Published May 19, 2017

This Giant Welfare State Is Running Out of Time

By Justin Spittler, editor, Casey Daily Dispatch

The Saudis are begging Trump to stop pumping so much oil.

Saudi Arabia made the plea earlier this month in its monthly oil report.

The report said “the collective efforts of all oil producers” would be needed to restore order to the global oil market. It added that this should be "not only for the benefit of the individual countries, but also for the general prosperity of the world economy."

It’s a bizarre request, to say the least. You’re probably even wondering why they would do such a thing.

As I'll show you in today's essay, it's a clear act of desperation. One that tells me the country is doomed beyond repair.

I’ll get to that in a minute. But first, let me tell you a few things about Saudi Arabia.

• It’s the world’s second-largest oil-producing country after the United States…

It’s also the largest producer in the Organization of the Petroleum Exporting Countries (OPEC), a cartel of 13 oil-producing countries.

Like other OPEC countries, Saudi Arabia lives and dies by oil. The commodity makes up 87% of the country’s revenues.

This was a great thing when the price of oil was high. Saudi Arabia was basically printing money.

But that hasn’t been the case for years.

You see, the price of oil peaked back in June 2014 at over $105 a barrel. It went on to plunge 75% before bottoming in February 2016. Today, it trades under $50.

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• Low oil prices are wreaking havoc on Saudi Arabia’s finances…

But not for the reason you might think.

You see, Saudi Arabia is the world’s lowest-cost oil producer. Its oil companies can turn a profit at as low as $10 per barrel. That’s one-fifth of what oil trades for today.

So what’s the problem?

The problem is that Saudi Arabia is one giant welfare state.

Nick Giambruno, editor of Crisis Investing, explains:

Saudi Arabia has a very simple social contract. The royal family gives Saudi citizens cradle-to-grave welfare without taxation. The Saudi government spends a fortune on these welfare programs, which effectively keep its citizens politically sedated. In exchange, the average Saudi citizen forfeits any political power he would otherwise have.

Not only that, about 70% of Saudi nationals work for the government. These “public servants” earn 1.7 times more than their counterparts in the private sector.

• In short, Saudi Arabia uses oil money to keep its citizens in line…

But this scheme isn’t cheap. According to the International Monetary Fund (IMF), Saudi Arabia needs oil to trade north of $86 a barrel to balance its budget.

That’s nearly double the current oil price.

This is creating big problems for the Saudi kingdom. In 2015, the Saudis posted a record $98 billion deficit. That was equal to about 15% of the country’s annual economic output.

Last year, it ran another $79 billion deficit.

• Saudi Arabia is now desperately trying to restore its finances…

It’s slashed its government subsidies. It’s borrowed billions of dollars. It’s even trying to reinvent its oil-addicted economy.

In fact, it plans to increase non-oil revenues sixfold by 2030. It’s also trying to spin off part of the national oil company, Saudi Aramco, on the stock market. And it wants to create a $1.9 trillion public fund to invest at home and abroad.

• The Saudis have even tried to rig the global oil market…

It’s why they met with non-OPEC members like Russia at the December meeting.

At this meeting, OPEC and non-OPEC members agreed to cut production. It was the first deal like this since 2001.

OPEC hoped this historic pact would lift oil prices. There’s just one big problem.

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• U.S. oil producers aren’t playing ball…

Instead of cutting output, they’ve rapidly increased production.

You can see this in the chart below. U.S. oil production has jumped 10% since last July.

U.S. oil production is now approaching the record level set back in 2015. There’s good reason to think production will blow past that high, too.

To understand why, look at the chart below. It shows the total number of U.S. rigs actively looking for oil. You can see that the total number of rigs plummeted in November 2015 before bottoming a year ago.

The total U.S. oil rig count has now risen 28 weeks in a row. There are now 396, or 125%, more rigs looking for oil in the United States than there were a year ago.

• If this continues, the price of oil will slide lower…

Saudi Arabia isn’t used to feeling this helpless.

After all, the Saudis had a firm grip on the global oil market for decades. If it wanted, it could raise the price of oil by slashing production. It also had the ability to drive the oil price lower by flooding the market with excess oil.

Those days are over. The United States now rules the global oil market, and it’s showing no mercy.

Unless this changes soon, Saudi Arabia is doomed.

After all, the country is already in a race against time. According to the IMF, Saudi Arabia is on pace to burn through all of its cash within five years.

In other words, we’re witnessing a seismic power shift in the global energy markets…one that could cause oil prices to plunge even lower. That would be bad news for many oil companies in the short term.

But it should also lead to one of the best buying opportunities we’ve seen in years.

I’ll be sure to let you know when it’s time to pull the trigger. Until then, stay on the sidelines. This one could get nasty…


Justin Spittler
Delray Beach, Florida
May 19, 2017

P.S. Crisis Investing editor Nick Giambruno predicted that Saudi Arabia’s oil-addicted economy would implode back in March 2016. Not only that, he told his readers how to profit from this crisis by recommending a world-class U.S. oil company.

Nick’s readers are up more than 20% on this investment. But it should head much higher once the U.S. puts Saudi Arabia out of its misery. You can learn all about Nick’s top oil stock by signing up for Crisis Investing. Click here to begin your risk-free trial.

An Important Question From One of Our Readers…

We recently received feedback from one of our readers that I'd like to address here. It's something you may be wondering yourself…

You see, with our lineup of gurus at Casey Research, you'll occasionally hear different opinions about the market. Here's what Casey Report subscriber Stephen L. wrote in:

My question is who are “WE” in making the predictions about $3,000 gold and 3,000 S&P in your most recent issue of The Casey Report. From other Casey publications, Doug Casey does NOT agree with your prediction on stock markets or S&P, specific reference to a recent interview/conversation between Nick Giambruno and Doug Casey published on International Man and Casey Daily Dispatch.

I know you don’t respond individually, but this kind of contradiction and inconsistency warrant some form of clarification.

Stephen L., The Casey Report subscriber

Thanks for writing in, Stephen.

Sometimes, what seems like a conflict between two editors may just be a difference in time frame or strategy.

In the recent issue of The Casey Report, E.B. predicted that "by the time Trump seeks re-election, we’ll see $3,000 gold and 3,000 on the S&P 500 Index." He also said a short-term market correction of 10% could be looming…and is even likely. If that happens, it would be an opportunity to buy profitable, world-class companies at discount prices.

His prediction is for the next few years. He may be right—only time will tell.

Casey Research founder Doug Casey says we're in the midst of a "Greater Depression"…and the economy is going to continue to get worse over the long term.

The main point is: We all have specific, well-researched ideas that are unique. It's the same with all of our editors at Casey Research.

None of our Casey publications are written by committee. And that's how it should be.

This is the beauty of our business. We don't tell our editors what to write. We want them to share their true opinions.

This allows us to provide you with the best ideas possible.

—Justin Spittler