The Saudi Oil Bluff Takes a New Turn

The oil market comedy continues.

First, there were the rumors of a production cut between the world’s biggest producers, Russia and Saudi Arabia — both of which denied that any such thing was happening.

Then the slew of meetings that never came to fruition, followed by one that actually happened… and led to absolutely nothing.

And finally, we have the biggest crock of crazy yet: Saudi Arabia, kingpin of OPEC and oil market cartel, is planning to wean itself off of oil.

Repeat Performance

Granted, this isn’t the first time Saudi Arabia has tried to reduce its dependence on the fossil fuel.

The problem is that nothing has worked so far.

To be fair, the young Prince Muhammad has some pretty ambitious ideas this time around…

First off, we already knew about the impending Saudi Aramco IPO. Estimates from the prince himself have put the company’s total value at a staggering $2 trillion.

Under the proposed reform plan, about 5% of the company would be opened up to investors abroad, which could potentially bring in as much as $100 billion.

That money, at least in part, will then be used to build up the Saudi sovereign wealth fund, which could go towards investments in non-oil industries both inside and outside the country.

They’ll certainly need every penny if they’re really going to cut their dependence on oil income.

As of the end of last year, oil accounts for about 90% of the country’s export revenue, 80% of its budget, and 45% of GDP.

That’s quite a bit to replace in just a few years…

There are also going to have to be some massive social reforms.

This includes subsidies, like those that have already been cut due to the sudden plunge in oil prices.

Saudi subjects were no doubt just waiting for their king to fix this debacle and bring them right back.

But that’s not going to happen under this new plan.

In fact, more subsidies are likely to be cut, which could cause further unrest.

What’s more, the country is going to have to be a lot more open to the rest of the world if it’s going to start diversifying.

That doesn’t just include foreign investors for Saudi Aramco. More trade, tourism, and even foreign business may be coming through the country if this plan moves forward.

That is, if anyone wants to go through Saudi Arabia.

Here’s the real punch line: Prince Muhammad has said all of this will be done by 2030 and that the country could function completely independent of oil as soon as 2020.

See?

It’s pure comedy gold for us.

And Everyone Else…

Let’s assume for a second that all of this goes smoothly. What happens to the oil market then?

Well, to begin with, notice that there’s no mention of cutting actual oil output in the prince’s plan.

Saudi Aramco isn’t going to cut back. In fact, some of the money raised will be used to expand and privatize some of its operations, such as offshore drilling.

But on the other hand, if any of this plan works, the OPEC kingpin won’t have as much reason to keep prices down.

If it’s not relying on those oil profits anymore, it shouldn’t need to keep starving out other producers.

We already know that the situation may be too late for some OPEC members like Venezuela, which is mandating a two-day workweek to save energy; or even Iran, which is having trouble ramping up its exports as much as it expected to.

Of course, if the price of oil were to go up just a tiny bit more, to say, just over $50 again… you can bet the beaten-down E&P sector in North America will be ready to turn the taps on.

Most drillers that have made it this far are hanging on by a thread, and only by drastically cutting capital budgets. If we see WTI prices break above $50 per barrel, it’ll be a new ball game, folks.

No, it won’t be the sudden, booming price spike that investors dream of at night, but it’s a start.

And to put it bluntly, the Saudi prince’s plan is incredibly ambitious… perhaps a little too much so.

Do you honestly believe the Saudi Kingdom, with its diminishing oil reserves and runaway population growth, will be able to function without oil within 14 years, after nearly a century of dependency?

I didn’t think so, either.

Until next time,

Keith Kohl

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A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing’s Energy Investor and Technology and Opportunity.

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