The Kingdom's Faustian Deal With The Devil

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Includes: ARMCO, BNO, DBO, DNO, DTO, DWTI, KSA, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Albert Goldson

Summary

Ministry leadership overhaul is the Saudi version of economic spring.

Powerful and inevitable challenges unfolding to thwart young leadership.

Potential of increasing Saudi political and civil instability can propel oil prices.

The Saudi leadership has taken bold political and economic action by shaking up their ministries and announcing that they are seriously considering offering up to 5% of Aramco that would generate upwards of $2 trillion. These newly acquired funds are intended to fuel Project Vision 2030 whose objective is to diversify their economy to become considerably less reliant on oil. The Saudis have already secured a de facto bridge loan called a $10 billion international bond issuance that essentially buys them time.

As articulated in my previously published article earlier this year "Saudi Arabia on the Brink of Sinking Into Economic Quicksand", the Saudis are burning through cash at a disturbing clip to meet growing domestic demand requirements, quell civil unrest while at the same time combating the newly economically unchained Iran from dominating the region. For this reason, the Saudis are counting on this financial war chest based on continued depressed oil prices in order to support their regional influence and domestic way of life.

These changes done gradually and in politically digestible stages would be all well and good when oil prices were well above $100/bbl., strong worldwide demand, Iran contained by sanctions, limited US shale oil production and Saudis' high foreign reserves. However, all these factors have changed dramatically simultaneously in short order against The Kingdom necessitating rapid and rather draconian policy changes.

Despite the necessity of such changes, the dark side is far more ominous. The Aramco proposal by such a tightly closed society is bound to agitate politically and religiously conservative elements who have a vested interest in the status quo. These elements not only want to prevent the consummation of such a deal with western interests, but use it as a possible precursor to the forcible removal of the upstart young Saudi leadership.

It wasn't long ago that Osama bin Laden claimed that he attacked the west because of western (military) presence on Saudi soil during the 1991 Gulf War. Prior to this, there were few American or western military forces in the region. Western financial investment in Aramco is deja vu, the selling of Saudi assets to foreign interests. If you think the protests in Egypt were intense with respect to the transfer of two uninhabited parcels of land to Saudi Arabia, imagine the eventual furor in the sale of nationally prized assets regardless of the terms and conditions and covenants of the deal.

The Kingdom's leadership must be prepared for intense internal political resistance as well as the stirring of public pressure that will be provoked by conservative elements. Simply the announcement of such a proposal has infuriated Middle Eastern radical elements and given them cause to rally their followers against the west's financial "occupation" of Saudi Arabia which has few, if any, allies in the region. The gulf states toe the Saudi line economically as a matter of convenience not as a matter of loyalty.

The Saudis' current daily output is estimated at 10.2 million bbls. That equates to about 12% of the world's production or one of every eight barrels. Should there be a direct challenge to the leadership through civil unrest, public internal political governmental strife and violent attempts to disrupt oil production including the possibility of internal sabotage, oil prices can increase dramatically, which ironically will serve most other oil producers far better than it would Saudi Arabia which don't have the burdens of expensive military adventures. The Middle East will continue to be in turmoil and the internal pressure in one of the biggest players in the region is about to come to a head.

Disclosure: I am/we are long VDE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.