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Sam's Exchange: Saudi’s Paradigm

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On his return from abroad, Saudi King Abdullah announced a handout of some $35 billion for his citizens. King Abdullah has spent much of the past two years out of Saudi Arabia for medical reasons and, given the pace with which discontent has spread across the Middle East in recent weeks, he was no doubt keen to stem any unrest upon his return.

On his return from abroad, Saudi King Abdullah announced a handout of some $35 billion for his citizens.  King Abdullah has spent much of the past two years out of Saudi Arabia for medical reasons and, given the pace with which discontent has spread across the Middle East in recent weeks, he was no doubt keen to stem any unrest upon his return.

But there are two reasons why King Abdullah may not be able to simply buy peace. Firstly, many Saudis are looking for political reform, not cash handouts, and secondly, it is unlikely that there will be much cash left over for the Saudi people after the royal family members taken their share.  Political reforms will lead to market reforms, and not just for Saudi Arabia, but for many other countries in the region.  In this context, the movement of oil and other commodity prices is irrelevant because market structures and price discovery are going to change as wealth and the control of it moves from an opaque fragmented trade execution to a more transparent accountable system as the social revolution rolls on.
The Saudi king did not mention political reform when he announced the cash handout. Saudi Arabia, like Bahrain, is an absolute monarchy.  It has no municipal elections, despite demands by liberal and opposition groups.  Saudi Arabia has no elected parliament or political parties and it does not tolerate political dissent.  Bahrain has a parliament but 80% of it, including the prime minister, is made up of royal family members.  Protesters across the Arab world are demanding political change.  That Saudi Arabia will be able to side step real political reform, and simply announce huge “welfare programs” is wishful thinking.

So why after so many years of pumping oil for dollars do Saudi nationals need any money at all?  Where does all the money go?  Part of the problem is that Saudi Arabia is governed more like a private company by the royal family than a country.  Each royal, whether a full brother, distant cousin or grandchild of the king, receives a monthly allowance from the national budget.  They receive the allowance simply for being royalty.  The money is not spent on national infrastructure or investment projects, but used instead to fund the exuberant lifestyles of the royal family.  How much of the $35 billion will be used for housing and job creation and how much will end up as royal allowances is unlikely to be made public.
 When it comes to trading Saudi oil, senior princes are given allocations of oil to sell, via whoever gives them the most commission. This makes the oil market somewhat fragmented, as the oil trades through intermediaries in order to generate the most commission for each prince. Political reform will lead to market reform.  Saudi Light Crude Oil (SLCO) should trade via an exchange, providing transparency, accountability to the market and to Saudi Arabia.  SLCO could even trade in a multi-currency environment, and become a global benchmark for price discovery.  This would help provide oil price stability in the national and international interests.  But as long as individual interests come before  national interests, there will be no reform.

Any reform in Saudi Arabia, and indeed the Arab world, will mean a change in how funds flow.  A change to a more market based system, where oil is traded in the national interest, and transparently, will mean that many intermediaries and banks will cease to be of any use in these roles.  Fund flows from the sale of Saudi oil would more likely be deployed back into the Saudi economy to generate jobs and housing for middle class Saudis, rather than fund royal lifestyles. 
Political and market reform in the Arab world will go hand in hand.  This could, and should see the development of new market architecture for trading oil hydrocarbons, one in which price discovery is transparent for both consumers and producers, and transactions are accountable.  It is easy to blame Saudi royals for a system which favors them.  This system requires the participation of international oil companies and banks, and so any political and market reform in Saudi Arabia and the Arab world, is going to have to see an equal amount of political and market reform from international oil companies, banks and governments in the Western world.

 

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Global Markets are anything but integrated. What if we had a paradigm shift in the way we think, the way we actually do business with each other, between nations. Balanced global trade can only occur if we have transparent, accessible, efficient markets, with standardized contracts and on a standardized platform of global exchange. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.

Sam Barden is CEO of SBI Markets General Trading LLC, a Dubai-registered trading and advisory company. Barden, 39, has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.

 

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