This week we declared that Saudi Arabia and OPEC have become totally powerless, certainly a bold move considering how breathless the media has become in describing Saudi moves to be akin to a chess grandmaster:
Riyadh has made a shrewd move. For being the bad boy of the energy world, for being adamantly unwilling to cut crude output, Saudi Arabia has passed the baton to Iran. In the process, Riyadh has not ceded much, reiterating Thursday that it was “not prepared” to cut production.
Despite the Saudi foreign minister Adel al-Jubeir stating to the AFP on 18 February 2016 “If other producers want to limit or agree to a freeze in terms of additional production that may have an impact on the market but Saudi Arabia is not prepared to cut production,” the pressure is somehow on the other side of the Persian Gulf:
Now, the heat is on Iran. And with Venezuela taking the lead and Russia on board, too, it will not be easy for Tehran to disregard these two longtime allies on this issue for long.
After this week’s agreement in Doha to freeze oil production at January levels, energy ministers from Venezuela, Qatar and Iraq dashed to Tehran to ascertain Iran’s position on the issue. After spending two hours with them, Iranian oil minister Bijan Zanganeh yielded that his country could support efforts to stabilize oil prices, including co-operation between Organization of the Petroleum Exporting Countries producers and non-OPEC oil producers.
Mr. Zanganeh emphasized that while he supported a production “ceiling” to stabilize oil prices, it should be the first of several steps taken. Sensing a positive hint in the statement, crude prices bounced slightly, with U.S. oil popping above $30 a barrel and Brent futures nearing $34.
The stability did not last long. Foreign Minister al-Jubeir’s comment slammed oil markets…
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DAILY CHANGE FEB 19, 2016
…and the worst is yet to come:
In fact, Saudi Arabia is no state at all. There are two ways to describe it: as a political enterprise with a clever but ultimately unsustainable business model, or as an entity so corrupt as to resemble a vertically and horizontally integrated criminal organization. Either way, it can’t last. It’s past time U.S. decision-makers began planning for the collapse of the Saudi kingdom.
In recent conversations with military and other government personnel, we were startled at how startled they seemed at this prospect. Here’s the analysis they should be working through.Understood one way, the Saudi king is the CEO of a family business that converts oil into payouts that buy political loyalty. They take two forms: cash handouts or commercial concessions for the increasingly numerous scions of the royal clan, and a modicum of public goods and employment opportunities for commoners. The coercive “stick” is supplied by brutal internal-security services lavishly outfitted with American equipment. The United States has long counted on the ruling family having bottomless coffers of cash with which to rent loyalty. Even accounting for today’s low oil prices, and even as Saudi officials step up arms purchases and military adventures in Yemen and elsewhere, Riyadh is hardly running out of funds.Still, expanded oil production in the face of such low prices—until the February 16 announcement of a Saudi-Russian output freeze at very high January levels—may reflect an urgent need for revenue as well as other strategic imperatives. Talk of a Saudi Aramco IPO similarly suggests a need for hard currency.
A political market, moreover, functions according to demand as well as supply. What if the price of loyalty rises?
It appears that is just what’s happening. King Salman had to spend lavishly to secure the allegiance of the notables who were pledged to the late King Abdullah. Here’s what played out in two other countries when this kind of inflation hit. In South Sudan, an insatiable elite not only diverted the newly minted country’s oil money to private pockets but also kept up their outsized demands when the money ran out, sparking a descent into chaos. The Somali government enjoys generous donor support, but is priced out of a very competitive political market by a host of other buyers—with ideological, security, or criminal agendas of their own.
Such comparisons may be offensive to Saudi leaders, but they are telling. If the loyalty price index keeps rising, the monarchy could face political insolvency.
Looked at another way, the Saudi ruling elite is operating something like a sophisticated criminal enterprise, when populations everywhere are making insistent demands for government accountability. With its political and business elites interwoven in a monopolistic network, quantities of unaccountable cash leaving the country for private investments and lavish purchases abroad, and state functions bent to serve these objectives, Saudi Arabia might be compared to such kleptocracies as Viktor Yanukovich’s Ukraine.
From a political perspective, Defense One describing Saudi Arabia as powerless could soon be seen as prescient. But from an economic perspective, the verdict is obvious.
See next post…
The Petroleum and Economic Analysis Report 