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Comment by bob33212 | Hacker News Reader

What happens when Saudi Arabia collapses? Does the royalty get the fuck out of town on their private jets with as many gold bars as they can carry?

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"My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Lamborghini, his son will drive a Lamborghini, but his son will ride a camel"

Actual quote was by the Sheikh of Dubai:

"My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel"

https://en.wikipedia.org/wiki/Rashid_bin_Saeed_Al_Maktoum

For interesting context, the man who said that was born in 1912, his eldest son was born in 1943, and his eldest grandchild that I can find in 30 seconds of research was born in 1976. That is were the Wikipedia articles stop but the child predicted to ride a camel is certainly alive today and they might even already know how to drive.

You need lessons to drive a camel ?

The man who said that used that quote as a rhetorical device to promote development of other industries such as finance.

People (justifiably) criticize the middle-eastern countries for a lot of things, but they are all aware that all the oil revenue is eventually going to dry up. Most of them have been hard at work transforming their economies for decades, not an easy thing to do when you're in the middle of a desert.

Sounds like a great place to put massive solar farms ...

...to power desalinization plants.

They havent been transforming in a remotely sustainable manner, Softbank, Neom etc.

https://en.wikipedia.org/wiki/Neom

This seems unlikely to me, given the low extraction costs they have for oil.

I guess the biggest danger they would face is if they have to stop "paying off" their population, and this leads to an "arab spring" type of situation. But it seems even in that case they would unfortunately have the will and resources to use Syria-style brutal tactics to contain any uprising.

Saudi Arabia’s extraction costs are about $3/barrel, their nation state budget require $80/barrel to break even.

They are burning through reserves at these market prices.

Edit: To your point, it’s going to get ugly locally if market conditions persist.

Saudi makes up shit when they say their extraction costs are $3/barrel. A lot of clever accounting in that one. Actual extraction costs are roughly $10-$15/barrel.

Still far cheaper then almost everywhere else. $3 or $15

Why do they or why would they make up extraction costs? (Genuinely interested)

Posturing. They want to intimidate producers (and their investors) that have much higher extraction costs, like U.S. frackers and Canadian oil sands firms. "We can bring oil to $10/barrel and still be profitable," you can imagine them saying threateningly.

exactly what exhilaration says below! I work in the oil and gas business. U.S. independent oil companies are survivors. If I have to pick between the U.S. shale producer or Saudi kingdrom, I'll pick the U.S. shale producer every time.

To have an upper hand in negotiation. Everyone knows Saudi can win the war of attrition with oil at low prices they just don’t know by how much.

The limited success of their war on Yemen, despite having the 3rd largest military budget in the world, says otherwise.

So you're saying KSA has a higher military budget than 1) The US, 2) China, or 3) Russia?

1 No.

2 No.

3 Yes.

The KSA spends 8.8% of its GDP on military expenditure. Seemingly the largest of any country.

https://en.wikipedia.org/wiki/List_of_countries_by_military_...

But KSA has no ambitions towards becoming a global military superpower. For a long time it had a choke point on the economy through its resource monopoly. Until recently that was a much more potent weapon than any number of aircraft carriers.

Russia does have superpower ambitions, which is a rather more expensive business.

My cynical suspicion is that much of the KSA military budget is really just a form of kickback - or possibly protection money, depending how you look at it - to the US mil-ind establishment.

While the Saudis are some of the worst people in the world, their ambitions are limited to keeping the ruling dynasty outrageously rich and maintaining power on their own patch of turf.

The Russian establishment is far more dangerous. It not only has links to organised crime, it also has a complement of nukes, bio, and chem weapons. And it has a very developed infowar, hacking, and social destabilisation arm, based on techniques pioneered by the US, with some home-grown twists to increase effectiveness.

This oil war and related COVID crash are going to do huge damage to the economies of both countries - and a lot of others besides - with increased prospects for instability everywhere.

It's my understanding that KSA largely buys its military equipment from the US (certainly in regard to Army equipment and its air force). I'm pretty sure they're one of the countries approved for F-35 export, and they're known to be F-16 and F-15 customers. The F-35 is not cheap, the other two are relatively cheap (still in the millions).

I don't think anyone is expecting KSA to declare war against Russia, but they're currently at war w/ (part of) Yemen, and they're not exactly happy with Iran, either. The middle east is set to explode, even without US involvement.

3) Russia. Look it up.

Isn't there some real issues with the military being larger given the ruling family? Fear of a coup? I though they spent the money on fancy toys and not a big military.

After the WW2 House of Saud made an agreement [1] with USA that in exchange for the US Army support of Saud, they will pump any amount of oil that is needed.

Now not sure how long this will last, since the current price war is directly affecting the US producers. Time will tell.

[1] https://www.vox.com/2016/1/6/10719728/us-saudi-arabia-allies

The US is currently a net exporter of oil, or at least was until the recent price drop. Saudi Arabia's capacity of pumping oil is completely based on what they view as their best interest in making money while maintaining market share. That's why they tried to take US Shale oil out, and why they tried over producing recently to get Russia to come to the table for a production cut. They've also embargoed the US in the past.

https://en.wikipedia.org/wiki/1973_oil_crisis

At the end of the day, US shale companies going under could benefit Canadian oil most of all, especially now that Enbridge has US approval.

The gold bars are already in the US, as part of the Nixon-Faisal agreements. That should not be a comfort to the Saud kleptocracy, as the Shah of Iran discovered.

technically wasn't the ayatollah that had to pay that price?

You're talking about https://en.wikipedia.org/wiki/Iranian_frozen_assets right?

Yes. He thought he’d be able to live his exile in luxury, but what he thought of as his assets (really belonging to the Iranian people he looted, of course) were frozen by Carter.

Not just Carter, the Supreme Court too. After Congress made a law to specifically make the seizure legal, the bank challenged the constitutionality of changing laws to be interpreted against the bank only when applied to that bank’s seized Iranian linked account. The Court sided with the government 7-2.

https://en.wikipedia.org/wiki/Bank_Markazi_v._Peterson

Does the Saudi kleptocracy have any reason to distrust the US klpetocracy? After 9/11/2001 the US was quite loyal in a difficulty time.

The Saud were still in power. If they lost power, all bets are off. It’s certainly not their sterling moral character that gets them so many free passes today.

Without a stable government in SA the Middle East would be even more chaotic than it is now. I think that's why after 9/11 a priority was made to keep the SA monarchy stable and in power.

If that were true, wouldn't it be counterproductive to destabilize the rest of the region (Afghanistan, Iraq, Iran, Libya to name a few) at the same time? I think the stability or instability of the Middle East is a function of how the US leaches resources off of it; in that if destabilizing the region gives U.S. interests more $$$, then so be it, chaos be damned.

Saudi Arabia still has the cheapest oil production costs in the world at $8.98/barrel (https://en.wikipedia.org/wiki/Price_of_oil#Comparative_cost_...)

They probably aren't making enough right now to pay for all of their commitments, but they definitely aren't losing money and they can likely borrow in the short term.

Not to mention they just had an IPO on their state oil company and raised a shot load of money.

I thought that had been called off no?

They wound up doing a limited sale to local investors. It has been suggested that there was some "influence" applied to the investors to put the price where it needed to be instead of at the purely market price.

It's not that they are losing money on production, the state budget is in the red with a price less than about $80/bbl

https://www.reuters.com/article/us-saudi-economy-budget/saud...

Oil in most countries pays the producers and some subsidies to farmers, truckers, etc.

Oil in Saudi Arabia pays the entire country

$8.98 might be the breakeven price for Saudi Aramco, but for the country, the breakeven point is, iirc, $80/barrel

This is a rather naived perspective on the strategic thinking and planning of the Saudi Royal family. They are heavy investors in renewable energy tech.

In the last 5 years, sure, especially with MBS holding the reins. But you can't just move your entire country onto solar power in 5 years unless you have huge hydro or battery resources already.

> But you can't just move your entire country onto solar power

If oil consumption enters extreme secular decline and SA doesn't transition to solar, then SA will be a horrendously poor country powered by oil.

If oil consumption enters extreme secular decline and SA does transition to solar, then SA will be a horrendously poor country powered by solar.

I doubt they collapse, this is a war of attrition started by the Saudis and Russia. They are attempting to force all of their competition (primarily each other) out of business by continuing to flood the market with oil. They are betting that they can outlast the other. These are both nations that care very little for their citizenry outside of the elites so both are willing to go to lengths other democratic nations would not.

Either side could likely stop this with the consequence only being loss of face.

Interesting. Russia is less oil dependent than SA, but the Saudi's have more oil per capita.

The Saudis also have a massive population of what are effectively indentured servants and the ability to get more or expel them at will, so that dependency comes with a degree of flexibility to modify their own economy.

Russia is less oil dependent than SA...

Are you sure? Everything I've read has said some variation of _Russia is heavily dependent on oil exports_ [1]. Russia has a massive cash reserve to weather this crisis but they're still being hurt just as badly as KSA.

[1] https://www.npr.org/2020/03/12/814824039/how-russia-is-react...

They didn't say Russia wasn't heavily dependent on oil. They said KSA was even more dependent.

From their Wikipedia pages, 40% of SA's GDP is oil[1] versus 16% of Russia's[2], also 90% of SA's exports versus 70% of Russia's. Certainly both countries are disastrously hurt by a collapse in oil prices, but SA seems to be worse off.

[1]: https://en.wikipedia.org/wiki/Economy_of_Saudi_Arabia [2]: https://en.wikipedia.org/wiki/Economy_of_Russia

I cannot imagine they meant for it to get this bad, though. I'm guessing they underestimated how bad the COVID-19 shutdown would be. They wanted it to hurt, but not this bad.

Well, Saudi started this mess when they decided to declare economic war on Russia and take out oil production in North America as a nice bonus. As long as Saudi can pay the people in Saudi they should be able to weather the storm they started. The huge demand drop for oil just makes it quite a bit nastier.

One of those strange conflicts where both sides are the bad guy.

All sides, actually.

https://edition.cnn.com/2020/02/18/politics/us-sanctions-ven...

Whatever hippy commune, theocracy, or warlord will arise to replace it, they will still keep pumping every drop of oil that they can out of the ground.

In that sense, it doesn't matter one bit what the House of Saud does, the machine they built will keep going long after its gone.

They've been talking about the House of Saud falling for decades now and it hasn't happened yet. Although I thought A few years ago the young prince was going to make a bunch of drastic moves away from oil in order to secure the economic future of the country?

Beyond a few articles in 2017, I haven't seen much of an update on that, anybody know if it was all just bluster, or are real things happening that would soften this blow coming?

Every Arab ruler has tried to do this for decades, but this is a HARD problem:

1) Their climate sucks 2) They have very little arable land and lack water 3) Production of electricity is expensive 4) A lot of interior cities - not a lot of port access

So, from a geographical perspective, what is SA supposed to produce that gives them a comparative advantage against the rest of the world? Then you move into the political/religious aspects:

1) Uneducated workforce, despite offering scholarships to study abroad for every one of their citizens 2) They import most of their labor from other countries, ergo, their labor costs are higher with respect to the rest of the world. A factory in India will be cheaper than a factory in SA, all else being equal.

These disadvantages make the only real route to a viable economy a service-based one. This is what Dubai has done - Dubai has done their damndest to establish free trade zones, a legal framework, and a tax regime to get companies to establish their MENA HQ's there (and they've done so accordingly). SA is WAY behind on this (I would argue irrecoverably behind).

Saudi Arabia is in a good location for logistics and transshipment hubs (although this is something else they've probably lost to Dubai). There's also obvious tourism appeal, due to the historic sites in the Hejaz (probably already maxed out though, unless they want to open it up to non-Muslims). The other obvious choice for a commodities producer is to move up the value chain: go from selling crude oil to selling petroleum-based products instead.

The biggest issue is the effect that the resource curse on the workforce, as you note. There is a small contingent of well-educated Saudis (largely found in Saudi Aramco), and the country has instead relied largely on giving their population sinecures in the government, which hasn't exactly done wonders for productivity.

To be fair, 2020 is proving to be the year all those long heard warnings are coming true

Dictators/Kings can survive on a very tight budget btw. It takes a long long time for those structures to crack. The only reason they would leave town would be something related to the virus (like other western rich folks are doing now)

IIRC Saudi Arabia is a massive welfare state with significantly subsidized food, power, water and more - all paid for by oil. People might be more willing to revolt because of that going away than they would have had it never been a thing in the first place.

Survive in a small enclave in a third country with a small group of servants, sure. Survive as dictators, I am not so sure -- it requires keeping troops and those in key positions happy, which is expensive. My 2c

Rules for Rulers by CGP Grey is a fantastic lesson in how this works: https://www.youtube.com/watch?v=rStL7niR7gs

Yes, except they already took almost all the wealth out of the country so no need for gold bars rolling about on planes...

Why take gold bars on airplanes when you can hire accountants to create shell companies with foreign bank accounts?

Why do either when you can just open an account in your own name in the USA and poor cash I to it? The minute Saudi starts to collapse, your allies have guaranteed you a visa so you can fly over, finally drop all this pious Muslim crap and spend your I'll gotten gains.

UAE and Saudi Arabia imo will be ok. They are trying to build themselves into big entertainment and tourism hubs with their ventures into sports and investment in tourism etc I think though they will definitely suffer they may be able to weather the storm. Kuwait and Qatar on the other hand I'm not so sure about

Saudi Arabia is trying to build tourism? From where?

Dubai is definitely a tourist destination for a small number of hyper-wealthy people. The tourists get to be in the part of the bubble that serves alcohol.

That is true, however Dubai is not in Saudi Arabia. It is part of the U.A.E.

Dubai is certainly a tourist destination but it's not in Saudi Arabia.

Dubai is definitely a tourist destination, and it's not just for hyper-wealthy people. They get a huge amount of middle class tourism from South Asia and China. There's a wide variety of hotels, from 2* to 7* and you can stay in a superb 5* hotel for $150/night.

It feels like a destination for the hyper-wealthy to Americans because our tourist offerings here are so much better - but not everyone can come here. My best analogy for Dubai is that it's like Vegas without the gambling - and while that may suck for some people, it can definitely be done. Vegas is also done at every price point!

https://www.nytimes.com/2019/12/25/business/saudi-arabia-tou...

Didn't they just start to issue tourist visas last year?

I have to say, from flying across in a research airplane that was not allowed to measure (so no work for the scientific crew = lots of time to move from window to window and observe) - it is a colourful country and very beautiful from above. There is black and white, and red and yellow, and the many patterns in the sand and the mountains are interesting. I didn't know they had (extinct) volcanoes either. If I wasn't a woman I might have even considered going.

That was my first reaction too, comparing it to somewhere like Doha or Dubai. But maybe religious tourism? [0]

[0] https://qz.com/1684679/the-hajj-pilgrimage-to-saudi-arabias-...

Don't forget Saudi-Arabia is controlling Mekka, the holiest site of Islam which every Muslim with the means and ability to do so must visit once as a pilgrim in his/her life time. There are something about 1.5 to 1.8 billion Muslim people on this planet, that definitely is a base to build a tourism industry on!

Ever heard of Mada’in Saleh? Saudi Aramco magazine actually used to have a number of articles on those sorts of sites. Plus the Red Sea beaches and diving used to be cool before House of Saud came to power. Just think of Jeddah as Mecca and Riyadh’s slightly stoned cousins.

Probably. I have to say though, their advertisements for tourists were a bit.. out there. 50°C+ outside? Come visit us, you can hang out in the AC mall, or go skiing in our fantastic artificial ski hall (all powered by fossil energy of course). Yeah.. no thanks. It's hard for me to imagine that they can keep up with this level of income with just tourism.

That didn't stop UAE from attracting nearly 16M tourists last year.

Only Saudi Arabia beats them (barely) in the Middle East, and that's mostly from religious tourism to Mecca

I haven't done much research but that's pretty funny if you're correct. The middle east has done their darndest trying to make sure women feel as unwelcome as possible in their domain. Gonna be tough to establish a tourism industry when you've alienated half the world's population (this isn't even a commentary on women's rights - you simply can't alienate half your customer base and think it's not going to affect you).

Their vastly expensive polluting tourism isn't aimed at people with moral values, and they loosen the rules for tourists. They aren't dumb.

Alienating half of the world's population isn't even as much of a problem, but they also managed to do so in the only way that it is homogeneously distributed over the entire world.

Qatar makes 95% of their revenue on LNG. These are long-term contracts at fixed prices. Kuwait and Qatar also have the fewest amount of actual citizens that it would need to "pay off".

Ex: During the Arab Spring, Kuwait handed out $500k checks to all Kuwaiti males above 18 years old. He also told the citizenry that he would forgive all car loans - population went and bought ferraris, range rovers, etc. and got the loans all forgiven by the government.

I worry more about the Arab countries that have high populations and cannot afford to pay everyone off - Saudi is on that list.

I never heard of this before and tried to look it up without success.

I did find this Reuters article which mentions "In 2011, to mark three major anniversaries, ruler Sheikh Sabah al-Ahmad al-Sabah granted 1,000 dinars to each Kuwaiti and free food rations for 13 months."

1000 dinars ~$3200

https://www.reuters.com/article/us-kuwait-parliament-debt/ku...

> During the Arab Spring, Kuwait handed out $500k checks to all Kuwaiti males above 18 years old.

Do you have a reference for this? I had a look, but it's one of those things that is a bit difficult to search for.

I wish I could find a news source for this, but english newspapers suck in their coverage. I was actually in Kuwait as this happened, so I know it's 100% true. I spent that day being driven around at 130 mph in some guys's new porsche 911 turbo s. Energy industry is wild.

It's artificial.

You are forgetting the costs of running a city in the middle of a dessert.

Indeed it would be no mere trifle to run a city in the middle of a dessert.

More of a truffle?

This is good for Saudi Arabia. Their oil is largely very easy to extract so they have the lowest production costs, meaning their losing the least amount of money compared to other producers.

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