Can Saudi Arabia Go Bankrupt ?

Saudi Arabia is out of money, and the recent drone attack from Iran on its oil refinery didn’t help. But the Saudi government said the attack will NOT stop it from listing its state-owned oil facilities, Aramco, to the public for investment. Saudi Arabia neither innovate nor manufacture. 91% of it’s exports relies on various Hydrocarbon products. They do not transition to renewable energy sources nor they trying to relief their economic dependency from Hydrocarbon commodities exports. And at the same time they’ve spent $56 Billion , with 28 million of population, on defense which accounts for 13.5% of it’s GDP. Saudi is spending more on ‘military sectors’ than on education.Saudi Arabia may not going bankrupt as of yet because it currently doesn't have any debts but its blowing a big hole in its bank and running on steroids towards financial ruin. The truth is, Saudi Arabia's state-owned oil giant, Aramco, can no longer fund the royal family's lavish lifestyle and the kingdom's proxy wars, and it can't support a heavily state-dependent populace. Add in on-the-floor oil prices, and it's clear that the House of Saud is mired in the most severe economic crisis of the last decades. Welcome to The Atlantis Report . in this video we will try to understand if the Kingdom of Saudi Arabia is about to go bankrupt . And how the House of Saud could collapse in the coming years and what it means to the region and the globe. Why Saudi Arabia is considering an IPO of its crown jewel Aramco , after it helped drive oil prices down. How Saudi Arabia has burned through $100 billion in the last few years and why capital is fleeing the country. Why OPEC is probably already defunct. How the Saudis know their oil policies are opening the gates for ISIS. Why Saudi Arabia’s decisions in the Gulf will take the Middle East to the brink of disaster—and trigger a geopolitical crisis in Central Asia. And finally what Middle Eastern oil policies mean for the future of the US shale industry , and why it matters to us. Saudi Arabia's economy is an oil-based economy and heavily dependent on oil exports. Despite spending billions of dollars to diversify the economy, no meaningful results have been achieved and there is virtually no other industry apart from petroleum industry. Oil accounts for 90% of its export earnings and 90% of revenue for budget. Riding on the high crude oil prices from 2000-2013 the Saudi foreign reserves swelled from a few billion in 2000 to a peak of $740 billion in 2013. Basically the whole economy and existence of the Saudi regime is dependent on oil. If oil was not discovered in Saudi Arabia the only thing Saudi Arabia would be exporting in 2015 would be dates, camels and maybe sand. Saudi Arabia is a medieval style Wahhabi monarchy which has repressive laws and restricts basic laws of freedom. The courts function in accordance with Islamic law called Sharia. Social spending is the glue that holds the regime together. The Saudi monarchs have been throwing money around for decades to quieten any dissent and maintain power. Citizens pay no tax on income. Subsidized petrol costs about 10 cents a litre. Electricity is given away for 2 cents a kilowatt-hour. There are generous social welfare schemes which include everything from free healthcare to a free burial and everything in between. The biggest supporter of the so called "Arab Spring" was worried about the revolution reaching its borders, spending on patronage exploded after the "Arab Spring" as the monarchy tried to smother any dissent within its kingdom. Bonuses to state employees, increased pensions, higher unemployment benefits or simply big handouts were given to distract the public attention from the uprisings in Arab world. All this was possible and affordable because oil was selling at $140/barrel. With significant recent advances in technology for shale oil extraction, the production of shale oil saw a steady increase from 2011 onwards. The high oil prices worked in the favour of shale oil producers as many projects which were not feasible earlier were able to generate profit because of the booming oil prices. The shale oil industry started producing oil in record amounts. Even though these numbers were not huge if compared to OPEC oil production, they were enough to influence the global oil market. Global oil prices fell slightly due to shale oil industry. Saudi Arabia, which has built its welfare state around the assumption that oil prices go only one way, that is up, started feeling the pinch of falling oil prices. In late 2014, Saudia Arabia "discovered" that supply has a direct effect on price. They came up with a "brilliant" plan: they decided to increase oil production. Saudi Arabia believed that the oversupply would reduce oil prices to a level where the shale oil industry would go broke and wouldn't be able to continue with production, thus making Saudi Arabia the undisputed king of the global oil market. Even though a large number of shale oil producers were US-based, Saudi Arabia had the blessing of the USA because the strategy would supposedly hurt Russia also. The plan was put into action and Saudi Arabia was saying, "what could possibly go wrong?" Saudi Arabia was indeed right. The increased oil production by Saudi Arabia started affecting crude oil prices. Saudi Arabia was hoping a manageable decrease in price would put the high-cost shale oil industry out of business. In the past, whenever crude oil prices dropped they bumped back to previous prices quite quickly, so it seemed as if Saudi Arabia would kill off the competitors and oil prices would rise again. In the worst case scenario, Saudi oil wells are the cheapest to run so there is no way anyone could be beat them at their game. Saudi Arabia had played its cards right. Many shale oil wells had to shut down, the Russian economy was hurt by falling oil prices, and countries like Algeria and Venezuela were crying in pain while the Saudis were laughing. The prices dropped to $80 a barrel which prompted a meeting of OPEC countries, which are responsible for 40% of world production. Countries like Iran and Venezuela wanted Saudi Arabia to cut back production to stabilize oil prices which were in free fall. But Saudi Arabia was not in a relenting mood. Though Saudi strategy seemed perfect on paper, it was deeply flawed. Saudi Arabia ended up hurting no one but itself. Shale oil extraction costs more than an oil rig, but with advances in extraction technology it's not considered high cost drilling anymore. To give you an idea, a shale oil well in Texas costs less than drilling in the Gulf of Mexico or the Arctic. So even though some shale oil wells had to shut down, the high yield wells were still profitable, and shale oil production hit a record high. Russia is among the largest exporters of oil and gas but it’s not entirely dependent on these exports. Gold, diamonds, precious metals, iron, wheat etc. are among the other Russian exports. Russia has a sophisticated defence industry worth billions of dollars. It also has a well-developed fishing and timber industry along with expertise in manufacturing, aerospace & aviation, construction etc. Saudi Arabia lacks any such expertise or capacity and is largely dependent on foreign technicians for even running their petrochemical industry. There has also been a general decline in the demand of oil, so there are several other factors affecting the oil industry. Saudi assumptions that China will continue to increase its demand for energy and Iran will continue to suffer under sanctions also proved to be false. Saudi Arabia not only failed miserably but it also ended up hurting its own economy more than anyone else’s. Saudi Arabia might have started this price war but it’s like a helpless beached whale now, it has lost control over the market price. There is no easy way out for the Saudis who have gambled without much thought. One option for Saudi Arabia will be to cut down its oil production and hope that the price will rise. The prices will eventually rise to their previous levels but the shale oil producers will also return in record numbers. This will also result in other countries grabbing their market share. Sanctions on Iran have also been eased and Iran will add another million barrels to the oil market. The Iranians would love to hurt the Saudis even further by supplying more oil. The other option is to be patient and see what happens. The patience game is a very expensive affair. Saudi Arabia might run out of money well before it runs of out patience. So things are not looking good for Saudi Arabia. I don’t think Saudi Arabia will go bankrupt. At least, not just yet. Remember the $740 billion foreign reserves? They are very handy but they have been shrinking at an unprecedented pace. A whopping $70 billion are already gone in less than a year. The costly Saudi welfare state is built around petro dollars. The Saudis need oil prices to be at $110/barrel to balance their budget. At the moment the Saudis need $5-10 billion a month to fill in the gap. If Saudi Arabia keeps taking out the money from foreign reserves, by 2020 they will be empty. The other option will be to borrow money. Borrowing money saves them from dipping into foreign reserves, but it doesn't change the fact the government has no means to make up for the huge budget deficit. Saudi Arabia's foreign reserves might be large but so is its population. If you calculate per capita foreign reserves, they are more comparable to Jordan or Thailand. Saudi Arabia's economic growth over the past decades has been fueled by petrodollars. If the petrodollars are gone, it’s quite likely the economy will also stagnate. Saudi Arabia is also involved in a very expensive war against Houthis in Yemen and heavily involved in funding and supplying weapons to Islamists in Syria. Saudi Arabia's entire military build up is dependent on foreign imports and defence accounts for 11% of the annual budget. If oil prices rebound before Saudi Arabia runs out of cash, the house of Saud will breath a sigh of relief. If Saudi Arabia runs out of money, then the monarchy has other things to worry about than bankruptcy like saving the regime because the "Arab Spring" may finally arrive in the kingdom.

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