Saudi Arabia's dangerous financial troubles

Steven LeBlanc06102016

Saudi Aramco – 12.5 million barrels per day– Saudi Aramco is by far the biggest energy company in the world, generating more than $1 billion a day in revenue

I am watching Saudi Arabia—Population of 32 million — Saudi Arabia is on the verge of its most significant change in decades.  The Kingdom is in financial trouble and is seeking to avert internal chaos.  Changes coming to this desert Kingdom have the potential to reshape not only the Middle East but also the entire world.

Saudi Arabia—and Aramco (the state owned oil company)—holds the world’s second largest proven crude oil reserves. Since the Saudi government nationalized Aramco, the company has become the tiara of the kingdom and the key catalyst behind Saudi Arabia’s economic wealth.  But now the combination of low oil prices and regional chaos directly threatens Saudi Arabia’s survival.  Saudi Arabia is not in disastrous straits at the moment; it has sufficient reserves—dollar reserves– to sustain the country for a few years. However, if these reserves do run out, it will face a mammoth political storm.  Saudi Arabia has gone through almost $100 billion in reserves the last few years. Reserves now stand at roughly $650 billion. It is bleeding foreign currency reserves and is seeking to stanch the “bleeding”.

The Saudis have been spending lots of money to keep the Arab world—from totally collapsing.  Many Arab states have either crumpled or been severely weakened. Saudi Arabia now confronts at least two key external challenges: Iran and the Islamic State—to fight them both costs vast amounts of capital.

Saudi Arabia has to spend a lot of money to keep up with its proxy war against Iran—its great enemy in the region.  Remember Saudi Arabia is Sunni—Iran is Shiite.  These nations do not fight each other directly but instead they wage expensive proxy conflicts throughout the region. When protests began in 2011 against the Iranian-backed regime of Bashar al-Assad in Syria, the Saudis used their oil wealth to back rebel groups, most of which are to erratic degrees jihadist, in order to attack the Assad regime.  All of this costs money.

In Bahrain, the Saudis intervened when protests by the Shiite majority population, also backed by Iran, imperiled the pro-Saudi Sunni monarchy. The Saudis are also involved in a military war in Yemen, where Iran is sponsoring Houthi rebels. Meanwhile, in Lebanon, the Iranians appear to have the upper hand.  Other than fighting proxy wars, Saudi Arabia also supports Arab states in battling economic havoc, including Bahrain, Jordan, Morocco, and Egypt.  As well, the Royal Family is attempting to lead a Sunni Arab coalition against Iran—and using their dollar reserves to buttress those relationships.  This is putting a tremendous strain upon Saudi foreign currency reserves.

So what is the strategy to build up cash reserves?  The Wall Street Journal reports the following:

“The planned initial public offering of oil colossus Saudi Aramco has kicked off a scramble among banks for a role in a deal that could generate $1 billion in fees and help define success or failure on Wall Street for years to come.

By virtually any measure, Saudi Arabian Oil Co., as it is formally known, is one of the largest enterprises on earth. Saudi Arabia has said the state-owned company could be worth $2 trillion to $3 trillion—roughly equal at its midpoint to the total market value of every other publicly traded oil and gas company in the world, according to S&P Global Market Intelligence.

Ever since Saudi Arabia indicated in January that it’s eyeing a public listing for Aramco, senior bankers at the world’s largest financial institutions have been swarming around the company’s headquarters in the coastal city of Dhahran seeking to ingratiate themselves with officials in the kingdom and win a piece of the biggest investment-banking deal ever.”

This strategy to take the nationally owned Saudi oil giant Aramco public is a clear demonstration of just how serious the Saudi financial crisis is.  So I am watching closely the upcoming public stock offering of the biggest oil company in the world (oil colossus Saudi Aramco).  And, always keeping in mind that Saudi Arabia is prophetically significant–We believe Saudi Arabia is home to the descendants of Ishmael: “He (Ishmael) will be a wild donkey of a man; his hand will be against everyone and everyone’s hand against him, and he will live in hostility toward all his brothers.”

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