Crashing oil prices are bad news for the world’s big oil producers, in particular Saudi Arabia.
In a new note to clients, RBC Capital Markets’ Helima Croft writes that falling prices come as violence spikes in the country.
“There have been several alarming security incidents in Saudi Arabia this week, raising fresh concerns about extremism in the Kingdom,” she writes. “All is not well.”
Kroft notes that the Saudi government needs higher prices to help fund programs that keep young people busy.
“Due to a surge in post Arab Spring spending, we believe that the Saudi government actually needs oil prices north of $US100 a barrel in order to balance its budget, and if Brent prices remain in the $US80s, it will be forced to run a deficit,” Kroft writes. “A significant portion of the new social spending has also been aimed at keeping Saudi’s large youth cohort occupied and away from extremist groups … In the wake of the 2003 terrorist attacks in Riyadh carried out by nationals, King Abdullah identified youth unemployment as the country’s number one national security challenge.”
Earlier this month, Saudi Aramco announced it was cutting the price of oil it was selling to the US, a move intended to make Saudi oil more competitive with the oil US producer are fracking from America’s shale basins.
Kroft believes, however, these moves will be limited in scope as suppressing prices is bad for business and consumer sentiment in the kingdom. Oil revenue funds an estimated 80-90% of the Saudi government’s budget, so people notice when prices fall.
“We maintain that the King would not sacrifice domestic and regional stability in order to punish Iran and Russia or bankrupt US shale producers,” she writes.
Bottom line: Saudi Arabia is in a very tricky situation.
“With thousands of young Saudis reportedly filling the ranks of ISIS, concerns about the country’s restless youth are likely taking on added urgency in security circles.”