The Phaserl


This Giant Welfare State Is Running Out of Time

by Justin Spittler, Casey Research:

The Saudis are begging Trump to stop pumping so much oil.

Saudi Arabia made the plea earlier this month in its monthly oil report.

The report said “the collective efforts of all oil producers” would be needed to restore order to the global oil market. It added that this should be “not only for the benefit of the individual countries, but also for the general prosperity of the world economy.”

It’s a bizarre request, to say the least. You’re probably even wondering why they would do such a thing.

As I’ll show you in today’s essay, it’s a clear act of desperation. One that tells me the country is doomed beyond repair.

I’ll get to that in a minute. But first, let me tell you a few things about Saudi Arabia.

• It’s the world’s second-largest oil-producing country after the United States…

It’s also the largest producer in the Organization of the Petroleum Exporting Countries (OPEC), a cartel of 13 oil-producing countries.

Like other OPEC countries, Saudi Arabia lives and dies by oil. The commodity makes up 87% of the country’s revenues.

This was a great thing when the price of oil was high. Saudi Arabia was basically printing money.

But that hasn’t been the case for years.

You see, the price of oil peaked back in June 2014 at over $105 a barrel. It went on to plunge 75% before bottoming in February 2016. Today, it trades under $50.

• Low oil prices are wreaking havoc on Saudi Arabia’s finances…

But not for the reason you might think.

You see, Saudi Arabia is the world’s lowest-cost oil producer. Its oil companies can turn a profit at as low as $10 per barrel. That’s one-fifth of what oil trades for today.

So what’s the problem?

The problem is that Saudi Arabia is one giant welfare state.

Nick Giambruno, editor of Crisis Investing, explains:

Saudi Arabia has a very simple social contract. The royal family gives Saudi citizens cradle-to-grave welfare without taxation. The Saudi government spends a fortune on these welfare programs, which effectively keep its citizens politically sedated. In exchange, the average Saudi citizen forfeits any political power he would otherwise have.

Not only that, about 70% of Saudi nationals work for the government. These “public servants” earn 1.7 times more than their counterparts in the private sector.

• In short, Saudi Arabia uses oil money to keep its citizens in line…

But this scheme isn’t cheap. According to the International Monetary Fund (IMF), Saudi Arabia needs oil to trade north of $86 a barrel to balance its budget.

That’s nearly double the current oil price.

This is creating big problems for the Saudi kingdom. In 2015, the Saudis posted a record $98 billion deficit. That was equal to about 15% of the country’s annual economic output.

Last year, it ran another $79 billion deficit.

• Saudi Arabia is now desperately trying to restore its finances…

It’s slashed its government subsidies. It’s borrowed billions of dollars. It’s even trying to reinvent its oil-addicted economy.

In fact, it plans to increase non-oil revenues sixfold by 2030. It’s also trying to spin off part of the national oil company, Saudi Aramco, on the stock market. And it wants to create a $1.9 trillion public fund to invest at home and abroad.

• The Saudis have even tried to rig the global oil market…

It’s why they met with non-OPEC members like Russia at the December meeting.

At this meeting, OPEC and non-OPEC members agreed to cut production. It was the first deal like this since 2001.

OPEC hoped this historic pact would lift oil prices. There’s just one big problem.

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