The End of OPEC

Written By Christian DeHaemer

Posted January 23, 2014

This is one of my favorite charts of all time. It’s the United States Natural Gas Fund (NYSE: UNG):


The fund follows the price of natural gas traded on the NYMEX, and it encapsulates the fracking revolution.

When the perma-bears point to skyrocketing debt and the clowns in Washington D.C. while rending their shirts and screaming about Austrian economics, I say, “Yes, that may be true, but cheap energy has saved this country before, and it can do it again.”

The industrial revolution started in England, which had an abundance of cheap coal. It continued in America, which had an abundance of cheap oil.

It may be that cheap energy is a precursor to industry, but it’s not a guarantee. One country, Saudi Arabia, has used its vast oil profits to build the most lucrative welfare state in the world…

Saudi unemployment runs around 42%, and those that do work are employed by the state.

This is all well and good — until the money runs out.

There is an old saying in the Kingdom that goes something like, “My grandfather rode a camel, I drive a Mercedes, and my grandson will ride a camel.”

That chart above says the money will run out sooner rather than later.

Though Saudi Arabia can pull oil out of the ground at the cheapest rates in the world, the true political cost (after paying off all the princes and citizens) is close to $90 a barrel.

The country has a budget deficit of only 4% of GDP and a $700 billion foreign account surplus, but a severe or long-term decline in the cost of oil would create an Arab Spring-like crisis.

The country funds 92% of its budget from oil exports. In 2013, the surplus fell 35.7% in dollar terms over 2012 due to lower oil prices and rising domestic spending.

This has led one of the richest men in the world to put out a warning…

Saudi Billionaire Alwaleed bin Talal, who owns large chunks of companies like Apple, Citigroup, and Twitter, said recently that Saudi Arabia faces a dire threat.

According to Alwaleed, the trouble will come from a flood of new petroleum reserves onto the global market, particularly from the shale oil in the U.S. and the end of the embargo to Iran.

Alwaleed wrote: “It is necessary to diversify sources of revenue, establish a clear vision for that and start implementing it immediately. The global dependence on OPEC’s petroleum and specifically the production of Saudi Arabia is in continuous and clear decline.”

In response to these seismic shifts in the global oil order, the Saudis have announced they will start to invest in United States fracking.

From Reuters:

Saudi Basic Industries (SABIC) is in talks with several U.S. firms to invest in the U.S. shale gas industry, and expects to enter that market this year, chief executive Mohamed al-Mady said on Wednesday. “We’re currently in talks with a few big names in the U.S. for investment in shale gas. We expect to enter the market sometime this year. This will be great for SABIC and will globalise our operations,” he said.

Last year, SABIC — one of the world’s largest petrochemical producers — announced plans to build a new shale gas cracker in the United States.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.

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