Look at the bottom left corner of this photo of oil prices. Last April, when oil traded above $100 per barrel, I argued that oil would collapse to $50. Now that we’ve seen $45, it’s time to ask, “Will this ignite another Arab ‘spring?’”
What an irony! Usually riots break out when people complain that prices are too high! Rock-throwing Tunisian and Algerians protesting high sugar and flour prices incited the 2011 Arab spring. In 2007-2008 food riots burst out from Bangladesh to Haiti to Cameroon. But now, we may see riots because prices – oil prices – are too low.
One of my mentors, legendary investor Julian Robertson, used to say that in Saudi Arabia you could strike oil just by sticking a straw in the ground. Saudi Arabia still makes a profit at $45. But here’s the problem: When Saudi Arabia promises its citizens food, health care, and housing, the government assumes that it will earn twice those profits! Just because you turn a profit on each barrel you sell does not mean that you’ve gathered enough money to pay all the debts you’ve racked up. According to Reuters, about 90 percent of the Saudi and Kuwaiti budget income comes from oil. Even when oil soared above $100 per barrel, the jobless rate for Saudi youth stayed stuck near 30 percent.
Back in October, when oil was still near $80, Kuwait’s ruler Sheikh Sabah warned that low prices were already ripping into its development programs. Sounds like shaky ground. It’s much worse, of course, for Iran. Mullahs without moolah get trigger-happy.