Risks of Saudi Arabia requiring a regime change are increasing, despite the OPEC production and non-OPEC production agreements. Fitch Ratings reduced Saudi Arabia’s rating to A+, the fifth-highest investment grade, and changed the outlook to stable from negative. The downgrade “reflects the continued deterioration of public and external balance sheets, the significantly wider than expected fiscal deficit in 2016 and continued doubts about the extent to which the government’s ambitious reform program can be implemented," Fitch said.
Saudi foreign currency reserves peaked at about $745 billion in 2014. They have dropped to about $525 billion, down $222 billion, or 30%. And despite higher oil prices in January, the reserves fell by $12.5 billion. The IMF has projected that the reserves may be entirely expended by 2020 if world oil prices do not recover sufficiently.
Note: The chart above provides reserves in SAR million
The Energy Report:Bob, in January you published an article saying that the drop in oil prices could be the "straw that pops the $7-trillion derivative bubble." Can you explain the influence of oil prices on derivatives?
Bob Moriarty: It's not the oil prices that are significant; it's the change in oil prices. If you own an oil field and it costs you $75 to produce a barrel, at $110 a barrel ($110/bbl), you're OK. If oil drops to $45/bbl, you're in serious trouble.
In the shale oil sector, producers were taking out hundreds of billions of dollars in loans to finance shale oil that was costing them about $110/bbl to produce. It looked good on paper, but was a disaster waiting to happen. A lot of people in the shale oil business will soon be going out of business.
This could start World War III. The United States is the biggest oil producer in the world today, and Russia is number two. Russia's economy is based on oil priced at $110/bbl. They are very angry at the U.S. and Saudi Arabia for the games that have been played in oil. Oil at $45/bbl is not sustainable. It could bring down the world's financial system all by itself.
The real cost of energy today is $60 to $70/bbl. In the last piece I did with The Energy Report, I said $75 to $100/bbl oil was the new normal. That's still true. Oil is way below the cost of production, and that's going to hurt a lot of people.