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Tuesday 07 April 2020

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Saudi Arabia's King Salman aims to win oil war Naimi started

King Salman is unlikely to change his country’s policy of flooding the market with oil, driving down the price and hurting rivals while the Gulf nation bides its time

Prince Salman appointed Saudi Arabia heir apparent
King Salman bin Abdulaziz al-Saud is likely to continue the oil price war Photo: AP

Saudi Arabia’s new ruler wasted little time after taking the throne in quashing speculation that a new broom in Riyadh would lead to the kingdom’s controversial oil policy being swept aside.

But King Salman bin Abdul-Aziz al-Saud, who is 79 and has already survived one stroke, should be viewed as a transitional monarch. For oil markets that could actually mean even more Saudi crude flowing onto the world’s markets, not less.

Instead of bowing to pressure within the Organisation of Petroleum Exporting Countries (Opec) to ease back on its policy that has resulted in the price of oil falling 50pc in the past six months, expect the new monarch to stick with the current strategy sanctioned by his predecessor. That could see Saudi Arabia turning the screw even tighter on its rivals in the oil market.

Opec insiders fear this will mean Saudi Arabia actually increases its production of oil to 10.5m barrels per day (bpd) this year, up from its current output of about 9.2m bpd, regardless of the wishes of other members in the cartel as it seeks to fill the gap being wrenched open in the global crude market by the brutal price war.

Markets are currently flooded with crude, while oil and gas companies are cutting back operations aggressively, which is just what Saudi Arabia had hoped would happen.

US crude stocks have increased by 10m barrels, the highest jump in 14 years, bringing total stockpiles up to an 80-year high of 400m barrels last week. Across North America, hundreds of rigs have been shut down since the beginning of the year.

All Saudi Arabia needs to do now is sit back and wait for high-cost barrels to drop out of the market and global demand to eventually pick up. Although that process may take the rest of 2015 to play out, Saudi Arabia’s new monarch isn’t in a hurry.

The kingdom’s vast foreign currency holdings — estimated to exceed $750bn — are more than enough to cover a forecast budget shortfall, while maintaining state subsidies, which are deemed essential.

The prize for King Salman — who knows about the workings of oil having previously headed the country’s top petroleum body — will be to complete the mission begun by his late brother and to reassert Saudi Arabia as the dominant political and economic force in the Middle East.

In so doing he can safeguard the continuation of his family’s power, which began 100 years ago with the rise of his father, Ibn Saud.

It is lower oil prices that will help King Salman and his immediate successor Crown Prince Muqrin bin Abdulaziz to achieve that goal.

The genesis of the strategy was perhaps incubated in the kingdom’s darkest hour in recent history almost four years ago to the day.

The regime of Hosni Mubarak in Egypt was hanging by a thread when on January 29, 2011, the late King Abdullah bin Abdul-Aziz al-Saud called US President Barack Obama, begging for America not to allow the government in Cairo to fall ignominiously.

For the first time in a generation, a direct plea from the ruler of the world’s biggest oil exporter to the leader of the world’s largest oil consumer would fall on deaf ears. Saudi Arabia had failed to build the kind of relationship it had previously enjoyed under successive Bush administrations and suddenly found itself in the uncomfortable position of being an outsider in the corridors of power in Washington.

Unlike his predecessor George Bush, Mr Obama had no interest in Saudi Arabia and wanted America’s economy finally dragged away from its cosy relationships with petrodollar dictatorships.

By putting down the phone on King Abdullah and opening the flood gates to an explosion in US shale oil drilling, Mr Obama was effectively telling the late king: “You’re on your own, at least while I am in charge.”

Meanwhile, the boom in US shale drilling and increase in high-cost oil production outside Opec further eroded Saudi Arabia’s ability to influence policy in the world’s largest economy.

However, as the clock starts to run out on Mr Obama’s administration, Riyadh has one eye on forming a new relationship with the White House that will once again be built on a lake of crude oil. Should Jeb Bush emerge as a viable presidential candidate, it would rekindle the special relationship between the House of Saud and the first family of Texas.

Without oil, Saudi would mean little in global affairs and it is hoped the current strategy of forcing prices lower will help restore the kingdom’s strategic importance to America for decades to come. Of course, that may mean bankrupting many of its partners in Opec such as Iran, Venezuela and Nigeria, but the cartel arguably no longer serves a significant purpose to Riyadh, or indeed its close Gulf allies among the Sunni Muslim Arab sheikdoms.

Combined, these countries constitute the core of Opec and may see their futures linked closer to global institutions such as the G20 than an organisation which counted dictators such as Saddam Hussein and Muammar Gaddafi among its heads of state.

Although King Salman will certainly have been involved in the decision by Saudi Arabia to allow oil prices to plummet, the real architect of the plan is Ali al-Naimi, the country’s long-serving oil minister.

The veteran technocrat has no royal family connections and has made some powerful enemies in the kingdom since oil prices fell from around $100 per barrel, which was viewed as a minimum for propping up the economy.

The late king had been a key ally of al-Naimi, allowing him to wield almost unprecedented power for a technocrat from humble origins.

Under Abdullah, men such as al-Naimi and Ibrahim al-Assaf, the finance minister, were given almost a free hand to direct government with a minimum of interference from the royal court. Under King Salman, that policy of allowing competent ministers such as al-Naimi to get on with their jobs mostly unhindered is unlikely to change.

If there is a change to that view it will come from the younger generation of Al Saud princes who are next in line for the throne and not King Salman.

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