Saudi Arabia: seeking security (catch all)

[davidbfpo]

Firn,

Thanks for that update (above) and a "lurker" has pointed out a different, though similar viewpoint in today's Daily Telegraph:http://www.telegraph.co.uk/finance/e...escalates.html

It appears to rely heavily on Dr Alsweilem, now at Harvard University's Belfer Centre.

I have not checked the McKinsey report you cite, but the article has this almost IMHO laughable suggestion attributed to McKinsey:

a McKinsey study – ‘Beyond Oil’ - that sketches how the country can break its unhealthy dependence on crude, and double GDP by 2030 with a $4 trillion investment blitz across eight industries, from petrochemicals to metals, steel, aluminium smelting, cars, electrical manufacturing, tourism, and healthcare.

[Firn]

Firn,

I have not checked the McKinsey report you cite, but the article has this almost IMHO laughable suggestion attributed to McKinsey:

Well, that is why I wrote about a "somewhat constrained" executive summary. The McKinsey guys I know are easily smart enough to understand in which kind of business they operate and who pays them for what. This doesn't devalue most of it's ideas but a "can do spirit" certainly helps in marketing them.

The value of "Beyond oil" lies in showing what happened with oil in the Saudi economy during the last decades. Some of that is captured neatly by those graphic graphs and stats. All in all the dire trends which I posted are nothing new and far more insightful guys like Evans-Pritchard and Khalid Alsweilem have come up with them before. Indeed two years ago the very author pointed out:

Prince Alwaleed bin Talal, the country’s best-known global investor, said the business model of Middle East oil exporters risks unravelling rich industrial states find ways of cutting demand. “Our country is facing a threat with the continuation of its near-complete reliance on oil: 92pc of the budget for this year depends on oil,” he said in a letter to Saudi oil minister Ali Al-Naimi.

In short if something can not go on forever it will stop, however the institutional imperative is very strong in the royal clan.

As this is the SWC it is proper to point out that military expenditures are about $60bn a year, roughly 40% of projected revenues for 2016. The Saudi defence budget is quite opaque, to put it mildly, and with no independent institutions things can easily be shifted around or kicked down into the next year. The takeaway is simply that it is massive relative to budget and indeed to the economy, no doubt in part due to the big salaries payed for the upper echelons.

Devaluation would of course help a great deal with some internal spending, witness Russia for which every $ goes now twice as far, and some of the military ones like salaries but should make replacing those bombs dropping in Yemen a lot more expensive.


Finally they seem to cut some of the harmful subsidies:

The Saudi government will raise the price of gasoline by two-thirds to 0.75 riyals a litre from 0.45 riyals for 91 Octane fuel. Higher electricity, water, and gas tariffs were announced by the Saudi Press Agency on Twitter, following the release of the Kingdom’s 2016 budget on Monday.

Subsidy cuts aim “to achieve efficiency in energy use, conserve natural resources, stop waste and irrational use”, the Ministry of Finance said in the annual budget statement. The changes will be monitored to ensure that they do not harm either “low and mid-income citizens [or] the competitiveness of the business sector,” the Ministry said.

P.S: In an ironic twist percentage-wise the dependence on oil of the Saudi revenues decreased this year from 93pc to 73pc just as they post a huge deficit largely because oil prices crashed...

[davidbfpo]

Two useful commentaries on recent events. The shortest is from the Soufan Group:http://soufangroup.com/tsg-intelbrie...f-sheikh-nimr/

Longer is that from WoTR:http://warontherocks.com/2016/01/sec...ism-alliance/?

[Firn]

Maybe that particular execution was indeed aimed at inflaming the conflict to have the old external enemy at the center of much internal attention in a time when subsidies have been cut for the first time in a long time and the budget deficit was shocking. Who knows?

Personally I'm inclined to believe that the recent Saudi pumping is not just a clever play aimed at destroying shale. That might well be part of their thinking, maybe even be the internal offical line as clever sounds always better then an obvious one: Cutting production might have well caused a still bigger short-term budget deficit. If they decided to cut, they would have needed to do so quite deeply to have an effect.

The oil market has it's specifics but just look at almost every other commodity out there. Be it iron ore or coal, most producers are in a rat race to the bottom, trying to cut costs and increasing production in some cases. So the Saudi decision to keep pumping is hardly singular for those lowest in the cost curve...

[Azor]

The new direction of Syrian arguments is about picking a side in the Sunni-Shia conflict.

Pro-Russian partisans accuse Saudi Arabia of being less democratic and more repressive than Iran, and of using Islamist groups including AQ and IS the way Iran uses the IRGC.

They highlight Iran's relative "freedom of religion" compared to KSA, the fact that women can drive in Iran, etc. The Al-Nimr execution has brought this line of argument to the fore.

However, upon closer examination, the Iranian regime is more bloodthirsty. They execute at least 3X more people per year than the KSA and have killed 12,000-15,000 in waves of purges against the Tudeh and other opponents to Khomeini. In contrast, Saudi political bloodletting from '79 to present is several hundred.

In addition, there is Hezbollah, Hamas and the IRGC to contend with, which are either arms of the Iranian state or sponsored by them. Private donations aside, the Saudis have nothing comparable.

Anyone care to add more?

[Firn]

Well I do focus more on the sinews of war, not the political conflict:

Contracts used to bet whether Saudi Arabia will allow its dollar-pegged currency to weaken were poised for the highest level in almost two decades as oil prices plummeted.

Twelve-month forward contracts for the riyal climbed 260 points to 950 as of 3:49 p.m. in Riyadh, set for the steepest close since December 1996, when Bloomberg began collecting the data. That reflects growing speculation the world’s biggest oil exporter may allow its currency to slide against the dollar for the first time since 1986.

A picture can say sometimes more then a hundred words...


In this context the previously unthinkable to most seems now possible to some: "Saudi Arabia Is Considering Aramco IPO, Deputy Crown Prince Says"

“Personally, I’m enthusiastic about this step,” [Deputy Crown Prince] Salman said.

Saudi Aramco produces all of Saudi Arabia’s crude oil, at 10.25 million barrels a day in December. Among listed companies, Russia’s OAO Rosneft produces more than 5 million barrels a day while Exxon Mobil Corp. pumps out about 4 million barrels.

An IPO will certainly be done in a way that Saudi Arabia de-jure and de-facto still controlls Aramco. Of course like many things it would have been smarter to make such moves in good times but buy high and sell low seems to be the motto of many a miner or driller, public, private or state-owned.

[Firn]

To sum up some of my thoughts on the economic (and political) future of Saudi Arabia:

1. What can't go on forever will end. Even with far higher oil prices - budget breakeven being at around 90$ - the expenditures must be reduced.

2. The McKinsey study is just one in a considerably number of studies and even official policies all aimed at creating a more diversified economy, so it's chances don't look good.

3. However as the economy can in the mid- to longterm no longer work like it does change has to be attempted. It will be very difficult as the terrible track-record shows, but it has to be tried.

4. Success, even a partly one, looks unlikely as past performance is a pretty good indicator, if not a guarantuee of future success.

5. Oil income has been bedrock of the royal might, enabling relatively generous social subsidies but also to pay the organisations of suppression and co-option (obviously all are related).


If we take the simple facts and combine them we have to come to the conclusion that Saud Arabia faces in the long run terrible economic challenges. If those aren't met properly, and history suggests that it will be hard to do so, the political system in Saudi Arabia is at grave risk. Of course it might conserve power for a long time even in the face of a much poorer society, but it is almost certain that Saudi Arabia will have a harder time seeking security then thirty years or so ago.


The Western would certainly do well to prepare well for a variety of scenarios. Things might continue in a certain fashion for a long time but can also change surprisingly quickly...