Tough Times To Be A Petrostate
/My interest was piqued this morning when I spotted a story saying that Saudi Arabia had announced a plan to go to the bond markets to borrow $27 billion from now to the end of the year. Wait a minute, don't those guys have infinite amounts of petrodollars gushing in all the time? And don't they have so much money that they haven't issued any sovereign debt at all since 2007? Sure oil prices have declined, but are things really going south that fast?
Actually, they are. The gift of huge amounts of oil to be extracted has certainly seemed like a blessing for the Saudis, and for many others, for a long time, but actually it's a curse. Somehow they all can't help following the same incompetent program that will lead inevitably to disaster: Get into state ownership of the asset and act like the money will keep flowing forever. Gradually build up difficult-to-reduce commitments to pass out money to the citizenry in the game to keep the government in power. When the price drops, you can hit the wall very quickly.
On Saudi Arabia, here's the story from the Financial Times this morning. The $27 billion of planned borrowing is real.
Fahad al-Mubarak, the governor of the Saudi Arabian Monetary Agency, said in July that Riyadh had already issued its first $4bn in local bonds, the first sovereign issuance since 2007. But the latest plans represent a major expansion of that programme, which bankers believe could even extend into 2016, given the outlook for the oil price. Saudi Arabia’s resort to further domestic borrowing highlights the challenges facing the region’s largest economy amid one of the steepest falls in the oil price in recent decades. Brent, the international benchmark, has dropped from $115 a barrel in June last year to about $50 this week.
OK, they're not exactly down to their last nickel. The FT article reports that they have $672 billion of reserves. That's not a bad size bank account to have. But weigh that number against this:
The kingdom has drained $65bn of its fiscal reserves to maintain government spending since the oil price plunge began.
That would mean that they've blown through about 10% of their reserves in less than a year.
Ambrose Evans-Pritchard has much more in an article today in The Telegraph. He reports that Saudi Arabia's latest burn rate through its reserves is some $12 billion a month. At that rate, even $700 billion doesn't sound like so much (less than 5 years). And this:
Far from retrenching, King Salman is spraying money around, giving away $32bn in a coronation bonus for all workers and pensioners. He has launched a costly war against the Houthis in Yemen and is engaged in a massive military build-up - entirely reliant on imported weapons - that will propel Saudi Arabia to fifth place in the world defence ranking. The Saudi royal family is leading the Sunni cause against a resurgent Iran, battling for dominance in a bitter struggle between Sunni and Shia across the Middle East. "Right now, the Saudis have only one thing on their mind and that is the Iranians. They have a very serious problem. Iranian proxies are running Yemen, Syria, Iraq, and Lebanon," said Jim Woolsey, the former head of the US Central Intelligence Agency.
Their government deficit has suddenly gone from nothing to about 20% of GDP. We worry about ours, which is less than 3% of GDP (at least on cash accounting basis). And what are the prospects that this will turn around any time soon for the Saudis?
The problem for the Saudis is that US shale frackers are not high-cost. They are mostly mid-cost, and as I reported from the CERAWeek energy forum in Houston, experts at IHS think shale companies may be able to shave those costs by 45pc this year - and not only by switching tactically to high-yielding wells. . . . OPEC now faces a permanent headwind. Each rise in price will be capped by a surge in US output. The only constraint is the scale of US reserves that can be extracted at mid-cost. . . .
Evans-Pritchard has a chart of the level of oil prices that would be needed to bring the budgets of various petrostates into balance.
With some exceptions, that's quite the collection of rogues. You can't help but notice that the very worst ones -- Russia, Iran, and Venezuela -- are in as bad or worse shape as the Saudis. And Iran hasn't even yet started to crank up its oil pumps for the coming relaxation of sanctions.
To see what the end game looks like, try some news from the guys in the worst shape of all, Venezuela. Oil is 95% of their exports, and they need a price of $160 per barrel to pay the bills; current price is about $50. How does it look down there? The latest report I find is July 16 from Bloomberg News. It reports annual cost-of-living change running 772% per year (otherwise known as incipient hyperinflation), a "collapsing" economy, and the markets predicting default by the end of the year.
“It’s a collapsing economy with a massive shortage of dollars, and these guys are printing as much money as they can to survive,” Regis Chatellier, a strategist at Societe Generale, said by telephone from London. “At these levels, the shortage of dollars is such that it will be difficult for them to pay debt coming due at the end of this year."
How lucky are we that all the worst actors on the world stage are so completely incompetent at running economic policy to generate the wealth to support their evil ambitions? Of course, our own President is even more incompetent -- he would shut down our fossil fuel business entirely if he could figure out how to get away with it. But at least so far, he has only nibbled around the edges.