The Shifting Sands of Saudi Arabia
Since the discovery of oil in Saudi Arabia seventy nine years ago, the country has been synonymous with oil. But now the sands under which 16% of the global proven oil reserves lie are beginning to shift under the feet of its leaders.
Saudi Arabia whose beneficence, peace-making efforts, soft power and great oil wealth brought it to the forefront of influential countries in the world over a period of more than half a century, is now embroiled in a crescent of conflicts involving Iran, Iraq, Syria, Yemen and now Qatar not to mention its uneasy relations with the United States.
The country’s oil and foreign policies are in shambles. Its misguided oil strategy of flooding the global oil market between 2014 and 2016 in defence of its market share, trying to damage Iran’s economy and slowing down if not killing US shale oil production inflicted huge damage on the Saudi economy and the economies of all oil-producing countries of the world. And its current foreign policy has led the country to crises from which it does not know how to extricate itself. The leaders of Saudi Arabia are now looking for the United States to help them extricate the Kingdom from its strategic impasse with Iran, from its war in Yemen, and from the reality that — absent the US — Saudi Arabia had no major power ally on which it could rely.
However, under the stewardship of the new Saudi oil minister, Khalid Al Falih, Saudi Arabia abandoned its discredited oil strategy and spearheaded the production cuts by OPEC and non-OPEC producers in support of the oil price.
Relations with the United States
Saudi Arabia’s de facto head of government, Deputy Crown Prince and Defence Minister Prince Mohammed bin Salman (the king’s son) is gambling on winning US support for the transformation of the Kingdom’s strategic fortunes.
The commitment of some $200- $350 bn of investment in the United States and arms purchases over 10 years was outlined during the visit by US President Donald Trump to Riyadh on May 20, 2017. This commitment was only part of the programme to re-engage the US.
The United States has been milking Saudi Arabia’s oil wealth for a long time under the pretext that it is the country’s most important ally and protector and that it can help disentangle the Saudis from the myriad of problems facing them. However, any Saudi investment in the US may be regarded politically as hostage capital.
Saudi investments in the United States could be at risk by the legislation passed by the US Senate on the 17th of May 2016 that would allow families of September 11 victims to sue the Saudi government for damages. It must next be taken up by the US House of representatives. If it became law it would remove the sovereign immunity, preventing lawsuits against countries whose citizens were found to be involved in the attacks. The minute one law case is launched by an American citizen against the Saudi government, all Saudi assets in the US will be frozen.
Moreover, the United States considers Egypt more significant, geopolitically, as an ally of Washington than Saudi Arabia, and the Trump Administration has gone to great lengths to woo it back as a US ally.
Saudi Arabia, in effect, was becoming isolated at the same time that it was running gradually out of funds. Even the slight recovery of oil prices in 2016 did not halt the slide in Saudi foreign exchange reserves, which were constantly being depleted by the war in Yemen and Saudi engagement in the conflicts in Iraq and Syria as well as the demands of a young and fast-rising population.
Saudi foreign currency reserves have declined from an estimated $797-billion in 2014 to $523.8-billion in January 2017. Thus, the commitment of some $200-$350 bn to win back the US as an ally can be described as a high-risk gamble.
Prince Mohammed’s other very big gamble is to transform the country’s giant oil company, Saudi Aramco, into a publicly-held corporation valued at $2-trillion by the Saudis. The Initial Public Offering (IPO) hopes to sell only 5% of the company’s assets for $200-billion. However, in the absence of an independent auditing of Saudi proven oil reserves, international estimates value Aramco far much less than $2 trillion.
So, at a depletion rate of more than $100-billion a year from its foreign exchange reserves to cover budget deficits, fund wars and meet social demands, the Kingdom faces an imminent financial crisis. Deputy Crown Prince Mohammed — in his additional capacity as Chairman of the Council of Economic and Development Affairs — is keenly aware of this, which is why he launched Saudi Arabia’s Vision 2030 in 2016, designed to diversify the Saudi economy and reduce its dependence on the oil revenue.
The major defence deals which Riyadh announced with the US were also designed to be a centrepiece of the Vision 2030 program, not just as defence hardware acquisitions per se, but as the start of a Saudi commitment to create a viable defence industrial base in the Kingdom to make the country self-sufficient in national security terms by 2030 as well as an exporter of defence technology. The real question, however, is whether the country has the technological base to achieve this goal.
Still, the last thing that the Middle East needs is massive imports of US weapons. In the powder keg that is the Middle East, this sale may simply light a fuse that sends the region deeper into perpetual military conflict.
Potential Conflict with Iran
During his visit to Saudi Arabia, president Trump made it clear that he is aligning US foreign policy with that of the Gulf Cooperation Council (GCC) countries regarding Iran. Trump describes Iran as a state that supports terrorism and which has not abandoned aspirations to build a nuclear weapon.
Some US sanctions on Iran are still in place. The US maintains that Iran’s ballistic missile programme and its alleged support for terrorism pose a continuing threat to US interests and the region. Moreover, US financial institutions continue to be barred from dealing with Iran. Still, no one expects the Trump administration to annual the nuclear agreement with Iran because the alternative is war.
In the aftermath of the visit, a sudden diplomatic crisis broke out in the Arabian Gulf on June 5, as a coalition of countries moved to isolate Qatar, the tiny oil and gas-rich emirate. In a joint statement Saudi Arabia, Bahrain, the UAE and Egypt announced they would halt air, land and sea travel to and from Qatar, with Riyadh going so far as to ban Qatari aircraft from using Saudi air space as of June 6.
Shortly after Trump’s visit, Saudi and UAE media began launching verbal attacks on Qatar, including accusations that its leader Sheikh Tamim bin Hamad Al Thani during a military graduation ceremony on May 23, referred to Iran as “a big power in the stabilization of the region.”
The official justification was Qatar’s alleged support for terrorism, including ISIS but analysts point to regional tensions and growing divisions within the GCC vis-à-vis Iran.
Besides Oman, Qatar has perhaps the closest relationship to Iran, a country which Saudi Arabia considers as its chief regional antagonist and which most of the GCC countries consider a threat to regional security. Qatar and Iran cooperate somewhat over sharing the massive North Field/South Pars natural gas field, from which Qatar draws most of its natural gas exports and thus its immense wealth.
However, if tensions between the GCC members continue, it could have an impact on the region’s stability and the security of the Strait of Hormuz through which 30% of the world’s tradeable oil passes each day. It could also exacerbate the conflict between Iran and Saudi Arabia. Such a conflict has the potential of escalating into a war engulfing the whole Gulf region.
Saudi Arabia’s involvement in Yemen was prompted by unproven allegations that the Northern Yemeni tribes known as the Houthis who seized the Yemeni capital, Sanaa, in the chaos that followed the Arab Spring uprising in 2011, were armed and supported by Iran.
As a result, the Saudi defence minister, Prince Mohammad bin Salman decided in March 2015 to launch an air blitzkrieg in Yemen promising to uproot the Houthis in a matter of days. But the war, costing Riyadh tens of millions of dollars a day, has turned into a stalemate.
However, it transpired afterwards that the Houthis insurgent movement emerged independently of Iran though some reports claimed that Iran has since tried to supply it with arms.
In order to disentangle his country from the debacle in Yemen, Prince Mohammed declared on May 2, 2017 an end to Saudi military involvement in Yemen, noting that the Saudi-led coalition had relinquished its plans to escalate the war in Yemen and has also abandoned plans to seize and occupy the northern Yemeni port city of Hodeida. And yet the Saudi-led attempts to quarantine Yemen from the sea would apparently continue, presumably with the assistance of the US Navy.
The Generational Change of Leadership Succession
After King Salman departs the scene, a power struggle within the royal family is likely. No one can say how intense or violent it might become, but the prospect of crisis comes at an especially bad time. The region is afire, and oil prices are plummeting.
Political instability in Saudi Arabia is growing as King Salman continues to overhaul the Saudi government, putting a long list of family members into positions of influence while increasing the power of his son, Deputy Crown Prince Mohammad. These actions have the potential to lead to a direct conflict with Crown Prince Mohammed bin Nayef. The expected internal power collision, predicted by many analysts, finally seems to be heating up. The real surprise, however, is that it is taking place while King Salman is still alive rather than during the succession period. King Salman’s royal decrees, in which he has appointed two of his other sons, Prince Abdulaziz and Prince Khaled as Minister of State for Energy Affairs and Ambassador to the United States respectively, could be viewed as a direct move to increase the influence of the Salman branch of the Al Saud family tree.
Prince Mohammed bin Nayef remains the current Crown Prince. And though Prince Mohammed bin Salman has never openly challenged Nayef’s claims to the throne, it is clear that there is a potential for an all-out power struggle. As the main power behind the Coalition War in Yemen, Saudi Vision 2030, and Saudi Aramco’s IPO, it is clear that Prince Mohammed is highly ambitious.
Though opposition in Saudi Arabia is extremely quiet at present, the current situation could be the quiet before the storm. A destabilized Saudi Arabia would be a god-send for Iran. Taking out Tehran’s main adversary would not only give Iran total freedom in Iraq, Syria and Yemen, but it could also threaten Bahrain - even Kuwait. Internal unrest in Riyadh could start a bushfire which would be difficult to extinguish.
In the final analysis, for Saudi Arabia, the United States is part of the problem rather than the solution since it is the Saudis misplaced trust in the United States that bedevilled them and brought them to the current impasse in the first place. For more than half a century, Saudi leaders manipulated the United States by feeding its oil addiction, helping to finance American wars and buying billions of dollars in weaponry from US companies. Now the sand is beginning to shift under their feet.
From Syria to Iraq and from Yemen to Qatar, one could not but notice a common denominator: Iran. Rather than putting all their trust in the United States, the Saudis should accept a multipolar world and build strong relations with China, the European Union and Russia rather than allying themselves solely with the United States.
Saudi-led GCC countries should have the confidence and far-sightedness to build bridges of trust and understanding with Iran. The GDP of the GCC countries at $1.9 trillion is almost five times that of Iran and their combined military power bolstered by Egypt’s powerful armed forces are far more than a match to Iran’s. It is far more economical and beneficial and strategically desirable to talk to Iran rather than invite a potentially devastating war to the Gulf region. Such an approach could ease tensions in the Gulf region and indeed the whole Middle East thus alleviating Saudi isolation and current problems.
*Dr Mamdouh G. Salameh is an international oil economist. He is one of the world’s leading experts on oil. He is also a visiting professor of energy economics at the ESCP Europe Business School in London.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the position of ESCP Europe Business School.