Foreign Affairs
Related: About this forumYemen's disaster becomes "cataclysmic
Brookings
By Bruce Riedel July 6, 2020
The five year-old war in Yemen is intensifying. The country is splitting apart as the pandemic ravages the poorest country in the Middle East. The war is a burden on the Saudi economy, dooming hopes of diversification. Iran is the winner in the quagmire.
... The escalation in the fighting marks the failure of months of efforts to arrange a ceasefire, including the Saudi public call for a unilateral ceasefire. The Saudis are well aware that the war costs them a fortune, at a time when global oil demand is sharply down and Saudi revenue is low. Saudi oil is selling for around $40 a barrel, less than half what the kingdom needs to break even. The details of the multiple efforts at arranging a ceasefire are unknown, but certainly the Houthis dont feel much compulsion to quit while they are winning on the ground. The war rallies many Yemenis against the hated foreign Saudis.
... Crown Prince Mohammed bin Salman, the architect of the reckless Saudi war, has announced plans to diversify the economy and build a new city in the northwest of the country. Those plans are stalling due to the weak economy.
... The head of the United Nations International Childrens Fund (UNICEF) in Yemen says the crisis is of cataclysmic proportions, and is getting worse as aid funds dry up due to the global economic depression. The Houthis are in denial about the pandemic, citing absurdly low numbers of infection and deaths. They also tax humanitarian assistance and divert aid to themselves. But they retain exclusive control of virtually all of the north.... Tehran has bogged down its regional rival Saudi Arabia in an expensive debacle in Yemen, with apparently no way out. The war costs to the Iranians, in contrast, are minimal. The Saudis will be tarred by the humanitarian catastrophe they have helped create for years to come, and the crown princes reputation is toxic. Iran has a host of problems the virus, mysterious explosions, and others but in Yemen its a winner.
https://www.brookings.edu/blog/order-from-chaos/2020/07/06/yemens-disaster-becomes-cataclysmic/
muriel_volestrangler
(101,148 posts)That's at odds with everything I've ever seen about oil production. The standard line is that Saudi Arabia can produce it cheaper than anyone else.
eg
https://www.aljazeera.com/ajimpact/oil-price-war-nightmare-shale-producers-200309173245129.html
Or the table here: https://en.wikipedia.org/wiki/Price_of_oil#Comparative_cost_of_production
which, with other costs, still puts them below $10/barrel - the lowest.
bronxiteforever
(9,287 posts)Saudi Aramco lifted the veil on its financial condition in a bond offering for the company. There was no way to audit the costs prior to 2019.
https://www.rns-pdf.londonstockexchange.com/rns/6727U_1-2019-4-1.pdf
The Forbes energy consultant wrote
However, I found the most significant item in the prospectus to be that Saudi Aramco struggled to break even in 2016 when Brent crude averaged about $45 per barrel. Net income in 2016 was only $13 billion, and free cash flow a mere $2 billion. Contrast that with the $111 billion in income and $86 billion in free cash flow the company made in 2018 (when Brent crude averaged $71.34/bbl), and it looks like Aramco's breakeven price is just about $40/bbl.
https://www.forbes.com/sites/rrapier/2019/04/01/saudi-aramcos-breakeven-oil-price-is-higher-than-expected/#43197c1f1c02
Also a recent Carnegie Report from 2 weeks ago quoted the International Monetary Funds breakeven point for Saudi Oil to be $76.00 a barrel
The double blow of depressed oil prices and the COVID-19 pandemic is placing unique pressure on the Saudi economy. COVID-19 has further devalued oil and wreaked havoc on the non-energy sectors Saudi Arabia is trying to develop in the name of diversification. Current dynamics are testing the sustainability of the rentier state and prompting the introduction of unprecedented austerity measures. Saudi Vision 2030, the centerpiece of Crown Prince Mohammed bin Salmans mission to transform the kingdom, is largely on hold and may never return to its original form. Yet, this crisis may also present an opportunity for a new frame of thinking and modifications to the Saudi economy that may be beneficial in the long run. The government will have to make critical decisions, some that could create a leaner and more efficient economy as Saudi Arabia emerges from these conditions. While those decisions would have been arduous to implement under normal circumstances, they are necessary today.
In March, Saudi net foreign assets fell by almost $27 billion to $464 billion, the lowest level in 19 years. The Ministry of Finance increased its debt ceiling from 30 percent of GDP to 50 percent. Saudi Aramco, the worlds largest public company, reported a 25 percent drop in net income in the first quarter of 2020. The IMF projects a breakeven oil price of $76 USD per barrel for Saudi Arabia, more than double the current price. Public health concerns are also threatening the viability of welcoming millions of pilgrims to Mecca and Medina in July for the Hajj. Religious tourism typically makes up about 20 percent of the countrys non-oil GDP.
https://carnegieendowment.org/sada/82104
muriel_volestrangler
(101,148 posts)The IMF figure is for "fiscal breakeven oil price" - "the oil price at which the fiscal balance is zero", or
https://www.cfr.org/content/newsletter/files/Breakeven_Oil_Summary.pdf
So it's not about the cost of oil production, it's about how much they want to spend with the profits.
bronxiteforever
(9,287 posts)Saudi Arabia remains the biggest buyer of British weapons and these weapons will be used in Yemen.