Ronaldo’s $313m contract shows why it’s time to worry about oil

Sascha: [00:00:02] From Equity Mates. Media this is the dive. I'm your host, Sascha Kelly in the Australian Financial Review. Last week there was a column that had us intrigued. It said Ronaldo's $313 Million Contract shows Why it's Time to Worry About oil. Cristiano Ronaldo. It's a great headline and it made me want to know more. It's Monday, the 11th of September, and today I want to know what does the richest footballer in the world have to do with the price of oil to talk about this today? I'm joined by Chanticleer journalist James Thomson. James, welcome to the dive. 

James: [00:00:39] Oh, thanks for having me. 

Sascha: [00:00:40] Last Tuesday night, Saudi Arabia and Russia announced extended production cuts that have pushed global oil supply to lowest point since November 2021. Oil analysts have reasoned there are several important reasons for this. What are they? 

James: [00:00:57] Yeah, well, I guess what we're seeing here is first, there's this big cartel that runs oil production across the world. It's called OPEC, and it's got lots of the Middle East states are in OPEC. Of course, Russia is in OPEC. Plus there's a few African nations. But what part of this is about is showing that OPEC still has a very tight grip on global oil supply. They can basically make the market they can shape the market. And so extending these cuts into the end of the year says, well, look, guys, we're still in charge of how the oil market works. Various fees around the world that, you know, the global economy is slowing and that's usually bad for oil demand. But this is less about the Saudis worrying about that. Oil demand is going to be lower and more about them trying to balance the market. So we've had global inventories of oil. The amount of oil supply lying around has been a little bit higher than demand. The Saudis are trying to soak up that excess inventory and make sure that supply and demand is basically in balance. And that means that they can control the price by cutting or adding barrels of oil into the market. They can say where the price is going to go. And of course, the higher the price, the more profits for Saudi Arabia. 

Sascha: [00:02:23] Yeah, and there's important and tunnel reasons. They want higher prices as well. There are several large scale projects underway. Can you talk me through those? Yeah. 

James: [00:02:33] They've got this project called Vision 2030, which is about diversifying the economy away from oil. Actually, it's obviously Saudi Arabia's got rich on oil, but the rulers there want to make the economy more diverse and vibrant over time. 

Audio Clip: [00:02:51] Part of the Vision 2030. It has many facets, not just infrastructure development to technology transformation, to business transformation, digital transformation project, but any area. 

James: [00:03:04] But of course, the way you do that is by using all these oil riches and investing them into other things to try and diversify your economy, create other industries. One of those industries is tourism. And the big thing that Saudi Arabia has gotten onto is trying to cotton on to is that they can drive tourism through sports. And that takes a number of different forms. So I guess everybody knows how much Saudi Arabia has pumped into golf through this live golf concept. And of course, live golf emerged earlier this year with the PGA. We're still sort of waiting to see how that's going. But Saudi Arabia's funded heaps of other things. They've got Formula One races, they try to have big boxing matches. And I guess the biggest area where they've really spent is on their soccer league, their local soccer league, where they've splash the cash to try and get a number of big name stars, the biggest being Cristiano Ronaldo, who came across earlier this year from Manchester United in a deal that is worth about $330 million in Australian dollars. 

Audio Clip: [00:04:12] Here now at a salary that is the highest in football history. There's no doubting Ronaldo's commercial pulling power. Thousands turned out to welcome the five time Ballon d'Or winner in Riyadh. Al Nasser. Shirts are selling around the world and the club's Instagram account has jumped from 800000 to 8.8 million followers. 

James: [00:04:30] What Saudi Arabia is trying to do here is, you know, create tourism, diversify their economy, but they are also trying to keep their young population excited and engaged in this economic development. So about 60% of the Saudi populace is 30 and under, and they see sports as a way of really appealing to young men in Saudi Arabia. And the way to fund those sports is through oil. So it's interesting that that's why Cristiano Ronaldo's contract speaks to what's happening in the oil market. 

Sascha: [00:05:12] Yeah, and those are the key stats that stood out to me as well, reading a column, 60% of the population being under 30. That really speaks to the amount of demographic change that the nation's going to go through. And then I went on the Vision 2030 website, and you can just see how massive that's really slick and resource intensive. This project and these projects that they are undergoing are going to be so obviously just a huge amount of money being spent in Saudi Arabia at the moment. 

James: [00:05:42] Yeah, that's right. And and that is, as I say, they're trying to get away from oil. But to do that, you've sort of got to use the money from oil to make that transition, to invest in the big events and the big infrastructure projects and improve your sporting teams and get the awareness of your sporting leagues higher. So it's interesting. I mean, I'm sure the Saudis aren't sitting there going, you know, let's tweak the oil price or oil production to figure out which soccer player we can buy next. But it is part of this broader thrust to change their economy and change their stance in the world stage. And we should say also that this investment in sports often referred to as sports washing, you know, the human rights record of Saudi Arabia is not good. And this is been heavily criticised. The investment in sport as a way of sort of, you know, burnishing their reputation by spending lots of money. So that's part of it too. But it all comes back to oil, that's for sure. 

Sascha: [00:06:43] So there's a third part of this story that I want to get to, and that's about the global context of oil prices. But we're going to talk about that after the break. Welcome back to the Dive. I'm speaking today to Australian financial journalist James Thomson about the price of oil. James There's two parts of the story that we've talked about so far, and that's obviously opaque, making the decision to restrict the supply of oil and therefore control prices. And then we've talked, of course about sports washing and how that's related to the internal projects that are happening within the Kingdom. And the third part of this story and why it's important is the global context of oil. Restricting supply is not good news. I know that we're all conscious about moving towards green energy and green minerals, but the consumption of oil is predicted to rise. And you add into this mix the fact that we've had a massive underinvestment and therefore we're going to have a mismatch in what we'll need in the future. Can you expand on this context, the context we're sailing into at the moment? 

James: [00:07:56] Yeah, Yeah. I mean, I think you're right. We all do want to get off fossil fuels and particularly oil as quickly as possible, but that is a, I guess, for want of a better term, that's a pretty Westernised idea at the moment. If you think of the developing world or the emerging economies, so China, India, Indonesia and Brazil, they account for about 40% of the world's population. If you just think about those economies, their demand for oil over the next 30 years or so is going to go up 40% against today's levels. So we like to think that we're trying to get off oil, but really demand for oil is growing. It's not falling, unfortunately, it's growing and it's growing quite sharply. But that is coming against a period of underinvestment in a new oil production. So for lots of reasons, ESG is one of them. You know, we don't want companies investing in new oil fields. There's been a lot of activism around that. And also because oil companies have become a lot more disciplined around how they use their capital. Once upon a time, they would go out and splurge on big exploration projects. More recently, they've become focussed on giving that money back to shareholders. So for a combination of reasons, we've got this massive increase in demand on one side and then this shrinkage in new supply, this underinvestment in new supply. And it's estimated that since 2016, our underinvestment, we, we should have invested $2.1 trillion that we haven't put into developing new oil supply. So what we have is a really tight market. Supply and demand is going to be really finely balanced. And so if you're Saudi Arabia and you can say, well, we're going to produce 300,000 less barrels of oil a day or 500,000 less barrels of oil a day, or we're going to do a million more barrels of oil a day. You can push the price around very easily because the market is so balanced. So that's the world we're moving in to where we want to get off oil. But at the same time, oil markets are pretty tight, Oil supply is pretty restricted and oil prices could well remain higher for longer. 

Sascha: [00:10:21] It's a fascinating conversation with James Thomson, the Chanticleer columnist from The Australian Financial Review today. A huge thank you for joining us on the dive today.

James: [00:10:32] Thanks for having me. It's great fun.

Sascha: [00:10:34] As always. A quick favour from mate. Jump into your podcast player and give us a five star review. It's a really small action from you, but it does make all the difference in terms of getting us in those cheeky algorithms and subbed to more is, as I said, 30 seconds from you all the difference to us. I will be back in your feeds on Wednesday with a new story. Until then, take care.