Home > Energy, Journalism and Economics > Remember, Many Business Journalists Majored in Journalism, Not Business

Remember, Many Business Journalists Majored in Journalism, Not Business

Students, for an example of business journalism you should read critically, see CNN Money’s Matt Egan’s article Saudi Arabia to run out of cash in less than five years:

If oil stays around $50 a barrel, most countries in the region will run out of cash in five years or less, warned a dire report from the International Monetary Fund this week.

That’s poor reporting.

Here are some clues that the reporter doesn’t understand the IMF report he’s covering:

(1) No link to the original source. When you attribute something to a published online report…why wouldn’t you link to it?

(2) Even if oil falls below $50 a barrel, all Middle Eastern countries will have cash in five years.

Maybe Mr. Egan has an unusual definition of “cash.” Surely he can’t mean that Saudi Arabia will run out of currency and coins. Does he really think the IMF is saying Saudi Arabia will have no currency or currency-equivalents in five years if oil prices don’t go up?

If Mr. Egan really thinks any one of these countries will “run out of cash” I’d like to make a sizable bet with him!

Saudi Arabia’s war chest of cash is still humungous [sic] at nearly $700 billion, but it’s shrinking fast.

(3) Can’t spell humongous. 🙂

(4) Sovereign wealth funds don’t exist to simply store up hordes of cash. Resource-exporting economies are supposed to draw on reserves of wealth built up in better years when resource prices fall. Saudi Arabia would be foolish to not use these funds in years of low oil prices.

The kingdom barely has enough fiscal buffers to survive five years of $50 oil, the IMF said.

(5) Mr. Egan must not understand the concept of ”fiscal buffer” as used in the report. The report actually says:

A good starting point is the size of governments’ financial assets—commonly referred to as “fiscal buffers.” In general, countries with larger buffers can afford to maintain fiscal deficits further into the future, so as to reduce the impact of lower oil prices on growth. On current trends however, all non-GCC MENA oil exporters are already projected to run out of liquid financial assets in the next three years [emp. mine] (see Chapter 1). In, contrast, …GCC countries are split evenly between countries with relatively large buffers (Kuwait, Qatar, and the United Arab Emirates—more than 20 years remaining) and countries with relatively smaller buffers (Bahrain, Oman, and Saudi Arabia—less than five years).

An asset is liquid if it can be converted into cash quickly and with little impact on the asset price. Saudi Arabia is smarter than to stuff cash from oil revenues into a gigantic (humungous?) mattress. Its investments are both in liquid assets like bonds and illiquid assets like real estate. If, in a year or two, oil prices are still low, and it needs more cash, it will simply begin to liquidate assets–that is, turn them into cash.

I will assume Mr. Egan isn’t responsible for the [mis]-“infographic” that is titled “Break-even Oil Prices in the Middle East.” The IMF says that Saudi Arabia needs a price of $106/barrel to balance its budget. Hopefully even my first-year students know that this is not the same as “break-even” when discussing oil production. Saudi Arabia has one of the world’s lowest crude production costs, and could continue to profitably generate positive cash flows even if oil prices drop further. It won’t be able to maintain its current level of government spending without borrowing or drawing down on reserves of wealth, but that’s not the same as not “breaking even.”

This is CNN. I wouldn’t depend on it for reliable business analysis.

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