The great American businessman Andrew Carnegie once wrote, “It is only but three generations in America from shirt sleeves to shirt sleeves.” He was invoking the old trope in business where the first generation earns, the second generation maintains, and the third generation squanders.
Saudi Arabia is not only three generations removed from the stoic life of the nomad warrior, but some 70% of the population is under 30 and mostly (1.22 to 1) male.
Make no mistake; these grandchildren are soft. Where Abdulaziz Al Saud conquered an area three times the size of Texas riding camels and using bolt-action rifles, his grandchildren are more known for crashing million-dollar super-cars on public streets.
There is a serious question about how this young, spoiled mass of humanity will handle a crisis. And it looks like we will soon find out.
The drop in oil to $33 today from over $100 a barrel just a few years ago could cause chaos in the Kingdom.
Despite the fact that the Saudis can produce at the lowest price in the world, the barrel price needed to maintain socialist benefits is as much as $72 a barrel.
The New York Times reports:
For decades, the royal family has used the kingdom’s immense oil wealth to lavish benefits on its people, including free education and medical care, generous energy subsidies and well-paid (and often undemanding) government jobs. No one paid taxes, and if political rights were not part of the equation, that was fine with most people.
But the drop in oil prices to below $30 a barrel from more than $100 a barrel in June 2014 means that the old math no longer works.
Budgets are getting tighter. Government projects are being delayed. There are now spending limits on ministries and talks about imposing taxes and even selling shares of Saudi Aramco, which could go public at $1 trillion.
The New York Times quoted Ahmed Mohammed, 21: “The government is good, but our generation is spoiled. Everyone wants a government job.”
His colleagues agreed. “Everyone wants to sit at home and get paid,” Abdulrahman Alkhelaifi said.
Cash Flowing Out
After years of surplus cash flooding in from all over the world, today the Kingdom is spending far more than it is taking in.
Don’t get me wrong; the country still has $640 billion in foreign reserves. The U.S., by contrast, is underwater by $19 trillion. This gives the Kingdom plenty of wiggle room.
That said, war has a way of burning cash, and after 75 years, the country is again at war…
Yemen
My brother was a major in the Marine Corps in the First Gulf War. He would tell stories about how useless the Saudis were as fighters. They had just the right mix of haughty arrogance and disdain for physical labor. Apparently, they all wanted to be fighter pilots.
So I was not surprised when I read news accounts of the Saudi Arabian coalition getting its nose bloodied by the Houthis militias in Yemen. Don’t get me wrong; the Saudis spend more money as a percentage of GDP on defense than any country in the world and are fourth in spending overall. They will take Yemen. The question is at what cost — not only in blood and treasure, but also in time.
In 2015, Saudi Arabia had a budget deficit of 15% of GDP. In 2016, it is expected to be higher.
It should be noted that during the Arab Spring five years ago, Saudi Arabia increased its benefit state for fears of revolution. Now it must cut back. To do that, it must bribe its citizens in other ways. This is why we have seen women voting for the first time and winning seats in municipal councils.
And still a senior prince has called for regime change, writing two letters saying that the king should be removed. This is unheard of in Saudi Arabia.
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Young Turks
Saudi Prince Mohammed bin-Salman, the 30-year-old minister of defense and son of the current king, is heading the war in Yemen. He is now making noise about joining the fight in Syria as an ally of Turkey.
The Saudi coalition, in a show of force, is conducting a massive military drill as I write this. And the first batch of Saudi F-15s has already landed at the Turkish airbase of Incirlik.
Prince Mohammed is aggressive. He made it clear at the NATO Defence Ministers summit in Brussels last week that although the Kingdom fully supports the air campaign against ISIS as part of the U.S.-led coalition, it has deep reservations about its possible success.
This means that Saudi Arabia and NATO member Turkey could very well get into a ground war against Assad and the Shia militias backed by Russia and Iran.
For better or worse, the Obama strategy at this point is to hope nothing too bad happens until he gets out of office.
Meanwhile, Russia and the Saudis have agreed to an absurd deal regarding an oil production freeze that no one will adhere to. Iran and Iraq are ramping up production.
On the flip side, in the U.S., more than 40 oil companies have gone under. Rig count is down 817 from last year and fell by 30 last month. U.S. crude oil production is projected to decrease from an average of 9.4 million b/d in 2015 to 8.7 million b/d in 2016 and to 8.5 million b/d in 2017.
Adding up all the new oil, subtracting the declining non-OPEC production, and adjusting for slowing demand, the IEA projects that the oil surplus will increase in 2016 by another 285 million barrels.
That’s a lot of oil to work off, and it will take some time. But things change in the oil game. China isn’t doing as poorly as the media would have you believe. The country is seeing an uptick in oil imports and hit a record in December of 7.15 million b/d. Furthermore, low oil prices mean more oil demand as people use more of it. After six years of falling, miles driven in the U.S. is climbing again. Small cars are out, and big pickups are back in.
That said, if we get a real Sunni/Shia war in Syria, all bets are off. In 1990, in response to the Iraqi invasion of Kuwait, the price of oil jumped from $17 a barrel in July to $46 a barrel in October and caused the recession of 1991.
And right now, we are slouching towards war.
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
