Source : THE AGE NEWS
By Ambrose Evans-Pritchard
The universe is rife with too much fuel.
Saudi Arabia is dealing with austerity and fiscal issues with crude that is close to US$ 60 ($ 92 ) per barrel. It is experiencing a slow-motion problems and finally an existential threat to its economic unit at US50 or lower.
That tragedy is no longer a distant tail-risk.
Donald Trump visits Saudi Arabia and pays little attention to quite severe financial constraints. In his pre-modern head, the petro-states of the Gulf represent a sizable pot of money.
He wants to smuggle$ US1 trillion in Saudi wealth, even more than the$ US600 billion that Crown Prince Mohammed bin Salman has already promised over the course of four years. He desires the remainder of the Gulf’s trillion and a half.
Good luck with that.
The GDP of Saudi Arabia is only slightly higher than the GDP of the Netherlands, which is a mere US$ 1 trillion. The per capita income in Saudi Arabia is comparable to Portugal’s. Trump will have to rely on sensational stories and apprehension from the public.
According to the International Monetary Fund, Saudi Arabia’s “fiscal break-even value” is$ US96 per barrel. To maintain the village’s cage-to-grave security system and to prevent social dissention, Brent is required at this price.
According to statistics from the Stockholm Institute, it must also support the fifth-largest military force in the world, which has a defense budget that is more than that of France or Japan.
Since Riyadh subcontracts Middle Eastern supporters with unnamed funds, the true break-even price is likely higher.
China, the largest car market by far and the second electro-superpower in the world, is the rhino in the room.
Since 2022, Saudi Arabia and the OPEC + cartel have been defying fundamentals of the oil industry, holding up 5 million barrels per day in one way or another to stop prices from returning to their pre-equilibrium levels.
This approach has failed. They gave their market share to Brazilian and US shale frackers, but they were unable to raise rates high enough to cover their financial needs.
The Saudis have thrown in the blanket and are now working on a less costly version of the cost war from 2014 to 2018. The country is quickly reinforcing source, causing a 30 % price drop.
According to Capital Economics ‘ David Oxley,” Any facade of cohesion within OPEC + has vanished.” By the end of the year, he has penciled in Brent crude at$ US50.
Trump’s tax acquiescence of China has caused a rebound this month, but markets still remain unaffected by a structural supply glut.
Daan Struyven, a Goldman Sachs employee, has not altered his negative estimates, anticipating a range of US$ 52 to US$ 56 in the US next time even if the US stays out of recession. In a world slowdown, Brent could drop below US40 and West Texas crude may fall below US38.
That may cause US frackers to make a major turn. The gung-ho growth of Shell, Exxon, and Chevron may appear to be a costly business error.
China, the largest car market by far and the second electro-superpower in the world, is the rhino in the room. Goldman Sachs says China’s oil consumption peaked in 2023, fell in 2024 and is going into irreversible decline as falling demand for road transport outpaces rising demand for jet fuel and petrochemicals.
China’s electric vehicles and cars have already supplanted 1 % of the world’s oil need.
The rate is sluggish. Plug-in vehicle sales currently account for half of the Chinese market, where they fall below old cars by 8 % on the purchase price. By 2027, they will be two-thirds. China is determined to renounce imported energy that could cause a naval embargo.
We can debate how quickly the rest of East Asia did resurrect the excellent substitute. However, the topic of discussion isn’t about whether or not it does occur. Any attempt to turn the clocks backwards will fail.
China’s electric vehicles and cars have already supplanted 1 % of the world’s oil need.Credit: Bloomberg
Saudi Arabia also has a budget that is based on oils. The payout for this year’s year will be reduced by 30 %, according to Audi Aramco. The fiscal deficit, according to Fitch Ratings, will increase to 5.1 % of GDP. Other people warn that it will drop below 7 % at sub-US$ 60 oil prices without painful retracement.
Saudi Arabia may find the money from this strained macroeconomic foundation to prevent a magnificent blunder at the modern gigaproject Neom, which was actually scheduled to cost US$ 500 billion but is now projected to cost US$ 8.8 trillion, according to a leaked Mckinsey assessment obtained by the Wall Street Journal.
This Ozymandias in the sands is the impetuous king prince’s fantasy, and it serves as the perfect setting for Donald Trump’s make-believe world, where everything must be bigger and glitzier, superlatives movement, and nothing is completely true.
Neom will be a high-tech area express with superior production, cutting-edge technology, clean energy, banking, and a tourist riviera, connected by a 177-kilometer zero-carbon Linear City stretching through the desert from the Red Sea to a Trojena Mountains ski resort, ready for the 2029 Pan-Asian Winter Games.
The king lord has had accomplishments. Royal people are quite well-educated and work, which increases the GDP growth path. The revenue base has grown. His 8000 aristocratic relatives must make a living doing it.
His larger Vision 2030 is a brilliant thought. Saudi Arabia needs to convert its oil revenues into a varied financial foundation that is ready for the post-fossil age.
The nation should have begun in the early 2000s, when crude now fetches more than$ US200 per barrel. However, the older watch hoped it would instead undermine international efforts to reduce CO2 emissions.
I just had a close-door meeting with a senior Saudi official who explained how the nation hopes to become a natural power. The cheapest thermal in the world starts at US11 per ohm ( or is it already US9)? – will use the highest electrolyser focus in the world to create green hydrogen.
For the purpose of meeting global desire, this enormous Red Sea hotspot will produce zero-carbon steel and fertilizers on site. It will produce alternative molecules for Asia shipment, replacing the current tankers with the new tankers for green ammonia. Gas pipes, the natural Gazprom of Arabia, may supply gas to Europe.
Some of this makes sense commercially, while others don’t, but at least it embodies a clean-tech plan for the 21st century. Due to a very Trumpian ability to stay to unromantic nuts and bolts, it has gotten out of control.
Problem is beginning to break out.
Fitch projects that Saudi Arabia’s loan will equal 35 % of GDP in the next year, but it was close to zero ten years ago. Since 2022, it has been the largest state supplier of foreign currency debt in the world. According to Capital Economics, a long-running fuel drought may cause the loan amount to reach 90 % of GDP in five years.
The central bank needs all of its$ US450 billion in foreign exchange reserves as a strong defense for its fixed-dollar exchange peg, which is half of what it did at its earlier peak in real terms.
The country has access to its$ US925 billion sovereign wealth fund, but the majority of that is not remunerated. It co-owns Selfridges, Heathrow Airport, and Newcastle United. Uber, Meta, and Boeing are among the US companies that have invested in equity.
The Saudis announced late last year that they planned to spend the majority of their income on local needs, probably to protect Neom and Vision 2030. In essence, they don’t have any money to spare.
Saudi Arabia is not insolvent, but it is not nearly as wealthy as mythology would suggest.
One wonders with wonder how the kingdom could conjure a round trillion to keep the president content. Trump and the House of Saud both have a lot to offer.
London’s The Telegraph
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