Bringing Iran into the fray out of panic will also give the Persian nation the recognition it wants in the oil and gas industry, allowing for it to extend its grip on the Middle East on its economic front. Furthermore, having an increased say within the OPEC cartel will give it more global clout and give it a tool to wage economic warfare.
Saudi Arabia’s oil policy, unveiled just under two years ago at the November 2014 OPEC meeting where it effectively splintered the OPEC cartel by announcing it would produce excess quantities of oil in hope of putting shale and other high-cost producers out of business, has backfired spectacularly. OPEC has failed to crush the U.S. shale industry, which as a result of increasing efficiencies and debt-for-equity exchanges has seen its all in production costs tumble. This has made far cheaper oil prices profitable (especially with the addition of hedges), not to mention Wall Street’s ravenous desire to buy any debt paper that offers even a modest yield, allowing U.S. oil producers to delay or outright avoid bankruptcy.
But while shale has avoided annihilation, it is Saudi Arabia that has been suffering. In “Kingdom Comedown: Falling Oil Prices Shock Saudi Middle Class“, the WSJ reports that “a sharp drop in the price of oil, Saudi Arabia’s main revenue source, has forced the government to withdraw some benefits this year—raising the cost of living in the kingdom and hurting its middle class, a part of society long insulated from such problems.”
The kingdom is grappling with major job losses among its construction workers—many from poorer countries—as some previously state-backed construction companies suffer from drying up government funding. Those spending cuts are now hitting the Saudi working middle class.
Saudi consumers in major cities, the majority of them employed by the government, have become more conscious about their spending in recent months, said Areej al-Aqel from Sown Advisory, which provides financial-planning services for middle-class individuals and families. That means cutting back on a popular activity for most middle-class Saudis: dining out.
“Most people are ordering less food or they change their orders to more affordable options,” she said.
We have previously documented the soaring interbank funding costs and plunging bank stock prices, but that’s just part of it: Saudi’s entire economy is suddenly collapsing. To boost state finances, Saudi Arabia cut fuel, electricity and water subsidies in December, after posting a record budget deficit last year. It also plans to cut the amount of money it spends on public wages and raise more non-oil revenue by introducing taxes. But in response to these moves, inflation more than doubled from last year to about 4 percent now, crimping consumers even more.
Making matters worse, Saudis are beginning to speak out about a sense of anxiety about the economy. “I think we are going through a difficult period,” said Emad al-Majed, a Riyadh-based pharmacy technician. “There will be suffering.”
The oil market is in a “much more critical” state than when the Organization of Petroleum Exporting Countries last met three months ago, and its members must seek ways to shore up crude, possibly by freezing or trimming production, Noureddine Boutarfa, said Sunday in an interview. Aside from the Saudis, producers have made additional proposals, he said later at a news conference, without giving details. OPEC ministers plan talks in the Algerian capital on Sept. 28.
Meanwhile, it is not just Saudi Arabia who is panicking: “The situation since the last meeting in June has worsened, the situation is much more critical,” said Boutarfa, who’s been involved in talks with Saudi Arabia and other members in the run-up to the meeting. “So it’s important to see what measures can be adopted in the short term and very short term to find a solution to this situation that isn’t helping any OPEC country.”
That said, it’s all up to Iran, which is currently resolutely refusing to cut production, knowing it can easily capture market share even if the price of oil remains under pressure and capping maximum potential revenues.
Full article: Desperate Saudi Arabia Offers To Cut Production By 500,000 Barrels (OilPrice)