“Oil makes up 90% of Saudi government revenue”

(FILES) -- A general view shows 09 March
AL-RUB AL-KHALI, SAUDI ARABIA: (FILES) — A general view shows 09 March 2004 the Shaybah mega-project, the first, and so far sole, oilfield development in Saudi Arabia’s vast al-Rub al-Khali desert, some 800 kilometers (500 miles) southeast of the eastern oil center of Dhahran. World oil prices shot higher 01 June 2004 as fears of disruption to supplies from number one exporter Saudi Arabia intensified after insurgents killed 22 people in the kingdom over the weekend. The Shaybah mega-project, which sits on top of some 15 billion barrels of proven oil reserves, more than a drop in the ocean of Saudi Arabia’s estimated total reserves of about 260 billion barrels, has been producing oil to the tune of 600,000 barrels per day (bpd) for less than a dollar a barrel. AFP PHOTO/Bilal QABALAN (Photo credit should read BILAL QABALAN/AFP/Getty Images)

J. Reeves, editor, The Palm Beach Daily: Nick, Saudi Arabia continues to flood the global market with cheap oil. Why are they doing this right now?

Nick Giambruno, analyst and editor, Casey Research: The Saudis are flooding the market for a couple of reasons.

First, to hurt Russia’s and Iran’s economies. They both depend heavily on oil sales.

The Saudis want to hurt Russia for supporting their regional rival, Syrian President Bashar al-Assad. They want to hurt Iran for the same reason. Iran is the Saudis’ age-old geopolitical rival in the region.

The Saudis have also declared war on the U.S. shale oil industry.

In the 1990s, the U.S. imported close to 25% of its oil from Saudi Arabia. Today—because of high U.S. shale oil production—we only import 5%.

By keeping the market saturated with oil, the Saudis are driving down the price. They hope to drive it down low enough and long enough to bankrupt the shale industry…since shale oil costs more than Saudi oil to produce.

This would knock out a major competitor and let the Saudis regain lost market share.

J.R.: Doesn’t this market oversaturation also hurt the Saudis?

Nick Giambruno: It definitely hurts them. I think they’ve overplayed their hand…big time.

Oil makes up 90% of Saudi government revenue. So the price drop has been very painful. They’re bleeding through their reserves.

The market is putting more pressure on their currency peg than at any time in its history.

For over 30 years, Saudi Arabia has pegged its currency at 3.75 riyals per U.S. dollar. To maintain this, it needs a large stash of U.S. dollars. With its historically large reserves, this has never been a problem.

But now, the Saudi budget is under serious pressure. The government is only staying afloat by draining its foreign exchange reserves. This threatens Saudi Arabia’s ability to support its currency peg.

If the currency peg breaks—which is exactly what the current market expects—the riyal would be devalued. This would increase the cost of living for Saudis across the board.

It would also increase social unrest.

Advertisements

Offer something of value . . .

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s