Saudi Arabia’s Great Run Seems Headed for Trouble
bloomberg.com
bloomberg.com
It does create a big baby boom problem. They have a big generation that is going to grow old relatively healthy (unlike earlier generations) and wealthy. They are going to be dependent on a new generation that is much smaller and currently struggling with unemployment. So, the good news is that there should be plenty to do for these people when their parents retire. The bad news of course is that at point the saudi's will have some economic issues of having to produce more with less people, while facing issues with their oil revenue dropping.
Other issues that are affecting them are the fact that their cities are becoming inhabitable due to rising temperatures. Regular temperatures above 50 degrees are not very sustainable. They are apparently already planning to create some new cities to address this.
The political situation is of course the big topic. The royal family's power is rooted in oil money. As that dries up, the geo-political landscape in the region will start shifting. There's no shortage of countries in the region with similar issues and competing agendas to address their issues. E.g. Iran and Saudi Arabia is a war waiting to happen. The proxy wars have been going on for decades with the US and Europe having played no small role in the history of both countries. Weapon exports to the Saudi's and other countries in the region are substantial.
Unless they plan to build them somewhere else, I doubt that'll help. Large swathes of the middle east will become completely uninhabitable, quite possibly during our lifetime.
https://www.popsci.com/united-arab-emirates-mars-city-pictur...
Also, rather indoctrinated... which can be antithesis of education.
Perhaps the world should have done more to help Venezuela, but we at least had the option of ignoring it (or worse). When (not if) SA goes the way of Venezuela, it will be a far messier situation for the rest of us, and I don't think we are even thinking about it, much less preparing.
For me personally, the only unique thing that KSA has that you can’t find elsewhere is Mecca.
They have zero credibility. Mecca and Medina are an exception to this.
For example, if KSA blows up politically, and it leads to (for example) 6 months of no oil coming out, do we even have the tanker or pipeline capacity to keep Europe supplied?
Oil prices go up. Mind-bogglingly huge investments go into getting previously impossible-to-get oil out of the ground. These techniques get cheaper through scale, experience, and innovation. Now it's possible to profitably use them at medium prices.
(However, in 2014 the US ended a 40 year ban on exporting crude oil. We also would not have seen this boom without a return to more free market on oil.)
Crude oil production is down to 50% of what it was when Chavez took power. The refining side is even worse, with gasoline production was down to 17% of rated capacity mid-2018, and much worse since then. The latest report I could find had their biggest refinery operating at 5% of rated capacity, and often completely out of action.
It's not uncommon from late 2018 to now for Venezuela to be unable to export oil for periods because of pipelines and processing plants breaking down from atrocious maintenance.
For just a few of the issues, see:
While I support Humanity's move away from fossil fuels, let's not kid ourselves -- Muslim World (which represents 2+ billion people) as well as China and India are in no rush to give up Fossil fuels. What we see now (drop in oil prices, oversupply) may get corrected over time as the poorer Muslim Nations like Pakistan and Central Africa region stabilizes and industrializes thus softening the blow from any dip in business with West.
As for social development across Saudi Arabia -- this is nothing new. Back in 1960s/1970s, Saudi Government had a modernizing phase where they bought Television and media to the masses. Universities were opened and Education was encouraged. Ever since then, Saudi men AND women have been sent to West and other places for their studies. This modernizing phase is just part 2.
You have to understand something about Saudis, Emiratis, Kuwaitis, Qataris, etc. Average citizen in these Countries may have good amounts of wealth and may get exposed to secular culture, however, at heart, their population is very much conservative and strong supports their Royal Family. Case in Point UAE: Flush with Wealth and relatively liberal -- but local population still appears conservative and prefers to live in their own social circles.
This (GCC) region is part of World where up until the Grand/great-Grand parents of current generation lived in desperate poverty since beginning of time and the society still remembers those harsh times very, very clearly -- given those circumstances and where they are now (almost First world type of living standards), any population of Human beings would be, very, very satisfied by their leadership.
Anecdotals suggest the House of Saud itself has exploded in size.
Supposedly at a rate far greater that House of Saud’s revenue streams.
Petrodollar recycling programs often in the form of western arms contracts are a way for the House of Saud and insiders to “clip the ticket” on big dollar contracts.
The multidecade Al Yamamah contract worth tens of billions with UK defence industry saw a corruption investigation stopped as a “matter of nationa, security” due to Saudi pressure.
In commerce, financial reporting often includes “same store sales” for retail and restaurants.
I wonder if “average Saudi Prince kickback/revenue generated” would be a valid metric?
I suspect kickback revenue per member of the House of Saud has been in the decline.
Surely 1 would solve the other?
Edit: So according to wikipedia, these are the age distributions:
0-14 years: 25.74%
15-24 years: 15.58%
25-54 years: 49.88%
55-64 years: 5.48%
65 years and over: 3.32%
This suggests to me about the right amount of young adults, not too many, with potential issues in 10ish years time.
Note that "upto 37%" of the population are immigrants, I assume they disproportionately fall into the 25-54 age range, and that that immigration could be controlled to some extent if needed.
https://en.m.wikipedia.org/wiki/Demographics_of_Saudi_Arabia
The KSA is a wealthy absolute monarchy. They absolutely can.
The king may have the right to send all the plumbers back to India and wherever they came from, effective on the coming Monday, but he doesn't have the ability to stop the pipes from being clogged.
It's not just unskilled workers. They rely on many foreign skilled workers too. Two acquaintances of mine are expert concrete engineers. They go out there to work on these building mega projects like the Burj Khalifa, as well as ones in KSA. There is little local engineering expertise; it's all brought in. When you're mega rich, it's easy to do that. It would be better to develop their own expertise and industry and have a more balanced economy, as well as a more secular society that would value such careers, but that takes time as well as the desire to change their economy and society to permit it. It's not clear they have the desire or will to do so.
15-24 years: 7.64% (male 408,376 /female 332,986)
25-54 years: 70.45% (male 5,297,201 /female 1,537,300)
55-64 years: 6.05% (male 499,579 /female 87,037)
65 years and over: 1.47% (male 106,739 /female 35,669) (2018 est.)
https://www.cia.gov/library/publications/the-world-factbook/...
Source: https://www.cia.gov/library/publications/the-world-factbook/...
I figured they got rich on oil, but could now stay rich through investment.
Saudi is trying to do this by spinning off part of Aramco in to public ownership and by stealing wealth from top officials. realistically they should have started 30 years ago.
It’s got to be pretty weird to work for or in a WeWork and know what sort of regime you are sustaining.
Also, how much is invested versus being spent lavishly on their princes and populace to keep them happy?
But the Saudis have the same problem nearly every other petro-regime has, which is spending that money on unproductive personal property (palaces, fancy cars, private jets, etc.) as well as unproductive state property (defense, mostly). They have built some universities and other public goods, but I suspect it's a small fraction of the wealth that's been extracted.
They have no comparative advantage over other nations in anything other than petroleum, and religious tourism. There's no particular reason why you'd want to build a factory or move your multinational company there. They could create reasons for people to want to do that, but it would probably be expensive (they'd need to have low wages, probably artificially depressed or subsidized, or a very lax regulatory environment, which has its own costs, or both).
In the short term I'd look for them to start borrowing to keep their budget balanced, using the oil still in the ground as collateral, basically. (They're effectively borrowing against future income.) If they do enough of this and build productive, sustainable economic assets, they might do okay. But eventually the cost of borrowing might get high, because as demand for oil falls and extraction costs increase, there will come a point where it's no longer economical to extract anymore and they'll have a load of "stranded assets" on their national books. The day they finally have to write those down will be the real day of reckoning, financially.
If the ruling class is smart, they'll make it seem as though it's all a big Western bankster conspiracy (when in doubt, blame the Jews), not their own long-running incompetence, because the immediate cause of the pain will probably be a debt crisis or default.
Birthrate of 4-6 is unsustainable (unless, maybe, they're Canada with all that land and resources) but above 2 is needed. Someone needs to work in 25 years and pay social security so old people get theirs.
Looks like stormy seas ahead. They can open the spigot for a while but unless the tank keeps refilling (oil prices might not cooperate) it will run dry.
We have some very clear problems to solve if we have a negative birthrate. Caring for elderly is very hard work, harder, IMO, than raising young children.
When we have a negative birthrate, how do we care for the elderly without it becoming a significant drain on our economy? We can essentially run government programs, like American Social Security, like a Ponzi scheme, because as long as population is growing, there's always more people who pay in than take out.
And, just "saving more" won't solve the problem, because then there will be a bunch of rich old people who can't hire help because there just isn't enough young labor!
Leads to a good discussion!
Aka the price of oil at which the Saudi sovereign is cash flow positive?
The source of their biggest threat in regards to social unrest, is that they can't afford to placate their massive population expansion since ~1980. Their population has tripled since roughly 1982 and they have no traditional economy to support that what-so-ever, it's all oil dependent. The worst thing that could happen is that you double that population again rapidly, against a relatively static output of oil and while having still not developed a traditional economy to support the new population.
It's a pretty simple equation. N oil production divided between Z population. Every year that goes by that their population increases and their oil production doesn't keep up, that oil money gets thinner per capita. Boosting the population doesn't boost their economy much (such that doing so enables them to better provide for an aging population), as they have practically no conventional economy.
That's fundamentally why their budget requirement for the price of oil just keeps going up. It's at least ~$80 per barrel now that they need to balance the budget [1], so it's nearing a state of becoming permanently impossible to fulfill their budget demands. Soon it'll be $90, then $100.
They've increased their population by 1/4 in roughly the past decade. That's far too fast of a population expansion rate based on the structure of their economy. What they actually need is population contraction, desperately.
That oil economy is now trapped in hell with US shale production always acting as a price & supply counter that makes it impossible for Saudi to gain ground. The EIA output estimate for the US for 2018 as recently as three years ago was roughly two million barrels per day of production lower than what it actually turned out to be. In one form or another, that's largely coming out of the pocket of OPEC+ (OPEC + Russia). US shale supply will never stop pressing against the price & supply of oil and the US is rapidly ramping up its export capabilities. If the Saudis cut to firm prices, US supply takes it up and takes their price gains away (which may take months or years to fill out depending on the macro situation).
Saudi will expand their population by another 12-15% in the next decade, against this disastrous economic scenario. The outcome is obvious, they won't be able to placate the burgeoning population and over time it'll rip the kingdom apart.
If you cut their population in half right now, they'd struggle to build a traditional economy big enough to put under it in time before there's an oil crisis in the kingdom. As it is, they appear doomed to an inevitable civil war or revolt of some sort.
[1] https://www.spglobal.com/platts/en/market-insights/latest-ne...
For Saudi Arabia the deal with America is that the House of Saud get to stay in power in exchange for the oil, it is that simple. If there is this 'uprising' that you speak of then it will be Uncle Sam's job to put it down.
The original deal goes back to the time when Britain was supposed to have Iran and the U.S was supposed to have Saudi Arabia. On the back of this deal the Saudi 'Royal Family' have built some myth of entitlement to the throne and being a proper 'royal family'. It is an illusion, there is no legitimacy there. So long as they wear the 'traditional' outfits and keep the 'traditional' laws nobody is going to see that the emperor has no clothes.
I don't get the impression that there is any type of organisation against this so-called 'royal family' with a class of people clued up as to how to live in a non-feudal society. They are far from socialist, mere serfs in an offshoot of empire, relatively rich because that is where the oil comes from. They never had industrial capitalism, they went straight from sand and a bit of tourism revenue to the monster of finance capitalism, trickledown economics and everything that the IMF demands. Because of the oil they do get a few empty gifts from the system such as cheap petrol.
For decades those dollars have flowed back to the West in arms sales. To an extent this clawing back of the money has also happened with luxury goods too. So the serf-grade workers of Saudi Arabia are doubly screwed, when this imaginary 'uprising' happens and they impose a government that 'shares the wealth' they will find it has all been spent on underground aircraft hangars and bits of paper that are allegedly investments in the Western stock market.
My favourite fact regarding oil is how it all went wrong in the 1970's with the oil crisis. What only a careful reading of the Wikipedia article tells you is that the US increased grain prices 300% to pay for Vietnam. This was bad news for the OPEC countries, places like Iran had kind of got used to affordable wheat. This wheat had kind of covered the U.S. balance of payments for oil imports before Vietnam, so it had been a happy arrangement. Our history tells the 1970's oil crisis very differently, forgetting the wheat price hikes.
As the article states the government can make quite a few concessions, e.g. women driving, allowing people to go to the theatre, that sort of thing. They can buy off those that might resent how things are going by these concessions yet still keep a tight grip on the deal which is essentially oil for arms and food.
How can that be if they've been locked up into their homes until recently? (To my limited understanding of KSA)
Because they follow rules obediently. That same tendency nets them lower salaries, with a conciliatory style during negotiations.
That certainly used to be the deal. The US no longer has any need of OPEC oil. The US got 3.3 million barrels per day from OPEC in 2017, down from 4.2m in 2012. I haven't seen the last two months of data for 2018, but I believe that fell below 3m per day for 2018. That will drop by another million barrels per day over the next few years.
US oil production is estimated to climb to 16-18 million barrels per day over the next eight to ten years give or take. OPEC now stands in the way of the US maximizing its oil position and the value of its enormous production.
The US will benefit from destroying Saudi Arabia at some point. US global hegemony (courtesy of energy production) is increased if you permanently decimate Saudi Arabian oil production. All the countries that need Saudi Arabia's oil, including China, will find themselves into an economically compromised position and require US oil to fill the demand.
Between now and the switch to all-electric vehicles globally (20-30 years), the US is economically best served to deplete as much of its oil as possible.
If you're a nefarious US looking to increase your power, the only question would be the ideal time to pull the trigger and collapse them. You boost US production from 12m barrels per day, to 18m, and slash Saudi down by six plus million by turning their country into a war zone.
18m barrels per day times $85 oil = $1.53 trillion
Versus today's 12m barrels per day at $50 oil = $600 billion
Over ten years, that value gap is reasonably $8 to $10 trillion. How much are Exxon and Chevron (2 of the 3 largest holders of acreage in the Permian) worth under that 18m * $85 scenario?
Or push it a notch further: 2029, 20m barrels per day at $100 oil (equivalent to maybe ~$60 in 2004, a tolerable inflation adjusted level). $2 trillion per year, the size of Italy's whole economy. It would pour a bonanza of epic proportions into the domestic US economy. I don't believe either 18m or 20m barrels per day of US production can co-exist in the next eight to ten years with Saudi Arabia's ~10-11m production (much less their desire/fantasy for more production at a higher price to keep up with their budget).
Simple question: what will the US do to realize that value potential? It'll certainly not be concerned about the collapse of Saudi Arabia, putting it mildly. Cynically or not, there's a popular opinion about what the US is willing to do as it pertains to oil; what then will it do for its own, massive, direct benefit re oil? That benefit scenario is several fold better than just ensuring oil supply from overseas as in the past. The days of (non-Canadian) foreign oil being a strategic critical are nearly over, which means the US allegiance to the Saudi deal is running out. Everyone knows how willing the US is to flip such an allegiance when it's convenient, there's no scenario where the US will feel bound to continue with that after it no longer serves the US interests.
At 16m-20m barrels per day, the interests served by that much oil production at $85-$100 prices, is pretty clear.
The US economy can easily tolerate $85-$100 oil circa 2029. Inflation adjust that back 25 years to 2004, you get maybe in the realm of $50-$60 oil. The US will be less oil dependent in 2029 than it is today or in 2004, continuing its existing trend line of a lot more economic output without a corresponding increase in oil consumption.
$10-$15 billion in annual arms purchases from Saudi Arabia is meaningless against $1.5-$2 trillion in annual domestic oil production in my scenario. They'll just bump the US military budget to offset the difference.
Your last section, describing how the US needs Saudi as a regional counter and stabilizing agent, assumes the US acts with particular long-term rational behavior in its pursuits. When have you ever seen that be the case in the post WW2 era? It's rare. We wouldn't be in the situation we are now with Iraq, Syria, Iran, et al. if the US behaved the way your theory proposes. The scenario one would expect based on the last 70 years of US behavior, is instigated chaos (whether originally intentional or not).
Exxon and Chevron (not to mention a dozen other relevant oil companies) are far richer and more politically powerful than Lockheed Martin.
There's no conflict between that and the routinely chaotic and irrational foreign policy of the US. They can both exist side by side. Some of the foreign policy irrationality is in fact caused by domestic lobbying, we've seen that throughout post-agrarian US history where the US Government intervenes in foreign affairs on behalf of powerful domestic commercial interests. A further cause of that foreign policy irrationality is at least in part due to administration changes over time, with which agendas change. Adminstrations change, domestic lobbying continues. If you need to think long-term, and you change plans every four to eight years or similar, you're inevitably going to get chaos and wild unintended outcomes. Consider all the plan changes from Bush to Obama to Trump in Afghanistan. I'm not arguing that their goal is necessarily chaos, rather, it's the inevitable product of the approach.
I'm not arguing that acting on behalf of domestic oil interests that might want to see Saudi's output hampered, is rational. Indeed, that might very well be another ideal example of irrational, dangerous behavior that could cause more instability. When trillions of dollars are at stake, one thing you can assume is lobbying toward the dollars will be involved.
I don't believe there's any meaningful US Government loyalty to Saudi Arabia beyond a matter of oil convenience. Trillions of dollars at stake over time as it pertains to domestic oil production, is worth a lot more than the arms purchases from Saudi Arabia. As the US oil production figures continue to rise year after year, the powerful interests represented in that will want higher prices. Their influence increases as the production does (and Saudi's influence declines).
Saudi is set to become primarily a competitor of one of the largest, most important industries in the US. Rather than a relationship of shared security (they get system security, we get oil security), it'll become a relationship of growing animosity / tension, which we're already seeing the early beginnings of (Congress being willing to invoke its war powers to try to force an end to the US support of Saudi re Yemen; and their increasing willingness to criticize Saudi generally).
When it comes to the rest, why should the US care about Syria strategically? The US should have never been over there in the first place. The only people that want us there are the war hawks.
The next administration after Trump will yield more new chaos, as plans and agendas change. It's the inevitable consequence to being perpetually in a position of war and meddling in foreign nations. You're always there as a nation and the people controlling the meddling come and go, with each change lighting new unintended fires. I'd argue that any involvement choices made in the Middle East other than to entirely pull out of the region, are by default irrational. There's no winning or rational direction if you're doing what we're doing, only fires to constantly be put out while you're in the muck of it.
I haven't seen anyone seriously predicting sea and air transport fully going electric in that timescale - current tech would require massive amounts of rare earths and isn't really viable as regards air yet I don't think. There will likely still be reasonable demand for kerosene and hopefully LPG if we can get sea transport off bunker fuel.
Nice historic trivia here, a genuinely thank you for the info, I for one wasn't aware of that connection. Wasn't the same hike in the price of US wheat partially to blame for the wheat shortages experienced by the USSR in the second half of the '70s?
I think they produced too little and at some point the US wheat market became off-limits for them. There's this Wikipedia article [1] stating how because of a failed crop the URSS basically bought everything they could get their hand on from the Chicago Mercantile Exchange (this was happening in 1972), and I also found this 1982 Foreign Affairs article [2] that detailed the reasons why URSS had become a net grain importer by that time. Also, apparently Russian PM and economist Yegor Gaidar said that the fall of the URSS was partially caused by the "wheat situation", combined with a decrease in the price of oil in the 1980s [3]
> But there was a more immediate explanation for the collapse of the Soviet Union provided by Yegor Gaidar, who had been acting prime minister of Russia from June of 1992 to December of 1992 and a key figure in the transformation of the Russian economy. In his last work, Collapse of an Empire: Lessons for Modern Russia, published in 2007 Gaidar provides a powerful explanation for the collapse of the Soviet Union. Soviet agriculture had stagnated in the 1980's but the demand for grain in the cities was increasing. It was necessary to buy grain in the international market. While the price of petroleum was high it was feasible to finance the purchase of grain from internal sources. When the price of petroleum fell in the late 1980's the Soviet Union needed to borrow the funds from Western banks to purchase the needed grain. This severely restricted the international activities of the Soviet Union. It could not send in Soviet troops to put down the rebellions against communism in Eastern Europe because such an action would have resulted in a refusal of Western sources to lend the money needed. Likewise the attempted coup d'état was doomed to failure because the coup leaders would not have been able to borrow the funds needed to stave off starvation in the major cities.
[1] https://en.wikipedia.org/wiki/Great_grain_robbery
[2] https://www.foreignaffairs.com/articles/russia-fsu/1982-03-0...
oil economy is now trapped in hell
it'll rip the kingdom apart.
They might be in the middle of the same thing for themselves. Virtually all depend on oil, smaller but richer ones like Qatar, Dubai etc might get invaded, ala Kuwait
https://www.eia.gov/beta/international/data/browser/
Oil consumption is dropping in Europe, stable in the US and rising fast in Asia and Middle East (also in Africa, but it is on absolute terms not very relevant).
It seems more technologically advanced countries are seeing an uptake in new energy sources. If this theory is correct, it is expected that tech will percolate to the rest of the world, and a drop in oil consumption is indeed on the medium-term horizon.
China's push towards electric transportation is consistent with this theory.
They also need to stop treating women like being worst than cattle, that way maybe industries other than the ones heavily involved in the industrial-military complex would come and invest in SA (the "women are seen as worst than cattle"-analogy has been told to me by a friend who used to work in SA as part of a defense company).
Also, they need to "secularize" their education pretty rapidly. The same friend, an engineer, told me how one of his Saudi colleagues was telling him and his other colleagues about how they used to teach the Quran in SA's engineering schools. Also, said SA engineer confided in his Western colleagues by telling them that he was a closet Atheist, and if word got out about his non-believe status he would risk the death penalty. You cannot build a modern, wealthy society when you're still threatening your people with the death penalty for not believing in a particular god or religion.