Disquiet in the house of Saud as oil price plummets

The falling price of oil is spicing up a succession battle in the royal family.

Saudi's Deputy crown prince Muhammad bin Salman, 30.

During the past couple of decades there has been a minor industry prophesying the imminent fall of the house of Saud. Every year some new book or article would argue that Saudi Arabia’s rulers were about to be overthrown. Every year these prognoses have been proven wrong.

But now the Saudis are losing a proxy war with Iran and a real war in Yemen. There is dissent at home and in the leadership ranks. And the money to pay for wars, co-opt dissent and paper over cracks in family unity is running low.

The recent news that the Saudi royal family is considering selling shares in the state-owned oil company Aramco has fed particular grist into the declinist mill. How desperate must the royal family be for cash if they are thinking of selling the thing that not only funds the Saudi state but keeps it Saudi? How desperate must they be to even consider it with oil at less than $US33 a barrel, when they did not all that long ago when oil was $US115 a barrel?

Until recently, there has been good reason to be sceptical of analyses predicting the collapse of the house of Saud. Often such analyses ignored the enduring foundations of Saudi rule: the ruthless determination to stay in power that kept family rivalries in check; the alliance with the Wahabbist establishment that provided the house of Saud with religious legitimacy; and the world’s deepest reserves of oil that allowed Riyadh to buy loyalty and to fend off adversaries.

Much of the “coming fall” Saudiology was also based on the thin data and voluminous rumours that still surround one of the least transparent regimes in the world. To really know Saudi Arabia is to admit that you really don’t know that much. However, in recent years the fuzzy outlines of the family’s prospective demise have suddenly become a little sharper.

Regionally, Saudi Arabia is losing the latest round of its long-time rivalry with Iran. In the 1980s, Tehran’s revolutionary leadership promised to foment uprisings in the Arab world and to challenge Saudi Arabia’s claims to Islamic leadership. Saudi Arabia beat back the Iranian challenge by pouring money into the Iraqi side of the Iran-Iraq war, co-opting Sunni extremists and spreading its financial largesse (and its puritanical Wahabbist theology) throughout the ­Islamic world.

The time, Iran has gained its revenge. In 2003, the US invasion of Iraq transformed into an Iranian satellite what the Saudis and many other Arab states saw as their chief bulwark against Iran. Since then, Iran has extended its influence in Lebanon, stymied efforts to overthrow its ally Bashar al-Assad in Syria, and has found new allies on the Saudi border in Yemen, where a Houthi uprising overthrew the Saudi-backed president last year.

The Saudis sometimes overstate the full extent of Iranian influence in Baghdad, Beirut, Damascus and Sana’a, but it is real enough for Riyadh to pour money into Syria in an attempt to overthrow Assad and, more unusually for the Saudis, to send its own troops into Yemen, but without any decisive effect in either case.

To add insult to injury, last year the Saudis watched their chief ally strike a deal with their chief adversary. The US-led nuclear deal with Iran may have resolved the ­nuclear issue, at least for a time, but in Riyadh’s eyes it did nothing to address Tehran’s other nefarious behaviours. Instead, it rewarded Iran by lifting sanctions and ended its international isolation, which the Saudis fear will only empower and embolden the Iranian regime further.

But if troubles abroad complicate and challenge Saudi policymaking, it is problems at home that really matter. Sometimes external and internal challenges coincide. Saudi Arabia’s proxy wars with Iran are not just a fight for regional supremacy. Riyadh has long accused Tehran of promoting unrest among its Shia minority. A Shia uprising would never threaten Saudi rule, but it would threaten the Saudi balance sheet, because most Saudi Shi’ites live in its oil-rich Eastern Province.

Saudi Arabia’s recent execution of dissident Saudi Shia cleric Sheik Nimr al-Nimr may or may not have been a message to Iran. But it was certainly a message to Saudi Shi’ites that the ruling family is taking a firm line against dissent. The fact the Iranians reacted with such outrage to the ­execution of a Saudi citizen, including by burning the Saudi ­embassy in Tehran, merely confirmed Iran’s malicious intent in Saudi eyes.

Nimr was not, however, the only dissident put to the blade. An even larger number of Sunni extremists and dissidents were also executed, with the same message of zero tolerance for dissent.

The Saudis are once again being forced to deal with that other edge of their double-edged support for Sunni extremism. Useful instruments of Saudi policy abroad, the extremists become sources of insecurity at home. In the 80s, Saudi royals carried Osama bin Laden bags of money for the anti-Soviet jihad in ­Afghanistan. By the 90s, he had become the enemy of Riyadh and was stripped of his citizenship.

Today, Saudi Arabia is once again funding Sunni jihadists in Syria. The Saudis claim they are being more careful and that neither money nor materiel is going to Islamic State. But who knows where the cash and arms end up.

Even if the Saudi state is being more discriminating in its sponsorship of jihadists, Islamic State has wealthy private benefactors and sympathisers in Saudi Arabia. It has listed the house of Saud as one of its targets and its Saudi partisans recently began bombing Shia mosques in Saudi Arabia in an ­effort to stir up the kind of sectarian conflict that has brought ­Islamic State success in Iraq. Unrest sponsored by Sunni extremists is a more serious problem for Saudi royals than Shia agitation.

The Saudi leadership treats it harshly, as the latest round of executions demonstrates, but it also treads carefully lest it spread to other Saudis who may condemn the extremists’ methods but share their outlook. One thesis about Nimr’s execution was that it was done to demonstrate to Sunni Saudis that the ruling family was being ecumenical in its punishment of transgressors.

The house of Saud has dealt successfully with domestic unrest before. Two factors make it potentially more challenging this time: unrest within the ruling family and the declining price of oil.

For close watchers of the Saudi regime, the chief threat to the continued rule of al-Saud has always been that moment when the leadership passes to the next generation. Since the death in 1953 of the founder of the modern Saudi state, Abdul Aziz ibn Saud, the state has been ruled by one of his sons. (Ibn Saud was prodigious, siring almost 100 children.)

Up until now, the line and rules of succession from brother to brother were fairly clear. The tricky part was always going to come when the line of brothers ended and a decision had to be made to pass rule to the next generation of princes. But to which branch of a family that numbers in its thousands?

Last April, King Salman, now 80 and infirm, appointed his nephew Prince ­Mohammed bin Nayef as Crown Prince and his son Mohammed bin Salman as Deputy Crown Prince.

The former appointment was relatively uncontroversial. ­Mo­ham­med bin Nayef, 56, is well ­regarded, competent and experienced. His father, who belonged to the same powerful branch of the family as King Salman, was interior minister and crown prince, but did not live long enough to be king. Mohammed bin Nayef succeeded him in both capacities.

The appointment of Salman’s son as Deputy Crown raised more eyebrows. Before Salman’s ascent to the throne, Mohammed bin Salman’s main distinction was as the reputedly diligent and energetic overseer of his father’s court. Since becoming King, Salman has cleared potential rivals from senior positions and concentrated unprecedented power in the young prince’s hands (he is officially 30; some claim he is even younger).

Mohammed bin Salman was made Defence Minister, appointed head of the country’s chief economic planning council and to the board of Aramco, and runs the King’s court. Prince Mohammed is undoubtedly positioning himself as his father’s successor, either after the current Crown Prince or possibly superseding him.

Rivalries in the family are nothing new. What is different this time is the lack of a clear line of succession, which raises the stakes. The customary cautious, consensual approach of Saudi princes is not going to win Mohammed bin Salman the throne. One result is an unprecedented boldness in Saudi policy. Mohammed bin Salman has sought to bolster his position by leading Saudi Arabia into an initially popular war in Yemen.

And now, according to The Economist, which featured an interview with the young prince this month, he is using the collapse in the price of oil to undertake wholesale economic reforms, including the potential privatisation of ­Aramco. This is no small challenge in a kingdom in which up to two-thirds of workers are employed by the government and its oil provides 90 per cent of revenue.

Financial problems including low oil prices last year pushed the budget deficit out to 15 per cent of gross domestic product. Foreign reserves fell by $100 billion and public finances have become unsustainable for more than a few years.

The budget unveiled last month cut subsidies on water, electricity and fuel. On January 1, the price of petrol rose by 50 per cent. The Economist says Mohammed bin Salman’s plan is to have the kingdom’s 29 million-strong population — roughly 70 per cent of whom are under 30 — paying market prices within five years.

One anecdote provides some insight into the prince’s ambition. Just after he became Defence Minister, a Saudi-watching friend of mine showed me a digital photo doing the rounds. It was an image of Mohammed bin Salman that after a few seconds dissolved into a picture of the founder of the Saudi state, Ibn Saud, highlighting the similarities in their physical and, by implication, other features.

Quite what Mohammed bin Nayef can do about this is not clear. Some speculate he is biding his time, giving the young prince enough rope to hang himself. But what gives the rivalry added ­piquancy is the oil price problem. Some of this is Saudi Arabia’s own doing. It has refused to cut oil production, keen to preserve its market share and deliver an economic poke in the eye to rival oil producers in Russia and Iran, as well as to the shale oil wildcatters of the US.

The costs of this policy are rising. Saudi Arabia is not about to go broke, but that is not the point. Saudi Arabia’s oil wealth funds the highly subsidised, little-taxed lifestyle at the heart of the house of Saud’s political bargain with its people. If the royal family cannot deliver the free education and healthcare, cheap housing and easy jobs Saudis are used to, they might shift their political allegiance. It is against this background that the possible Aramco float needs to be viewed. In part, it may reflect a need for cash. But it probably also reflects both the real need for economic reform as well as Mohammed bin Salman’s ambitions to be reformer in chief.

It is no coincidence that he raised the idea in his interview with The Economist. The relatively brief media release later issued by ­Aramco confirming the idea begs the question of how well thought out the move is and whether it will actually materialise.

But the irony is that the economic reform being championed by Mohammed bin Salman as a ­cipher for his ambition is actually really needed by the Saudi state. This matters enormously in the region and for the global economy.

Riyadh may have fumbled its response to Iran’s regional ascendancy, but without Saudi Arabia there would be little response at all. The global economy might be enjoying low oil prices, but it could ill afford to have access to the world’s greatest oil reserves impeded by political instability.

Much of this boils down to whether Mohammed bin Salman is some underestimated genius or a reckless pretender.

In the interview with The Economist, he professed himself to be an admirer of Winston Churchill and the wartime British prime minister’s line that opportunities come from crises. The question is, what opportunities will he seek: to advance Saudi Arabia’s interests, or merely his own?

Saudi Aramco: by the numbers

The potential sale of shares in Saudi Arabia’s state-owned oil giant, as raised this month by Saudi Defence Minister and Deputy Crown Prince Mohammed bin Salman, brings into focus some startling numbers, including a market valuation in the trillions.

10 per cent: Saudi Arabian Oil Company, known as Saudi Aramco, produces about 10 million barrels of crude oil a day — more than 10 per cent of the world’s oil supply — and has built a large chain of refineries and petrochemical facilities to complement its exploration and production operations.

261 billion barrels: Saudi Aramco has 261 billion barrels of proved crude-oil reserves, according to its 2014 annual report — the largest of any oil company in the world. This compares with fewer than 14 billion barrels of proved liquid reserves reported at the same time by US oil major Exxon Mobil.

$US10 trillion: With its enormous petroleum reserves, Saudi Aramco could be worth up to 20 times as much as Exxon, the largest non-state-controlled publicly listed oil company, which has a market valuation of $US317 billion ($455bn). Mohammed al-Sabban, a former senior adviser to the Saudi oil ministry who is now an independent oil analyst, says Aramco’s value could be more than $US10 trillion.

12 million barrels a day: Saudi Aramco’s production isn’t limited to 10 million barrels a day. It has the capacity to pump up to 12 million barrels a day.

55,000: Saudi Aramco employs 55,000 people, making it the kingdom’s second-biggest employer behind the government.

Value unknown: Given Aramco’s strategic importance to Saudi Arabia, many of the operational and geological specifics related to Saudi production and reserves are treated essentially as state secrets. Regulators could demand that Aramco open up its books on reserves and production before it would allow an overseas listing — something the government historically has been reluctant to do.

The Wall Street Journal

Anthony Bubalo is deputy director and research director at the Lowy Institute for International Policy.