Saudi Arabia made a big mistake in the oil market

The price war on the world oil market, into which Saudi Arabia was so pleased to engage, began to bear fruit unexpectedly for this country.

Riyadh started a price war in order to supplant and bankrupt its competitors. In particular, American shale workers and Russian oil industry workers. As a result, he supplanted himself.

It may seem to some that the phrase of Tirion Lannister, popular among the younger generation, “if you are looking for justice, you have come to the wrong place” is more applicable than ever to international relations. Recently, however, another, much more ancient wisdom – “what you reap, what you reap” – has turned out to be much more relevant. The American elites shook the color revolution at home, the Swedish elites reaped the consequences of their neglect of quarantine activities.

And the Kingdom of Saudi Arabia (KSA) is reaping the fruits of the price war unleashed by it.

Pressed the Americans

Yes, at first glance, the crop is not bad. Recall that the purpose of the price dumping arranged by Riyadh was to bury the United States, the main and, most importantly, not bound by any obligations in terms of export volume, United States.

The Americans sharply increased production growth (almost doubled over the past 10 years) and in the middle of last year took the first place in exports solely due to the development of shale oil. Developing profitable only at high oil prices. It was also said about the threat to the Russian share in the world oil market.

By dropping prices, Saudi Arabia really achieved a sharp reduction in operating drilling rigs in the United States, making the Kingdom once again able to become the largest oil-exporting country. In April 2020, it sent almost 11 million barrels a day to foreign markets, while the United States only 8.6 million.

Moreover, the forecast for US production remains pessimistic. If you subtract unprofitable shale, you can see that the production of conventional oil in the United States has been declining (with the exception of several temporary surges) for the past half a century.

Given the current difficulties of the shale industry, as well as their very sad future in the light of maintaining a low price for “black gold”, experts believe that the production (not export, but production) of oil in the United States in the coming years may be reduced by a third or almost half. This means that exports will decrease even more.

It’s enough

However, this does not mean that Saudi Arabia with its cheap oil will be interested in the US market. If in April, Saudi Arabia delivered to the United States about 1.3 million barrels per day, then for the entire first half of June, the Saudis sent to America only about 133 thousand barrels.

Naturally, this does not happen at the request of KSA, but at the request of Washington – the oil storage facilities in the USA are overflowed (almost 540 million barrels of oil accumulated there, which is equivalent to 50 days of American production), their own producers go bankrupt due to lack of demand, and now they have no time for purchases oil from the allies.

Mohammed bin Salman, of course, is Trump’s friend – however, the interests of his own oil workers are more expensive for the American president. And to any American president, not just Donald Trump.

The reduction in Saudi oil supplies is not only observed in the United States. Since July, Saudi Arabia (which seems to have won the price war) refused to provide frantic discounts for its Asian customers and sharply boosted prices – however, these supplies are not really needed by customers.

Asian countries took advantage of the discount period and stuffed their oil storage tanks with penny oil. As a result, KSA reduces supplies to at least five of its Asian customers – and one client (the name of the country is not called) reduces the volume of purchases by almost a third.

On an oil needle

And so everywhere in the world. Experts assure that even because of a drop in production in the United States (which accounts for only a few percents of the global consumption of oil and oil products), there is no reason to expect a rapid increase in demand. First, you need to restore the global economy, and then empty the oil storage tanks, which are full.

And Saudi Arabia can’t wait, because the country’s budget in many respects provides for the revenues of the largest oil company Saudi Aramco. 98% of the company Saudi Aramco belongs to the Saudi state, or rather, the ruling surname.

The company’s revenues go to finance many projects: industrial, social, waged on the borders of the kingdom of “luxury wars”. But first of all, on the personal image of the de facto ruler of Saudi Arabia, Crown Prince Mohammed bin Salman.

One of the mainstays of the image of the crown prince in the West (and inside the country) is his ambitious program “Vision 2030”, which provides for the implementation of large-scale reforms within the kingdom by the indicated date. The liberalization of public life, trillion-dollar investments in various mega-projects, a 6-fold increase in revenue from non-oil industries, and a 3-fold increase in the share of their products in the country’s total exports.

That is, the transformation of the country from a gathering of medieval obscurantists with oil and garages full of “Ferrari” into a modern developed state, claiming at least the role of a constructive leader in the Middle East.

It was planned that the oil industry should have given the lion’s share of the money to implement this “vision” – and now these plans are a big question. According to the results of the first quarter of 2020 (not even the peak of quarantine measures), Saudi Aramco’s profit fell by almost 25% to $ 16.6 billion.

The company was forced to cut hundreds of jobs in order to reduce operating costs. The company also reduced its planned capital expenditures by almost a quarter this year and also suspends investment projects to develop a number of new and modernize existing fields.

Shopping is the best fitness.

It would seem that KSA can survive the difficult times of the year due to the gold and foreign currency fat. However, it is rapidly depleted. Recall that in 2015, the country’s gold and currency reserves amounted to more than 730 billion dollars.

The fall in oil prices led to the constant withdrawal of funds from the egg capsule, and the coronavirus epidemic sharply accelerated this process. As a result, by May 2020, almost 450 billion remained in the country’s zagashniki (to understand the pace of decline – over the previous 2 months, the kingdom consumed about 10% of gold and foreign exchange reserves).

And this is far from the limit of a fall. Tourism, construction, trade, the transport sector – all areas of the economy of the Kingdom have been affected by the coronavirus, and urgently needs cash infusions for resuscitation.

The volume of injections is not yet clear, because the epidemic in KSA (and therefore quarantine measures) do not even think of ending. In Saudi Arabia, there were 150 thousand people who were sick, and – much worse – since the beginning of June, the country has experienced a sharp increase in the number of sick people at the moment.

If we take in terms of per capita, then this is perhaps one of the largest indicators in the entire region of the Middle East – even greater than in Iran. The authorities of the kingdom are seriously discussing the abolition of the Hajj (which should begin in late July) – and it is possible that the deportation of foreign labor, which accounts for about half of all new infections, will be on the agenda.

Falling incomes, declining foreign exchange reserves, geopolitical problems and possible internal unrest – all these can become components of an ideal storm that will plunge the Kingdom into a state of permanent conflict.

And all because one ambitious crown prince not only lived beyond his means but also decided to measure his wealth and influence with the leading states of the world.