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Arabia

Saudis could run out of cash in about five years

2015-11-02

Not even the mighty Middle East can survive cheap oil forever.

If oil stays around $50 a barrel, most countries in the region will run out of cash in five years or less, warned a dire report from the International Monetary Fund this week. That includes OPEC leader Saudi Arabia as well as Oman and Bahrain. Low oil prices will wipe out an estimated $360 billion from the region this year alone, the IMF said.

Huge budget surpluses are quickly swinging to massive deficits as oil prices have crashed to around $45 currently from over $100 last year. Many of these countries are being forced to tap into rainy day funds to weather the storm.

"Oil exporters will need to adjust their spending and revenue policies to ensure fiscal sustainability," the IMF wrote.

The depressed oil prices have come at a time when spending has gone up as many of these countries are grappling with regional violence and turbulence in financial markets.

Saudi Arabia, the world's largest oil producer, needs to sell oil at around $106 to balance its budget, according to IMF estimates. The kingdom barely has enough fiscal buffers to survive five years of $50 oil, the IMF said.

That's why Saudi Arabia is moving fast to preserve cash. The kingdom not only raised $4 billion by selling bonds earlier this year, but its central bank has yanked up to $70 billion from asset management firms like BlackRock (BLK) over the past six months.

Going to have to sell assets, and may take some losses to do so...

After years of huge surpluses, Saudi Arabia's current account deficit is projected to soar to 20% of gross domestic product this year, Capital Economics estimates. Saudi Arabia's war chest of cash is still humungous at nearly $700 billion, but it's shrinking fast.

Saudi Arabia is unlikely to jack up taxes, but it is poised to cut at least some forms of spending.

It's not likely to cut social and military spending programs as leaders fear a repeat of the 2011 Arab Spring uprising.

"In an environment with regional insecurity and domestic instability, to chip away at that social contract is a bit of a political gamble," said Henry Smith, a Dubai-based associate director with consultancy Control Risks.

Yet Smith said big government spending projects are already seeing far greater scrutiny.

"Some of the projects that are less economically essential are quietly being sidelined," Smith said.

Iran's break-even oil price is estimated at $72 and it could survive cheap oil for less than 10 years, the IMF estimates. It's a rosier outlook compared to its neighbors. But Iran's outlook is clouded by potential sanctions relief (which hasn't come yet) and a surge in oil production from its nuclear deal with the West.

Except Iran will get the big cash splurge from relief of the sanctions. That's a double insult: all Obama had to do was walk away from the deal, and the Iranians would have had to change course. Now the ayatollahs can get the cash they need to foment revolution and buy time at home.

Iraq has virtually no fiscal buffer remaining, according to the IMF. The country is grappling with internal strife and has lost large swaths of land to ISIS.

"Violence increasingly affects civilians, and has a particularly adverse effect on confidence and expectations, and consequently on economic activity," the IMF warned.

Bahrain is also under great financial pressure, with the likelihood of also running out of options in less than five years. The country already has lots of debt and has been running deficits for several years in a row.

"They are in a relatively tight spot. They are going to have to undertake a more significant tightening," said Jason Tuvey, a Middle East economist at Capital Economics.

However, a handful of countries are well positioned to face the storm. Topping that list are Kuwait, Qatar and the United Arab Emirates. That's partially because these countries don't need sky-high oil prices to balance their budgets. Kuwait's break-even oil price is estimated by the IMF at just $49, or just a tad higher than current levels. The magic number is believed to be $56 in Qatar, the host of the 2022 World Cup, while the UAE needs $73 oil.

But these three countries have built up mountains of oil money that protect them during the leaner times. The IMF said the UAE has enough fiscal buffers to withstand $50 oil for nearly 30 years. Qatar and Kuwait can sustain cheap oil for almost 25 years.

Posted by:Steve White

#9 Mehhh, given various Pert claims on the Net that both Alaskan + Dakotas Shale oil regions are running out of oil or very soon will be, I'm more concerned about the state of the KSA'S, ME's, + World oil reserves through 2050 + beyond.

Posted by: JosephMendiola 2015-11-02 21:49

#8 Meanwhile Low Energy Nuclear aka Cold Fusion continues to move ahead.

NASA plans to use LENR thrusters in deep-space probes.

Link

Posted by: phil_b 2015-11-02 18:47

#7 I suspect control of Mecca and Medina rank high on the lists of both ISIS and Iran.

Posted by: rjschwarz 2015-11-02 13:57

#6 In today's government driven demand economy, less expensive is not a successful marketing strategy.

Halliburton nailed it.

Posted by: Besoeker 2015-11-02 13:54

#5 OPEC's strategy is to create the conditions for higher than $200 per barrel oil in the next couple of years' time.

The Treasury and Fed are working hard to make that come true by debasing the currency as fast as they can get away with it and the ruling caste keep a strangle hold on the Beltway. Keep printing and creating money without backing. The power brokers can lose half the value of their holdings and still be 'comfortable' which is not the same for the middle and lower class.

Posted by: Procopius2k 2015-11-02 12:51

The Saudis probably won't see $106 a barrel oil again ....

This is approximately as likely as the idea, widely accepted only a couple of years ago, that crude would never drop below ~$100/bbl again. The fundamental metric that everyone glosses over is that global oversupply is presently equal to approximately half a year's natural decline from existing wells. Thus: stop drilling, wait half a year and supply and demand come into balance with an attendant meteoric rise in prices. Drilling of course won't stop and thus it'll take a bit longer and the price rise will be more gentle but given the level of present investment it's unavoidable that prices will be going up in the not-too-distant future.

Also, consider the effect of the eventual, and likely unavoidable, instability in oil producing nations that will result from prolonged low prices as thugocracies the world over run out of money with which to buy the acquiescence of the yokels. See e.g., the million bbl/day (something on the order of half the present global oversupply) that the Hildebeeste's little Libyan war took off the market for a year. Now imagine what happens when it's Persians vs Jews, Shia vs Sunni, ISIS vs the House of Saud, etc. The present oversupply of crude is sufficient to absorb a modest geopolitical shock. A large one or multiple simultaneous shocks? Kaboom!

It's also worth considering that what just happened in the US oil patch was the horizontal driller's equivalent of the dot-com bubble. E&P's are almost exclusively (junk) debt financed entities and the finance kiddies who stuffed so many billions into the boom are mostly of an age that they were likely at mommy and daddy's house watching Power Rangers though the last real oil shock / boom and were thus unprepared for what comes next (now). Namely desperate production of as much as possible prior to capital exhaustion in hopes of surviving followed by defaults, consolidation and a much slower and more rational expansion by the survivors as markets recover. I'd wager that in a year half the E&P's with horizontal wells in the US will be tits-up. No one is going to be excited about issuing (or buying) new debt to finance expansion of production from assets that produce at, or anywhere near, the marginal cost of production. Think of it as market instability resetting the investment bar higher.

Then there's the relative strength of the dollar presently depressing prices, the socialist in the White House cutting the legs out from under the US economy, etc.

Personally I'd wager that we'll see oil top $100/bbl in the next five years and likely stabilize at prices significantly above today's much sooner.

Posted by: Halliburton - Foreign Affairs Division 2015-11-02 11:56

#3 The biggest threat to Saudi Arabia and big oil cartels over the past few generations has been the small "independent" oil companies.

Oil prices are, of course, a function of supply and demand. But without the market leverage enjoyed by the oil giants, small independent companies have no choice but to undercut international oil prices in order to get their product to market. A tactic long despised by the oil giants.

In 2005 Saudi Arabia estimated that the optimal revenue for Saudi oil would be achieved at an international price of about $170 per barrel.
It was only the willingness of the independent oil companies to sell their oil in the $80 per barrel range that has kept the price of oil down to about $100 per barrel for most of the past decade.

Independent oil and gas producers increasingly account for a larger percentage of domestic production in the near offshore and lower 48 states. Independent producers' share of lower 48 states petroleum production increased from 45 percent in the 1980's to more than 60 percent by 1995. Today the IPAA reports that independent producers develop 90 percent of domestic oil and gas wells, produce 68 percent of domestic oil and produce 82 percent of domestic gas.
Clearly, this is a situation that neither Saudi Arabia nor the major oil giants are willing to tolerate.

In 2012, it cost an independent oil company an average of $67.23 to produce a barrel of oil. It sold that oil for an average of $82.60 per barrel. That's a 22% margin... thin compared to some other oil giants. For example, it cost oil giant Exxon Mobil $9.28 to produce a barrel of oil. Its average global price over the same period was $100.79 per barrel. That's a 90% profit margin.
Because of their high operating costs, small oil companies have thin profit margins.
When oil prices rise, their thin margins can soar... along with share prices. But when oil prices fall, this leverage works the other way... and share prices can plummet causing investor panic.

Large global companies are well positioned to play the long game. But smaller companies have smaller budgets and are more exposed. They do not have the financial muscle to withstand a prolonged price fall. Hundreds of smaller and mid-tier oil and gas explorers - and their investors - will be rethinking their business plans urgently as analysts begin predicting waves of mergers and acquisitions as firms seek out rescue deals. The falling share prices create bargains for larger predators with deeper pockets.

It is telling that OPEC has boosted production by almost 1.5 million bpd since November 2014, which has helped cut oil prices more than half to below $50 a barrel today.
OPEC and the oil cartels have already proven during the 1970's, and again during the 1990's, that they are willing to drive oil prices to as low as $9.00 per barrel, if that is what it takes, to rid themselves of the smaller competitors they have despised for decades.

OPEC's strategy is to create the conditions for higher than $200 per barrel oil in the next couple of years' time.
Saudi Arabia and the oil cartels long-game strategy is clearly working out the same as in the past.
And Obama's over-regulation of U.S. oil companies plays directly into OPEC's hand.

Posted by: junkiron 2015-11-02 10:40

#2 need to stop funding mosques/madrasses worldwide

Posted by: paul 2015-11-02 04:06

#1 That's amazing.

At one time KSA's cost per barrel delivered to Andover Delaware was $0.75 per barrel due to the nationalization of most oil production and the fact that KSA oil is under pressure from vast gas deposits, requiring no pumping, just a Christmas tree and a spigot as it were to get the oil out of the ground.

If they need $106 a barrel oil with their minuscule cost of production, they have really been overliving their means.

Of course, the second oil gets above $75 a barrel, our buddies in South Texas and North Dakota crank up the oil shale, tar sand and fracking and cap price growth at about $80 a barrel,

The Saudis probably won't see $106 a barrel oil again and I hope they enjoy riding camels and living in their mansions without electricity or running water...sort of back to their roots.

Posted by: Mystic 2015-11-02 01:34

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