Do the Saudis want this war to end?
High prices mean more money for Saudi Arabia even though export volumes are down
According to a recent article in the Wall Street Journal, Saudi Arabia isn’t happy with US peace overtures towards Iran. The stated reason is that any premature peace could leave Iran extremely hostile and - even with all the destruction that’s happened - very dangerous. Better therefore to continue the fight until Iran is sufficiently weakened.
There’s another possible explanation for Saudi opposition to a rapid end to this war and that’s economic self interest. Saudi Arabia is in a unique position because it has a pipeline that can deliver five million barrels per day for export to Yanbu, a port on the Red Sea. This allows Saudi Arabia - to a significant degree - to sidestep the disruption to tanker traffic through the Strait of Hormuz. Prior to the outbreak of war, Saudi oil exports ran around seven million barrels per day.
In today’s post, I do a simple calculation to see if Saudi Arabia is better off with war than without. On the one hand, volumes are lower currently. On the other, oil prices are a lot higher, so it’s a matter how these two things offset. Yanbu is running around four million barrels of oil per day currently. If that can be raised to five, Saudi Arabia conceivably reaps a five percent of GDP windfall. I’d say that’s a pretty good incentive to advocate for more war.
The chart above shows how the Brent oil price (horizontal axis nearest the reader) and export volumes (horizontal axis away from the reader) map into Saudi Arabia’s annual export revenues (vertical axis). For Brent, I assume a range of $50 to $130, while for export volumes I set a range from one to seven million barrels per day. The two red dots on the 3D surface denote the pre-war equilibrium and the status quo, assuming oil exports can now be ramped up to five million barrels per day. The pre-war dot has Brent at $60 and export volumes at seven million barrels per day. That puts annual export revenues at $150 billion. The status quo dot assumes Brent at $110 and export volumes at five million barrels per day. Export revenues are $200 billion in this case. Saudi Arabia’s nominal GDP has averaged right around $1 trillion in recent years, so that’s five percent of GDP upside. If Brent is only $100, this windfall shrinks to three percent of GDP. You’d need Brent to fall all the way back to $80 for Saudi Arabia to get the same export revenues - at five million barrels per day - as before the war. The bottom line is that more war for longer suits the Saudis just fine.
Interesting analysis but assumes 1) East-West pipeline can’t be attacked by Iran or Houthi’s won’t attack tankers in the Red Sea 2) There is no risk that running below production capacity damages long term production 3) Saudi sees little risk in Iran hitting non-oil infrastructure eg desalination plants 4) Longer term instability doesn’t incentivise long term switching away from Gulf oil / products.
From a narrow, financial perspective it may well be so. There is obviously more than a financial perspective to the war. An extended war increases the risk for Saudi Arabia, and all Gulf emirates, that Iran could get through with one or the other rocket, or drone, and cause severe damage on everything within reach. As the 4000 km-rocket towards Diego Garcia demonstrated, Iran may still have hidden capabilities. So far they have spared desalination plants and other possible targets.