We will know the fate of the House of Saud within the next 4 years

Riyadh Is Reeling from Bargain Oil Prices

"According to this new report, the Saudis fiscal deficit is now equivalent to a whopping 20 percent of the country’s GDP, and goes on to show that if Riyadh wants to balance its budget this year, it would need oil prices to hit $92 per barrel.

Barring some major supply disruption, that’s not going to happen. Oil prices are currently trading at exactly half of the reported Saudi breakeven price, and even the most optimistic readings of the effects of a potential OPEC production cut later this month only predict prices rebounding to somewhere in the range of $65. And let’s not forget that if and when that happens, hungry American shale companies will be pouncing on the opportunity to ramp up their own output, necessarily denting the impact of OPEC’s cuts.

So what does all of this mean? For now and the foreseeable future, Saudi Arabia is going to continue to run an enormous budget deficit, and will be forced to dig deeper into its rainy day funds in order to cope with today’s new oil market reality."

As I have written on many occasions, Saud has no real economy at all, its economy is oil, everything else is essentially dependent on the oil revenue.

It is also locked in an existential war of Sunni vs Shia with Iran, which as a real economy, and has been released from international sanctions which will allow its real economy to begin prospering. 

Saud is faced with real problems, it does not have sufficient revenue to continue its rich welfare state which supports its people. And it has begun to tax them, and require they pay more for various subsidized goods, and services. How long before they become restive? 

Saud has about 4 more years of rainy day funds before it will all but exhaust them. It also has its crown jewel asset ARAMCO. It also can sell debt into the international market. However, ARAMCO is a one time asset, once parts of it are sold, they are gone, never to be recovered by Saud. Selling debt into the international market will be fraught with problem since resistance will grow unless there is a clear way for Saud to decrease the revenue imbalance. 

The other shoe is the fact that the world economy is in a very weak state, especially the European economy of which the South is in depression with extremely high unemployment, and weak economies. The North is in better shape but not sufficiently well off to bail out the torpid South. 

Lastly, the other oil market makers like Russia, and Venezuela all have a dire need for cash, and depend upon the sale of oil to generate that cash. Only the Western oil nations like the US, Canada, and Norway are economically capable of reining in production, and even they have little desire to do so. 

Absent point source supply issues, the price of oil should remain low due to an over supply to the markets, and storage at full or near full capacity.

In 4 years we will know much more about the long term viability of the House of Saud. My personal take is thumbs down.