Saudi oil is worth far less than Trump thinks

Telegraph

13-05-2025

The world is awash with excess oil.
At crude near $60 a barrel Saudi Arabia faces fiscal trouble and belt-tightening austerity. At $50 or lower it faces a slow-motion crisis and ultimately an existential threat to its economic model.
That fate is no longer a remote tail-risk.
Donald Trump cares little for such hard economic constraints as he visits Saudi Arabia. The petrostates of the Gulf represent a vast pot of money in his pre-modern mind.
He aims to scoop up $1 trillion dollars (£760bn) of Saudi wealth, even more than the $600bn already promised over four years by Crown Prince Mohammed bin Salman. He wants another trillion and a half from the rest of the Gulf.
Good luck with that.
Saudi Arabia's GDP is barely more than $1 trillion, smaller than the economy of the Netherlands. Saudi per capita income is on a par with Portugal. Trump will have to make do with blockbuster headlines and hope that nobody audits the details.
The International Monetary Fund estimates that Saudi Arabia's 'fiscal break-even cost' is $96 a barrel. That is the Brent price required to fund the kingdom's cradle-to-grave welfare system and to keep the lid on political dissent.
It must also fund the world's fifth-biggest military machine, with a defence budget larger than those of France or Japan, according to data from the Stockholm Institute.
The real break-even cost is probably higher since Riyadh spends undisclosed sums subsidising Middle Eastern allies.
Saudi Arabia and the Opec+ cartel have been defying oil market fundamentals since 2022, holding back 5m barrels a day in one way or another to stop prices sliding to their equilibrium level.
This strategy has failed. They surrendered market share to US and Canadian shale frackers, and to Brazil, but failed to push prices high enough to fund their budget needs.
The Saudis have thrown in the towel and are now pursuing a soft version of the 2014-18 price war. The kingdom is feeding back supply on a rapid trajectory, setting off a 30pc fall in prices.
'Any façade of cohesion within Opec+ has gone out of the window,' said David Oxley, from Capital Economics. He has pencilled in Brent crude at $50 by late next year.
Trump's tariff capitulation to China has triggered a bounce this week, but a structural supply glut still hangs over markets.
Daan Struyven, from Goldman Sachs, has not changed his bearish forecast, expecting a range of $52-56 next year even if the US avoids a recession. Brent could fall below $40 and West Texas crude below $38 in a global slowdown.
That would force a drastic retreat by US frackers. The gung-ho expansion of Chevron, Exxon and Shell would look like a costly corporate error.
The elephant in the room is China, the world's first electro-superpower and its largest car market by far. Goldman Sachs says China's oil consumption peaked in 2023, fell in 2024 and is going into irreversible decline as falling demand for road transport outpaces rising demand for jet fuel and petrochemicals.
Electric cars and trucks in China have already displaced 1pc of global oil demand.
The pace is quickening. Sales of plug-in vehicles now take half the Chinese market, where they undercut old auto by 8pc on purchase price. They will be two thirds by 2027. China is determined to wean itself off imported fuels that are vulnerable to a naval blockade.
We can argue over how fast the rest of East Asia will replicate the great replacement. But the debate is about the speed, not about whether it will happen. Any attempt to turn back the clock is doomed to failure.
Saudi Arabia still relies on hydrocarbons to cover 65pc of its budget. Saudi Aramco has said it will cut this year's dividend by 30pc. Fitch Ratings expects the fiscal deficit to double to 5.1pc of GDP. Others warn that it will blow through 7pc at sub-$60 oil prices without painful retrenchment.
From this stretched fiscal base Saudi Arabia must find the money to head off a spectacular debacle at the futuristic gigaproject of Neom, originally billed at $500bn but now heading for $8.8 trillion, according to a leaked Mckinsey audit obtained by the Wall Street Journal.
This Ozymandias in the sands is the dream of the impetuous crown prince and the fitting frame for the make-believe world of Donald Trump, where everything must be bigger and glitzier, superlatives flow and nothing is entirely real.
Neom is to be a hi-tech city state of advanced manufacturing, cutting-edge science, green energy, banking, along with a tourist riviera, linked by a 170km zero-carbon Linear City stretching through the desert from the Red Sea to a ski resort in Trojena Mountains, with no natural snow, to be ready for the 2029 Pan-Asian Winter Games.
The crown prince has had successes. Saudi women are very well-educated and entering the workforce, lifting the GDP growth trajectory. The tax base has been broadened. His 8,000 royal cousins are having to work for a living.
The idea behind his larger Vision 2030 is impeccable. Saudi Arabia needs to recycle its oil revenues into a diversified economic base, ready for the post-fossil age.
The country should have begun during the commodity boom of the early 2000s, when crude fetched over $200 a barrel in today's money. But the old guard frittered money away, hoping it could instead subvert global efforts to slow CO2 emissions.
I recently attended a closed-door meeting with a top Saudi minister who spelled out how the kingdom aims to become a green superpower. The world's cheapest solar at 11 cents a watt – or is it already 9 cents? – will produce green hydrogen from the world's greatest concentration of electrolysers.
This giant Red Sea hub will turn out zero-carbon fertilisers and steel on site for global demand. It will make green molecules for shipment to Asia, replacing today's oil tankers with tomorrow's green ammonia tankers. It will pipe hydrogen to Europe through gas pipelines, the green Gazprom of Arabia.
Some of this makes good commercial sense, some less so, but at least it amounts to a 21st-century clean-tech strategy. It has spun out of control because of a very Trumpian inability to stick to unglamorous nuts and bolts.
Trouble is brewing.
Saudi Arabia has modest debt – Fitch expects it to reach 35pc of GDP next year – but it was near zero a decade ago. It has been the world's biggest state issuer of dollar debt outside the US since 2022. Capital Economics says the debt ratio could hit 90pc of GDP within five years in a long oil drought.
The central bank has $450bn of foreign exchange reserves, half its earlier peak in real terms, but it needs all of that as a credible defence for its fixed dollar exchange peg.
The kingdom can dip into its $925bn sovereign wealth fund, but most of that is not liquid. It co-owns Newcastle United, Heathrow Airport and Selfridges. A chunk is already invested in US equities such as Uber, Meta and Boeing.
The Saudis said late last year that they planned to spend the lion's share on domestic needs, presumably to save Neom and Vision 2030. In short, they have no money to spare.
Saudi Arabia is not insolvent but it is not nearly as rich as mythology would have it either.
One watches with curiosity to see how the kingdom can possibly conjure a round trillion to keep the president happy. The House of Saud and the House of Trump surely deserve each other.