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Accueil / Actualités / Analyses de l’actualité

Saudi Arabia : The price of politicising oil policy

Par Neil Quilliam
Publié le 12/05/2020 • modifié le 12/05/2020 • Durée de lecture : 8 minutes

Neil Quilliam

 

As such, the issue of succession is now effectively signed and sealed and the kingdom’s future rests very much in his hands. In most areas of policy, he appears to be central to decision-making ; and whilst this is not unusual in the case of Saudi Arabia, he has broken with the more traditional system of governance by consensus, which, in effect, served to check and balance the powers of former rulers. To better manage the policy process, he has for the most part appointed technocrats to run key ministries, such as finance - many of whom are drawn from amongst younger generation professionals. Whilst the move away from decision-making by consensus to policy-making by one person is intended to make governance more effective and efficient, and there is evidence that it has done so in some sectors, it carries significant risks - and both the kingdom and the global oil industry are now bearing the consequences.

MbS’ penchant for rash decision-making has resulted in a number of policies that have not only harmed the kingdom’s interests, but also his plans to attract international investment. Most cases are well known and do not require further explanation, but they include amongst others : the detention of leading businessmen in Riyadh’s Ritz Carlton [2] ; spats with Sweden [3] and Germany [4] ; the prosecution of war in Yemen ; detention of then Lebanese prime minister Saad Hariri [5] ; assassination of Jamal Khashoggi ; and the decision to withdraw 7,000 students from Canada [6]. These decisions have meant that not only known and trusted partners continue to re-evaluate relations, but also, investors – all of whom are critical to helping the country transition towards a post-hydrocarbon future and address long-term structural problems, such as persistently high employment, poor housing stock amongst other things – are likely to steer clear of the kingdom. In other words, the shift away from consensual decision towards one-person rule is risky for the country. Having practically eliminated all challengers from within the ruling family, MbS can almost govern with impunity even if he is fearful or paranoid of being overthrown or assassinated, as so many analysts speculate. And that, in itself, carries great risks for not only the kingdom, but regional security and energy markets.

In the past, the kingdom’s ’crown jewels’ - Saudi Aramco, was by and large left in the hands of highly qualified engineers, who not only helped the National Oil Company (NOC) outperform its peers, but also develop into an integrated company, akin to the international oil companies (IOCs). At the same time, the oil ministry was also in the hands of senior technocrats, many of whom, including former ministers, being drawn from Saudi Aramco and, as a result, oil policy was spared from politicisation. This helped insulate the company from political interference and allowed it to provide not only handsome royalties to the Saudi government, but also funding for the ruling family.

However, MbS appears to have thrown away the Saudi Aramco playbook and compromised the independence of the ministry by not only moving aside known and trusted ’oil men’ but also putting the kingdom’s ’golden goose’ in the hands of his trusted advisors, such as Yasir Rumayan and, for the first time, a royal - Prince Abdulaziz bin Salman Al Saud - both of whom owe their allegiance to the crown prince. In other words, MbS has brought oil policy directly under his purview and, as in so many other areas of policy, introduced unpredictability. The most recent ’oil war’ which concluded, on 12 April, was sparked by MbS’ explosive response to Russia abandoning the deal to cut production.

The decision to flood the oil market, following the breakdown in talks with Russia, on 8 March 2020 appeared both rash and ill-considered, especially as a time when corona virus was decimating global demand. As Saudi Arabia announced that it would increase its production from 9.7 million barrels per day to 12.3 million [7] and Russia planned to increase oil production by 300,000 barrels per day [8], Brent crude fell by 30%, while West Texas Intermediate fell by 20% [9].

The ploy to flood the market to crowd out Russia’s market share - at a time when demand destruction is rife due to Covid-19 took the oil mercilessly close to US$10 bbl and took offline over 900,000 bd of US production [10]. It was a move almost unimaginable from a leader aiming to diversify his economy away from oil to ensure the long-term economic well-being of the kingdom and one that has arguably put in peril, Saudi Arabia’s critical security relationship with the US. Whilst President Donald Trump may still consider Saudi Arabia to be a key US partner, the move has done untold damage to the relationship – adding a multiplier effect to the hangover of the Khashoggi affair.

The impact of the decision has been far reaching and will be felt for years to come. For example, it has - to use the vernacular - wiped out for now - at least - the US shale industry. Although US shale will stage a comeback, when demand begins to pick up towards the end of 2020 as forecast by the US Energy Information Administration [11], it will not be in a position to capitalise upon the recovery. The impact on the US shale industry has further soured relations with the US, which is arguably at an all-time low, and even led President Trump to threaten withdrawing US forces from the kingdom unless the Saudis (and the Russians) agree to cut production, which they did on 9 April.

The decision to increase production to 12.3 mbd, following the breakdown with Russia, has therefore harmed seriously the kingdom’s close relations with the US. Coming on the heels of the Khashoggi assassination and the war in Yemen, Saudi Arabia has lost whatever support it once had in the US political system ; and MbS’ only ally in the system - who is at best mercurial, and his immediate family, is the current occupant of the White House. He appears to have damaged irrevocably a relationship, which has proven key to guaranteeing the kingdom’s security since the late King Abdulaziz ibn Saud and US President Roosevelt agreed the oil for security pact aboard USS Quincy in 1945.

In fact, according to The Wall Street Journal, the US is in the process of removing two Patriot missile batteries from Saudi Arabia and two others from the Middle East, along with dozens of military personnel who were deployed to the region following a series of attacks on the Saudi oil facilities last year. Whilst this move can be explained away as a routine measure already planned to rotate materiel, it is hugely symbolic and most likely intended to send a message of deep displeasure [12].

MbS’ oil policy has of course reverberated at home. Low oil prices are painful for a country that needs around US$80 per barrel to balance its budget ; Moody’s cut the kingdom’s financial outlook from ’stable’ to ’negative’ at the beginning of May [13]. The country has already recorded a US$9 billion deficit in the first quarter of 2020 [14].

Finance minister Mohammed al-Jadaan told Al Arabiya TV on 2 May that Saudi Arabia will now take strict and painful measures to address the economic impact of low oil prices and the coronavirus pandemic. This will include not only cuts in public spending, but also putting on ice major government projects, including mega-projects. He also noted in April that Riyadh will now borrow US$26 billion more this year [15], while it would draw down US$32 billion from its foreign reserves to finance the deficit [16]. Without an early price recovery, the Saudi economy looks as though it is in for a rough few years. Indeed, according to Karen Young, "What makes this crisis so jarring for the kingdom is that there is little reason to expect future revenue to ever recover to the recent past, in particular the special period or "magic decade" of 2003-2014 when oil revenues surged. Those days are over" [17].

But Jason Bordoff has argued convincingly in his Foreign Policy article, "The 2020 Oil Crash’s Unlikely Winner : Saudi Arabia," [18] that the kingdom stands to benefit significantly when oil demand does eventually return as many new shale producers and established producers will struggle to increase production given the freeze on investment and lengthy shut ins - and therefore the Saudi economy will once again bounce back and be in a strong position to push forward Vision 2030 and begin along the path to the future. In other words, Saudi Arabia will bounce back, as it has always done, given the boom and bust cycle of the oil markets, and it just needs to wait for another turn in the cycle. However, many analysts have argued convincingly that the pandemic will lead to a structural shift in energy consumption and, as a consequence, will usher in quicker the post-hydrocarbon economy, which Saudi Arabia is ill-prepared for.

It is not obvious that the global economy is on the verge of moving into a post-oil era, let alone post-hydrocarbon future. Although demand destruction at present gives the appearance of being persistent ; and international oil companies are going through yet another major downturn, which will undoubtedly affect not only their business models, but also hasten their own move towards energy transitions. Saudi Arabia is likely to remain the bulwark of oil markets and, as such, occupy a commanding position that affords it a slow-down in diversifying the economy until revenues once again rebound and finance yet another cycle of Vision 2030+. In spite of the doom and gloom, MbS will likely have another throw of the dice – at least for one more cycle of the boom bust ride – much more by luck, than design though.

MbS’ consolidation of power has made him decision maker number one - and he has now considerable authority over all aspects of policy - this is a real change from what was there before and arguably poses a threat to long-term stability of the country. It is not clear whether his decision to flood the market, seize market share and crush the US shale industry was part of a well-thought strategy – it is highly unlikely. It is much more likely that the decision was made in a fit of pique as described by those close to the crown prince, and that does not bode well for the kingdom’s future or global oil markets. Whilst the Saudi leadership was once criticised for the slowness of decision-making, which was often compared to the movement of a glacier, the crown prince’s grab for power has resulted in decisions, which have had major consequences, being made on ’the turn of a screw’.

There is an abundance of talent and experience in the kingdom and oil policy was previously insulated from direct political interference, let’s hope that the crown prince draws lessons from the pain he has inflicted not only on his own people, but also the oil industry, as a whole, and like his predecessors acknowledges and recognises the counsel of the technocrats, many of whom he surrounds himself with.

Publié le 12/05/2020


Dr Neil Quilliam is the CEO of Castlereagh Associates. He is an energy policy, geopolitics and foreign affairs specialist, with extensive knowledge and experience of the Middle East and North Africa (MENA) region. He is an associate fellow with Chatham House’s Middle East and North Africa Programme and headed the programme’s Future Dynamics in the Gulf project.


 


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