WinnCad Elements Blog: Brace for $200 oil if unrest hits Saudi Arabia

Thursday, March 10, 2011

Brace for $200 oil if unrest hits Saudi Arabia

By Jon Markman, MarketWatch

SEATTLE (MarketWatch) — Strong markets are supposed to rise along a wall of worry. This one was rising very nicely amid plenty of worries until investors caught a whiff of the idea that Saudi Arabia could fall victim to the unrest enveloping the Middle East.

So now stocks are slipping and crawling. It’s all about the optics. If you can see a problem, then you can ignore it. But if you aren’t sure what you see, paralysis ensues

Any real threat that the Fahd monarchy and Sunni hegemony in Saudi Arabia could possibly come under attack would spark more than a worry. It would be thunder, lightning, a hurricane, a tornado, a tidal wave and earthquake all rolled up in one sand-colored bombshell.

No one really cares about Libya, after all. The two sides there can blast each other to kingdom come for all that most investors in London, Paris, Frankfurt and Wall Street care. Sure, there’s a decent amount of oil at stake at Bayda, Benghazi & Beyond, but concerns about the region begin and end at Saudi borders.

Desert crossroads
So how credible is the threat? Let me give you two views: One negative and one positive, and then I’ll bring the two together.

Satyajit Das, a global finance expert featured in the Oscar-winning documentary “Inside Job,” and author of the forthcoming book “Extreme Money: The Masters of the Universe and the Cult of Risk,” believes that Riyadh is where the rubber is going to meet the road in the latest Mideast crisis.

For if the Saudis are not prepared to deal with the greatest challenge to their power in 60 years, he argues, the world economy will look very different by the end of this year than it does now. As pessimistic as the Sahara is hot, Das said he believes investors need to ask what crude oil prices north of $200 would do to global economic growth, and then make a column in their spreadsheets for $500 oil.

“I think we are entering a period of unparalleled political uncertainty,” he said in a telephone interview from Australia. “An arc of instability that starts in Morocco and ends in China is taking shape, and people are grossly underestimating its potential to radically upset the current world order.”

Das believes that investors are painfully naive in particular about Saudi Arabia, as current energy prices do not reflect the real possibility that the monarchy may not survive the next couple of years. “The Fahds have made hay while the sun shines, making themselves fabulously rich at the expense of 80% of the rest of their country,” Das observed.

The country suffers from 40% unemployment, most people cannot afford to buy a home and food prices are soaring. Desperate people suffused with confidence that their time in history has come could turn surprisingly violent.

But no one knows how the Fahds will react to large-scale protests. News reports Thursday said that Saudi police fired on several hundred protesters in the eastern city of Qatif. But will the Saudis use their full military might against their people?

Das says they will not. “The Saudis don’t want to fight,” he explained. “They are all immensely wealthy. They are Bedouin. They are nomadic. They don’t care if they are in Saudi or not. They would just as soon leave and move to their homes in London and Paris and Beverly Hills. Their emergency jets are fueled and ready to fly. They are not going to fight to the last drop of blood.’’’

The problem for the West in this scenario is that any Saudi government that would follow may not be nearly as pro-Western. And they may wish to essentially weaponize their country’s reserves, holding it back as a gesture of faith — to hell with the economics.

Of course this is an extreme point of view, but it gives you an idea of how risk may emerge unexpectedly on the fringe.

Best-case scenario
Here’s a more sanguine reading of the fact pattern. Optimists believe that concerns about Riyadh are overstated because protests in Saudi Arabia so far appear limited to economic issues that can be papered over by the monarchy simply with more distribution of its vast wealth. The Los Angeles Times published an analysis Thursday explaining that, in fact, top dissidents are treating their disagreement with the Fahds more as a family dispute over freedom of speech and assembly than as a revolutionary cause.

Already the Saudis have announced a new $36 billion spending program for more housing, education, sports activities and social welfare on top of a 2011 fiscal spending plan that is the largest in its history. The measures are aimed at citizens suffering from double-digit joblessness and also expand a measure of security to lower-income Saudis. Some funds are aimed at writing off debts of deceased borrowers.

The kingdom is reported to have reserves totaling $445 billion and it has no external debt. Basically it can buy its way out of trouble by bribing the opposition, a time-honored tradition everywhere, as well as by allowing more commoners a say in government.

Moreover, the kingdom does have extra capacity of at least 4 million barrels of oil a day, which is more than twice the current production of Libya — and can put it on the market quickly. We know it’s a slightly lower quality than Libyan sweet, and that the extra capacity may be more like 2 million, or more than 6 million, but that is a technical matter which has been overblown.

Das may be right about Saudi Arabia. But my expectation is that the Saudis are much more capable of emerging from this crisis in better shape than their neighbors, and once they make this more clear, energy prices should simmer down and global equity markets can go back to their previous orbits.