Saudi Arabia tries to lessen reliance on oil, as long as the Ferraris don’t have to go

Generally we don’t know much about Saudi Arabia except that it’s hot, it has so much oil you can find it with a shovel, and it has single handedly kept the world’s useless luxury goods industry afloat. As it turns out, things have been changing in the country and we’re all going to be impacted a lot more than you’d ever imagine.

Ok, it’s still hot there, no observable changes in that. And they still spend money like LA trophy wives. But that is where the change is starting to be noticed – the endless stream of funding has dried up, and the bank account is draining fast. It’s a startling reversal for a country blessed with such vast, easily marketable natural resources.

It all unraveled when high oil prices, which were fueling epic shopping binges for Ferrari-smashing young princes, led to the development of oil fields that had been mapped out for years but were too expensive to develop. The primary culprits were the Canadian oil sands and US shale deposits, but many other fields in remote locations suddenly became attractive to oil majors who had picked over the rest of the world.

Saudi Arabia smelled trouble on the horizon, so quickly enacted a major policy reversal – no longer would they defend high oil prices by cutting production, because that was threatening to wreck the party. So they decided to allow oil prices to plummet, which is indeed killing off the expensive supply fields, but the cost is looking much higher than SA bargained for. And thus we are seeing what appears tp be panic under the elegant flowing gowns, or whatever they are.

There is good reason to panic. In 2015 SA’s budget deficit was almost $100 billion, which is material even for them. Even with decades of petro dollars flowing into the puritanical sandbox, all they were able to save was a $750 billion kitty which peaked in mid 2014. Since then reserves have dropped to somewhere around $600 billion.

That’s a lot to you or I or even Donald Trump, but for a country that has been producing billions of barrels per year for 4 decades, it’s like winning a million dollar lottery one year and being unable to pay rent the next. Sort of. If oil prices stay low and spending stays high, reserves would be depleted in half a decade. Realizing that the oil party can’t last forever, possibly because their production has peaked, SA is launching major new programs to diversify their economy and rein in spending. They are new to the game so don’t realize that diversifying the economy costs a lot of money, but whatever, their heart is in the right place, in one tiny little sense.
So they’re tightening their belt and clipping coupons. Well no not really, no one’s talking crazy talk like stooping to drive Mercedes’, it’s more like hey all you poor people, no more subsidies. Which of course will blow up spectacularly, sending jets of furious militant fanatics out into the atmosphere ready to blow up anything that’s either against Saudi Arabia, out of force of habit, or for it, because their allowance has been cut.

For the rulers It is a precarious balance then, to balance a budget, plan for a future after oil, maintain a rigid hyper-religious culture, and still yet maintain a breathtakingly vulgar lifestyle. Wish them well.