April 5, 2017|

These are interesting times globally.  Big changes are in the air.  The world will most likely
be a far different place in four or five years than it is today.  You can argue it is going to be
a far better place and you can argue just as easily that it is going to be a far worse place.  If
you break it down politically, those who support the new president Donald Trump are
most likely going to say it will be a far better place and those who don’t support him will
say it is going to be a far worse place, making it a flip of the coin.

However, one thing seems certain, there are going to be large shifts in the global power structure when it comes to oil, currency, and banks, which are really at the heart of all the power.  If you read between the lines and connect the dots when reading today’ news stories, whether they are main stream or alternative sources of news, it is already starting to happen.  You can see
and feel it bubbling just under the surface of the news that is
being disseminated.

These are going to be exciting times for some and scary times for others.  Human beings by nature like status quo, don’t like uncertainty, and don’t like abrupt and sudden change.  One thing you can count on and that is all of the coming changes will create many new opportunities for investors who see and understand them.  Change and opportunity go hand in hand.

One of the major changes taking place right now is in the power wielded by Saudi Arabia and OPEC
over the global oil market.  All indications are that OPEC is in serious trouble.  The Aramco IPO is a major indication of just how bad the situation is for Saudi Arabia, OPEC’s most powerful member.  The decision announced by the Saudi government to take its national oil company public has generated a lot of interest given the size of Aramco and the fact that it would become the largest publicly traded company on earth.  The future of the young Saudi elite now seems to be depending on this Aramco IPO.

There are a number of reasons for the troubles Saudi Arabia and OPEC face.  Around three years ago Saudi Arabia made a major power play to manipulate the oil market, drive oil prices down, and drive high cost producers, particularly in the U.S., out of the market.  High cost producers in the U.S. are those that were drilling deep horizontal shale wells in states like North Dakota and Texas where the wells are drilled vertically down to a depth of up to a mile or more and then drilled horizontally for up to a mile.  These wells can cost up to $10 million or more to drill and put into production.  The cost to produce a barrel of oil from one of these wells three years ago was in the $50 to $60 range.  That means if a barrel of oil sells for $30 or $40 they are losing money and at $50 to $60 they are just breaking even.

By forcing high cost producers in the U.S. and other nations out of the market, that meant less oil being produced and less competition
for Saudi Arabia and over time higher oil prices from a supply and demand standpoint.  But this strategy appears to have backfired and
as a result, Saudi Arabia and OPEC are in big trouble.

Here is how it unfolded:

On October 15, 2013 Bloomberg reported “U.S. Becomes World’s Top Oil Producer in 2013, PIRA Says.”  This was a direct result of all the oil that was being produced from the deep shale wells in the U.S.  Then three years later after Saudi Arabia and OPEC had flooded the market with oil and drove the price down to a low point of $26 in February of 2016, Bloomberg reported on September 13, 2016 “Saudi Arabia Ousts U.S. as Biggest Oil Producer, IEA Says.”  This was a direct result of all the deep shale oil wells in the U.S. that had to be shut-in (closed off) because the wells were losing money because of the extremely low oil prices.  “While Saudi Arabia added 400,000 barrels a day of output from low-cost fields since May, about 460,000 barrels a day of “high-cost” production was shut down in the U.S.”

One of the main reasons their strategy backfired is that Saudi Arabia needs oil to be at $93 per barrel in order to balance their budget.  Low oil prices for the past few years have brought their economy to its knees as they have had to burn through cash.  Not only have they burned through their foreign exchange reserves at a rapid pace, their net oil exports have continued to decline.

This has forced Saudi Arabia to take all kinds of painful austerity measures, many of which are not popular with the people they rule over.  It has forced them to do an IPO with Aramco, their state owned mega oil company, which enables them to sell off part of the company and raise a lot of capital that they desperately need to keep their government running.

Another reason their strategy backfired is that the U.S. companies who were extracting oil from the deep horizontal shale wells figured out how to get their cost to produce a barrel of oil down to around $35, and as a result are back in business with production from these wells roaring back.   If all of this wasn’t enough for Saudi Arabia to deal with, there has been an oil price war brewing between Saudi Arabia and Russia for some time now.

This is not the first time that Saudi Arabia made a power play.  It was on Oct. 20, 1973, that Saudi Arabia announced it was imposing a total oil boycott against the United States in retaliation for its support of Israel during the October war. The action caused an economic earthquake around the world.  Suddenly Americans and others were forming long lines at gas stations, and the greatest transfer of wealth in world history began. The price of gasoline soared, briefly up tenfold.

Saudi Arabia is a key member of OPEC.  From a U.S. standpoint they are more significant than all the other members of OPEC combined because they became a close ally of the U.S. in the early 1970’s when Richard Nixon was President and Henry Kissinger was Secretary of State.  Henry Kissinger brokered a deal with Saudi Arabia that the U.S. would buy Saudi oil in return for financial help with the U.S. economy.  The gold standard was abandoned by Nixon in 1971 and an oil standard now drove the U.S. dollar.  The dollar became the reserve currency for the world and as a result of agreements
entered into in 1971 and 1973, OPEC oil was exclusively quoted in US dollars.  This created a permanent demand for dollars on the international exchange markets.  The close relationship between Saudi Arabia and the U.S. continued right up through the Bush years.  In very recent years this relationship has been somewhat strained because of geopolitical differences and events that are changing the Middle East, not to mention the
previously classified documents being recently released by the U.S.
government that have implied that some officials in Saudi Arabia may have been somehow involved in the 9/11
attack on the U.S.

Currently OPEC members are experiencing a considerable amount of pain
because of the low price of oil.  Their economies cannot run on $50 per barrel oil.  Take a look at the chart on the right.   What this chart says is that OPEC members cannot afford to have low oil prices and are going to be forced to take drastic action to restore higher oil prices, which they have already started to do. Low oil prices have already negatively affected 67% of the members of OPEC to the point that their entire Wealth Fund reserves is being wiped out.  It is pretty obvious what their actions are going to be and that is to manipulate the oil market so that the price of oil goes up.  They have no choice.  The problem for them now is that their power to manipulate the oil market has been greatly reduced and is nowhere near what it was back in 1970’s.

A development that has been lightly covered by the U.S. mainstream news media is that the U.S. dollar is in danger of losing its status as the world reserve currency.  There have been closed door meetings in recent years between Gulf Arabs, China, Russia, Japan, and France.  In these meetings it was being decided that these countries would get rid of the U.S. Dollar and trade commodities for alternative currencies, like the Yen or Yuan. The Gulf Arab countries are also planning a new common currency.  All of this could cause huge changes to the world financial structure.  “Big changes are in the air.”

By: Ron Clark
ACQU Energy