Tuesday, December 29, 2015; The Beginning Of The End Of "Free Money" In Saudi Arabia

Updates

January 1, 2016: from a couple of days ago in Financial Times (if you hit a paywall google saudis face fuel price jump under):

Saudi Arabia, which spent around $107bn, or 13.2 per cent of gross domestic product, on energy subsidies in 2014, is one of the world’s biggest consumers of energy, with rock-bottom prices fostering excessive consumption.

Later, 9:53 a.m. Central Time: from the AP:

Saudi Arabia on Monday said this year's budget deficit amounted to $98 billion (367 billion riyals) as lower oil prices cut into the government's main source of revenue, prompting the kingdom to scale back spending for the coming year and hike up petrol prices.

A royal decree announced that petrol prices would go up by 50 percent effective Tuesday. Even with that jump, Saudis will pay just 24 cents (0.90 riyals) for a liter of 95 octane gasoline, less than a dollar per gallon. The Saudi-based Jadwa Investment estimates the government spends around $61 billion on energy subsidies annually, almost $11 billion of that on gasoline alone.

For two consecutive years the kingdom has posted a deficit, and it is planning for another budget shortfall next year, projected at $87 billion (326 billion riyals).

It's hard to believe it won't be worse in 2016: low oil prices could get lower, and that pesky war in Yemen, President Obama's "poster-child" success story in the Mideast.

Original Post

 

From Bloomberg/Rigzone:

Confronting a drop in oil prices and mounting regional turmoil, Saudi Arabia reduced energy subsidies and allocated the biggest part of government spending in next year’s budget to defense and security.

Authorities announced increases to the prices of fuel, electricity and water as part of a plan to restructure subsidies within five years. The government intends to cut spending next year and gradually privatize some state-owned entities and introduce value-added-taxation as well as a levy on tobacco.

The biggest shake-up of Saudi economic policy in recent history coincides with growing regional unrest, including a war in Yemen, where a Saudi-led coalition is battling pro-Iranian Shiite rebels.

In attempting to reduce its reliance on oil, the kingdom is seeking to put an end to the population’s dependence on government handouts, a move that political analysts had considered risky after the 2011 revolts that swept parts of the Middle East.

“This is the beginning of the end of the era of free money,” said Ghanem Nuseibeh, founder of London-based consulting firm Cornerstone Global Associates. “Saudi society will have to get used to a new way of working with the government. This is a wake-up call for both Saudi society and the government that things are changing.

Having said that, it's going to be a rough, rough year for American drillers, as well. Also from Bloomberg/Rigzone:

The Energy Information Administration now predicts that companies operating in U.S. shale formations will cut production by a record 570,000 barrels a day in 2016.

That’s precisely the kind of capitulation that OPEC is seeking as it floods the world with oil, depressing prices and pressuring the world’s high-cost producers.

It’s a high-risk strategy, one whose success will ultimately hinge on whether shale drillers drop out before the financial pain within OPEC nations themselves becomes too great.

Drillers including Samson Resources Corp. and Magnum Hunter Resources Corp. have already filed for bankruptcy. About $99 billion in face value of high-yield energy bonds are trading at distressed prices. The BofA Merrill Lynch U.S. High Yield Energy Index has given up almost all of its outperformance since 2001, with the yield reaching its highest level relative to the broader market in at least 10 years.

“You are going to see a pickup in bankruptcy filings, a pickup in distressed asset sales and a pickup in distressed debt exchanges,” said Jeff Jones, managing director at Blackhill Partners, a Dallas-based investment banking firm. “And $35 oil will clearly accelerate the distress.”

Shale drillers aren’t the only ones hurting. OPEC’s strategy is causing pain for its members. Saudi Arabia is said to be considering selling stakes in state-owned companies to help stem a budget deficit that reached 20 percent of its economy.

Venezuelan Oil Minister Eulogio Del Pino said the industry is “at the door of a catastrophe” if crude production outstrips storage capacity.

***********************

Note To The Granddaughters

Everyone got back from the ski trip in great shape -- including 17-month-old Sophia. Apparently in the past few days she has really been learning and saying new words. One of the new words is "cheese" because she hears "Say 'cheese'" whenever photographs are being taken and folks are being reminded to smile.

She now carries "old-fashioned" receivers around (see photos below) and constantly repeating "cheese." Apparently she thinks that all phones/receivers are cameras. She was born in the iPhone / camera era.

So, she walks around hotel rooms carrying disconnected receivers, taking selfies. (Photographs below have been previously posted.)