The Saudi Conundrum

Todd Shriber
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I was searching for a sexier title for this week's commentary, something along the lines of the ''Italian Job'' or the ''French Connection,'' but conundrum, quagmire, problem, etc. all work with regards to Saudi Arabia and the escalating tensions in the Middle East. With all this calamity in the Middle East, I have come up with a comparison to the fallout faced by Wall Street banks during the financial crisis. One regime falls and everyone wants to know who is next.

I will say Hosni Mubarak in Egypt was Bear Stearns and Moammar Gaddafi in Libya is Lehman Brothers. Saudi Arabia and its ruling royal family are Goldman Sachs. For lack of a better way of putting it, if real regime change makes its way to Saudi Arabia, you know what is going to break loose in the oil market.

To be sure, Saudi Arabia is not much different than many other countries in the region, it just happens to produce a lot more oil. In 2009 that figure was 9.8 million barrels a day, according to the U.S. Energy Information Administration. When I say that the kingdom is not much different than its regional brethren this is what I mean: Almost all of the nation's wealth is held by a scant percentage of the population, the ruling family does not subscribe to the same version of Islam as a fair amount of the population and there is a young population that is clamoring for jobs with few to be had.

Looking at that last point, the CIA World Factbook says Saudia Arabia had an unemployment rate of 10.5% at the end of last year. Sounds terrible, but that's down from a whopping 25% in 2002. Here's the rub: That data only pertains to Saudi men and some estimates still put the number as high 25%.

Looking at the issue of the royal family, they are Sunnis. Most Saudis are. But the bulk of the Shiite population is domiciled in the kingdom's oil-producing areas. In other words, it would be pretty easy for the Shiites to throw a wrench in Saudi Arabia's daily output if they so desire.

Figure it this way, oil prices spiked on news of the unrest in Egypt and that country only produces 662,000 barrels a day. Now oil is spiking again because of Libya. Makes a bit more sense as Libya is an OPEC member (Egypt is not) and Libya produces 1.1 million barrels of oil per day. The country is also home to Africa's largest oil reserves.

NYMEX-traded crude for April delivery (the March contract expired today) surged $4.86, or 5.4%, to $94.57 today. That is on speculation of what is going to happen next in Libya folks. On a dollar-for-dollar basis, it is hard to pinpoint where oil could go if the unrest spreads to Saudi Arabia, but we know it will go higher and almost certainly past $100 a barrel.

CNBC tossed around the $140 a barrel number today and that is within sniffing distance of the all-time high set in July 2008. Gluskin Sheff Chief Economist David Rosenberg said supply disruptions in Libya are one thing, but unrest in Saudi Arabia could lead to $200 oil, CNBC reported.

Oil at $200 may seem like an attractive proposition for those that are long oil stocks, but the tax such an event represents on the world's major economies would be so stifling that it is hard to envision equity markets moving higher if $200 lasts for even a short time. Yes, there is a potential Saudi problem, and no, we probably do not want to see it become a reality.