Barton Biggs, the storied hedge fund manager who runs Traxis Partners, recently had an interesting encounter recently over lunch with a Saudi businessman who explained to him the real motivations behind Saudi Arabia’s ramp up in oil production and why oil prices will likely continue to fall as a result for an extended period of time.
It’s all part of a plan hatched by the Saudi royal family, according to Biggs, who relays this conversation in a note just published by Itaú BBA. Biggs says he asked the man what his outlook for Saudi Arabia was in the medium and long term, and the man was particularly negative about this, even given the vast riches of Saudi Arabian oil wealth.
Here is what Biggs writes about his conversation with the Saudi man:
“You have to understand our geo-political equation and vulnerability,” he said calmly but intensely.
“Our two most dangerous enemies are Iraq and Iran. Both are Shia, and both are trying to destabilize the Arab world and our Sunni kingdom by funding terrorism. Our only weapons against them are our wealth and our oil. Their current vulnerability is their financial fragility. Their financial reserves are a fraction of ours, and they desperately need money to prop up their economies.
The ruling council has decided that over the next two years we have a brief window of opportunity to impoverish and weaken them by driving down the price of oil. Iraq and Iran need to produce and sell their oil at well over one hundred dollars a barrel. In the next 20 four months, we will gradually increase our production with the objective of breaking the price of crude down to 60 dollars a barrel.
The man also pointed out to Biggs the opportune timing of this plan from the Saudi standpoint:
“Don’t forget we have the wind at our backs because of Europe’s problems and the weak global economy. Under normal recessionary circumstances, we would be reducing production to maintain current prices. Instead, we will be flooding a weak market already suffering indigestion. You also should understand that Kuwait and the United Arab Emirates are with us. Royal families tend to stick together.“
Biggs, when posing the question to himself whether or not he believes what he heard from the Saudi man, says “maybe.” He described the man as “very rich and presumably well-connected” but “not part of the extended Saudi royal family.” He also notes that the Saudi plan as described to him could hit a lot of snags along the way, given the political hotspot the region is, with many competing actors and a dynamic plot.
However, Biggs sees some light in all of this, saying that if the scenario were to play out as described, it would essentially amount to “a giant tax cut, which is just what this sickly old world needs.” And he ends his story with another interesting note:
Meanwhile the Saudis, perfectly reasonably, are hedging their bets. Last week they signed a $3 billion
contract with British Aerospace to provide the training jets and combat management of the new fighter jets that The Saudi Royal Air Force has purchased. The best, high-performance jets don’t protect you from suicide bombers, but obviously they could be handy in preventing the bad guys’ aircraft from blitzing your oil lifting installations or in a shooting war in the Gulf.