The Fuse

Saudi’s Arabia’s Destabilizing Game of Petro-Thrones

by Matt Piotrowski | November 07, 2017

Recent chaos in Saudi Arabia has included a roundup of prominent royals, businessmen, and officials; the arrest of a major international tycoon; a missile from Yemen intercepted near Riyadh; the Lebanese prime minister resigning after returning from the Saudi capital; and a major prince and potential opponent regime opponent mysteriously dying in a helicopter crash.

The events surrounded Crown Prince Mohammed bin Salman’s (MBS) consolidation of power, which heightens the possibility of further political instability inside Saudi Arabia and in the Middle East, home to 66 percent of the world’s proven crude oil reserves. His moves sent shockwaves through the international community and amplify divisions in the country and the entire region. “This is a crucial turning point,” said Bruce Riedel, a senior scholar at the Brookings Institution and a former Central Intelligence Agency officer. “Saudi royal politics have gone from consensual to an unstable blood sport.”

“Saudi royal politics have gone from consensual to an unstable blood sport.”

One consequence of this “anti-corruption” purge is a more hawkish foreign policy. MBS, a main architect of the Saudi-led war against Yemen, intends to intensify the country’s “cold war” against Iran. Saudi Arabia’s military intervention in Yemen—a proxy war against Iran—began in 2015 and has claimed the lives of more than 10,000 Yemenis. Saudi Arabia’s population is generally supportive of aggressive policies toward Iran. But alienating the Kingdom’s Shia community or a direct military confrontation with Iran could increase risks to oil production in both countries. Most oil fields in Saudi Arabia, OPEC’s top producer with capacity of 12.5 million barrels per day (mbd), are located in the Eastern Province, home to the country’s Shia community. Iran, emboldened by its growing influence in the region, is OPEC’s third top producer at 3.8 mbd. Combined, the two countries make up approximately 17 percent of the world’s crude output. The tension between the two major producers is likely to put upward pressure on oil prices and threaten stable supplies.

One other key concern from the weekend’s events is the pace of economic reform in Saudi Arabia. MBS has repeatedly stated his intention to liberalize the country’s economy by reducing its dependence on oil revenues, scrapping energy subsidies, and opening state-owned Aramco to outside investors. But reform is always rocky, and Saudi Arabia is struggling to move forward.

The regime has already reversed itself on several reforms, particularly regarding household electricity prices, and it may slow some of its harshest subsidy reforms to limit discontent and support the economy. Saudi Arabia also has yet to find an exchange to list Aramco’s initial public offering, which the Saudis hope to launch next year. The reforms are occurring against the backdrop of a sluggish economy, declining financial reserve assets, and higher fiscal deficits. Although most of the population currently seems content with MBS’ leadership and vision, ongoing economic stagnation is likely to lead to social unrest and heightened political turmoil.

With the U.S.’s national security and economic well-being highly vulnerable to instability in Saudi Arabia and the Middle East, measures to strengthen energy security and reduce oil dependence to fight acute threats are increasingly imperative.

The Saudi purge of prominent royals, ministers, and businessmen may continue, as more were arrested on Monday, confirming that the country is entering an unpredictable period of political instability. Oil prices edged higher on recent events, with ICE Brent rising to $64 per barrel—but momentum from OPEC’s production cut and strong demand growth are the factors currently providing support.

With the U.S.’s national security and economic well-being highly vulnerable to instability in Saudi Arabia and the Middle East, measures to strengthen energy security and reduce oil dependence to fight acute threats are increasingly imperative—and this week’s moves in Congress to eliminate tax credits for electric vehicles come at a time when the need for transportation alternatives are increasingly obvious. Bolstering fuel economy, breaking petroleum’s monopoly in the transportation sector through advanced transportation fuels such as electricity and natural gas, and increasing domestic production should be top priorities to reduce the U.S.’s exposure to the unfree, unfair, and volatile oil market that is dominated by Saudi Arabia.

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