The Kingdom of Saudi Arabia is hurting. Their move of increasing oil production with the goal of lowering prices in order to gain a larger market share (Saud denies this but they are trying to put US shale out of business – low interest rates in the US have contributed to staving off the death blow, for now) has hurt all net oil exporting economies worldwide, including Saud, itself. The secondary effect was to pressure Russia into leaving Assad to the jackals. Russia bit the bullet and did not yield. Strike two. The war in Yemen as well as the financing of Syrian rebels costs the kingdom a lot of money they just don’t have. Steeeerike three.
Oil represents about 80% of Saud’s revenue. With ISIS competing for market share by selling oil to Turkey at $20/barrel – thereby undercutting the market by half, their economy can simply not withstand this price point for much longer. So what can they do?
They could find other sources of income, they could cut output of oil, they could de-peg from the US dollar, or they could start selling oil in yuan. Remember what happened to Saddam Hussein when he tried to sell his oil in Euros. Everybody was a loser in that affair.
Today, the renminbi (yuan – for all intents and purposes) will likely be included in the IMF’s SDR basket of funds. There is an OPEC meeting this Friday.
Saudi Aramco is rumoured to be going public, that is to say, privatized. An IPO is being considered. Of course the Saudis wouldn’t let this corporation fall into the wrong hands (5% for now,) so is this simply a variation on a stock-buyback scheme of epic proportion? This way they can raise their stock price without raising the price of oil. Since doing so would hurt the stock price, this would more or less guarantee low oil prices for a while. This would be a bad thing for all oil net exporters; Canada will be especially hard hit.
One wonders if they will allow Yuan transactions for their shares.
The recent drop in the price of oil has had widespread negative consequences for Canada and many other net oil-exporting countries. It has also had dire consequences for the United States. The fracking industry has seen lay-offs, rig closures, and the beginnings of consolidation; the smaller outfits are becoming more and more attractive to large corporate buy-outs as their over-leveraged business models are being slaughtered by dwindling margins. We have been told that lower gas prices are good for the average consumer, but how good can it be if it takes out their entire economy? The petro-dollar scheme, it would appear, is showing signs of stress.
Meanwhile, strategic reserves and storage facilities are filling up fast. It has been estimated that all the extra storage space left in the USA will be full by the end of May. According to the American Petroleum Institute (API) last month saw the biggest build-up of US oil reserves in 34 years (at least.) Most countries that can afford to buy more oil are also adding to their reserves; and who can’t at these prices? Stockpiles are at an all-time high, and not just in the USA; China is also buying a lot of oil while the prices are near record lows. When all the storage capacity is used up, oil will be dumped onto the market driving the price down even further. Yet, the algos aren’t crashing; nobody is putting much pressure on the Saudis to cut production, the markets are not in a panic, and there seems to be a laissez-faire attitude towards the whole debacle. Surely this must be temporary. Maybe things will turn out for the best, but how? We’ll get back to this in a moment.
The Arab spring has brought about many changes in the middle-east. Egypt, Bahrain, and Yemen have seen meaningful change since 2011, and they are not alone. There has been a political awakening in some parts of the region, and there are now new actors taking the stage. ISIS has become a force thanks to the backing (either direct or indirect) of the Saudi and American governments; a renewed call for a caliphate has re-awoken a new generation of Arabs who want to assert themselves internationally. There are grass-roots political movements springing up all around the region and even spilling into northern Africa. It seems that change is all around.
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