Saudi oil is worth far less than Trump thinks
The world is awash with excess oil.
At crude near $60 a barrel Saudi Arabia faces fiscal trouble and belt-tightening austerity. At $50 or lower it faces a slow-motion crisis and ultimately an existential threat to its economic model.
That fate is no longer a remote tail-risk.
Donald Trump cares little for such hard economic constraints as he visits Saudi Arabia. The petrostates of the Gulf represent a vast pot of money in his pre-modern mind.
He aims to scoop up $1 trillion dollars (£760bn) of Saudi wealth, even more than the $600bn already promised over four years by Crown Prince Mohammed bin Salman. He wants another trillion and a half from the rest of the Gulf.
Good luck with that.
Saudi Arabia's GDP is barely more than $1 trillion, smaller than the economy of the Netherlands. Saudi per capita income is on a par with Portugal. Trump will have to make do with blockbuster headlines and hope that nobody audits the details.
The International Monetary Fund estimates that Saudi Arabia's 'fiscal break-even cost' is $96 a barrel. That is the Brent price required to fund the kingdom's cradle-to-grave welfare system and to keep the lid on political dissent.
It must also fund the world's fifth-biggest military machine, with a defence budget larger than those of France or Japan, according to data from the Stockholm Institute.
The real break-even cost is probably higher since Riyadh spends undisclosed sums subsidising Middle Eastern allies.
Saudi Arabia and the Opec+ cartel have been defying oil market fundamentals since 2022, holding back 5m barrels a day in one way or another to stop prices sliding to their equilibrium level.
This strategy has failed. They surrendered market share to US and Canadian shale frackers, and to Brazil, but failed to push prices high enough to fund their budget needs.
The Saudis have thrown in the towel and are now pursuing a soft version of the 2014-18 price war. The kingdom is feeding back supply on a rapid trajectory, setting off a 30pc fall in prices.
'Any façade of cohesion within Opec+ has gone out of the window,' said David Oxley, from Capital Economics. He has pencilled in Brent crude at $50 by late next year.
Trump's tariff capitulation to China has triggered a bounce this week, but a structural supply glut still hangs over markets.
Daan Struyven, from Goldman Sachs, has not changed his bearish forecast, expecting a range of $52-56 next year even if the US avoids a recession. Brent could fall below $40 and West Texas crude below $38 in a global slowdown.
That would force a drastic retreat by US frackers. The gung-ho expansion of Chevron, Exxon and Shell would look like a costly corporate error.
The elephant in the room is China, the world's first electro-superpower and its largest car market by far. Goldman Sachs says China's oil consumption peaked in 2023, fell in 2024 and is going into irreversible decline as falling demand for road transport outpaces rising demand for jet fuel and petrochemicals.
Electric cars and trucks in China have already displaced 1pc of global oil demand.
The pace is quickening. Sales of plug-in vehicles now take half the Chinese market, where they undercut old auto by 8pc on purchase price. They will be two thirds by 2027. China is determined to wean itself off imported fuels that are vulnerable to a naval blockade.
We can argue over how fast the rest of East Asia will replicate the great replacement. But the debate is about the speed, not about whether it will happen. Any attempt to turn back the clock is doomed to failure.
Saudi Arabia still relies on hydrocarbons to cover 65pc of its budget. Saudi Aramco has said it will cut this year's dividend by 30pc. Fitch Ratings expects the fiscal deficit to double to 5.1pc of GDP. Others warn that it will blow through 7pc at sub-$60 oil prices without painful retrenchment.
From this stretched fiscal base Saudi Arabia must find the money to head off a spectacular debacle at the futuristic gigaproject of Neom, originally billed at $500bn but now heading for $8.8 trillion, according to a leaked Mckinsey audit obtained by the Wall Street Journal.
This Ozymandias in the sands is the dream of the impetuous crown prince and the fitting frame for the make-believe world of Donald Trump, where everything must be bigger and glitzier, superlatives flow and nothing is entirely real.
Neom is to be a hi-tech city state of advanced manufacturing, cutting-edge science, green energy, banking, along with a tourist riviera, linked by a 170km zero-carbon Linear City stretching through the desert from the Red Sea to a ski resort in Trojena Mountains, with no natural snow, to be ready for the 2029 Pan-Asian Winter Games.
The crown prince has had successes. Saudi women are very well-educated and entering the workforce, lifting the GDP growth trajectory. The tax base has been broadened. His 8,000 royal cousins are having to work for a living.
The idea behind his larger Vision 2030 is impeccable. Saudi Arabia needs to recycle its oil revenues into a diversified economic base, ready for the post-fossil age.
The country should have begun during the commodity boom of the early 2000s, when crude fetched over $200 a barrel in today's money. But the old guard frittered money away, hoping it could instead subvert global efforts to slow CO2 emissions.
I recently attended a closed-door meeting with a top Saudi minister who spelled out how the kingdom aims to become a green superpower. The world's cheapest solar at 11 cents a watt – or is it already 9 cents? – will produce green hydrogen from the world's greatest concentration of electrolysers.
This giant Red Sea hub will turn out zero-carbon fertilisers and steel on site for global demand. It will make green molecules for shipment to Asia, replacing today's oil tankers with tomorrow's green ammonia tankers. It will pipe hydrogen to Europe through gas pipelines, the green Gazprom of Arabia.
Some of this makes good commercial sense, some less so, but at least it amounts to a 21st-century clean-tech strategy. It has spun out of control because of a very Trumpian inability to stick to unglamorous nuts and bolts.
Trouble is brewing.
Saudi Arabia has modest debt – Fitch expects it to reach 35pc of GDP next year – but it was near zero a decade ago. It has been the world's biggest state issuer of dollar debt outside the US since 2022. Capital Economics says the debt ratio could hit 90pc of GDP within five years in a long oil drought.
The central bank has $450bn of foreign exchange reserves, half its earlier peak in real terms, but it needs all of that as a credible defence for its fixed dollar exchange peg.
The kingdom can dip into its $925bn sovereign wealth fund, but most of that is not liquid. It co-owns Newcastle United, Heathrow Airport and Selfridges. A chunk is already invested in US equities such as Uber, Meta and Boeing.
The Saudis said late last year that they planned to spend the lion's share on domestic needs, presumably to save Neom and Vision 2030. In short, they have no money to spare.
Saudi Arabia is not insolvent but it is not nearly as rich as mythology would have it either.
One watches with curiosity to see how the kingdom can possibly conjure a round trillion to keep the president happy. The House of Saud and the House of Trump surely deserve each other.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
The Independent
9 minutes ago
- The Independent
Has Iran actually tried to kill Trump? Here's what we know
Days after it was reported that Donald Trump rejected Israel's plot to assassinate Iran's Supreme Leader Ayatollah Ali Khamenei, the president publicly announced that the United States knows his location and is holding off killing him 'for now.' Israeli officials, meanwhile, have openly demanded his death. This week, Israeli Defense Minister Israel Katz said Khamenei 'can no longer be allowed to exist.' Prime Minister Benjamin Netanyahu, turning to Fox News over the weekend to make the case for the United States to join a war with Iran, said Khamenei sees the president as 'public enemy number one.' Israel has sought to justify intervention using allegations of Trump's assassination threats as leverage, while the United States has faced years of blowback in the wake of Middle East wars and the 2020 killing of a top Iranian general. During his first administration in 2020, Trump ordered a drone strike near Baghdad International Airport that killed Qassem Soleimani, commander of the elite Quds Force with Iran's Revolutionary Guards Corps, after he had survived several assassination attempts from western, Israeli and Arab states over the past two decades. The strike, which was planned over several months, ignited fierce blowback across the region, denounced by Iran's foreign minister at the time as an act of international terrorism. By 2024, U.S. intelligence officials had collected evidence they believe shows Tehran was seeking ways to kill then-candidate Trump, according to Politico. In September, Trump claimed there were 'big threats on my life by Iran.' Neither of the two assassination attempts against then-candidate Trump in the summer of 2024 have been linked to Iran. One month earlier, a Pakistani national with alleged ties to Iran was accused of seeking to carry out a murder-for-hire plot targeting U.S. government officials, according to federal prosecutors. Asif Raza Merchant was accused of joining a complex plot to carry out assassinations last year, including trying to hire hit men who were undercover officers, according to an indictment. In November, a fugitive Iranian government operative was accused of hiring a pair of New Yorkers he met in prison to carry out an assassination plot against a critic of the regime. He allegedly admitted to FBI agents that he'd also been tasked with finding a hit squad to kill then-President-elect Trump. Farhad Shakeri claimed he was asked by regime officials to 'put aside his other efforts... and focus on surveilling, and, ultimately, assassinating' Trump, according to a criminal complaint in Manhattan federal court. In February, Trump, who campaigned against U.S. involvement in foreign wars, said Iran would be 'obliterated' if he was assassinated by state actors. 'That would be a terrible thing for them to do,' he told reporters. 'Not because of me. If they did that, they would be obliterated. That would be the end. I've left instructions: if they do it, they get obliterated. There won't be anything left.' Iran has denied ever targeting the president. 'A new scenario is fabricated,' Iranian Foreign Minister Abbas Araghchi posted on X following accusations against Shakeri. 'The American people have made their decision. And Iran respects their right to elect the president of their choice. The path forward is also a choice. It begins with respect,' Araghchi wrote. Iranian foreign ministry spokesperson Esmaeil Baghaei said the allegations were part of a 'repulsive' plot by Israel to 'complicate matters between America and Iran.' In January, Iranian President Masoud Pezeshkian stressed that Iran 'never attempted' to kill Trump, 'and we never will.' 'This is another one of those schemes that Israel and other countries are designing to promote Iranophobia,' Pezeshkian told NBC News. 'Iran has never attempted to, nor does it plan to assassinate anyone. At least as far as I know.' Asked whether there have been any plots against the president under Iran, he insisted there have been 'none whatsoever.' On June 15, Netanyahu asked Fox News host Bret Baier whether 'these people who chant 'death to America'' and 'tried to assassinate President Trump twice' should 'have nuclear weapons and the means to deliver them to your cities.' Baier then pressed Netanyahu about his claim that Iran launched two assassination attempts. 'Through proxies, yes.' he said. 'Through, through their intel, yes, they want to kill him,' he added. 'He's enemy number one.' Former Fox News host Tucker Carlson, who has emerged as a prominent voice across right-wing media against the United States joining Israel's war, told Texas Senator Ted Cruz that the United States would be bombing Tehran if those assassination allegations were credible. 'We should attack Iran immediately if that's true,' he said. Cruz insisted that 'nobody disputes' Iran is trying to kill the president, calling it an 'objective fact' following his interview with Carlson. On Thursday, Trump said he plans to decide on whether to order U.S. warplanes to strike Iranian nuclear facilities within the next two weeks, depending on whether Tehran engages in talks over ending their nuclear weapons program. In a statement relayed through White House Press Secretary Karoline Leavitt, Trump said: 'Based on the fact that there's a substantial chance of negotiations that may or may not take place with Iran in the near future, I will make my decision whether or not to go within the next two weeks.' The president's statement followed a week of escalating strikes between Israel and Iran. More than 600 Iranians and at least two dozen Iranians have been killed, according to officials.
The Guardian
22 minutes ago
- The Guardian
Israel and Iran: where is the conflict heading? – Today in Focus extra
The Guardian's senior international correspondent Julian Borger reports from Tel Aviv as the Israel-Iran conflict enters its second week and the world awaits Donald Trump's decision on whether the US will enter the war
Daily Mail
23 minutes ago
- Daily Mail
Israel-Iran war, blow by blow: Maps and graphics reveal locations of EVERY strike so far as conflict escalates
Israel began pounding Iran on June 13, in a conflict that has the world holding its breath because of fears it could rapidly escalate and drag Britain and the US in. The IDF's blistering aerial assault – codenamed 'Operation Rising Lion' – has targeted dozens of key nuclear sites, military bases and surface-to-air missile launchers. Oil and gas infrastructure have also been hit, as well as Iran's state news broadcaster, which was struck while live on air. Among the eliminated are nuclear scientists and senior Iranian commanders, including the head of the Islamic Revolutionary Guard Corps (IRGC) – an elite wing of Tehran's military. In a televised address to the nation, Israeli Prime Minister Benjamin Netanyahu said the attack was neccessary to 'roll back the Iranian threat to Israel's very survival'. Iran was thought to be 'closer than ever to obtaining a nuclear weapon'. Iran immediately retaliated with drone strikes, before launching several waves of ballistic missiles aimed at Israeli cities such as Tel Aviv and Jerusalem as part of its own 'Operation True Promise III'. Israel's largest oil refinery in Haifa was shut down following an attack that severely damaged the facilities. The IRGC claimed their precision-guided missiles struck the headquarters of Mossad, Israel's spy agency, as well as another military intelligence unit known as Aman, near Tel Aviv. Israel's state-of-the-art air defences, including its 'Iron Dome', have been in near-constant action. Ayatollah Ali Khamenei, Iran's Supreme Leader, told Israel to prepare for 'a severe punishment'. He has previously called Israel a 'terrorist base' and a 'cancerous tumour' that must 'be removed and eradicated'. Iran has also issued bloodcurdling threats urging the US, UK and France not to rush to Israel's defence, warning that their military bases and ships will be in the firing line should they intervene. Donald Trump has demanded Tehran's 'unconditional surrender', boasting his forces could assisinate Khamenei. Posting on social media on June 17, he said the Ayatollah was an 'easy target' but remained safe 'for now'. Actual US strikes aimed at targets inside Iran remain on the table. America is assembling an armada of warships and fleets of fighter jets in the region ahead of possible military action. Britain itself has ordered military reinforcements to be sent to the Middle East as the war rages. Keir Starmer told reporters en route to the G7 summit in Canada that he would 'always make the right decisions for the UK and our allies'. Britain already has fighter jets in the region as part of an operation to counter threats in Iraq and Syria. Tehran has repeatedly insisted its nuclear programme is peaceful and that it has never intended to make a bomb, despite the fears of Israel and the West. However, its ever-growing stockpile of enriched uranium – needed to produce an atomic weapon – had triggered major concerns. The International Atomic Energy Agency (IAEA), the UN's nuclear watchdog, said Iran's activity was a 'matter of serious concern'. On June 12, the day before Israel's sudden attack, the IAEA ruled that Iran was in breach of its safeguard obligations. Iran criticised the 'politically motivated' decision, announcing it would bolster its nuclear programme with a new enrichment facility in a 'secure location'. Officials also said centrifuges – machines that enrich uranium – would be upgraded at Fordo, one of the nation's most secretive and heavily fortified nuclear sites, buried deep beneath the mountains near the holy city of Qom.
