Can Saudi Arabia Buy Love for $35 Billion?

Jim Brown
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Saudi King Abdullah returned to Saudi Arabia this week after being away for three months for medical treatment. He immediately announced a package of concessions worth $35 billion in an attempt to prevent Saudi Arabia from falling into the same crisis as Libya. Can you buy love for $35 billion?

The action plan is officially to offset inflation, help young unemployed people and families to obtain affordable housing. The country will pay extended unemployment for a year and pay tuition fees for those that want to study abroad. Another program will provide zero interest loans for homebuyers. There is currently an 18 year wait to get a home loan.

Most of the land in the country is owned by the royal family so having money to build a home just means the royal family is going to get it back when the land is sold to the buyer. Most of the land is not for sale and that leads to the current housing shortage.

The king had back surgery in the U.S. three months ago and has been recuperating in Morocco for the last four weeks. His return was preceded by hundreds of men in white robes doing a traditional sword dance on special carpets in the Riyadh airport as the king arrived. Reporters ad commentators on state TV wore scarves in the colors of the Saudi flag in coverage termed "the joy of a nation" to mark his return.

The "day of rage" scheduled for March 11th will prove exactly how much love you can buy for $35 billion. Saudi Arabia has a zero tolerance policy for political dissent so there is likely to be a confrontation if the protest comes off as planned. After seeing the condemnation fall on Egypt and Libya for violence against the protestors it will be interesting to see how Saudi handles the events.

Libya has seen between 60% and 80% of its 1.6 mbpd of light sweet crude production shut down over the last three days. Saudi's oil minister Ali al-Naimi tried multiple times this week to calm the hysteria over the loss of Libyan production. His standard refrain is "the world is fully supplied with oil" and "OPEC will add production if needed." I have not actually heard anyone use the OPEC phrase "$112 is a fair price for oil" so even those who worship at the altar of the dollar have some sense of when to be quiet. Saudi is the "excess capacity" in OPEC. If more oil is needed it would be up to Saudi to supply it.

The problem remains, "If the world calls on Saudi, will they show up?" Saudi claims to have 4 million barrels per day of excess production. Nobody actually knows for sure. What we do know is that any excess Saudi production is heavy sour crude and not the light sweet crude Europe depends on from Libya. Refiners using that low sulfur crude cannot use the heavy sour crude from Saudi Arabia. It is the equivalent of pulling into a service station looking for unleaded and finding out they only have diesel. They could have a million gallons of it but it won't work in an unleaded car.

Having 4 mbpd of excess heavy crude capacity will not help when Europe is short of light crude. The price of Brent (light) has been rising steadily for months because of the shrinking supplies of light crude and that was well before we lost close to a million barrels from Libya. How much tighter is that supply going to be in the days ahead?

Brent Crude Chart

If Libya's oil remains offline in the weeks ahead we should get an early preview of how peak oil will impact global prices. In effect it will be "Peak Light Crude" and that is the most critical component of the transportation fuels. I have preached this light/heavy problem for years so it will be interesting to see how it plays out.

Jim Brown

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