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.