House of Saud = House of Cards
by Bill Powers, Editor
Canadian Energy Viewpoint
June 29, 2003
financialsense.com
One of the most important political and economic events of the first decade of the 21st century is the coming regime change in Saudi Arabia. Predicting the fall of governments is very similar to shorting stocks, one gathers all the fundamental facts about the situation, checks and re-checks all facts and figures, and then takes action. While it is impossible to predict the time and date of the fall of the House of Saud, a preponderance of evidence suggests it is inevitable. Let’s examine several of the myths surrounding the current state of affairs in Saudi Arabia and what the country’s downfall will mean for investors in the Canadian energy sector.
One of the greatest myths regarding Saudi Arabia is that it is a wealthy country. While it’s true that Saudi Arabia has the world’s largest oil endowment and a royal family that leads the world in conspicuous consumption, the country’s financial health continues to deteriorate. The country’s severe economic problems are a result of an exploding population and a lack of economic growth outside of the oil industry. The country’s population has grown from 10 million citizens in 1980 to over 22 million today.
Despite many protestations by the royal family that Saudi Arabia has invested its oil money in infrastructure, defense and an economic diversification plan, the country has little to show for all of its spending. Saudi Arabia is burdened with more military equipment than it could possibly use, woefully uncompetitive state supported industries and poor infrastructure. Where did all of the money go? It was frittered away by the thousands of dependents of the royal family and stashed in overseas bank accounts.
With little exploration success since the 1960s and many of its fields showing signs of decline, Saudi Arabia is having an increasingly difficult time keeping production flat. According to energy investment banker Matt Simmons, head of Simmons and Company International, many of the country’s aging fields are showing increased water cuts. Water cuts, water produced along with crude oil that is later separated, are a sure sign that a field is headed into decline. The country’s largest field, Ghawar, now produces over 1 million barrels of water a day along with its nearly 4.5 million barrels of crude. With Ghawar accounting for 60% of the country’s 7.5 million barrels per day of crude production, there is little hope Saudi Arabia can keep production flat if Ghawar continues to water out. Since Saudi Arabia cannot invest the billions of dollars needed to maintain current production and develop smaller fields, Ghawar has assured the world high oil prices are here to stay.
and more / jim |
