Sunday, January 31, 2016

Saudi Arabia and Oil

With the price of oil pushing $30 a barrel I'm seeing all sorts of hand wringing about how Saudi Arabia is on the verge of bankruptcy.

My response is, oh please, give me a break.

It was the Saudi strategy to drive the price of oil down to drive the shale producers, who's overhead is higher, out of the market.

It costs the Saudi's about $10 a barrel to produce oil so they're still making money just not as much money.

So how do you go broke when you're still making $20 a barrel on oil? Like anyone else goes broke. They're spending more than they take in. Their oil revenues in 2016 are estimated to be about $100 billion but their budget is at $223 billion. They get about $37 billion from other sources so that's going to leave them about $87 billion short. Since their GDP is around $632 billion that's 14% of GDP.

To put that in perspective, the US 2016 budget was $4 trillion with a $474 billion deficit which is about 2.6% of GDP.

At an $87 billion deficit and a $624 billion reserve, plus an A+ bond rating from S&P so they can borrow money at reasonable rates, they're good for at least 10 years and probably more.

By that time production will drop and prices will increase because just about everyone else will be losing money on oil at $30 a barrel.

So, you'll excuse me, but I wouldn't worry about the Saudis one bit.

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