Sometimes with so much happening in the news it’s easy to get bogged down and not think twice about what a headline really means. We just take it at face value and move on to the next headline. If we do that, there’s a good chance we’ll miss the bigger picture.
Let me explain.
I recently read an article that indicated Saudi Arabia will run out of cash in less than five years.
While many Americans in the past may not have concerned themselves with what is happening in the Middle East, most of us now know that we are so embedded in the Middle East under this administration that to ignore what is occurring there would most definitely be to our disadvantage.
This time is no exception and it involves Saudi Arabia’s oil production as well as other particular countries’ interests.
In order for Saudi Arabia to break even, they must charge approximately $106 per barrel of oil. Currently the price of oil is around $45 per barrel. This certainly is not good for Saudi Arabia’s future economy.
Turns out it’s not so good for us either.
In the past, when the price of oil coming out of Saudi Arabia is high, typically over $100 per barrel, American oil drillers make money as well.
Even though you and I are paying more at the gas pump, the oil drillers are hiring and running many oil rigs to produce oil on their own so that we can be less dependent upon the Saudis for oil. We’ve become really good at what we do and we have fracking to “blame” for helping us become more independent.
In the past, we’ve always been able to ask Saudi Arabia to cut oil production so that the price of oil could go back upwards of $100 barrel. We could then continue to drill for oil and employ people to run the rigs.
Due to countries like Iran now having a lot of oil to pump and the money from the Iran nuclear deal to help them finance it, who would pay a higher price to Saudi Arabia when they can get it for the same cost from Iran?
As a result of the Saudis declining to raise their cost per barrel of oil by cutting production, oil drillers in the United States have been laid-off, 60 percent of oil rigs have been closed and some oil drilling companies may be facing bankruptcy or other financial hardships.
Saudi Arabia is beating us in the marketplace as well.
Although the U.S. has been banned from exporting crude oil, we can export oil once it has been refined. Even then, Saudi Arabia is outperforming us because what takes us six months to bring to market, Saudi Arabia can do in one week.
Saudi Arabia and other countries within the region are losing money and must find a way to recoup their losses.
Reports indicate that after years of tremendous surpluses, Saudi Arabia’s current account deficit is projected to skyrocket to 20% of gross domestic product this year. While they still have a lot of cash at nearly $700 billion, it is decreasing quickly.
Iran and Iraq are also facing a loss in revenue because of a higher than $45 barrel break-even oil price is required and a lack of fiscal buffer is negatively impacting Iraq’s financial future.
So, is this the coming storm in the Middle East that no one is talking about? No. While an important financial factor, I believe there is much more to concern ourselves with at this point.
The next step that Saudi Arabia and other countries may take to remedy their future deficits is more concerning.
I believe that the Saudis and others have two viable options to stem the loss of funds.
First, they can create an additional product or service to offer their consumers that is not being offered by other competitors. Although a feasible alternative, I do not believe most counties, especially Saudi Arabia, would choose this option because it’s not what they do best. They are solidly in the oil business.
The second option would involve eliminating the competition altogether. This is where the waters could get muddied. While a business person in the U.S. may devise a legal plan to “destroy” their competition, we have often witnessed unrest in the Middle East to secure this result.
Blocking the Strait of Hormuz for example, where approximately 20% of the world’s petroleum and about 35% of petroleum traded by sea passes through, would have a devastating impact on the price of oil and international trade. One which could provide a short-term financial advantage to those responsible.
Additionally, what if new competition were to spring up in the region? How would it be handled? Would new competition be allowed to “take” profits away from those who are already losing cash?
Since Russia and Iran are already in Syria, will an impending glut in the marketplace caused by the discovery create a potential conflict in the region with Israel.
Also, because a U.S. based company is conducting the drilling in the region, will our involvement upset Saudi Arabia whose dwindling cash reserves are surely to be negatively impacted by newly discovered oil?
Could it be that the potential for oil in the region is at least one of the reasons why the U.S. is in Syria and not there just to fight the Islamic State?
I believe we are seeing the beginning of what could be a very antagonistic situation if nothing else, developing in the volatile Middle East.