Saudi Crown Prince Mohammed bin Salman’s largely self-inflicted losing streak appears to have come to an end, and just in the nick of time, with arch-nemesis Iran in the process of consolidating its Shiite sphere of influence to the north of the kingdom and instability growing throughout the Middle East.
The Trump administration’s ‘no waiver’ sanctions on Iran’s crude and condensate exports, subsequent sanctions on the Islamic Republic’s steel, iron, copper and aluminum exports, and its sending of a carrier strike group and bomber task force to the region have again shown America’s unwavering support for Saudi Arabia.
Congress did attempt to end U.S. support for Saudi war efforts in Yemen, forcing a veto from President Donald Trump to overturn the legislation. But 70 percent of Americans recently identified Iran as an ‘enemy’ in a public opinion poll, suggesting that U.S. support for the Saudis in this regional power struggle is unlikely to end any time soon.
The highly successful bond offering by Saudi Aramco in April was another important win for MBS, especially given last autumn’s horrific Khashoggi affair. Monetization of the state-owned oil company, whether by the sale of equity or debt, is a key step in funding MBS' ambitious Vision 2030 economic program. Net-inflows of foreign direct investment (FDI) into the kingdom have been modest in recent years, although there was a slight uptick in the first quarter.
The combination of Trump's support and Aramco's successful bond offering should buy MBS time to consolidate his top-down revolution in Saudi Arabia. In consolidating his power MBS will also be able to drive higher oil revenues that will help fund Vision 2030.
Consolidation of Power
It is clear that MBS has taken a page out of the post-Mao Chinese playbook, and he is hoping to achieve a revolution from above using whatever means necessary. But in the case of Saudi Arabia, it is not just in the economic sphere, but in the social and political ones as well. The Chinese Communist Party had already centralized absolute power in the late 1970s when it began adopting ‘radical’ capitalistic economic reforms, and the Confucian belief system that assisted the implementation of these reforms was already deeply embedded in society.
In defense of MBS, the status quo in Saudi Arabia had become untenable economically, socially and politically. The age of high oil prices has come to an end – barring a major geopolitical event in the Persian Gulf region in which the kingdom likely would not benefit – given the Shale Revolution on the supply side of the world oil market equation and the global campaign against carbon emissions and the rise of alternative fueled vehicles on the demand side.
The House of Saud’s centuries old pact with the conservative Wahhabi clerical establishment to help legitimize their rule in all or parts of Saudi Arabia has morphed Frankenstein-like, with Salafists such as Daesh calling for the overthrow of the Saudi ruling family. The Islamic Republic of Iran has gained substantial power in the Middle East since the U.S. invaded Iraq in 2003, primarily at the kingdom’s expense.
Since becoming king in January 2015, Salman has consolidated power around the al-Saud family. MBS, in particular, has benefited from this consolidation, using his power to ‘reform’ the kingdom and drive through Vision 2030 in the hope of creating a bright future for the monarchy and Saudi Arabia. The primary goals of MBS’ economic reform plan are to diversify the economy away from oil and create substantially more jobs for his subjects. Seventy percent of the kingdom’s population of roughly 30 million is under the age of 30; many are under or unemployed. Related: Iraq Close To Signing Mega $53 Billion Oil Deal
The consolidation of power in his line of the family was completed through the ‘velvet purge’ in November 2017, when many of the princes, government officials, military officers, and businessmen were arrested on ‘corruption’ charges and held at Riyadh’s five-star Ritz Carlton hotel. In this purge, Prince Mutaib, son of the previous king, Abdullah, lost control of the tribal-based national guard. MBS suddenly had control over the three main branches of Saudi security – military, internal security services, and national guard – which for decades had been distributed between different branches of the House of Saud as a way of balancing power between them.
Based on MBS’s domestic and foreign policies to date, as well as the supposed rationale for the velvet purge, it appears he is attempting to make Saudi commoners the base of his power rather than his fellow princes and the Wahhabi clerical establishment. In order to do so, he is improving the economic prospects of his subjects, loosening the tyranny of hardline Wahhabi clerics over their everyday lives, and supercharging secular Saudi nationalism. A side-effect of this policy appears to have been the heating up Saudi Arabia's regional Cold War with Iran.
In 2016, MBS stripped the religious police of their power of arrest and has since been expanding the space for women in public life. He appears to be playing to youth and women in the kingdom with his modest social liberalization, while allowing women to drive vehicles, and join the Saudi workforce in greater numbers and in mixed-sex environments. The anti-corruption campaign, with MBS in the lead, was a huge hit among Saudi commoners, with many of them pleased to see the comeuppance of the rich and powerful in their highly stratified society.
On the other hand, to ensure social control during the Saudi transition, MBS has substantially ramped up political repression, both domestically and abroad – the gruesome assassination of Jamal Khashoggi inside the Saudi consulate in Istanbul is a prime example of the latter. Shiites in the oil-rich Eastern Province have been especially hard hit by this repression. MBS is increasingly resorting to draconian measures such as beheadings to crush even modest acts of political dissent, with 104 executions of Saudi nationals as of April 24 of this year, compared to 149 in all of 2018.
Manna from Heaven
Strict U.S. sanctions on Iranian exports of oil are like manna from heaven for Saudi Arabia, assuming a moderate amount of oil manages to leave the country in order to sustain the Islamic Republic. The memory of the 1951-53 oil embargo that toppled the democratically-elected government of Prime Minister Mohammed Mossadegh remains fresh in the minds of Iranians. If the Iranian regime nears the point of collapse at any point, the regime would likely lash out militarily at Saudi Arabia and/or targets in the Strait of Hormuz region.
Fortunately, China is likely to continue to import significant volumes of oil from the Islamic Republic, while neighboring Iraq and Turkey have both committed to importing oil from Iran. Iran was exporting 2.7 million bpd of crude and condensate prior to the U.S. imposing partial sanctions last year, a figure that fell to an estimated 1 million bpd in April. With the end of waivers at the beginning of this month, Iranian exports are likely to quickly collapse to the 500,000-700,000 bpd range before gradually rebounding 300,000 bpd or more on Iraqi and Turkish smuggling operations.
In this case, Saudi Arabia will benefit two-fold. The large drop in oil – and metal – exports will starve Iran of foreign exchange, forcing it to prioritize imports for domestic consumption over military operations and infrastructure projects designed to consolidate its territorial gains in Iraq and Syria.
At the same time, Saudi Arabia should benefit from substantially greater oil revenues due to a combination of higher crude prices and oil export volumes. The kingdom holds the most spare production capacity in the world and could certainly benefit from high prices and less competition. Related: STEO: Brent To Average $70 This Year
The Saudi budget break-even price of US$80 per barrel – add US$5 for Brent crude equivalent – is inconceivable in a none Iran sanctions world, with the Energy Information Administration (EIA) forecasting U.S. oil – crude and NGLs – output to increase by an average of 1.75 million bpd both this year and next with Brent below US$70 per barrel. But in a geopolitically-charged world with minimal spare capacity, a sustained price of US$85 per barrel for Brent – if not more – is much more plausible.
Assuming Saudi oil exports increase by 1.5 million bpd to 9.5 million bpd for an average price of US$80 per barrel – instead of US$65 – the kingdom’s oil revenues would average US$277 billion annually under strict U.S. oil sanctions on Iran, 46 percent more than otherwise.
Higher-than-anticipated oil revenues and the monetization of Saudi Aramco, whether through the sale of equity or debt, have the potential to cover a large proportion of the cost of MBS’s Vision 2030, which McKinsey Global Institute has pegged at US$4 trillion.
To conclude, the losing streak of MBS and Saudi Arabia has come to an end in spectacular fashion in recent weeks, making it much more likely Mohammed will accede to the throne and have a long and prosperous reign.
By Vincent Lauerman for Oilprice.com
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