MOSCOW, January 9 (Sputnik) — With oil below $50 a barrel and Saudi Arabia offering further discounts to European and American markets on February futures, it seems the Saudi strategy to dampen the market remains unshakable. Even as the country faces a possible succession-based shakeup with 90-year-old King Abdullah in hospital with pneumonia, Crown Prince Salman delivered a televised speech on Tuesday saying that oil price fluctuations are nothing new and that the Kingdom will deal with them "with a solid will".
In late December, Saudi Oil Minister Ali Al-Naimi told the Middle East Economic Survey that Saudi Arabia would not lower its output even if prices hit $20 a barrel. "Whether it goes down to $20, $40, $50, $60, it is irrelevant," the minister noted. Producing about 13 percent of the world's output, and with production costs at about $10 a barrel, the minister can, at least theoretically, put his money where his mouth is.
And if expert opinion is to be believed, the country's policy may actually appear to be a rational and sensible position taken up by its governing elite. Gevorg Mirzayan, contributor for Russia's business magazine Expert, explained in an article entitled 'The Saudi Consensus' that the Saudi strategy has both short-term and long term goals. In Mirzayan's words, the short-term goals include "the desire to hang on to the American market, where in the near future Canada is set to provide a large amount of its Canadian heavy crude, and the desire to bankrupt competitors by squeezing them out of the market." The long term goals include the desire to dampen demand for alternative energy and the development of shale-based energy. "By knocking down prices, [Saudi Arabia is] bankrupting alternatives-based competitors and undermining the feasibility of the development of alternative energy resources," Mirzayan explains.
In some areas, the strategy seems to be working. Energy Strategies Fund co-chair Dmitri Marunich told Expert that "companies producing unconventional hydrocarbons in North America are already operating on the edge of profitability at current prices on the world market. A number of Canadian companies have already filed for bankruptcy, and if prices in 2015 remain at the present level, the list of bankruptcies will be filled up by their colleagues."
Other experts have stated earlier that the Saudi position also has a geopolitical dimension, with some believing that Riyadh has teamed up with Washington to punish Russia and Iran over their assistance to Syria's Bashar al-Assad, with the US receiving the additional benefit of undercutting Russia's economy over Crimea, along with the hostile, anti-American government in Venezuela.
Strategy Unsustainable Long Term
Despite the economic and possible geopolitical rationale behind Saudi policy, some experts have begun pointing out that it has already begun harming the country itself. Mirzayan notes that this is reflected "first and foremost from the point of view of the budget." The record $230 billion list of expenditures has resulted in a large deficit, which "under current prices is already in the tens of billions of dollars."
And while the country will be sure to be able to cover the deficit through its foreign exchange reserves, amounting to over $700 billion, Mirzayan notes that "such a step is unlikely to meet with understanding from among the country's princes, who view these reserves as their property."
Dissenting commentary from the massive Saudi royal family has already begun to be expressed, with Prince Al Waleed bin Talal saying earlier this week that "the big fear, or let’s say the big disaster, is that the [government] will continue withdrawing from the state financial reserves until they are totally depleted, as was the case long time ago, when we were forced to borrow from abroad,” the Financial Post reported.
And panicky attitudes aren't limited to the royal family. Emad Mostaque, emerging markets expert for Ecstrat noted that ordinary Saudis are beginning to feel the pinch too, with "oil prices…now at levels that cause real concern on the streets of Saudi Arabia." The analyst told the Financial Post that "the prospect of succession [is] the icing on top that has caused retail investors to take the [Saudi] market down another leg."
Al-Monitor columnist Madawi Al-Rasheed noted in an article earlier this week that given falling oil prices and their likely impact on the economy, whoever ultimately succeeds King Abdullah will need "to assure the population that their subsidies and welfare will continue." Al-Rasheed notes that "the new king will have to hope that there is enough surplus and opportunities to distribute among an educated and aspiring young generation," but that even this may not be enough for youth who seek "a stake in the policy and the future of the country" in addition to financial stability.
Present Policy Harms Saudi Arabia's Position in the Gulf
In addition to generating potential economic problems at home, the country's decision to maintain output despite the massive glut in the market has made many of its neighbors unhappy. Mirzayan notes that while "the Gulf countries were not able to stand up to Riyadh at the OPEC Summit last year…this does not mean that their leaders won't be able to find some sort of asymmetric response by the Saudis' unfriendly actions. This includes for example the blocking of Saudi political initiatives to unite against the Iranian threat." The expert notes that "some countries, Oman among them, are not only refusing to stand against Iran, but on the contrary, are calling for the more active involvement of the Islamic Republic in the Gulf. Oman's leader Sultan Qaboos wants to counterbalance Saudi Arabia's influence via Iran to achieve balance in the region." Mirzayan notes that the aging Omani sultan's adversarial position vis-à-vis the Saudis may lead struggle over the country between Saudi Arabia and Iran sometime in the future.
Will Succession Lead to A Change in Policy?
Citing Western media analysis, Marunich told Expert that the opinion exists that "in the event of the death of the King, the Kingdom's Energy Minister Ali Naimi may lose support. He is considered to be the mastermind of the strategy to drop [world] oil prices, including via the provision of discounts by Saudi producers and the refusal to lower the OPEC quota." The Financial Post has pointed out that Crown Prince Salman's son, Prince Abdulaziz, who presently serves as an Assistant Minister in the country's Oil and Natural Resources Ministry, made clear that he was not supportive of the decision made at the OPEC Summit in November to maintain output at present levels.
King Abdullah is believed to favor Deputy Crown Prince Muqrin to be his successor, despite questions arising over Muqrin's royal heritage, Simon Henderson of the Washington Institute for Near East Policy has said. In any case, once the time comes for succession, the potential for conflict and infighting will be huge, with many of the country's thousands of princes likely to jockey for position once the king, the crown prince or the deputy crown prince pass on. Henderson told NPR that if the hidden tensions were to "erupt into public view," it would be "bad news for policy against Iran, policy on oil and policy against ISIS." He added that for its part, the United States "can't afford anything but a smooth succession" in the country. As things are, Saudi watcher Rachel Bronson told NPR that the country's current batch of gerontocratic leaders means the country lacks "the agility and flexibility [needed] in difficult times."
Ultimately, Expert's Mirzayan believes that "it is possible that in the near future the decline in prices will stop." However, "it is clear that a sharp change in the trend, and price increases, are not worth waiting for. The process will be gradual; nobody seeks turmoil on the market. And the succession of the King will not matter very much here."
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