The Saudis Are Stumbling – They May Take the Middle East With Them, by Conn Hallinan

From Conn Hallinan at antiwar.com:

America’s leading Sunni ally is proving how easily hubris, delusion, and old-fashioned ineptitude can trump even bottomless wealth

For the past eight decades Saudi Arabia has been careful.

Using its vast oil wealth, it’s quietly spread its ultra-conservative brand of Islam throughout the Muslim world, secretly undermined secular regimes in its region, and prudently kept to the shadows while others did the fighting and dying. It was Saudi money that fueled the Mujahedeen in Afghanistan, underwrote Saddam Hussein’s invasion of Iran, and bankrolled Islamic movements and terrorist groups from the Caucasus to the Hindu Kush.

It wasn’t a modest foreign policy, but it was a discreet one.

Today that circumspect diplomacy is in ruins, and the House of Saud looks more vulnerable than it has since the country was founded in 1926. Unraveling the reasons for the current train wreck is a study in how easily hubris, delusion, and old-fashioned ineptness can trump even bottomless wealth.

Oil Slick

The kingdom’s first stumble was a strategic decision last fall to undermine competitors by scaling up its oil production and thus lowering the global price.

They figured that if the price of a barrel of oil dropped from over $100 to around $80, it would strangle competitors that relied on more expensive sources and new technologies, including the U.S. fracking industry, companies exploring the Arctic, and emergent producers like Brazil. That, in turn, would allow Riyadh to reclaim its shrinking share of the energy market. There was also the added benefit that lower oil prices would damage oil-reliant countries that the Saudis didn’t like – including Russia, Venezuela, Ecuador, and Iran.

In one sense it worked. The American fracking industry is scaling back, the exploitation of Canada’s tar sands has slowed, and many Arctic drillers have closed up shop. And indeed, countries like Venezuela, Ecuador, and Russia have taken serious economic hits.

But it may have worked a little too well, particularly with China’s economic slowdown reducing demand and further depressing the price – a result that should have been entirely foreseeable but that the Saudis somehow missed.

The price of oil dropped from $115 a barrel in June 2014 to around $44 today. While it costs less than $10 to produce a barrel of Saudi oil, the Saudis need a price between $95 and $105 to balance their budget. The country’s leaders, who figured that oil wouldn’t fall below $80 a barrel – and then only for a few months – are now burning through their foreign reserves to make up the difference.

While oil prices will likely rise over the next five years, projections are that the price per barrel won’t top $65 for the foreseeable future. Saudi debt is on schedule to rise from 6.7 percent of GDP this year to 17.3 percent next year, and its 2015 budget deficit is $130 billion.

The country is now spending $10 billion a month in foreign exchange reserves to pay the bills and has been forced to borrow money on the international financial market. Recently the International Monetary Fund’s regional director, Masood Ahmed, warned Riyadh that the country would deplete its financial reserves in five years unless it drastically cut its budget.