We investors naturally tend to think in terms of money. That is well and good, but occasionally it can cloud our understanding of the motivations of others.
The country of Saudi Arabia has plenty of financial reserves. Even at current oil prices, it can continue its spending for years before it has to go even $1 in debt. The House of Saud, and here I'm specifically talking about the people at the head of the family not the country of Saudi Arabia, also have all the money they need. While it's difficult to separate the family's assets from the country's, the House of Saud is estimated to be worth approximately $1.4 Trillion. It's hard to put this in perspective but I will try. First let's get rid of the shorthand, $1.4 trillion is 1,400,000,000,000 dollars. $1.4 Trillion is to $1 Billion as a day is to one single minute, something you barely even notice. Can you imagine that? Not even noticing a billion dollars... If you assume a 7% return, the House of Saud can spend $270 million per day without ever dipping into principle. That's enough to buy a brand new Boeing (NYSE:BA) 777-200ER jumbo jet every day for the rest of your life.
According to Pagetutor.com this is what a Million dollars in $100 bills looks like:
The House of Saud has 1.4 of these.
These analogies and illustrations are not included just to amaze everyone. Rather I'm trying to emphasize that money is probably not the primary motivator for the House of Saud. At this point money is a way to keep score, but more importantly for the House of Saud, it is a tool. Retaining power is more likely to be their motivator.
People generally do what they think is in their own best interests. All that oil money and the power it supports will stop for the House of Saud if they are no longer the rulers of Saudi Arabia and the effective heads of the oil central bank referred to as OPEC. And the Al Sauds probably have good reason to feel threatened:
- Both Iran and now ISIS are a threat to the House of Saud. These threats receive significant funding from oil revenues and have nowhere near the financial reserves of Saudi Arabia. The Arab Spring is not a pretty one for the Al Sauds.
- Fracking and alternative energy are a threat to OPEC and the House of Saud. One unlike any other because they are neither in OPEC nor even controlled by a large central power than can be negotiated and dealt with. This cancer of fracking (from the Saud's point of view) can spread to other regions of the world further marginalizing OPEC.
- Reduction in US willingness to provide military support in the Middle East is a direct threat to the House of Saud. The US has long provided military support to the region as well as both implied and direct military support specifically to Saudi Arabia (anyone remember where we first staged our military assets before invading IRAQ?). This direct military relationship with the US helps the House of Saud to stay in power.
Keep in mind, the House of Saud is an absolute monarchy and the Kingdom of Saudi Arabia formed relatively recently (1932) by military conquest. This conquest, followed quickly by the fortunate discovery by Americans of oil on their newly conquered lands, led to their incredible wealth. The current Al Sauds are not so many generations removed that they don't know this. They fully realize their continued existence is threatened and dependent on maintaining power. Exactly how comfortable and secure would you feel if this is where you lived?
Maintaining production and allowing oil prices to fall helps the House of Saud on a number of fronts when viewed from the lens of power.
- It significantly reduces resources for political/military threats from Iran and ISIS.
- It cracks the whip on the other members of OPEC who have been cheating on production quotas, particularly those who can least afford the decline in income and have been cheating the most: Iran, Venezuela, etc. This re-establishes the cartel and Saudi leadership in it.
- It ultimately helps to ensure the OPEC cartel does not get broken up by outside uncontrollable influences, fracking.
- It garners the favor of the US government (and probably China) by supporting their economic growth and reducing Venezuelan, Russian, Iranian and ISIS resources.
That the US started bombing ISIS and at least halting their military pullback from the region just a few months before the House of Saud started cutting oil prices may be a coincidence (or not). However, there is little doubt the House of Saud has a direct line to the US government and CIA (and vice-versa). It is somewhat ironic that our pullout from the Middle East and the Arab Spring has ultimately led to lower oil prices, but that is where we currently stand. Maintaining production and allowing oil prices to fall, is just one more way the House of Saud is using money to maintain power. They can afford to lose a few hundred billion dollars, they can't afford to lose their control of Saudi Arabia and OPEC.
So when we investors consider how long oil prices are likely to stay at current levels, we should not just think about monetary influences. In this case, the maintenance of political power by the House of Saud is at least as big a driver. How low oil prices can go and for how long is still as dependent on the geopolitics of the Middle East as the boardrooms of the Mid West. The House of Saud might very well be willing to keep oil at $60 per barrel for years.
In the end, the best indicator of when the House of Saud will cut production to support oil prices may be 3 months after SAMA (the Saudi's sovereign wealth fund) takes large positions in Seadrill (NYSE:SDRL), Linn Energy (LINE), First Solar (NASDAQ:FSLR), Renewable Energy Group (NASDAQ:REGI) and Tesla (NASDAQ:TSLA).
Disclosure: The author is long LINE.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is intended to provide information to interested parties and is not a recommendation for any particular equity. As I have no knowledge of individual investor circumstances, goals, or portfolio concentration, readers are expected to complete their own due diligence before purchasing or shorting any equities mentioned.