Saudi Arabia about to Buckle in Oil Price War?

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“Things are very fine.”

By Rakesh Upadhyay, Divergente LLC, via

The Kingdom is struggling with weak GDP growth, higher fees and taxes, and an economy that is unable to pay the dues to its workers, leaving thousands of workers from South Asia with an uncertain future.

When a nation is unable to provide food to its migrant workers, it says a lot about their financial condition.

The oil price crash has forced the oil-rich Kingdom to introduce austerity measures, and delay payments to already cash-strapped contractors.

“It looks like austerity has hit hard and more than we had anticipated, halting construction projects and stopping hiring,” said Jason Tuvey, Middle East economist at Capital Economics, reports the Financial Times.

During the financial crisis in 2009, the government paid companies to help them tide over the cash crunch, however, this time, the finance ministry has cut advance payments from 20% to 5%.

“Money is not being paid at the top level,” said one banker to the industry. “This has been going on since October, and it is hard to know how long it will go on for,” reported Reuters back in February.

The stranded Indian and Pakistani workers are evidence that things aren’t any better now than they were in February.

Who is the Hardest Hit?

Construction laborers from India and Pakistan are most affected by the Kingdom’s hardships. This group of workers are left without a job, and without basic amenities such as insurance coverage, food, shelter and medical facilities—a situation that has improved after respective consulates stepped in to offer their own citizens aid.

Why Can’t They Go Home?

The laborers haven’t been paid many months of overdue salary and benefits, and most are not sure how and when their dues will be paid to them—if ever. Under the Saudi system, the employer’s approval is needed to obtain the visas, which has left many stranded.

After having toiled for years, the workers also do not want to return home empty-handed, without taking what is rightfully theirs—in essence, workers are left to wonder whether they should cut bait or double down and try to ride it out.

“They don’t give us any answers about our salaries,” said Mohammed Salahaldeen, a duct fabricator from Bangladesh, as he stood in a labor camp in Riyadh set up by the Saudi Oger construction company in better days. “After they pay me my salary and benefits, I will go,” reports the Financial Post.

Everything is Just Fine

In a meeting between the India’s junior foreign minister and the Saudi labor minister, Mufrej al-Haqbani, in Riyadh, the Saudi government has agreed to help the workers get their dues.

“Things are not as bad as they have been shown and projected,” the minister said in joint remarks with Mr. Haqbani after their meeting. “Things are very fine. We are in constant touch with all the officials and the various departments of the Kingdom of Saudi Arabia.”

Even other foreign governments are in touch with the both the Saudi government and the construction companies to ensure payment to their workers.

Saudi’s Empty Pockets

Setting aside the Kingdom’s positive outlook, until the Saudi economy reduces its reliance on oil, the situation is likely to get worse before it gets any better. With oil prices reeling close to $42 a barrel, the Saudi economy is likely to run out of cash, according to the International Monetary Fund, as shown in the chart below.

“All oil exporters will need to adjust to the new low oil price,” the IMF warned, reports the Independent. “All” in this case, includes, probably most importantly, Saudi Arabia.

Meanwhile, Saudi Arabia continues its record oil production, reaching 10.67 million barrels per day, up about 120,000 bpd on the prior month—with no signs of slowing. Although this will allow Saudi Arabia to hold onto its market share, which they can hardly be blamed for trying to cling to, it will no doubt add to the supply glut, and certainly will not bode well for oil prices in the short term.

And if oil prices continue to languish near today’s lows, it will be years before Saudi Arabia can regain its erstwhile glory. By Rakesh Upadhyay, Divergente LLC, via

The hangover of oil dependence has only just begun. Read…  Saudi Arabia’s Oil-Bust Cash-Flow Debacle Begins to Bite

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  16 comments for “Saudi Arabia about to Buckle in Oil Price War?

  1. August 12, 2016 at 11:46 am

    If the price of oil does not go up anytime soon they may have a Civil War…

    No more Saudi drifting videos for you!

    • NY Geezer
      August 12, 2016 at 1:20 pm

      A Saudi civil war is a monster nightmare.

      Saudi Arabia is the home base of the Salafis, a most repressive and fanatical Sunni Muslim religious sect intent on expanding its influence to every Muslim area and enclave. They not only pose a threat to “friendly” control of Saudi oil interests, but also to the weak control being maintained over the failed and failing middle eastern states.

      • Chicken
        August 12, 2016 at 1:53 pm

        I hear the Saudis are a staunch US ally. I drive by their embassy outpost occasionally and the place is eerily still and ominous looking with swords emblazoned above the front doors. I sometimes wonder if I innocently stepped foot on the property, would I be arrested or something.

        I can’t determine if the priority is death to infidels, iniolation of Shia occupiers, or just an insatiable desire to vacuum up wealth and redistribute it to foreign migrant workers but I sure am glad they’re a staunch ally as opposed to a wolf in sheep’s clothing.

        Maybe with some Pentagon funding, perhaps a friendly neighborhood cookout or something like that might be arranged? Well, I probably wouldn’t attend, but thanks.

  2. Chicken
    August 12, 2016 at 1:19 pm

    It’s the Baby Boomers fault! Nothing to do with insatiable greed at the top.

  3. Chicken
    August 12, 2016 at 1:40 pm

    Isn’t it just amazing how the RTH ETF has crashed and burned just as predicted?

  4. Nicko
    August 12, 2016 at 4:34 pm

    Hard times for sure in Saudi, but silver lining is they still have plenty of cash reserves to draw upon and eked out some positive growth. Russia on the other hand is burning just as much cash with the added hindrance of being in a recession for the last 18 months (and counting), not to mention international sanctions.

    • sinbad
      August 12, 2016 at 4:57 pm

      Most Saudi money is in the US, and the US won’t let them take their money out of the country, they can swap it for weapons, but that’s all.
      Why do you think the Saudis are borrowing money?

    • Graham
      August 13, 2016 at 8:30 am

      Saudi hasn’t got than much time (i.e. cash reserves are low due their failure to implement a sovereign growth fund or diversify from oil – despite having 50 cash rich years to get it done).
      Additionally they are busy smashing up Yemen and buying new weapons – wars are expensive. Very expensive, even for the ‘winners’.

      Russia is a different story, a nation used to austerity and self reliance (the sanctions actually helped then start this process IMO) and a far greater diversity. It will suffer of course – but how much compared to it’s main self proclaimed enemy – the US, I’m not so sure there’s much in it.

      Low oil prices hits all sorts of economies, it has broad effects.

    • Jim
      August 13, 2016 at 5:04 pm

      Burning cash? They just reported that their reserves increased by 2 B last week

  5. sinbad
    August 12, 2016 at 4:49 pm

    China and India consume about 14 million barrels a day.
    They can get all of that oil from Russia and Iran at prices that will always be lower than the Saudi price.
    The Saudis are cactus.

  6. Thomas Malthus
    August 13, 2016 at 3:36 am

    The Saudi’s need nearly $110 oil to break even

    Have a look at what other producers need on this Council for Foreign Relations research paper:

    Here is another good article on this issue

    Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said

    The thing is … high priced oil destroys growth and lead to recession

    According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.

    So if most producers need $100 or more to continue producing … but the economy cannot function with oil anywhere near these levels…

    Connect the dots….

  7. Gerald Stehura
    August 13, 2016 at 10:02 am

    After reading this article and all the comments concerning all the problems with oil, I read not one word about oil’s biggest,baddest catastrophe. Climate Change! Burning forests! Acidic Oceans! Dying Coral Reef! Drought! Mega Storms! Climate Migrations! The Great Die Off!
    It’s like none of these catastrophes are happening in real time in the present moment. It’s change or die time! Everything will be worse next year and the next and the next.

  8. robt
    August 13, 2016 at 10:47 am

    Selling marginally more of a finite resource that reduces the price to 1/3 to 1/2 for the total daily production would probably be the most daft policy I can imagine. In current theorizing it was a ‘plan’ to undermine shale production and ultimately end up dominant in the business. But short cycle shale production, which must be constantly renewed with new sources would actually be favorable to traditional producers because of its high marginal cost, enabling prices to remain high. For a traditional producer to sell 8 or 9 million barrels a day at 120 rather than 10 million at 50 has obvious benefit to the traditional producer: it preserves the resource and provides 500 million dollars a day more in revenue.
    I cannot believe the high production scenario would actually be chosen as a strategy to specifically attack new methods of production. More likely, because the business is cyclical the state of Saudi Arabia should have planned its fiscal needs far into the future on lower prices rather than higher, but just got caught in a fiscal squeeze in the belief that high prices were here to stay. Looking at oil prices over the past couple of generations, with spectacular boom and bust cycles, is all that is needed to confirm the conservative approach the best.
    Listening to Sheik Yamani’s interviews from many years ago, logical, reasonable, and precise, is an education in itself. He was dismissed as Oil Minister in 1986 after 25 years on the job, at least partly because of his view on pricing and the impact of it to both producing and consuming nations. He has been a private consultant for the last 30 years.
    1973. Shipping less oil for more money, the result of potential aggressive moves by consuming nations:

    From 1983, starting about 7:00, 9:50 starts discussion of oil prices. A speech of less than 1/2 hour and questions after. He talks about vulnerability of producing nations to volatile prices, how they provide risk to Western banks when prices drop too low and debt cannot be paid, how marginal producers in countries like the US would go bankrupt, again threatening banks, about alternate energy sources, solar power used to power Saudi towns, and diversification of Saudi industry. 33 years ago, but the discussion could well have been last year.

    And from 2008, especially from 6:48. The effect of speculation on oil prices.

  9. fellowtraveller
    August 17, 2016 at 1:10 pm

    it is ever so nice to see that possibly, the Saudis thought ‘high prices for oil would remain forever’.

    that very same notion which fueled the housing bubble in the USA.

    so the Princes of the World, have been kicked downwards several [or possibly more?] notches eh?

    nice. a real shaden-froh moment for sure.

    perhaps this financial condition that the Criminal Family Corporation [i.e. Saudi Arabia] is one which finally diminish if not completely stop its aggressive establishment of Wahhabi Mosques all over Planet Earth?

    I surely hope so.

    It tok awhile but their current state of affairs, with a ‘hard landing clearly within sight, has been a long time coming. Hopefully many “aristocracy’ types will lose THEIR own heads, while being held down , in front of cheering masses of poor Arabs.

    one can only hope .

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