Hey there.
Just shy of a year ago I made a video claiming that Saudi Arabia was running out of time.
My diagnosis hasn't changed.
In fact Saudi Arabia has been disintegrating even more quickly than I expected.
Thanks to Saudi Arabia's unrivalled Public Relations budget however, this is well hidden.
So this week and next week I will be laying out why Saudi Arabia's still finished.
Today we're discussing oil and money.
Despite a half century’s worth of investment in diversification, and a whole lot of recent
hullabaloo, the Saudi government and economy is still almost completely reliant on oil
and gas.
There has been some good news on this front, just not quite as good as we have been told.
Like the US President celebrating the stock market last week, you just have to extend
the graph back a bit to realize that things aren't actually that great.
Oil market analysts love to use words like rally and record prices, while leaving out
the fact that prices are still only a little over half of what they were four years ago.
The oil price is a bit better than I expected.
In last years video I said they were unlikely to break 60 dollars a barrel, well at a couple
points last week one of the oil price measures did break 70.
So I was wrong.
But 70 dollars is not 110 dollars, and its worth reviewing the extraordinary set of circumstances
that led us to this point.
In the old days, a single oil exporting country running into difficulty could send prices
into the stratosphere.
Over the past three years Libya, Iraq, Nigeria, and most shockingly Venezuela have experienced
extraordinary drops in production.
Wildfires in Alberta Canada in 2016 and Hurricane Harvey in Texas in 2017 also knocked out essential
infrastructure.
Since November 2016, Russia has joined with OPEC in an unprecedented, and uprecedentedly
well followed agreement to cut production.
And all of that can't keep oil prices over 70 Dollars a barrel.
If any of these countries manages to ramp its production back up, or if other countries
stop complying with the agreed quotas, we will be right back down to the 50s or even
40s, which will be disastrous for Saudi Arabia.
Perhaps the best indicator of how little things have changed is the state of Saudi Arabia's
foreign reserves.
There was some excitement over them around the end of last year.
The free fall seemed to have stopped.
The reserves even ticked up by a billion or two for a couple months.
But debt continues to rise.
And the supposed recovery in oil prices only stopped the bleeding for a month or two.
Saudi reserves are falling a little more slowly than they used to be, but there's a context
here that's worth pointing to.
In November of 2017, right before their reserves supposedly stabilized, they arrested the richest
men In the kingdom.
This was a money grab pure and simple.
The Saudi government reportedly extorted over 100 billion dollars, yet their foreign reserves
only stopped falling briefly.
There is also the absurd run up in asset prices over the past couple years to consider.
This went into overdrive after Trump was elected.
As one of the world's largest owners of stuff, from land to securities, the markets have
been doing Saudi Arabia a huge favor since 2009.
Over the past month or so, it has begun to look like this may be over.
We may not get a full on crash, but stagnation will be a problem regardless.
Saudis aren't going to be making as much money for sitting around owning stuff as they have
for the past few years.
So no, my estimation of Saudi stability has not changed.
The switch in government the country experienced over the past year, from an oligarchy to one
man absolutism, is just the beginning.
Winter is still coming for Saudi Arabia.
And no, the Saudi Aramco IPO will not save them.
Come back next week for our take on that particular fantasy.