OPEC divorce and self-destruction thanks to Saudi oil strategy?

In fact, Saudi government revenue and expenditure data suggest that the Saudis must do far more than "reduce investment" in 2016: the precipitous drop in oil prices—a consequence of their new policy—has put Saudi Arabia on an unsustainable financial path.

The two tables that follow, which should be viewed as directional rather than precise since some input data is estimated, illustrate the severity of the Saudi financial challenge. The first shows that Saudi defense spending—a Saudi priority, given its external conflict with Iran and its internal security situation—has steadily increased as a percentage of Saudi net crude export revenue (export revenue minus Saudi Arabia's estimated $5 production cost), the planned annual Saudi government budget, and the planned annual government revenue (budget/revenue data from the U.S-Saudi Arabian Business Council), and that will reach an estimated ~73.4 percent of net crude export revenues in 2015, as these revenues fall nearly 50 percent from 2014. Were Saudi defense spending to be financed entirely from net oil export revenues in 2015, the spending would consume ~73.4 percent of these revenues.

Given they depend largely on imported defense equipment, services, and expertise, and crude revenues reportedly comprise 90 percent of Saudi budget revenue, it is clear that net crude export revenue is critical to financing the Saudi military.

The defense spending for 2011, 2012, and 2013 draws on the Stockholm International Peace Research Institute (SIPRI) Military Expenditure Database Constant U.S. dollar spreadsheet. In a CNN article quoting SIPRI for 2014, the author's guesses for 2015 (6.25 percent increase) and 2016 (3.5 percent increase), based on Saudi Arabia's conflict with Iran.

Net export revenue is based on average annual OPEC Basket prices for 2011, 2012, 2013, and 2014 of $107.46, $109.45, $105.87, and $96.29 respectively, with an estimated $51.81 for 2015 (based on actual average monthly prices through August of 53.97 and $50 from August through December), and $50 (undoubtedly too high or too low) for 2016. Annual export volume is based on the IEA's monthly Oil Market Report's Table 2 (Summary of Global Oil Demand) and Table 3 (World Oil Production). Export revenues are net of $5/barrel production cost.

However, defense spending isn't the only claim on net crude export revenues, the Saudi budget, and budget revenues. The U.S.-Saudi Arabian Business Council provided the following data on the Saudi government's 2015 budget. It puts totalnon-defense spending at $163 billion, which is 71.43 percent of the 2015 budget and 85.89 percent of 2015 budget revenues:

Adding estimated defense spending ($85 billion) and the U.S.-Saudi Arabian Business Council's data on non-defense spending ($163 billion) yields Saudi government spending that totals $248 billion, or 204.5 percent of estimated net crude export revenues (versus 118.3 percent of 2014 net export revenues).

Much Higher Volume and/or Much Higher Prices

The net export revenues Saudi crude exports generated in 2014 are, simply put, impossible to attain given Saudi policy. The following table shows how much crude the Saudis would have to export in 2015 at various OPEC Basket price points to match the revenue their crude exports generated in 2014 (based on 2015's 6.31 mmbl/day average exports (IEA data) at the 2014 average OPEC Basket price of $96.29 per barrel (minus $5 production cost).

Their exports would have to reach ~12.7 mmbl/day in 2015—~6.4 mmbl/day more than 1H 2015 average daily exports—at a $50/barrel export price ($45 net of production cost) to generate the same revenue 2014 crude exports generated.