by John Galt
September 7, 2015 19:00 ET
The first observation is the biggest lie of them all; that the crash in oil prices has not hurt the Saudi Arabian stock market and economy. The Tadawul All Shares Index (TASI) demonstrates this fact (chart courtesy of Bloomberg):
Thus this could be one of the reasons for the peculiar headline from the Financial Times this evening:
Usually it is the other way around; US executives beg the Saudis to invest part of their massive reserves in their companies. There has been a history of the former with Citigroup, News Corp, etc. all receiving investment capital from the Saudi sheikhs and various attempts to buy large portions of the United States companies involved in international energy production. So why the sudden shift?
This chart provides a clue:
Since Saudi crude is priced in dollars but sold based on the Brent North Sea Crude Oil contract, things have not been going well with multi-decade lows being approached on an almost weekly basis. The article above from the Financial Times highlights the problems this is creating for the Saudi economy:
Saudi Arabia’s King Salman has met senior US executives in Washington as the country seeks to lure foreign investment to help diversify its economy amid sustained low oil prices.
“Many of these sectors have been open to foreign investment before, but few came,” said one banker. “Previous attempts to develop opportunities have yet to deliver — I wonder how this will be different.”
However, officials and government advisers say the leadership is committed to improvement, with Prince Mohammed ruthless in removing underperforming officials, including the former housing minister.
With unemployment high and housing in short supply, the government is concerned about the potential for rising economic unrest amid a growing threat from Sunni jihadi extremists.
Disturbing perhaps? But the truth in domestic and other headlines and stories underlines the problems the House of Saud is now facing financially as a world awash in crude resets the geopolitical picture. From the Arab Times, the Saudi national newspaper:
From Arabian Business:
Lastly, from CNN last month:
The warnings were given by the IMF in 2014 as economists projected problems with the Saudi economy for this year (via Reuters on September 24, 2014):
Saudi Arabia’s state finances could fall into the red next year and the country could start running down its huge foreign reserves if it does not rein in the growth of government spending, the International Monetary Fund said.
The IMF has been urging the world’s top oil exporter to moderate its rapid spending growth for years – warnings which have been publicly dismissed by Saudi officials as alarmist.
Alarmist? Hardly, but this trip by King Salman to Washington, D.C. appears to be more of a hat in hand trip of a beggar to the banksters than a strategic meeting between two long time allies. The Saudi royal family has never hidden its disdain for President Obama and their capitulation on the Iran Nuclear Program deal might well be an indication that their economy is in far more dire straits than reported; after all, the Saudis are as deceptive as the Chinese when it comes to honest reporting about their assets, liabilities, and economic condition.
If the Saudis are serious about allowing U.S. banksters and hedge funds into their previously closed economy to invest in key industries and build branches inside the Kingdom, then conditions there must be far worse than anyone could imagine. Just a short decade after getting the last of the infidels off of their soil, the House of Saud is now fighting a three front war, something they never dreamed off:
- In Yemen against the Iran backed Shiite Houthis and Al Qaeda who have conducted cross border attacks into southern Saud Arabia
- In the north, the military is on alert not just for ISIS forces crossing from western Iraq, but Iranian forces which essentially occupy the eastern part of that nation
- Inside their own nation, as Shiite and radical Sunni terrorist groups have been conducting attacks on Saudi and other GCC targets on an almost weekly basis.
The grand strategy originally was to make the West dependent on their petrol products and force them to ally with the House of Saud to fight the wars for them; thanks to 7 years of American incompetence in the region, that will not happen any time soon. The Saudis are desperate to enlist support with other Arab or Muslim nations to help with the conflicts but thus far to no avail due to their isolationist policies in the past.
As the Saudi economy and investment opportunities open up, it is worth watching oil prices to see if indeed the Saudis follow through on these new initiatives or if the radical Islamist movements force the region into a major conflict which destroys the viability of any investment in the region. If the Saudi economy collapses, a torrent of instability could be released which will impact every region of the world that practices the religion of Islam or is closely tied to the region as Europe is now.