The Saudis are feeling the financial strain of their suicidal 'market share' oil strategy

Saudi Arabia, OPEC’s de facto leader and the world’s largest oil exporter, has seen better days – much better days.

Its now infamous decision in November 2014 to abandon its role as swing producer and actually ramp up production as global oil supplies were increasing and prices were tanking has hurt itself as much or more than U.S. shale oil producers it wanted to drive out of the market.

In the ensuing two years since that decision, Saudi Arabia’s state coffers have taken a hit. Due to low oil prices, attributed to the supply glut, the kingdom – which derives as much as 92% of its revenue from oil sales - ran a historic budget deficit last year of $98 billion, with an estimated $87 billion forecasted for this year.

Saudi Arabia is also being forced to raise cash in its first international bond sale, as much as $16.5 billion , sometime this month. It’s massive state-owned oil company, Saudi Aramco, the world’s largest, will soon go public, offering partial ownership in an IPO in 2018 worth as much as $2 trillion, the largest IPO in history.

However, if oil markets remain over supplied with corresponding low prices, the company’s offering will not bring as much as it could have previously.

Saudi Arabia’s budget woes have also hit ordinary citizens hard, while most are used to generous cash subsidies and other state benefits. Nearly 30% of Saudi Arabia’s 32 million population is under the age of 15, while the country’s median age is just 28.6 years.

Now, all of that is changing.

“As a rapidly growing population welfare state with a significant unemployment rate, the government, which is an absolute monarchy, provides its people with cash subsidies as well as other generous incentives in housing and healthcare sectors,” Reza Yeganehshakib, a professor of Middle Eastern studies at Fullerton College and a geopolitical and energy analyst, told me on Saturday.
There is more.

OPEC and the Saudis have lost the ability to manipulate prices since they started the suicidal "market share" competition.  Now any cut in production faces others stepping in to sell more such as Russia and Iran and any price increase makes it easier for US shale producers to increase their own production.


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