Nine months on from Saudi Arabia’s second major oil price war in the last five years, more negative consequences are manifesting themselves. Aside from the irrevocably damaged core relationship with the U.S., the permanent distrust of international investors, and the further alienation of many of its fellow OPEC members, Saudi Arabia is now beginning to discover the true depth and breadth of damage that it has done to its own economy, which will endure for many years to come.
Figures released at the end of September show that Saudi Arabia’s economy contracted 7 per cent year-on-year (y-o-y) in the second quarter of 2020, with the Kingdom’s private sector showing a negative growth rate of 10.1 per cent, while the public sector recorded negative growth of 3.5 per cent. Saudi’s oil revenue in the first half of the year was 35 per cent lower than a year earlier, while non-oil revenue fell by 37 per cent. Moreover, in the second quarter of 2020 alone, the Kingdom’s petroleum refining activities recorded a 14 per cent y-o-y drop. All of this resulted in a current account deficit of SAR67.4 billion (US$18 billion), or 12 per cent of GDP, in Q220 compared with a surplus of SAR42.9 billion, or 5.8 per cent of GDP, a year earlier, according to Saudi Arabia’s General Authority for Statistics.
The official line being peddled by various Saudi agencies to explain these appalling numbers is that they are the result of the COVID-19 pandemic outbreak that destroyed demand for oil around the globe. That, of course, is only partly true, as the key element that made this factor exponentially worse was that Saudi Arabia decided to launch yet another oil price war at the same time, the key feature of which was to crash oil prices by ramping up oil production from itself and other OPEC members, plus Russia. For a market already saturated with oil as demand continued to fall away, the price effect on the supply side of the oil price equation was catastrophic and led to unprecedented negative pricing on WTI futures contracts for May. The additional factor that has been overlooked by market commentators is that by the beginning of March, when Saudi launched the last oil price war, it was becoming clear that the COVID-19 outbreak would not be as containable as many had thought even a month or so before. It would have been entirely understandable to the senior Saudis with whom Saudi Crown Prince Mohammed bin Salman (MbS) had shared his plan to try to destroy and/or disable the U.S. shale oil sector again (albeit with exactly the same strategy that had failed so disastrously just four years earlier) that the new oil price war would be put on hold.
This, though, would have required self-control, introspection, and intelligent analysis, the lack of which in MbS was noted by, among many others, the German intelligence service, the Bundesnachrichtendienst (BND), as long ago as 2015. As highlighted in a leaked intelligence dossier from the BND in 2015 entitled ‘Saudi Arabia - Sunni regional power torn between foreign policy paradigm change and domestic policy consolidation’ the then-Saudi Arabian defence minister, then-Deputy Crown Prince Mohammed bin Salman, was “trying to strengthen his own position in the royal succession [regardless] of whether this put Saudi Arabia’s relationship with erstwhile regional allies in jeopardy.”
The intelligence agency added that: “The careful diplomatic stance of older members of the Saudi royal family has been replaced by an impulsive policy of intervention.” MbS’ impulsive nature had also clearly not taken into account the prescient warning from Saudi Arabia’s deputy economic minister, Mohamed Al Tuwaijri, back in 2016 which stated unequivocally – and completely unprecedented criticism of government policy from a Saudi minister - that:
“If we [Saudi Arabia] don’t take any reform measures, and if the global economy stays the same, then we’re doomed to bankruptcy in three to four years.”
The consequences of the oil price war that prompted this outburst from a Saudi minister were also apparently not taken into account by MbS either who now, as then, appeared more concerned with his own personal position in the royal succession (given the ill-health of King Salman) than with the economic and social health of his country or his OPEC brothers. Between 2014 and 2016 alone, the Saudi-instigated oil price war cost OPEC member states lost a collective US$450 billion in oil revenues from the lower price environment, according to the IEA. Saudi Arabia itself moved from a budget surplus to a then-record high deficit in 2015 of US$98 billion and spent at least US$250 billion of its foreign exchange reserves over that have gone forever. Even before the 2020 oil price war was launched, Saudi Arabia was facing sizeable budget deficits every year until at least 2028.
Moreover, there is no sign whatsoever of any change any time soon to the massive supply overhang that began in earnest with the Saudi-led crude oil overproduction at the same time as the faster spread of COVID-19. According to figures from the end of September from various data analytics companies, Saudi Arabia’s domestic crude oil stockpiles have climbed to the highest since the effects of the COVID-19 outbreak were most deeply felt on the oil market’s supply-demand balance in April. Specifically, according to data analytics firm Kpler, Saudi Arabia’s crude stockpiles were 78 million barrels as of 23 September, the highest since the end of April, with an uncertain demand outlook from Saudi’s key target market of Asia still weighing on pricing. This is not likely to improve in the coming weeks as, despite the reduction in Saudi’s official selling prices (OSPs) for Asia for September and October deliveries, refiners continue to struggle with suppressed oil products’ margins. To add to this negative factor, a large proportion of refineries in Asia have term contracts for up to 80 per cent (or even higher) of the oil they take in and local traders report that many of them are not even using this volume on their current run rates.
With very little new money added into Saudi Arabia’s finances from the internationally-shunned Aramco IPO, oil demand still low due to COVID-19 but supply still high after the latest oil price war, and foreign exchange reserves drawing closer to the minimum level needed to ensure the survival of the economically-crucial SAR-US$ currency peg, Saudi has little choice but to start contemplating ‘selling the family silver’, metaphorically speaking. According to various news reports, Saudi Aramco is currently in talks with global fund manager, BlackRock, and other international investment firms, to sell a stake in a core part of its oil infrastructure – its pipeline business - for around US$10 billion. To put the sheer scale of Saudi Arabia’s MbS-inflicted economic disaster into perspective, though, the entire proceeds from the sale of this core part of the Kingdom’s core industry will only cover 48 days of the guaranteed dividend payments due to shareholders of Aramco. This extraordinary guarantee was, again, a product of the fact that MbS did not want to lose face and cancel the Aramco offering when it had become clear that no serious international investors wanted to touch it due to its multiple toxic elements.
This comes on top of the slew of announcements since the end of the 2020 oil price war of Saudi projects either delayed or cancelled, including the once much-vaunted flagship US$20 billion crude-to-chemicals plant at Yanbu on Saudi’s Red Sea coast. The similarly high-profile purchase of a 25 per cent multi-billion dollar stake in Sempra Energy’s liquefied natural gas (LNG) terminal in Texas is also apparently under threat, although Sempra for its part has said that it continued to work with Aramco and others “to move our project at Port Arthur LNG forward.” In the same vein, according to various news sources, Aramco has suspended its key US$10 billion deal to expand into mainland China’s refining and petrochemicals sector, via a complex in the Northeastern province of Liaoning that would have seen Saudi supply up to 70 per cent of the crude oil for the planned 300,000 barrels per day refinery. In sum, it appears that all of Aramco’s principal projects aimed at diversifying Saudi Arabia away from the relatively zero added-value pursuit of just pumping and selling crude oil are now subject to review and/or outright suspension.