Can Saudi Arabia survive the oil price war it started?
By Dr. Cyril Widdershoven – Berry Commodities – Global Head of Strategy & Risk
As the world watches an oil price war unfold between Russia, OPEC, and US shale, another major crisis is looming in the Middle East.
Saudi Arabia is facing multiple existential threats as a renewed oil price slump threatens to not only hit the country?s revenues and economic diversification programs but also the already fragile position of Saudi Crown Prince Mohammed bin Salman.
Last week, international media reported on the crackdown of two major power brokers inside the Saudi Royal Family. Former Crown Prince Mohammed bin Nayef and Prince Ahmed bin Abdelaziz Al Saud were both arrested in what seems to have been an attempt to counter a possible coup threat within the Saudi Royal Family from which Crown Prince MBS continues to face resistance.
The current crackdown comes at a pivotal time for Saudi Arabia?s economy, as the country has been pushing an aggressive economic diversification program to flaunt at this year?s G20 summit. Just as investors and business people started to become more optimistic about the situation in Riyadh, things have turned sour again. The arrests can be seen as a consolidation of power by Mohamed bin Salman. After his major shakedown just after the FII2018 that saw wealthy Saudi nationals imprisoned at the Ritz Carlton, the opposition within the royal family to MBS has been growing. These family feuds have been a constant threat to MBS since 2018 and this pre-emptive strike may well have been his only choice. Regardless of whether it was the right decision, it has added pressure to the Saudi crown prince just as the global economy is faltering and the coronavirus threatens regional stability.
The oil price war, which was initiated after Russia and OPEC failed to agree on deeper production cuts, is another worrying issue for MBS. By taking the hardline that he did after that meeting, he has put the Kingdom?s economy at risk due to its heavy dependence on oil income. Without the influx of billions of dollars of oil money, other high-profile investment projects to prepare the country for a sustainable economic future are now in doubt. Projects that MBS considers a vital part of his ‘Vison 2030’ legacy. Multi-trillion dollar investments are needed so that these projects can both wean Saudi Arabia off its hydrocarbon addiction and also create more than 6 million jobs to employ Saudi Arabia’s youth. If the economy crashes on the back of an oil price war then MBS may find his key projects and, by extension, his legacy under threat.
Taking into account the multitude of possible negative repercussions of the OPEC+ breakup, the current oil price slump, which could be leading to very low oil prices in Q2 and Q3, could deal the Saudi economy a tremendous blow. According to the IMF, the fiscal breakeven price for Saudi crude is around $80 per barrel. Its soaring deficit, in the meantime, is putting immense pressure on the Kingdom. Megaprojects will likely see delays or may be suspended indefinitely, leading to possible unrest among investors, operators and Saudi society. This sort of instability could further jeopardize the fragile position of MBS. A possible economic slowdown or even crisis would support the existing anti-MBS forces and would strengthen the conservative factions within the country. In fact, the two recent arrests by MBS suggest the unrest has already begun.
Analysts should also keep an eye on the share price slump of Saudi Aramco. If Aramco were a ?normal? oil company listed on the stock exchange, it would not be a threat to the government. At present, however, Aramco?s share price slump is a major issue for MBS if oil prices don?t improve. The impact of the Aramco listing is already immense, with most of the exchange turning red after Aramco lost 10 percent of its value on Monday. This steep correction is a major threat, as Saudi citizens have been investing not only their own money but also borrowed money from banks to buy Aramco shares. A total breakdown or major share price slump would result in yet another headache for the Saudi Royal Family.
The Crown Prince has increased his power in the last couple of years. Criticism was quelled by the opening up of the Wahhabi Kingdom, giving more room for women and girls to take part in society, and removing conservative hardliners from power. These successes, however, might not be enough to get the foreign investment the country needs. The stability of Saudi Arabia and the future of MBS depends on the Aramco IPO, Public Investment Fund projects and diversification. All can be linked directly and indirectly to OPEC+ and oil prices. At present, a lower-for-longer oil price scenario could seriously jeopardize the future of MBS.
By Dr. Cyril Widdershoven for Oilprice.com