The Fuse

Understanding the Saudi Leadership Shakeup

by Paul Ruiz | @pmruiz | June 18, 2015

Recent developments in the Saudi leadership have left many wondering about the implications for the Kingdom’s influential energy policy. Last month, the new King Salman bin Abdulaziz Al Saud introduced a series of structural reforms intended to alter the line of royal succession and reshuffle the country’s vast petroleum sector. The King moved Saudi Aramco—the state-owned oil company—out of the country’s oil ministry, and in January reappointed several positions at the top of the Saudi government. “The changes amount to a comprehensive shakeup of the senior leadership of Saudi Arabia,” Rice University’s Kristian Coates Ulrichsen told Bloomberg.

Oil market observers have questioned whether these developments will influence global oil markets, or alter the geopolitical dynamics in the region. In spite of much speculation about the potential implications of leadership changes on the Kingdom’s oil policies, most experts are in fact in agreement that the country’s oil output is likely to remain entirely stable, and the decision not to play the swing producer role in light of lower oil prices will remain unchanged.

King Salman’s Legacy

At 79, the King of Saudi Arabia is in reportedly poor health and working to solidify his legacy, despite only ascending the throne in January. Over the past several months, the new king has named Mohammed bin Nayef, age 55, to be crown prince, and acting minister of the interior. His son, Mohammed bin Salman, who is about 30 years old, was named deputy crown prince, minister of defense, and Chairman of the Council for Economic and Development. The new deputy crown prince was also educated in the United States and is understood to be far more west-leaning than his predecessors.

These developments were notable for placing bin Nayef in charge of the Kingdom’s internal defenses, said Anthony Cordesman of the Center for Strategic and International Studies, at a May event hosted by the Atlantic Council. Nearly as soon as bin Nayef took the helm of the Saudi interior ministry, the country launched a major air offensive in Yemen to engage Houthi rebels. The younger defense minister, Mohammed bin Salman, has been an advocate of decisive military engagement in the region, assisting the United States—at least symbolically—in its air campaign against ISIS, and arming Syrian rebels. In support of these strategic maneuvers, the Saudis have placed $90 billion in arms orders from the United States over the next three to five years.

Technocrats at Aramco

Saudi Aramco was separated from the oil ministry last month after the ten-member Supreme Economic Council approved the decision. The company’s chief executive, Khalid al-Falih, was appointed chairman and health minister in a step that moved commercial decisions away from the royal family, yet retained full financial control over the country’s oil policies.

It was a tough choice. Giving the top oil ministry job to a prince, analysts say, could have stirred disagreement among the many royals. The restructuring at the oil ministry still potentially allows a prince to be named the next oil minister, once 79 year old Ali al-Naimi—the incumbent minister of petroleum and mineral resources—retires.

“[Al- Naimi] is still Minister of Petroleum and Minerals, but oil will no longer be handled by that ministry,” said Jean-Francois Seznec, a visiting professor for the Center for Contemporary Arab Studies at Georgetown University. “The Supreme Council is now chaired by Mohammed … But the fact is, Mohammed has very little time on his hands to really manage oil policy, especially since [the oil ministry] is so difficult to handle.” In large part, Aramco is—and has traditionally been—very heavily specialized, and there is no indication that this will change any time soon.

Energy Beyond Oil

Over a longer term, Saudi Arabia has said it will diversify its energy sources, boosting the country’s own energy security by constructing new natural gas export facilities. Aramco plans to expand into solar, petrochemicals, and nuclear power industries. In fact, at the recent OPEC International Seminar in Vienna, Saudi oil minister Ali al-Naimi commented that the Kingdom’s investments in solar energy could free up enough oil (currently used for power generation in the country) for export, that it would be a “black swan” event in global oil markets.

The recent leadership changes have also made the oil industry much more technocratic, placing al-Falih in charge of the day-to-day operations at Aramco. He was an early proponent of the oil giant’s venture in petrochemicals, which will soon open a $20 billion petrochemical plant co-owned with Dow Chemical.

“Whistling Past the Graveyard”

Despite generally calm language from the Saudi delegation in Vienna at the most recent OPEC meeting, the global swing producer may not be able to keep Iran and Iraq from flooding the market with surplus crude. “They’re whistling past the graveyard, to a certain extent,” said Bob McNally, president of energy consultancy The Rapidan Group. “This is a longer game than they thought it would be last fall. Notwithstanding all the happy talk in Vienna, we’re still in the staring-down phase of this contest.”

Overall, Seznec said he was not worried about a “race to the bottom” in oil prices.

Experts are noting that the Saudis remain deeply skeptical of any Iranian nuclear deal. Although recent press reports have focused exclusively on the Saudi role in Yemen, and the age of the new leadership, the issues are significantly more intricate. The Saudis view their campaign in Yemen as a show of force, which asserts their role as a regional power. From a Saudi perspective, a nuclear agreement will not have any positive impact because it is not going to counter Iranian nuclear capability.

Further, a deal could be reached to redevelop Iran’s natural gas resources. The country is currently a net importer of gas, despite holding the world’s second largest proved reserves. With a capital infusion, it could construct a pipeline to supply customers in neighboring Pakistan, or distant Europe. Such a move would not only be beneficial for its oil and natural gas industry, but it would also reduce Europe’s dependence on Russian energy. Iran also could develop LNG export facilities, and—most relevant here—if sanctions are lifted, another 600,000 to 700,000 barrels per day could come to market. Such an arrangement may be mutually beneficial to the Saudis and the Iranians, who see Islamic militants destabilizing the region.

Neighboring Iraq also has the potential to affect the regional energy supply balance. Some supply has already been halted due to militant attacks, but the country has the capacity to significantly increase production. Internal conflicts continue to threaten the stability of current supply. Following disagreements with the central government in Baghdad, the regional authority has been displeased with the outcome of a December agreement to share oil revenue. If Erbil secures control of its main oil-producing facilities in Kirkuk, and relations with the central government continue to strain, it could—in theory—independently export between 500,000 and 1 million barrels per day in a couple of years, though this could still be a few years down the line.

Ongoing instability—on every border with Saudi Arabia—makes it difficult to divine the Kingdom’s future foreign policy and energy policy ambitions. But in terms of oil policy, it seems that the more things change, the more they stay the same.