Bankrupting OPEC.. One Million Barrels Of Oil At A Time

The world hasn’t really caught on yet, but OPEC is in serious trouble.  Last year, OPEC’s net oil export revenues collapsed.  How bad?  Well, how about 65% since the oil price peaked in 2012.  To offset falling oil prices and revenues, OPEC nations have resorted to liquidating some of their foreign exchange reserves.

The largest OPEC oil producer and exporter, Saudi Arabia, has seen its Foreign Currency reserves plummet over the past two years… and the liquidation continues.  For example, Saudi Arabia’s foreign exchange reserves declined another $2 billion in December 2016 (source: Trading Economics).

Now, why would Saudi Arabia need to liquidate another $2 billion of its foreign exchange reserves after the price of a barrel of Brent crude jumped to $53.3 in December, up from $44.7 in November??  That was a 13% surge in the price of Brent crude in one month.  Which means, even at $53 a barrel, Saudi Arabia is still hemorrhaging.

Before I get into how bad things are becoming in Saudi Arabia, let’s take a look at the collapse of OPEC net oil export revenues:

The mighty OPEC oil producers enjoyed a healthy $951 billion in net oil export revenues in 2012.  However, this continued to decline along with the rapidly falling oil price and reached a low of $334 billion in 2016.  As I mentioned before, this was a 65% collapse in OPEC oil revenues in just four years.

The last time OPEC net oil export revenues was this low was in 2004.  OPEC oil revenues that year were $370 billion based on average Brent crude price of $38.3.  Compare that to $334 billion in oil revenues in 2016 on an average Brent crude price of $43.5 a barrel.

This huge decline in OPEC oil revenues gutted these countries foreign exchange reserves.  Which means, the falling EROI- Energy Returned On Investment is taking a toll on the OPEC oil exporting countries bottom line.  A perfect example of this is taking place in Saudi Arabia.

Saudi Arabia was building its foreign exchange reserves for years until the price of oil collapsed, starting in 2014.  At its peak, Saudi Arabia held $797 billion in foreign currency reserves:

(note: figures shown in SAR- Saudi Arabia Riyal currency)

In just two and a half years, Saudi Arabia’s currency reserves decline a stunning 27%, or approximately $258 billion (U.S. Dollars) to $538 billion currently.  What is even more surprising, is that Saudi Arabia’s foreign currency reserves continue to decline as the oil price increased towards the end of 2016:

The BLUE BARS represent Saudi Arabia’s foreign exchange reserves and the prices on the top show the average monthly Brent crude price.  In January 2016, the Brent crude oil price was $30.7 a barrel.  However, as the oil price continued to increase (yes, some months it declined a bit), Saudi’s currency reserves continued to fall.

Matter a fact, Saudi Arabia liquidated approximately $78 billion of its foreign currency reserves in 2016.  I checked out Saudi Arabia’s oil exports at the JODI – Joint Organizations Data Initiative for the past year.  Saudi’s average oil exports for the year was 7.7 million barrels per day.

By multiplying that figure by 365 days, Saudi Arabia exported approximately 2.8 billion barrels of oil in 2016.  That’s one hell of a lot of oil.

Okay… so why did Saudi Arabia need to liquidate $78 billion of its foreign currency reserves in 2016?  Well, according to the U.S. EIA – Energy Information Agency, Saudi Arabia’s net oil export revenues were $130 billion in 2015.  Assuming a 17% drop in the price of oil in 2016, that would suggest that Saudi Arabia’s export oil revenues also fell approximately 17% in 2016 to $108 billion.

Saudi’s oil export revenues of $108 billion are 65% less than the $307 billion it received in 2012.  Again, this low oil price is seriously gutting Saudi Arabia’s balance sheet.

Unfortunately, things may get even worse for the House of Saud.  According to the article, Saudi Arabia’s Social Stability To Fall Apart:

Geopolitical Futures’ George Friedman has warned that Saudi Arabia’s inability to keep oil prices up to $90 a barrel will frustrate the kingdom’s effort to balance its books, meaning it is only a matter of time before “Riyadh’s unique social stability comes apart.”

To balance its books, Saudi Arabia needs the price of oil to be $90, versus the current $54 per barrel. Despite the kingdom being “engaged in a number of measures towards adjusting political economy to accommodate low oil prices,” Riyadh has blown through 27 percent of its foreign exchange reserves,” which hit $535.9 billion as of October – a $10 billion drop from the prior month.

Furthermore, with the biggest U.S. gasoline glut in 27 years, on top of a record concentration of long positions in crude oil, the price of oil will likely head much lower… and this is not good news for the Kings running the show in Saudi Arabia.

Once the lousy economic fundamentals finally kick in and give the broader stock markets one heck of a serious ENEMA, watch out… the price of oil could really fall.  Of course, the Fed and Central Banks could step in and do something really STOOPID, but this will only postpone the inevitable a little longer.

According to The Hill’s Group and Louis Arnoux’s work, the thermodynamics suggests that the market will continue to experience falling oil prices over the next 5-10 years.  Even though there could be some volatility, the oil price will trend lower because the net energy available to market will continue to fall as well.

This will be a disaster for Saudi Arabia and the other OPEC oil exporting nations.  Keep an eye on the oil price.  If it continues to fall, well then…. I suggest owning STOCKS, BONDS or REAL ESTATE may come with a great deal of pain and suffering.

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20 Comments on "Bankrupting OPEC.. One Million Barrels Of Oil At A Time"

  1. It’s to my understanding Saudi Arabia exports less oil and keeps more for themselves because their population and standard of living is going up and thus they need more oil to accommodate their lifestyles.

    • Dan,

      Even though Saudi Arabia’s domestic oil consumption has increased significantly over the past 50 years, they produced a total of 11.5 million barrels of petroleum liquids in 2015, while consuming 3.9 million barrels. Thus, they exported about 7.6 million barrels per day in 2015.

      The falling oil price is more the problem than the increased domestic consumption.. but both are going in the wrong direction.


  2. Good reason to sell a major stake in Aramco by 2018. Sell a failing oil company to suckers before it is well and truly broke.


  4. Except the worlds largest (Russia) and second largest (Saudi Arabia) oil producers are now selling their oil to the largest consumer (China) for yuan, not the USD pertro dollar.
    Their USD reserves may be shrinking, but their yuan reserves are building.
    Another huge reason to bring down the size of their US dollar reserves, is the fact that these holders have become quite nervous about the stability of their USD backed Treasuries.
    The global oil pricing mechanism is beginning its transformation from being USD concentric, to a different interim valuation based on a hand full currencies, with the Chinese yuan as the central core.
    As with the evolving gold and silver pricing markets – East and West, you will find the bench mark price being increasingly set in the eastern market. The petro dollar is dying a slow death of billions of treasury redemptions.

    • GOLD reserves… …oil for aurum is the endgame of the current petro-$ystem, since there is simply not enough gold to deliver (at current prices). 85 million barrels at 54$ = 4.59 b$ or the equivalent of 114 metric tons of gold (at 1250$/oz). Every single day. Obviously this is too extreme and not realistic, as not all of this “liquidity” flows into gold. but the idea is right. It’s getting close… Stock markets at an all time high and the masses will be shut out of what’s about to unfold in gold (and silver).

  5. I’ve read the book twilight in the desert. The main Saudi fields have huge water cuts ad are near end of life. My question is why do the Saudis over produce?

    Why not cut the production, boost the price and make same Money? The reserves will last longer and they can stay in the oil business longer.

    Eventually, their social compact will fail and radical lslam will take over – Isis they will cut the production and raise the price if they can. They will not need to buy off anyone.

    I’m still not convinced the price of oil will go down and stay down as it gets scarcer. I’m convinced the eroi of oil is falling and much of the oil in the ground will not be produced. This will restrict supply and cause the price to rise. Yes, the economy will decline and demand will fall. Americans waste so much oil. However, at some point , supply and demand will balance and I think that point, Americans will have to spend a higher income fraction for oil.

    • Again, as I have wrestled with Steve’s point re: the Hills Group’s prediction, I think we have two processes here. As you suggest, if Americans have to spend more money for gas, then that is the equivalent of a self perpetuating demand destruction, which will in turn blunt any real price increase. The cure for high prices is high prices as they say….But…

      Once this supply/demand/cost curve settles out over the next few years, then by this EROEI theory the problem changes to one where there is no oil because there isn’t enough cheap oil available to get it out of the ground, especially when it requires deeper wells in increasingly remote areas and even more energy -in contrast to the good old days when you swung a pick-axe into the ground and out gushed a geyser at a ratio of 30 barrels for every one expended to run the rigs, trucks for transport, build the refineries, the roads, the gas stations etc. Fracking is down to 5 to 1 ratio from Steve tells us. A guranteed economy shrinker unless by soem miracle a Manhattan Project with the discovery of Fusion or a crash building program of Thorium reactors etc. I agree solar and wind just ain’t going to cut it. I chuckle at all the hippies and yuppies here in Asheville, NC who are into electric and hybrid cars. Nothing even comes close to the energy density of a gallon of gas. The thought of having to push my car 25 miles rather than using a gallon of gas just staggers my mind, and gives me a new found respect for the energy in gasoline.

      Thus it may not be demand destruction by conventional economic theory, rather a new kind of demand destruction working in the reverse: If there is no oil to be had, then there is no growth, no commerce, and the whole issue of demand is mooted. Not because it costs so much, but rather if you have no economy then you have no need for oil, and thus the price declines until there is no economy, and what ever oil has already been brought to market is used up at a leisurely pace.

      I know this really sounds off the wall, and really caught me off guard, and I still don’t have a good grasp of it. This theory is from so far out from left field that it may be indeed the ultimate black swan. A paradox upon paradox.

      • I see it much simpler. The cheap oil is already gone, and EROEI is falling fast, driving up the cost of oil production. The reason production has not fallen significantly (yet) is that these costs are being “hidden” in plain sight by an ever-growing amount of (irreparable) debt, both on the shoulders of oil companies as well as the banks. As long as the corresponding debt-levels can further rise (implies lower interest rates!!!) the current status quo can hang in there for a bit longer. IF interest rates were to rise, the costs of these loans will not be bearable (let alone to pay any of them back) and a huge amount of defaults and bankruptcies will bring the energy industry (and the banks that gave them loans) to their knees, and I doubt the FED or any other entity could bail out the entire sector.

        As for the current price, the problem is that even after doubling of the oil price (up to 54 from 27) the prices are still too low for the producers to make the necessary profits to survive (there may be some individual companies that are exceptions to this, but not the industry as a whole; I guess 2/3 of all producers are still operating at a net loss here) but are getting too high for the real economy, as rising energy prices have a systemic inflationary effect on prices.

        How this all pans out is anyone’s guess. My hunch is, that we will see higher prices in the short- and medium term so as to avoid the previously mentioned defaults that would have immediate and severe consequences for the banking sector. If that was true, a run up to 70-90$ (or more) may be in the cards, followed by a crash in price due to a huge amount of forward bona fide hedging by the producers. The can’t hedge here… hedging losses makes no sense IMO. I may be wrong though and prices tank from here as Steve and the Hills group suggest, but I think the CBs will continue to inject more debt-fiat to keep the corpse afloat. We’ll find out soon enough.

      • You argument is the hills group paper. We will see a series of cascading collapses. This process started in 2008. Decline and recovery decline and recovery. After all, the oil us not going to all disappear all at once. I suspect the declines will get worse. The next one will be greater than 2008 and the recovery will be even weaker.

        Over time electric cars will increase. However vehicle miles travelled will not.

        Also, the dollar itself is a declining entity so don’t get fixed on today’s prices.

  6. Bracha Sarah Meyerowitcz | February 25, 2017 at 3:01 pm |

    Sun, wind and other power will drop the need for oil so the world will not need Saudi or Russia, it is only a matter of time before oil use is for lubricants not power.

  7. You hit the nail on the head when you mentioned Thorium reactors. That is the answer I believe.

    • You can’t drive a tractor trailer with Thorium, or wind, or hydro. If the trucks don’t run then food doesn’t get distributed, commodities, and goods don’t get delivered. In the Hills Group article “Gold Mines vs. oil Depletion” their chart states that consumers can only afford roughly $50 oil. Exxon has a return on assets of 5% at that price. The trend of that chart shows that at $30 Exxon has a zero percent return on assets. The chart shows oil going to $30 sometime before 2020. Look around at the oil glut today. Lower oil prices look like a real possibility. Lower oil prices would destroy companies like Exxon. I wonder if the Hills Group model includes inflation which is really the devaluation of the currency. Meaning Exxon would need higher oil prices then what’s shown on the chart. If the inflation rate picks up then the timeline of events might accelerate. Lots of unquantifiable variables to consider.

      I can’t cut and paste the article with my iPad. Anyway you can find the article on “The Hill’s Group: Gold Mines vs Oil Depletion” Nov. 29 2016. A quick search should bring it up.

    • Thorium reactors as an answer to what, overshoot? As if doing more of the same (growth) gives us another answer?

      I’m sorry, but that’s way beyond stupid.

      Growth is the problem. Using debt gave the planet 7 billion+ useless eaters. Now deal with it.

  8. I just had an epiphany. Could it be we in the U.S. are being setup to fall right now? If you took the U.S. out of the energy picture how much longer would cheap oil be available to the rest of the world? If you look at it from a globalist’s perspective Americans make up 4.5% of the world’s population and yet consume nearly 20% of its energy. What if TPTB know all about EROI, how could they not? It could be what motivates the globalist agenda.

    • Enjoy your redpill… You said EXACTLY what the situation is. I almost thought your post was sarcasm. Certainly they know all about EROI. It is probably the most important stat to them.

  9. Oil is the explosive and bonds are the detonator.

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