August 07, 2015

The Oil Wars

This article is a fascinating read.

The author believes, and makes a good case that Saudi Arabia is toast. Not in the long term, in the medium term. They are up against the wall because tar sands and moreover fracking, have changed the game forever. The US is now the largest oil producing country in the world and it is not going to stop. The Saudis are very quickly burning through their cash reserve and while they have no practical price floor, they do have a political one. They are funding the spread of Sunni mosques around the world and those are expensive proposals. If they do hit a cash crunch, they'll have to reduce their funding of those efforts in order to keep the locals happy and keep the neighborhood quiet. With the pressure on them from Houthi rebels in the south and the high likelihood of ISIS growing in the near to medium term that spells disaster for them. ISIS has considerable support among the average Saudi citizens. If they are unable to diversify their economy (unlikely) or somehow change the oil markets to put themselves on top (similarly unlikely) they are going to consume their reserves even more rapidly. The hole in this theory is that no one really knows how much the Saudis have in reserve. It is certain that the royal family has billions and billions around the world not just in liquid assets but in real estate and other holdings and ongoing concerns.

The key question: What happens in the worst case scenario? What happens if they forgo maintenance on their infrastructure in favor of the price war and they burn through their reserves. I'd predict the royal family bugs out to France or Switzerland, ISIS rolls in and they go head to head with the Saudi Military who has taken over once the King and his ilk fled.

The darker alternative is that the Saudis use terrorist groups as proxies to wreak havoc on the fracking efforts around the US so as to slow or halt the yield. That is a very dangerous game and would be a measure of absolute desperation and would end very very badly for all involved.

Granted all of this is conjecture but I for one, would be very happy to see the end of Saudi rule both in their country and the oil markets. The upside of the US producing oil is that we would no longer be funding terrorists who are literally plotting to kill us.

Posted by Duffy at August 7, 2015 03:28 PM | TrackBack

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