Mideast Turmoil: Follow The Oil, Follow The Money

Authored by Charles Hugh Smith via OfTwoMinds blog,

In this scenario, time is running out for Saudi Arabia's free-spending royalty and state - and for all the other free-spending oil exporters.

While there are numerous dynamics at work in the turmoil roiling Saudi Arabia and by extension, the Mideast, one way to cut to the chase is to follow the oil, follow the money. Correspondent B.D. recently posited a factor that has been largely overlooked in the geopolitical / fate-of-the-petrodollar discussions:

Perhaps the core dynamic is a technical one of diminished oil production. Here is Bart's commentary:

"I think the Saudis may be quickly running out of profitable oil to produce/export.

I think they tried to over-produce for a while to damage the competition... and they now have production issues resulting from that. (As has happened in the past)

I think they may have recently slipped over the event horizon for being the world's swing producer of 'cheap-ish and abundant' oil. That has huge ramifications for the global markets ability to quickly respond to supply/demand fluctuations.

I suspect they’re no longer cutting production voluntarily ... they are now in the grip of a technically driven decline in output. (Why else begin selling off ARAMCO now?)

I doubt that many national economies can handle $70+ oil for very long... price will be limited by the ability of the consumers to pay. What I assume should happen is relentless severe volatility in the absence of a big swing producer that can open up or shut in production with comparative ease."

Thank you, B.D. Let's start with what's well-established about Saudi oil production:

1. The days of sticking a straw in the sand and oil gushing out are long gone. Oil production now depends on costly technologies such as pressurizing the wells with seawater, CO2, etc.

2. The soaring population of Saudi Arabia is dramatically increasing domestic consumption of the Kingdom's oil, reducing the amount of oil available for export.

3. The industry is skeptical of official Saudi estimates of proven reserves and production capacity.

Let's sketch a conjectural scenario which explains the extraordinary purges and power plays underway in Saudi Arabia:

1. As B.D. posited, Saudi production is already flat-out, and there is no million-barrel-per-day slack that can be brought online to depress global prices, crushing competitors and maintaining control of crude prices. In other words, the Saudis no longer have the technical / production capability needed to control global oil pricing-- a power that they've enjoyed since 1973.

2. Saudi production is declining due to technical/real-world factors (depletion of super-major fields, etc.) that cannot be overcome at a financial cost that make sense at $50/barrel oil.

3. The possibility of a global recession unfolding in 2018 is rising. In a global recession, oil demand will fall, crushing the marginal pricing power of exporters.

4. The Saudi royal family and the Kingdom's vast state welfare system is no longer sustainable should oil fall into the $30-$35/barrel range due to a collapse of global demand.

5. The only way out is to grab the power now that will be needed to slash domestic welfare and domestic consumption of oil/gas, i.e. the power to overcome resistance within the royal family to severe reductions in royal/central state budgets.

Geopolitically speaking, very few if any oil exporters are able to prosper and fund their regional/global ambitions if oil plummets to $35/barrel and stays there for years. Every oil exporter makes brave statements about being just fine with $25/barrel oil, but the reality is every major oil exporter is dependent on oil revenues of a scale that can only be generated at $50/barral and up.

The discovery of new oil fields has fallen far below global consumption.

Meanwhile, U.S. producers have taken market share away from OPEC exporters, effectively reducing their influence over prices, as U.S. producers are to some degree the marginal swing producers.

The costs of exploration and production changed around the turn of the 21st century. The cost of discovering, extracting, refining and transporting new oil have increased dramatically.

All this suggests oil will have to become more costly for it to make financial sense to produce it. But as B.D. observed (and analyst Gail Tverberg has explained in great detail), oil-consuming economies will be pushed into stagnation/recession by significantly higher oil prices.

Will China Bring an Energy-Debt Crisis? (Our Finite World, Gail Tverberg)

In this scenario, time is running out for Saudi Arabia's free-spending royalty and state - and for all the other free-spending oil exporters. As a global recession looms ever closer, every oil exporter edges closer to the event horizon of financial, social, and political disorder and upheaval. Venezuela is just the first domino that's toppling. The Saudi leadership is trying to avoid being in the line of oil exporting dominoes that will fall in the 2018 global recession.

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Arnold wisehiney Tue, 11/14/2017 - 09:22 Permalink

Around here, in western Pensyltucky, many of the shallow gas wells are non producers.

Most every farm, and some Schools, have one to defray winter heating costs and maybe sell excess.

The best set up I have seen, is that a house in the hill has broken into an anthracite seam and are shoveling in a little more coal, to keep the kittens warm.


In reply to by wisehiney

katagorikal youngman Tue, 11/14/2017 - 14:07 Permalink

Production cost does not really matter. KSA consumes about a 30% of its production, and that figure is rising, because there are subsidies on consumption, no energy efficiency standards, and no alternative means of energy production (renewables, nuclear).What does matter is the state's total revenues compared to expenditures - the oil price relative to the value needed for fiscal balance. KSA has reduced its breakeven price, by increasing borrowing, reducing subsidies and increasing taxes (VAT next year), but it is still way above the current price, and foreign exchange reserves continue to be depleted. 

In reply to by youngman

Cloud9.5 Tue, 11/14/2017 - 09:32 Permalink

Something is happening when key producers like Saudi Arabia and Venezuela are collapsing economically.  The Saudis produce light sweet crude but their fields are long in the tooth and their water cut is increasing.  Venezuela produces heavy oil that has to be blended with lighter distillates to produce gasoline.  Production costs in both regions have been on the rise.  While this is a factor, what the two countries both have in common is that they have both funded an exponential growth of their welfare states with oil profits.  When those profits began to decline for production reasons and market reasons their need for ever increasing revenue did not decline.They are destabilizing because they can no longer fund their dependent classes at the level they have come to expect.  Entitlements are a bitch. The collapse is most noticeable at the periphery.  Then it migrates to the core. https://ftalphaville-cdn.ft.com/wp-content/uploads/2013/01/Perfect-Storm-LR.pdf  

Last of the Mi… Tue, 11/14/2017 - 09:33 Permalink

Most of this is B.S. The attempting to sell part of aramco is the tell. Why would you ever do such a thing if there weren't problems in paradise. Maybe it's as simple as not spending enough money on R&D and explorations, maybe their fields are awash with sea water from pushing oil production. It would be ironic if they attempted to run all other producers out of the market then ended up pumping little but seawater from their own depleted wells. Clearly, there is a problem somewhere and the recent "night of knives" shows there is potentially a lot of pressure on oil income whatever the problem is, whether it's a hiccup or whether it's the end of the road where their total dominance in oil production is concerned. I suspect it's the latter, and if that is so, then there a lot more unrest within the Kingdom and within the ME as tensions arise from the failing of the oil spigot. This could be monumental in the ME if the finances, which are the big unknown, are as bad as some suspect. It could mean the end of the dominance of the house of Saud in the ME and have ramifications all over the globe. Ultimately, mismanagement of assets could be the problem here with a real understanding of how serious the problem may or may not be coming some time in the not too distant future.  

Freddie Last of the Mi… Tue, 11/14/2017 - 10:03 Permalink

Saudis would not try to IPO if their wells were healthy.  The wells are old.  US oil companies over pumoped  decades ago when they knew they were getting kicked out and damaged the wells.  Saudis overpumped because they are greedy pedos.Their monster well Ghawar is 60+ years old and must be close to dead.  I believe the heat from the earth's core very very slowly refills most underground pools but not fast enough to refill them.The Saudis must have cold sweats because 40 years of embargoes means Iran has barely touched their reserves.  This was also the grab for Iraq's oil.  I would guess Iraq and Iran are in the top 5 for reserves.   The NWO Rothschilds want to grab Iran's oil any way they can.  The same way they want to grab Russia's resoruces and to break up Iraq into 3 countries. 

In reply to by Last of the Mi…

Ponyexpress Tue, 11/14/2017 - 09:35 Permalink

A little bit of simplified historical  perspective:Remember the Middle East , before the West  found and developed its oil resources ?.Remember Venezuela the same way. Remember Cuba with the Sugar.?Now that the West is essentially no longer dependent on their oil, their one- income, socialistic  hierarchical  and by definition, corrupt  form of government, like all have done historically, will fail.Venezuela is just a Harbinger of what is going to happen in the  Middle East.Predictable as well, and even worse, stupid and unnecessary All the blah blah blah above notwithstanding it really is that simple

samsara Tue, 11/14/2017 - 09:38 Permalink

I posted before..... samsara Nov 8, 2017 9:34 AMAfter 40 years of the family pilfering billions and everybody taking what they want,  why is this an issue now? BECAUSE GHAWAR IS GOING TITS UP.   Water cut is hitting the pipes, And they know it.  Now they are scrounging up coins in the sofaGAME OVER KIDS.

Freddie samsara Tue, 11/14/2017 - 10:07 Permalink

^^^^^^This.  Most people do not realize that Ghawar is or really WAS the biggest oil well or field on earth.  All in one spot.  The Saudis have some others but they are peanuts.  The Saudis are in a panic trying to grab Syria, war with Yemen, palace coup.  They are lashing out at everything because the money tap is empty and their subjects will kill them all once the money is gone.

In reply to by samsara

Fahq Yuhaad Tue, 11/14/2017 - 09:46 Permalink

Another one of these American, zero-credential, self-styled armchair experts on geopolitics, probably sitting in a basement somewhere outside of Jerkwater, Oregon.

World Cash Day Tue, 11/14/2017 - 09:55 Permalink


Total DoomPorn!

Wow. Trump is the President now and the US & Global economies are finally recovering after 10 years of Bush-Obama disasters.

The next 8-9 years will be much much better than the last 8-9.

Strong economies. Strong growth.

This Doom Porn is just so wrong it's laughable.

Anyone round here checked the stockmarkets lately? New All-Time records all over the place!

Gohigher Tue, 11/14/2017 - 10:19 Permalink

I'm CERTAIN the CIA-DS playbook is recommending that the House of Soudomy buy a bunch of expensive weapons and go to the endless wars model killing those lesser humans in the region. And then ramp up the sell: visions of an exceptional future of wealth and prosperity for all if they would only sacrifice what they HAD for what is to come.......

Why does that sound familiar ?

FBaggins Tue, 11/14/2017 - 10:27 Permalink

In the Rothschild US-GB plan to bankrupt Russia OPEC oil prices were drastically reduced. That is a fact and Saudi Arabia has likely suffered more than any other nation as a result of the debacle. Royalties on oil were down so much that the Saudi government was on its knees. Then there is the misspent hundreds of billions in supporting the Syria insurgency which they were misled into by the same grasping group. Even with the relaxation over the past year in allowing oil to go up to $50 to $60 dollars the economic pinch in SA is still causing considerable turmoil. SA still has more proven oil reserves than any other nation. Also, it is BS to say oil extraction in SA is expensive. It remains the least expensive on the planet at less than $10/ barrel. The turmoil is more likely a result of the nation waking up and trying to extract itself from the London-based bankster manipulators. 

yt75 Tue, 11/14/2017 - 12:23 Permalink

This article may well be right, and if it is, what could be quite Ironic is that MBS (the son of current king and actual ruler), has a "modern" image within Saudi Arabia (allowing women to drive, giving jobs back to saudis, "great" projects like new eco cities NEOM etc), and if the article is right, it means he will be the one slashing welfare and subsidies (on gas, even electricity is almost free today in KSA, as well as water even if 75% of it is desalinized using oil/gas energy for the process)...