Saudi Arabia doesn’t change, their net debt could balloon to about 140% of GDP by 2030.

That’s why Saudi Arabia is looking to decrease their addiction to oil and diversify their economy, through the Vision 2030 project. 

Saudi Arabia’s nuclear project

As Bloomberg reports, Saudi Arabia is looking to build as many as 16 nuclear reactors in the next 25 years, which will set it back more than US$80 billion.

Yep, the world’s largest oil exporter is looking to diversify into nuclear power.

You see, Saudi Arabia’s population keeps growing. It has gone from only 6 million in 1971 to almost 33 million in 2017. It is expected to reach 46 million by 2050.

This massive increase in population needs more energy, and the more the population expands, the less crude oil Saudi Arabia has available for export. According to McKinsey, by 2030, domestic energy consumption could double to 40% of Saudi Arabia’s total production.

That’s why they want to reduce the amount they use at home, to export more oil abroad.

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Saudi Arabia agreed to increase oil production ahead of the US midterm election.

Yet now OPEC is looking at cutting down production by between a million and 1.4 million barrels a day in their next December meeting, which could increase oil prices.

As Bloomberg reports, Saudi Arabia needs a minimum oil price for their project:

Bin Salman needs oil revenue to fund his ambitious plans to transform Saudi Arabia, while avoiding unrest from those hurt in the process. The International Monetary Fund forecasts that the kingdom will need an oil price of $73.3 a barrel next year to balance its fiscal budget.

A bigger U.S. threat to Saudi plans than Trump’s tweets will come from the Texas oil patch. American producers have added a volume equivalent to the entire output of OPEC’s Nigeria in the past 12 months. Their production could reach 12 million barrels a day by April, according to the Department of Energy. That’s six months sooner than it was forecasting just a month ago and 1.2 million barrels a day more than it foresaw in January.

Brent crude is trading below that level.

So, while Saudi Arabia needs a higher oil price to develop their plan to reduce oil’s domestic consumption, the US is looking at keeping oil prices low to keep inflation at bay.

Venezuela is still in turmoil.

Iran is still facing sanctions. And while the US has issued waivers to some of Iran’s oil importers, these waivers will expire at some point.

And, as we have written before, shale oil drillers may have a harder time finding finance as interest rates go up.

That is, while oil is trading at lows, we see factors that could push oil prices higher in the near future.

Best,

Selva Freigedo,
Editor, Markets & Money
Noah Ford
Contributing Editor, Markets & Money

 


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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