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Saudi Arabia's Worst Nightmare

As-salamu alaykum Saudi Arabia

Posted October 22, 2015 at 6:59PM

“My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel." — Sheikh Rashid bin Saeed Al Maktoum

The Sheikh was talking about Dubai, but it could also be said of Saudi Arabia and other Gulf kingdoms. Everyone knows that when the oil runs out in the desert — and it will run out — the game is over.

Yesterday, it was reported in Bloomberg that the time may come sooner than you think.

Saudi Arabia may run out of financial assets needed to support spending within five years if the government maintains current policies, the International Monetary Fund said, underscoring the need of measures to shore up public finances amid the drop in oil prices.

The same is true of Bahrain and Oman in the six-member Gulf Cooperation Council, the IMF said in a report on Wednesday...

“Under current policies, countries would run out of buffers in less than five years because of large fiscal deficits.”

Down Dooby Doo Down Down

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Let the Good Times Roll

When the price of oil was in the triple digits, Saudi Arabia was on top of the world. It had enough money to bail out Citigroup in 2008.

When the Arab Spring caused revolution in places like Tunisia and Libya, the Kingdom responded by increasing its largess to the people — in essence saying, “Hey, times are good, don't rock the cart.”

The Saudis are afraid of revolution. Their princes are spoiled, and without U.S. backing, they face the possible war with the Shias.

Team Saudi

Don't get me wrong; the United States is still on Team Saudi — it's just that the relationship was always a Faustian bargain to supply the United States with oil. And now the Saudis aren't quite as important as they used to be.

In the past, in the face of global oil competition, the Saudis would pump oil, drive down the cost of oil, and put rivals out of business — at which point they would raise prices.

This time, the Saudis are playing the same game, but they are losing. Saudis have the cheapest crude in the world, but the political cost of keeping revolution in check, a war in Yemen, and not to mention 15,000 spoiled princes and princesses in Lamborghinis is increasingly prohibitive.

Saudi Arabia is now spending more money than it is taking in, and it will run out within five years unless something changes.

The market is well aware of this fact.

The benchmark Tadawul All Share Index for stocks is down 27% this year. That is more than twice the MSCI Emerging Market Index, which is down 12% over the same period.

Out of the West

But it isn't just oil that the Arabs have to fear. Not only is unconventional oil like tar sands and fracking eating the Saudi's lunch, but alternative energy is constantly getting cheaper.

Ironically, it was Citigroup that has reported that we crossed a tipping point this year and will never return to an era where oil is as powerful an economic force as it was over the past 30 years.

One reason is due to the rise of the electric car. Ten years ago, most people looked at electric cars as a nice idea that would never happen. Well, it has happened — you see them every day on the streets.

This is because the battery has gotten stronger, faster, and cheaper. There is one element needed in these new batteries, and its demand is soaring:

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All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Crisis & Opportunity and Managing Director of Wealth Daily. He is also a contributor for Energy & Capital. For more on Christian, see his editor's page.

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