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Here's How High Oil Prices Must Climb To Stop Saudi Arabia's Budget Bleed
Last week, we showed how long Saudi Arabia’s stash of USD reserves will last under $30, $40, and $50 crude.
As we’ve detailed exhaustively, the country is staring down a current account-fiscal account outcome that makes Brazil look favorable by comparison. The fiscal budget deficit is projected at some 20% of GDP and two proxy wars combined with the necessity of maintaining the status quo for ordinary Saudis mean fiscal retrenchment is a tall order - even with the help of "advisers."
Meanwhile, Saudi stocks just fell 17% in a month.
So how high, you might ask, do oil prices need to climb in order for Saudi to plug the gap? Here’s Deutsche Bank with the answer.
As you can see, there's a long, long way to go, and between the pain from lower crude and from maintaining the riyal peg (which we've discussed at length), expect the petrodollar reserve bleed to continue. Here's some color from DB:
The impact of oil prices on global central bank reserves is even greater than estimated by our model, due to the omission of Middle Eastern SWF holdings. In practice, low oil prices trigger reserve depletion through two channels. First, reserves are used to plug fiscal deficits. The Saudi government deficit, for instance, is to reach 20% of GDP this year. Second, a number of the largest oil exporters in the Middle East, notably Saudi Arabia and the UAE, maintain dollar pegs that come under pressure with low oil export revenues, which are also unhelpfully correlated with a stronger broad dollar.
We expect Middle Eastern governments to continue to lose significant reserves in the coming months. Low oil prices are only one ingredient in the mix. The exacerbating factor is our economists’ prediction that the main dollar pegs in Saudi and the UAE will hold, albeit at considerable costs in terms of reserves.
If oil prices do recover in the medium term, pressure on the pegs would naturally diminish. Our economists note, however, that Saudi public spending has increased by about 10% a year over the past decade. This has lifted the oil price needed to balance the budget from $25/bbl in 2004 to $105/bbl (Figure 22). This may be reduced with government spending cuts. Yet it seems unlikely that the budget breakeven will fall back to levels seen in the 2000s. Unless oil prices rise to unprecedented levels, therefore, OPEC reserve accumulation is unlikely to return to the run rate of the past decade. The more realistic baseline is that, over time, OPEC countries will slowly burn reserves.
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Not going to happen.
oh? how about on the 14th?
and a quick rise, er, rocket ride.
Place your bets,
The Saudi's plan is to sacrifice one million Yemei civilians to their evil overlords in return for rising oil prices.
Kissinger seems delighted, but I don't think Cheney is buying it. Stupid Saudis - won't they ever learn?
The U.S. started illegally building a military base on Socotra like they always planned. They don't care about the rest of Yemen any more. Hence, the Saudis and their little UAE sidekicks are screwed. They will both be driven to ruin in Yemen, and the West will own whatever Saudi and UEA oilfields that survive their revolutions.
Maybe they could lay off some of their head cutting executioners and whip lashing administrators.
Have they considered getting in the drug business with the United States?...Poppy seed growing season starts soon in Afghanistan.
Or they could just stop clusterbombing Yemen.
Maybe they just want to be as deep in debt as the rest of the West so they have loans to renege on when the SHTF... and that's why they're playing deficit spend catch-up.
.
Saudi Arabia is a welfare state. With free health care and free University education and riduclulously cheap energy costs for all. The majority of Saudi citizens are completely reliant upon the nanny state there. The moment Saudis start to cut any of these expensive programs there will be trouble like what happened in Egypt.
Interesting how both China and Saudi Arabia currently have such 'valid' reasons for dumping dollars. Makes one wonder.
What good fortune to get rid of these surplusses at the end of the debt supercycle. Haha.
Agreed. The question in the back of my mind is this: What nation(s) are willing to push WWIII and possibly even push "the BIG button" in the process in order to save their people and their economy...really they are trying to save their massive wealth, but apparently the socialist mentality so prevalent in everyone makes us think it is for "the people" The USA has used nukes, will do it again, i think...but will China? Russia? India? Pakistan? Israel? or the long list of others trying to save their "economy" and all that as the world burns?
Maybe I am a pessimist, but history shows war is ALWAYS the solution man uses.
The answer is "none". The real question is "which psychopath leader is willing push the BIG button to save his own ass?"
The folks at Sober Look provided an analysis done by Deutsche in late 2014 which showed that if oil remained in or around $83 a barrel,
Saudi had sufficient accumulated financial reserves to absorb that price for 8 years, whereas Nigeria could only absorb that price for 3 months and Russia could absorb that price for 3 years.
http://soberlook.com/2014/10/the-saudis-have-staying-power-to.html
No talk of China/Iran oil deals.
The is no petrodollar in Iran, Neo.
long seal oil..
Budgets aren't going to be the only things bleeding as oil continues its drift back down toward $20/barrel.
You can figure it out.
Well, the Houthi certainly are motivated. Saudi Spring anyone?
I think there is no more petrodollar. It is now backed by almighty paper.
ultimately?....gold...
Interesting coz the ragheads shoulda known what their burn rate was before they started trying to drive the frackers and Russians out of business.
the problem with driving the frackers out of business is that you really only send them into hiding. the wells are mapped and technologies developed, many wells drilled....they just went quiescent. sure, many of the developers have gone bankrupt, but who bought their developed reserves at a dime on the dollar, and what will they do with them when prices lift off again? i don't think it is that easy to shut down that whole portion of the industry with lasting effect, as there is too much money waiting to be made. in retrospect, it was a good turn of events for the US, as we developed a whole additional source of petroleum reserve, then put it on the back burner -- available if mideast unrest cuts off imports like in the 70s.
Why would the Saudis want to kill off the US fracking industry when they could simply buy into it? If profits are the object, then just become a shareholder and make money selling US oil, which leaves more Saudi oil in the ground for later.
This really isn't that hard to figure out. We're in a global depression which translates to lower demand for everything, and since everything requires oil at some stage in the process, and given the massive overcapacity built up in the last 20 years, prices have nowhere to go but down. You don't need a conspiracy theory to explain it - just the basic economic horse sense this site used to be known for.
I swear, if you hooked up all the windmills people tilt at around here you could power the entire continent for the next century.
+1
Saudi will be buying US shale plays as soon as they are bankrupt. It is coming very soon. They can print pretty paper just like everyone else. All countries accept paper no questions asked.
At which point the Saudi connection to 9-11 will be revealed, they'll become a pariah just like Iran, and all their US holdings will be seized as reparations.
Well, maybe not, but that's what I'd do if I were in charge;)
ebear goes over to the dark side!
They may have a medieval chip on their shoulder about working with infidels in the US fracking business though. It goes unstated out of liberal politeness for the most part, but it's a problem mixing Islamic society business with Western society business - rarely a successful mix. We work well with evil commies, no problem for the most part, but investing in Muslim countries, and vise-versa tends to not occur much. Poor trust, they are too fundamentalist, even though they think they aren't. Well, they may not be radicals, or extremists, but they are garden variety fundamentalists, and no one even likes Christian fundamentalists in the West these days. We see them as more or less deranged and impaired, and they see us as bordering on out of control, and undignified, at best, and disgusting filth otherwise.
bear.. did you fall for the conspiracy theory that an Arab in a cave in Afghan. shut down the 1/2T$ US air defenses with his laptop? Remember how they removed two 100 meter high piles of millions of tons of rubble overnight in 4 hours. instead of it taking 4 years. 3000 humans also 'vaporized'? Sure. Sure.. Big office-paper fire in the building. Now be a good boy, and get your homework done for skool tumorra.
You mean like these wells?
https://www.google.com/search?q=qld+gas+well+map
Had a mate working on the gas wells in northern Queensland Australia, there were over three thousand wells last time I looked.
Regards
Australia has been planning to become the world's biggest nat-gas producer by the end of this decade (a spectacular rise from a low base) but lower demand may delay that as uneconomic producers are shaken out. It remains to be seen who the weak hand producers are. My guess is it won't be Australian gas producers folding, as all the new production projects (that have now all about finished their construction phase) are already under 25 year export supply contracts to diversified national buyers (Japan, Korea, China, India).
To get from $25 to $105 in 11 years the Saudi budget has to be growing on average by about 14% a year. At 10% they should need about $70 oil to break even.
But who knows? The recent Saudi wars may have boosted that $70 to $105.
And with Russia siding with Iran/Syria. Well it could get interesting.
To get from $40 to $105 in 11 years is about 9% a year on average.
Some one doen't like math? It is not partial differentials. Jut log and anti-log.
I'd like to see Obama topple the house of saud and the israelis before he leaves. Those two things alone would make the rest of it almost worth it.
The purpose of the Israelis is well known. Some one to hate (they serve that purpose quite well around here). You eliminate them and the ragheads will only have more resources to focus on each other.
I say we keep them as a useful distraction and designers of some of Intel's chips.
That's just plain stupid, even if written tongue in keyboard.
There's nothing, repeat nothing, worth that big eared prick.
He's divided us, bankrupted us, humiliated us and marginalized us. Your comment is stupid in light of this. What's wrong with you?
It seems to me unlikely that the Saudis would have been dumb enough to think they could knock out a supplier via low prices.
So what was the intent? Was some prince playing the futures market? Some soverign wealth fund wanted to take out a rival?
I never thought their motive could have been the US Shale Oil industry, didn't make sense.
High oil prices lead to overcapacity as everyone rushes to cash in on the bonanza. As with everything else today, the players are over-leveraged and can't afford to cut production to support price.
It's a classic race to the bottom in a global depression that will ultimately separate what's wanted from what's actually needed, and the truth is, we don't need the Saudis anymore, so over the side they go.
As for the kingdom itself, they are trapped in the same "today will be just like tomorrow" fantasy as the USA and have made no provision for falling prices (which they no longer control) amid increasing demands from the burgeoning free shit army they spawned with their version of arab socialism.
Wait until the pink slips start arriving and the sinecures are cut off. That will make for interesting viewing I'm sure.
And on the pedestal these words appear:
'My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!'
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away
If you subscribe to the abiotic theory of oil, supplies are virtually infinite because oil wells keep getting refreshed from below. As more wells were being dug around the world, Saudis were losing their market share so they had to reduce their prices to discourage new exploration.
Russian scientists seem to believe in the abiotic theory. This information may be suppressed by western governments to maintain the petro dollar.
Excellent point. Although being abiotic does not mean the earth will relpace it at the rate we use it. But I have been thinking about deep water supplying hydrogen compounding with carbon which is abundant in magma. Russian have drilled to extreme depths, they probably do know something about this.
http://www.reuters.com/article/2014/06/13/us-science-water-idUSKBN0EO2QF...
Just another secret to keep from the people.
And the energy cost of getting it is more than you will get. EROEI.
It's called Methane Hydrates. Forget about it. I'll get my flying car before that happens. I'll let you in on the secret, There's no secret.
Abiotic is bullshit. It's called a shallow sea with algae sediment and a million years
They needed the money. Pure and simple. They're bleeding cash from every pore. They HAVE to pay off their middle and lower classes or there will be revolt. And ISIS and Al Quaeda ARE a revolt -- renegade members of the Saudi upper middle class leading poor followers from everywhere but many, many also from Saudi Arabia.
Read the Wiki article on Ibn Saud and understand: Saudi Arabia is not a nation. It's a medieval family fiefdom, held by the Sauds only as long as they can force everyone else to obey. And they've ALWAYS had a problem with religious fanatics, whom they have at times used as shock troops and at times purged like Hitler's SA. At the moment they're locked in a two-front war against the rebels while barely holding on at home. They're almost as finished as Bashir Asad. But the American press ignores all of this.
The Saudis are turning oil, which goes with ground they may not hold for another decade, into personal assets as fast as they can while holding onto their supremacy. It won't last much longer.
Exactly what I have been saying. They are pumping/selling all they can while they can regardless of the price.
Every barrel they don't sell, the faster they will fall.
It would have been a lot cheaper and more effective for the Saudis to lobby and to donate/buy some politicians, like the jooz do.
WAY more cost-effective than getting in a price war.
The policians have a myriad of ways of shutting down Saudi competition, if the politicians are properly motivated.
I am loving the Saud's taking it in the ass. Couldn't happen to more deserving ragheads.
I think this article understates their troubles. Almost all other oil producing countries have many other industries; diverse economies. The Saudis have taken decades of incredible wealth and built gilded towers. They only have one half of an economy.
Oil addiction is eventually lethal.
It seems that exporting terrorism and laundering all those missing Pentagon dollars is a pretty good business to be in.
Good, I say squeeze those suckers. Lets see how wealthy they really are when excluding oil factor.
They are wealthy in sand... so unless they can find some way to turn sand into energy, they are fucked.
Actually they did, as did everyone else. The problem is, the time has run out, as predicted. No other producer broke (not even Canadian oil sands) and now Iran wioll be coming on stream (bnot that it hasn't been selling its oil anyway).
So the Saudi gambit failed. Heads will roll, I am sure.
That's what it seems like. In their astounding arrogance they thought they were all-powerful.
How the mighty have fallen!
The King of Saudi should be arrested for human rights violations upon landing his plane in Washington.How can Obama meet with someone who treats woman like shite and beheads people by the hundreds.It shows Obama is nothing more than a F'n jerk-off.
Are you new to geopolitics?
Doesn't matter. He's still right. If I were president, I would invite all these cocksuckers to DC, including the Bushes, Clintons, European dictators (all of em), Putin, Xi, arrest them all and hang them all on the WH front lawn. A message to the world : This is what happens to scum who oppress their own people.
No problem. Just close the Straits of Hormuz and they'll have their target price in no time.
Don't worry... when ISIS puts Saudi Arabia on the gold standard we will finally get that production drop that will help raise prices.
As an aside, the main ad that shows up for me on this Zerohedge page lists the top ten richest people on earth and it shows their lovely faces over and over.
Just for the record:
#5. Larry Ellison lost 1.6 billion yesterday
#3. Warren Buffet lost $2 billion yesterday
#2. Carlos Slim lost $1.6 billion yesterday
#1. Bill Gates lost $3.2 billion yesterday
Got it all fixed that oil prices will rise because of Saudi's deficit ? A one causality ? What about the US-Iran axis ? This is an apple pie ? Quouting DB...LOL. You really think that DB has no positions to cut losses by hoping to rev up paper oil prices ? It is passe to trade from views of the likes of DB. These views are still flouted on naive retail investors. A delusional assumption that ZHers are retards.
All this is merely symptomatic of the imminent demise of the petrodollar, which is no longer working its magic. Clearly, all the economic rules of former decades simply no longer apply. In order to remain a viable state, the Saud dynasty will therefore soon be forced to drop the dollar altogether.
Or they could, I don't know, just go back to the 2007 budget?
Boo fucking hoo.
"Their leaders talked and talked..."
They will do what sand pigs always do.
All principles will vanish, another 9/11 is on the cards and the peg will get dumped.
And dumping the peg is what DB cannot even contemplate as it will see its multi trillion derivatives explode in an instant leaving Germany looking like Nagasaki and Wall St Like Hiroshima not to mention places like London.
But this is bollocks as SA cannot and will not start running up any flags, They will produce even at $10 and still keep ramping, and any ideas that they will take pity on their fucking sand pig slaves is pure sentimental dross.