Changing oil dynamics confront new crown prince
Reformer will likely need higher crude prices to succeed
If any single person could stop the oil market’s plunge, it would be 31-year-old Mohammad bin Salman.
The new Saudi crown prince, picked this week to succeed his father to the throne of a country that pumps one in every nine oil barrels consumed around the world, has pushed ambitious reforms aimed at unshackling the Saudi economy from fickle oil prices and furnishing new jobs and industries outside oil and government for a young and growing population, racing against time as the world’s energy mix evolves.
At the center of the young reformer’s plans is next year’s $2 trillion public offering of a slice of Saudi Aramco, a bid to raise seed money for new technology and manufacturing industries that would diversify the kingdom’s oil-dependent economy. But his agenda could flounder if oil remains cheaper than $50 a barrel.
“He wants to raise as much money as possible from listing Aramco,” said Jim Krane, fellow for energy studies at Rice University’s Baker Institute for Public Policy. “That’s crucial for the future of the kingdom and the national transformation he’s spearheading. He needs cash and high oil prices to do it.”
That means it’s more likely Saudi Arabia will keep the pressure on to drain the world’s oil glut — and work to convince other oil-producing nations like Russia to join it — despite the market pessimism that has driven prices
down 20 percent this year. The kingdom is aiming for $60-a-barrel oil, but prices have dropped under $45 a barrel in recent weeks.
If oil drops into the $30-a-barrel range, Saudi Arabia may lead an effort to make deeper oil production cuts, or once again try to extend the current agreement to keep 1.8 million barrels a day off the market beyond March 2018, ultimately clearing a path for oil companies in Houston to drill U.S. shale plays even faster, analysts said.
Salman’s rise comes as shifting global power structures complicate the once-straightforward relationships and dynamics that drove the oil market. The kingdom is fighting a proxy war in Yemen and supports Syrian rebels amid tensions with Iran and Qatar. Salman’s hawkish stance on defending Saudi Arabia could propel simmering conflicts in the region.
It has embraced Russia, its longtime rival for influence in the Middle East, even as Qatar has acquired a stake in Russia’s staterun Rosneft. And crude exports from the U.S. have pushed further into international markets this year, even as Salman extends friendship to the Trump administration.
“The challenges facing the oil market are as high as they’ve ever been, and the geopolitics is more complex than it has ever been,” said Amy Myers Jaffe, executive director of energy and sustainability at the University of California at Davis.
“Can he manage that on top of two wars and a very tense conflict with Qatar? It’s an important time for all the players in Saudi Arabia to come up with a sophisticated strategy, and the question is whether his ascension will facilitate that or not.”
Over the past year, Salman has consolidated power within the kingdom’s oil industry, elevating a new energy minister, Khalid al-Falih, who believed cuts would help rebalance the oil market, and steered its oil market strategy away from the previous push to hoard market share. Salman has orchestrated pacts with Russia, OPEC and several other countries to stop pumping more oil than the world needs — all in support of his plans to shake up the Saudi economy.
That puts Salman in a difficult position. Knowing the kingdom is motivated to boost oil prices to ensure a successful IPO of Saudi Aramco, other OPEC producers can lean on Saudi Arabia to bear the brunt of the output cuts if it wants to extend or deepen the reductions, analysts said.
So far, it appears Salman has been willing to make that exchange. On Thursday, OPEC said its crop of oil-producing countries conformed to their quotas in record numbers in May, reducing supply more than they promised. Most of that output cut has come from Saudi Arabia.
At the beginning of last year, Salman signaled it wouldn’t matter to him if oil prices plummeted. That has changed, analysts said, because Saudi national reforms — including efforts to boost labor-intensive industrial sectors to attract big financial institutions to Riyadh — are at stake.
“He thinks Saudi Arabia has to make up for lost time,” said Matt Reed, vice president at Foreign Reports, a Washington consulting firm focused on Mideast oil politics. “To him, these reforms are all overdue by years or decades. There’s an urgency about (Mohammed bin Salman) that you don’t see elsewhere in the Gulf.”