Dim Saudi Future

**tomcat** · 09-04-2020, 07:46 AM

Saudi Arabia’s World Is Coming Undone

Bulls are banking on the kingdom this week, but its future role could be far more disruptive.
By Liam Denning
April 8, 2020, 11:00 PM GMT+7

Shadows are falling over the kingdom. Photographer: YASIN AKGUL/AFP/Getty Images

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

Saudi Arabia is having a regular week: Facing off against Russia, taking phone calls from the U.S. president and supposedly cobbling together a plan to save the (oil) world. On Thursday, it will preside over an emergency meeting of OPEC+; the next day, a virtual gathering of G20 energy ministers.

As opportunities to strut the global stage go, this one comes at a big cost: Like most oil exporters, the country faces a cataclysmic drop in demand. But this isn’t just about the money. A new book lays out why the Covid-19 crisis offers a taste of a far-bigger problem: Saudi Arabia’s world is coming apart.

“Disunited Nations,” by geopolitics analyst Peter Zeihan, is a typically engaging read, but it is not a happy book. Zeihan contends the postwar global order that rested largely on U.S. sponsorship (or attention, at least) is unraveling. After seven decades of America suppressing humanity’s tendency toward general mayhem, more or less, with a muscular commitment to free trade and blanket security guarantees, a more Hobbesian future beckons.

Few countries have been shaped by the Pax Americana quite like Saudi Arabia, which gets its own chapter. A sparsely populated, largely desert kingdom that emerged from clan warfare amid the ruins of the Ottoman Empire, it would have been a geopolitical backwater — except for its vast reserves of a certain vital commodity. Even then, that would have made it more a target for bigger powers to swoop in than an independent actor. But it just so happened that Saudi Arabia’s emergence as both a country and a major oil producer coincided quite closely with World War II and the beginning of the Cold War. As Zeihan puts it:

The Saudis lucked into a world in which their absolute security was a prerequisite for European security and East Asian security and American security.

Now those twin pillars that defined the first nine decades of Saudi Arabia’s existence — the oil market and American protection — are crumbling. Long-term growth in global oil demand is no longer a given, and Covid-19 is like a fever dream of all the worst aspects of that. Meanwhile, U.S. ambivalence toward the Middle East has been supercharged by the debacle in Iraq and the shale boom. Even if “energy dominance” has succumbed to its own inanity, U.S. dependence on Middle Eastern oil has diminished, not least in terms of feeling the need to keep it flowing to nominal allies. While America’s continued enmity with Iran is welcome, the shrug given to September’s attack on the Abqaiq oil-processing facility was a reminder the world has changed nonetheless.

Saudi Arabia is trying to adapt. Doing so would have been easier with oil at $100 rather than $30. Oil provides about two-thirds of the government’s revenue, and it has been running deficits for six years already. According to Saudi Arabian Oil Co.’s accounts, royalties, income tax and dividends to the state added up to about $208 billion last year. This year’s take may drop by more than $100 billion, even with jacked-up oil production. 1
Against this stands the Saudi stash: almost $700 billion of net foreign assets. 2 This buys time, but not immunity. Financial markets notice sovereigns (and companies) cannibalizing their balance sheets long before the money runs out.

It’s hard to overstate the economic overhaul required. Two-thirds of the national workforce (as opposed to ex-pats) is employed by the government, with wages accounting for about 40% of public spending (which makes budget cuts tough to propose and even tougher to execute). 3 As it often does, oil has brought enormous wealth, but at the price of economic dynamism. One of the most striking aspects of this is how fuel subsidies have distorted Saudi Arabia’s own energy consumption. This does not look like a healthy, modern economy entering a more carbon-constrained world. 4

A recent study of the fiscal models of Gulf Cooperation Council members published by the International Monetary Fund concluded that getting onto a more sustainable path would require an immediate adjustment equivalent to almost a third of the non-oil-and-gas economy on average 5 . In other words, these countries are writing checks their future generations can’t cash.

At the same time, American backing is diminishing. It isn’t that the U.S. has withdrawn altogether; more that, as threatening letters from senators have demonstrated once again, it can’t be depended upon. In that light, the attempt to rope the U.S. into a brave new market-management scheme — call it OPEC-doubleplusungood — can be seen as an effort to preserve a much broader, but disintegrating, constellation of forces.

Far from prompting greater caution, Zeihan expects Saudi Arabia to respond to all this with aggression. Sporting a relatively weak military and surrounded by the proxies of arch-rival Iran, Saudi Arabia’s strategy will be to exploit its primary adversary’s over-extension, using its wealth to fund opposing proxies of its own. The idea being to light enough fires elsewhere in the region in order to avoid a direct, and likely devastating, war. Zeihan calls this “the geopolitics of arson.”

Like I said, it’s not a happy book. But while that remains a scenario for now, it isn’t pure conjecture. Saudi Arabia has long experience meddling in other conflicts from Afghanistan to Syria. And it has already adopted a more aggressive foreign policy in Yemen and with regards to Qatar under the de facto leadership of Crown Prince Mohammed bin Salman.

The emergence of MBS, as he is called, represents a jump from the ruling family’s old generation to its millennial incarnation. The ensuing centralization of power in his hands makes that far more than just a symbolic break. One of the most interesting aspects of this to emerge is his apparent embrace of populism, with his, ahem, anti-corruption round-up of fellow princes and easing of some restrictions on women being early examples of this.

In a fascinating recent article, Kristin Diwan of the Arab Gulf States Institute in Washington puts these moves in the context of a broader shift toward a more overt nationalism as a means of legitimizing the state. This came to the fore in the recent IPO of Aramco, which ended up being more of an exercise in national pride than mere fundraising. Having encouraged citizens to borrow to buy the shares, the government has, Diwan writes:

… effectively multiplied the public’s exposure to oil risk, amplifying the cost of the current downturn. Still, it may not be the last sacrifice the Saudi state demands of its citizens. If the economic situation further declines, the Saudi government is likely to lean further on the new nationalist narrative promoting a strong work ethic and greater self-reliance.

It’s fair to say a headstrong ruler lacking institutional checks and fostering nationalist fervor to offset economic hardship is not a model that tends toward mellow outcomes. It does, on the other hand, dovetail all too neatly with Zeihan’s vision of global fracture. Oil bulls banking on

Saudi Arabia to save the day this week should ponder what that means for the health of their market when this current crisis has passed.

This is based on a simple valuation tool I put together for Saudi Aramco's IPO. Main assumptions for 2020 include net margins for downstream and chemicals operations of $1 per barrel and $100 per tonne and 95% and 90% utilization, respectively. Includes $2.1 billion of free cash flow from Saudi Basic Industries Corp., based on the consensus forecast and assuming 70% ownership for two-thirds of the year. Assumes natural gas production of 10 billion cubic feet per day and output of other liquids and ethane of 2.3 million barrels a day. Upstream costs per barrel of oil equivalent, including depreciation, at $6.
Net foreign assets were $679 billion as of 3Q 2019 (source: Bloomberg Intelligence).
"Public Wage Bills in the Middle East and Central Asia", International Monetary Fund, 2018.
For more on this, see Jim Krane's book "Energy Kingdoms" (Columbia University Press, 2019).
"The Future of Oil and Fiscal Sustainability in the GCC Region", International Monetary Fund, January 2020. Thisanalysis uses the Permanent Income Hypothesis. This estimates each country's total wealth and then modelslimiting expenditure to the estimated annuity value of that wealth while saving a significant portion of oil receipts in revenue-generating assets whose dividend income is meant to replace oil revenue in the future. The authors found that, on average, the GCC countries would require an immediate fiscal adjustment equivalent to 32% of their non-hydrocarbon economy in order for future generations to equally share the existing level of wealth.

https://www.bloomberg.com/opinion/ar...-coming-undone

**VocalNeal** · 09-04-2020, 08:27 AM

Originally Posted by tomcat

The emergence of MBS, as he is called, represents a jump from the ruling family’s old generation to its millennial incarnation.

From Lawrence of Arabia.

Young men make wars, and the virtues of war are the virtues of young men.

**tomcat** · 09-04-2020, 08:36 AM

Originally Posted by VocalNeal

From Lawrence of Arabia.

Young men make wars, and the virtues of war are the virtues of young men.

...war has no virtues, Lawrence...

**jabir** · 09-04-2020, 09:16 AM

The Saudi throne is no place for a childish, stubborn, pigheaded superego, and that's what the King is planning to put on it.

MsB is surrounded by threats, and should grow up pdq if he wants to play adult games like global strategy with the big boys. So far he's been a disgrace and a disaster.

**tomcat** · 09-04-2020, 09:24 AM

Originally Posted by jabir

So far he's been a disgrace and a disaster.

...what Saudi king hasn't?...the whole family is a snake breeding ball of greed, self-indulgence and gross incompetence...

**kmart** · 09-04-2020, 09:35 AM

Originally Posted by VocalNeal

From Lawrence of Arabia.

Young men make wars, and the virtues of war are the virtues of young men.

Nope, old banking and industrialist elites make wars. And finance both sides.

**harrybarracuda** · 09-04-2020, 11:18 AM

Saudi is royally fucked when oil runs out.

You can't run all that AC and provide all that desalinated water without huge amounts of energy.

**jabir** · 09-04-2020, 11:23 AM

Originally Posted by tomcat

...what Saudi king hasn't?...the whole family is a snake breeding ball of greed, self-indulgence and gross incompetence...

Sure they have, but they also had a working relationship with the major world powers; this one has the hallmarks of an Arab Erdogan that cannot resist pissing off those he should be getting into bed with.

I reckon the big boys would've done everyone including themselves a favour if they started pulling out his teeth after the Khashoggi affair, to help him realise that successful power is quiet power, even for a Saudi king which is little more than a peasant in golden robes.

Good that he got smacked down this time in a way that allowed him to save face, because he really doesn't want to go to war with Putin, or Trump, or for that matter a timid, paralysed and incompetent EU.

**jabir** · 09-04-2020, 11:30 AM

Originally Posted by harrybarracuda

Saudi is royally fucked when oil runs out.

You can't run all that AC and provide all that desalinated water without huge amounts of energy.

I don't have the exact figures which are variable by source anyway, but Saudi needs something like $80 or $81 pb to balance its budget without needing to dip into reserves, and it won't be up there anytime soon.

**panama hat** · 09-04-2020, 02:15 PM

And if Saudi goes down the toilet . . . not a fu@k was given by the rest of the world

**tomcat** · 09-04-2020, 04:35 PM

Originally Posted by panama hat

And if Saudi goes down the toilet . . . not a fu@k was given by the rest of the world

...well, a smallish fuck would be given by neighbor Qatar as it reclaimed its landlink to the UAE. The Jordanians might attempt to reassert its claim to the Hijaz as an extension of the Hashemite throne and gain access to Haj pilgrimage fees. The US will liberate all the oil areas and proclaim a Republic of Petrolina. The Empty Quarter will be given to the UN as a protected area for wildlife. Yemen will regain Jizan and environs. Thousands of Al-Sauds will escape to properties in Marbella, London, Geneva, Marrakech, Cairo and Los Angeles.

**HuangLao** · 09-04-2020, 04:45 PM

Originally Posted by kmart

Nope, old banking and industrialist elites make wars. And finance both sides.

Yep. More often than not, as the historic nature is discounted.
Most aren't paying attention.

**bsnub** · 09-04-2020, 04:49 PM

But But what about NEOM?

Welcome to NEOM, Saudi Arabia's $500-Billion Self-Governed Tech Hub of the Future - Big Think

**tomcat** · 09-04-2020, 04:51 PM

Originally Posted by bsnub

But But what about NEOM?

Welcome to NEOM, Saudi Arabia's $500-Billion Self-Governed Tech Hub of the Future - Big Think

...all the artificial cities and their trappings will return to the sand...

**bsnub** · 09-04-2020, 05:08 PM

Originally Posted by tomcat

...all the artificial cities and their trappings will return to the sand...

Indeed...

In the Red Sea coastal province of Tabuk, where the futuristic city of NEOM was meant to rise from the desert, royals have hunkered down in new construction, the paint barely dry on the palace walls.

On the horizon, Jordan’s Aqaba port and Egypt’s Sinai Peninsula are visible but unreachable. The Arab littoral neighbors, envisioned as bridges to NEOM, are now in varying degrees of lockdown.
Israel, surveillance eyes to the monarchy, has sealed itself off.

In the heart of the kingdom, the gates to Mecca have been shuttered. The authorities are preparing the world’s Muslims for the cancellation of the Hajj, a rarity not witnessed since the Napoleonic incursions.

Movement between Tabuk and other parts of the country is banned, bringing the isolation of the brick red moonscape into stark relief.
Work at NEOM has ground to an undefined halt.

“There’s a high likelihood it fades into nothingness,” said a Gulf-based economist.

For dreamers

NEOM was supposed to replace Dubai as the Hong Kong of the Middle East, with the target of one million residents by 2030.

The local tribespeople would be relocated, allowing Crown Prince Mohammed bin Salman to erect his $500 billion fantasy world of flying cars and Michelin-starred restaurants from scratch, and without societal constraints.

The NEOM pitch, just a few years old, advertises a living lab for “doers … at the crossroads of the world.” It would be accessible to 40% of the world’s population in less than four hours.
In other words, reachable by plane.

This touted accessibility now sounds like an artifact of a bygone era of nationalities packed in economy class like sardines, and scant consideration of a deadly virus among them.

The 2008 global financial crisis, which saw fleeing expats abandon Ferraris in the Dubai airport parking lot, might have served as a warning.

Now, the tremor is twofold: a global pandemic that could alter travel and lifestyle patterns for years to come, and a parallel recession, which has already seen salaries slashed in Dubai.

The ravages of Covid-19, coupled with a bruising oil price war with Russia, have pushed the kingdom into emergency mode, the crown prince’s vanity projects pushed to the side.

King Salman on Friday decreed the government would step in to pay 60% of private sector salaries for its citizens for the next three months. The Saudi Grains Organization has meanwhile instructed Saudi investors abroad to supply the homeland with 355,000 tons of wheat.

“I don’t see the powers that be prioritizing [NEOM] now … It’s a running cost with no value added,” the Gulf-based economist told Asia Times.

“The momentum will likely die out. And it will take a lot to rebuild that momentum,” he said.

Drowning in oil

NEOM, billed as an oasis of sustainability, now seems to embody the vapid fantasies of the jet fuel-guzzling past.

The Saudi Public Investment Fund, the crown prince’s intended vehicle to economic diversification, on Monday took an 8.2% stake in Carnival cruises.

Saudi Aramco remains the bedrock of stability in a country now dominated by one man.

The state oil giant, arguably the best-run company in the kingdom, was last year listed on the local stock exchange, netting about $25 billion.

The proceeds from the sale were funneled into the Public Investment Fund, which in turn, is meant to bring NEOM to fruition.

The futuristic metropolis, egged on by paid teams from McKinsey, Boston Consulting, and Oliver Wyman, would be the jewel in the crown of the post-oil portfolio. Yet, at present, “there is no clear vision as to what exportable industries the kingdom will build up to replace its near-total dependence on oil and petrochemical industries,” remarked Salem Saif, a writer from the Arabian Peninsula.

“Such exportable industries are the ultimate barometer of the health of any capitalist economy in today’s globalized world. And as the 2007-8 crash made clear, sophisticated financial funds are no replacement.”

In recent days, global funds have fled toward safe havens like US Treasury notes, gold and the yen, leaving emerging markets behind.

While Saudi Arabia touts the world’s largest proven reserves and lowest extraction cost, the kingdom requires the barrel to be in the mid-$60s to fund its budget.

Oil is currently hovering in the mid-$20s as a price war with Russia enters its second month.

The protracted game of chicken has resulted in a monsoon of crude with nowhere to store it.

Saudi futuristic city turns into a mirage in Covid-19 era - Asia Times

**panama hat** · 09-04-2020, 05:45 PM

Originally Posted by tomcat

...well, a smallish fuck would be given by neighbor Qatar as it reclaimed its landlink to the UAE. The Jordanians might attempt to reassert its claim to the Hijaz as an extension of the Hashemite throne and gain access to Haj pilgrimage fees. The US will liberate all the oil areas and proclaim a Republic of Petrolina. The Empty Quarter will be given to the UN as a protected area for wildlife. Yemen will regain Jizan and environs. Thousands of Al-Sauds will escape to properties in Marbella, London, Geneva, Marrakech, Cairo and Los Angeles.

Obviously issues I'd failed to take into account . . . poetic justice would be Palestinians occupying Riyadh

**panama hat** · 09-04-2020, 05:47 PM

Originally Posted by tomcat

...all the artificial cities and their trappings will return to the sand...

Originally Posted by panama hat

not a fu@k was given by the rest of the world

There . . . I said it. I went there . . .

**harrybarracuda** · 10-04-2020, 12:37 AM

Originally Posted by tomcat

Thousands of Al-Sauds will escape to properties in Marbella, London, Geneva, Marrakech, Cairo and Los Angeles.

And Thailand. Oh, and definitely Thailand.

**NamPikToot** · 10-04-2020, 01:02 AM

And France, they own chunks of the south coast and sections of Buttplug's beloved parieeeee

**Saint Willy** · 11-04-2020, 06:39 AM

and now...

Up to 150 members of Saudi royal family have coronavirus

Up to 150 members of the Saudi Arabian royal family have been infected with the coronavirus — striking fear into the hearts of the authoritarian kingdom’s powerful rulers.
Crown Prince Mohammad bin Salman — the 34-year-old heir widely considered the real power behind the throne — and his ministers have been placed in quarantine for safety near the Red Sea, while his father, King Salman, 84, is in precautionary isolation near the city of Jeddah, the New York Times reported.
RELATED: Follow the latest coronavirus updates
RELATED: Why Australian lockdown could outlast other countries

Crown Prince Mohammed bin Salman has gone into quarantine for safety. Picture: HO / Saudi Royal Palace/AFPSource:AFP

King Salman’s nephew Prince Faisal bin Bandar bin Abdulaziz Al Saud is confirmed to be in intensive care after contracting the deadly illness, according to the paper, which cited doctors and people close to the family. The 70-year-old is the governor of Riyadh.
Saudi princes are believed to have caught the pathogen while travelling to Europe — and the health calamity likely played a role in the country’s decision to announce a ceasefire in Yemen Thursday, according to the Times.
Up to 500 beds have been prepared for the royals and people close to them at the elite King Faisal Specialist Hospital as the pandemic rages, a memo cited by the paper says.
“Directives are to be ready for V.I.P.s from around the country,” operators of the hospital wrote, adding that sick staff members will now be treated at a less elite hospital to make room for the royals.

Saudi King Salman bin Abdulaziz has gone into isolation. Picture: Bandar Al-Jaloud/Saudi Royal Palace/AFPSource:AFP

A total of 41 deaths from the virus and 2795 cases have been reported in the country as of Thursday, according to Johns Hopkins University.
“If it is reaching into the family, then it becomes an urgent issue,” said Kristian Coates Ulrichsen, an expert on the Saudi royal family from Rice University.
On Thursday, Saudi Arabia declared a two-week ceasefire with Yemen, which has been fighting Iran-backed rebels on behalf of the country’s president since 2015.
This story originally appeared on the New York Post and has been reproduced here with permission
Saudi royal family members reportedly have coronavirus, reports up to 150

**panama hat** · 11-04-2020, 07:03 AM

Trying . . . trying . . . trying . . . to feel sorry for them . . .

Can't

**harrybarracuda** · 11-04-2020, 01:25 PM

That's only about 1% of them. MbS will be hoping its some big ones.

**tomcat** · 11-04-2020, 03:45 PM

Originally Posted by harrybarracuda

That's only about 1% of them. MbS will be hoping its some big ones.

...and all of the big ones will be hoping he gets it in the neck...

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