Saturday, August 27, 2011

Saudi Arabia Needs High Oil Prices

Even though the unrest (Arab Spring) in the Middle East and North Africa is largely out of US headlines, tensions still simmer just beneath the surface in nearly every country in the region.

Well aware of this is the ruling royal family of Saudi Arabia, the world's largest producer of oil. They have come to the realization that, in order to stay in power, they must improve the living conditions for the country's 27 million citizens.

So this year the Saudi ruling family has taken decisive action.....

The Saudi government has initiated $129 billion in entirely new spending. These funds have gone towards new housing along with food and fuel subsidies. This amount is equal to well over half of the country's 2010 oil export revenues of $153 billion.

In addition, the Saudis are spending in excess of $100 billion over the next decade on power plants and electricity distribution networks.

Power demand in the kingdom is growing at rate of 8 percent annually, twice the country's growth rate. It is estimated that by 2018 Saudi Arabia needs to raise its power generating capacity from the current 45,000 megawatts to 75,000 megawatts in order to meet demand.

Based on all this extra spending by the Saudi government, veteran oil observers believe Saudi Arabia's oil revenues needs are rising rapidly.

In fact, on a percentage basis, rising to match those of the two most prominent oil price 'hawks' – Venezuela and Iran. This is a significant change for Saudi Arabia, a traditional oil price 'dove'.

Jadwa, a Saudi-based investment firm, estimates that Saudi Arabia now requires oil prices to average in the $80-$83 range in order to balance its budget. [So far this year, oil has averaged about $10 a barrel higher]. This is up from less than $40 a barrel five years ago and about $20 a barrel a decade ago.

The Institute of International Finance agrees with this assessment and even went further. It said that by 2015, Saudi Arabia will need oil to average $115 a barrel in order to balance its expanding budget.

If oil does shoot up to those lofty levels, a good way for investors to track that is through the use of an ETF – the United States Brent Oil Fund (BNO). It is based on Brent crude oil futures contracts which more closely tracks the global price of oil than does the US-based West Texas Intermediate (WTI) futures contracts.

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