Bloomberg has just recently reported that Byron Wien, the 79 year-old chairman of Blackstone Group LP’s advisory services unit, is forecasting an annual drop in oil prices for the first time in his career as swelling production pushes global inventories higher.
“The Iran premium is going to come out of the price of Brent. There’s an Iran premium in the price of oil, thinking that Israel will strike Iran, and I don’t think Israel will,” he said.
On another recent event, hedge fund manager Barton Biggs mentioned a conversation he had with an elegant, aristocratic, well-connected Saudi investment manager where they discussed the outlook for Saudi Arabia over the next several years. Apparently, the man was pessimistic on Saudi Arabia, citing inflation and the underemployment of the young.
“… you have to understand our geo-political equation and vulnerability. Our two most dangerous enemies are Iraq and Iran. Both are Shia, and both are trying to destabilize the Arab world and our Sunni kingdom by funding terrorism. Our only weapons against them are our wealth and our oil. Their current vulnerability is their financial fragility. Their financial reserves are a fraction of ours, and they desperately need money to prop up their economies. The ruling council has decided that over the next two years we have a brief window of opportunity to impoverish and weaken them by driving down the price of oil. Iraq and Iran need to produce and sell their oil at well over one hundred dollars a barrel. In the next twenty four months, we will gradually increase our production with the objective of breaking the price of crude down to sixty dollars a barrel. Aramco is raising its capacity to produce significantly more crude. Note that at the same time Iraq, Russia, and Libya are already increasing their exports, and Iran and Venezuela also need to sell more. Strategic reserves in the consuming countries all over the world have been topped out, and large amounts of oil are stored in tankers.”
“… we have the wind at our backs because of Europe’s problems and the weak global economy. Under normal recessionary circumstances, we would be reducing production to maintain current prices. Instead, we will be flooding a weak market already suffering indigestion.”
“OPEC and the others always cheat and produce beyond their quotas. They are self-indulgent adolescents who count on us to be the balance wheel.”
“Natural gas has never been so cheap in relation to crude. In ten years, with the age of austerity in America and Europe, hybrid and electric vehicles will be everywhere powered by electricity from natural gas. As for China, they will suffocate in their own pollution if they don’t go electric.”
“Sometimes I wonder if we will be able as planned to stabilize the price of crude so smoothly at around sixty. Now there is an Iran-Hormuz risk premium in the quotation of perhaps twenty dollars. Maybe eventually there will be a psycho-speculative, electric-car discount. Perhaps, as the price erodes month after month and the U.S. becomes self-sufficient in energy, the commodity speculators will move to another game and selling will beget selling. We could lose control, and the price could fall to forty or fifty dollars a barrel. Price wars always get worse than you think. Don’t forget Brent futures traded between 40 and 60 for six months less than four years ago.”
“The breakeven [for Saudi Arabia] is more like sixty to seventy. We have huge oil and financial reserves. Yes, we will have to endure deficits and live off our own fat for a few years. We can afford the reduction in our income for a while. Iraq and Iran can’t and will be strapped and much less inclined to fund revolutions and suicide bombers.”
According to Biggs, the Saudi executive is actually quite negative on Saudi Arabia. He thinks a lot of investment money will come out of the country in the future, though the thought above could be fundamentally very positive for the world economy, the oil importing and consuming countries, and world stock markets.