Saudi Arabia's $10 billion gambit isn't for friendly purposes

The oil kingdom want to continue its price war with the U.S. and world.

Saudi Arabia is taking out a $10 billion loan to offset losses caused by collapsed oil prices, a condition the conservative Islamic monarchy has created for itself. Saudi Arabia is beginning to consider changes to its economy that will shift the nation away from oil.

LOS ANGELES, CA (California Network) - For over a year, Saudi Arabia has pumped oil at an incredible rate. It has done so at a time when oil supplies are high thanks to the shale oil boom in the U.S. and the return of Iran to international markets. This has come at a cost however, Saudi Arabia's income has fallen dramatically, leaving the nation without the cash it needs to operate.

The move by Saudi Arabia, to flood the world market with oil, is a calculated one. The kingdom's managers concluded they could sustain some short term losses to enjoy greater profits later. Cheap oil has damaged the U.S. oil industry, creating havoc for smaller establishments in particular. Millions of American workers are laid off because shale oil is expensive to extract and cheaper oil is available on the market.

Cheap oil also undermines the Islamic State, a sworn enemy of Saudi Arabia that generates millions in operating revenue from selling oil on the black market. With the prices low, the Islamic State generates far less money.

The low prices also diminishes the push toward renewable energy, extending the global dependence on fossil fuels to power the world's economies.

But there's a possibly darker side to Saudi Arabia's plans to take out a loan.

The request for a loan has been eagerly greeted by U.S. firms such as Morgan Stanley, J.P. Morgan Chase, and Goldman Sachs.

Saudi Arabia is plotting to take a $10bn loan, possibly from the U.S., which is curious timing because the Congress is about to pass a law that would allow victims of terrorist attacks to sue state sponsors of terrorism, and that will likely include Saudi Arabia.

It's possible that Saudi Arabia's loan request is a hedge against these legal challenges. It is also possible that Saudi Arabia will use the loans as leverage to prevent the U.S. governments from facilitating these lawsuits. Whomever loans the money will want to be repaid, so their lobbyists will be motivated to dissuade the federal government from pursuing cases against the oil kingdom.

Paying interest is also forbidden in Islam, so there is the small, but discernible possibility that the Saudis could simply default on the loan, or that the creditors may only be returned the principal after several years. But this is unlikely.

This $10bn loan will be Saudi Arabia's first loan in 25 years. Their previous loan was for expenses incurred during the first Gulf War. The nation has expressed interest in issuing bonds to raise even more money in the future. All this is part of a greater plan to move Saudi Arabia away from oil dependency.

Saudi Arabia depends on oil revenue to support its population. The state lacks a diversity of resources, so it is largely a welfare state where the people are placated by government dependency. This means the government must appease the people by purchasing their loyalty at every turn. That's easy to do when the nation is flush with cash from oil sales, but the most recent effort to undercut competition is making this domestic policy difficult.

Saudi Arabia will soon have its $10 billion, and this will enable it to compete in its ongoing price war, a war that has already claimed millions of American jobs. The sooner Americans realize that Saudi Arabia is no ally, the smarter our decisions will be.

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