There are so many issues at play in the Kingdom of Saudi Arabia right now it is hard to find a starting point. The KSA is running at a deficit for the first time ever, a sharp decline in oil prices (that the KSA instigated in 2014 to bankrupt US and Canadian shale and tar sands industries), an increase in military spending by supporting Syrian rebels and continuing to ramp up the close to two year old war in Yemen are just the tip of the ice berg.
A sanction less Iran is making up for lost time, selling large quantities of oil and disputes over who will succeed King Salman are becoming more obvious to the whole world, as Crown Prince Mohammed bin Nayef (MBN) has clearly taken a back seat to King Salman’s favorite son, the thirty year old Minister of Defense/Deputy Crowned Prince Mohammed bin Salman (MBS).
Opinion on the “Arab Street” is in turmoil as age and experience have always been important attributes in the Islamic world and nobody can deny that Crown Prince Mohammed bin Nayef has these qualities. At age 57, he is the First Deputy Prime Minister and the Minister of Interior of Saudi Arabia. He is also the chairman of the new Council for Political and Security Affairs.
MBN is a Counter-terrorism expert and a strong ally of the United States in the war on terrorism. He graduated from Lewis and Clark University and intelligence provided by MBN and his intelligence network stopped an attack on Chicago during the 2012 U.S. Presidential Elections by Al-Qaeda via a slew of small bombs sent via Fed Ex and timed to go off upon arrival at a variety of election centers around the Chicago area.
MBN has two daughters, Sara bint Muhammad bin Nayef, Lulua bint Muhammad bin Nayef and this makes him no threat to Deputy Crown Prince Mohammed bin Salman’s eventual succession to the Saudi throne (giving the young prince time to mature and gain more experience, he is already the youngest Minister of Defense in the world).
While the ultimate decision is up to King Salman, the writing on the wall clearly suggests the young MBS will be the next King of Saudi Arabia and at a time when the kingdom will be facing a “perfect storm” of hard decisions.
November 30th, OPEC meets in Austria. While it would be rational for the KSA to decide to continue to drop prices in hopes of stabilizing the market, the conservative thing to do is keep policies and production as they are and see how the market reacts to a variety of new developments and this is what the Saudi’s will recommend, a conservative yet irrational approach.
On the 26th Al-Falih said, "We don't believe any significant intervention in the market is necessary other than to allow the forces of supply and demand to do the work for us” and was reassured that the “market is moving in the right direction.” According to Reuters this resulted in “global marker Brent futures (giving) back some gains, slipping as much as 35 cents, or 0.7 percent, over 20 minutes, before recovering somewhat”. Just five days later Al-Falih said, “The market is now saturated with stored crude at beyond usual levels and we don’t see in the near future a need for the kingdom to reach its maximum capacity.”
The KSA and OPEC also need to consider that Texas oil firms have come across large new reserves of oil and natural gas. “Wolfcamp shale, located in the Midland Basin portion of Texas’ Permian Basin, contains 20 billion barrels of oil and 1.6 billion barrels of natural gas liquid.
The Permian Basin is one of the most productive oil and gas areas in the country, and more than 3,000 horizontal wells have been drilled in the Wolfcamp shale section, the USGS agency said in a statement. “The fact that this is the largest assessment of continuous oil we have ever done just goes to show that, even in areas that have produced billions of barrels of oil, there is still the potential to find billions more,” said Walter Guidroz, program coordinator for the U.S. Geological Survey (USGS) Energy Resources Program. The oil is worth around $900 billion at current prices and is the largest continuous oil and gas deposit ever found in the United States, Bloomberg News reported.
Meanwhile Dallas-based Caelus Energy Alaska LLC announced a find of 6 billion barrels of light oil on its state leases in the Arctic Ocean waters of Smith Bay about 450 miles northwest of Fairbanks. Chief Operating Officer Jim Musselman called the discovery exciting news for the state, which receives a majority of its revenue from the oil industry. "It has the size and scale to play a meaningful role in sustaining the Alaskan oil business over the next three or four decades," Musselman said of the discovery in a prepared statement. "The Smith Bay development could deliver 200,000 barrels per day of light oil to the trans-Alaska pipeline, increasing volume and reducing the average viscosity of oil, which would help extend its viability", the company said.
While having to take into consideration these massive new oil finds in the United States, the IMF recently decided on a $12 billion loan for Egypt earlier this month, in a move intended to stave off economic collapse in the Arab world’s most populous nation as it grapples with a plunging currency, soaring inflation and shortages of staple foods.
Despite recent disagreements over the strategically located Red Sea Islands of Tiran and Sanafir, Saudi Arabia needs Egypt to remain strong if it is to continue to escalate their "conflict" in Yemen. The KSA has the airpower but is unwilling to commit more than 2,000 ground forces in the region and every armchair general knows that “boots on the ground” are essential to winning a war.
In the past, Saudi Arabia has generally looked to Egypt to provide conscripted ground troops to bolster their 200,000 man army. However, the KSA is reluctant to use it’s own troops abroad. The House of Saud keeps them within the kingdom as a deterrent to civil unrest and terrorism.
This is a prudent strategy for the House of Saud as they have serious demographic issues to deal with at home while taking the steps necessary to maintain and escalate their conflict with Yemen.
There are some demographic issues that the KSA is going to have a hard time dealing with as all the young Saudi Arabian students who went abroad in recent years (on the government’s dime) will lead to growing and endemic youth unemployment that will continue to endanger Saudi Arabia’s national security as these young Saudi’s come home to few prospects of a real job, never mind what they have a Master’s degree in.
Saudi Arabia needs to absorb the millions of unemployed youth already in the kingdom as well as those headed back to the KSA anxious to work. Cooperation between the public and private sectors needs to be created by the government to avoid these young Saudi Arabians from falling into to the abyss of terrorism or civil unrest that hopeless young people in other Islamic countries find themselves.
The KSA remembers all too well that in 2012 Saudi Arabian troops were called into Bahrain, to put down an uprising of disenfranchised youth. Bahrainis had protested before, mainly about the fact that the country's majority Shiites remain poor and disenfranchised by the Sunni monarchy. But they'd never protested like this. Young protesters asked for things like an elected Parliament, a new constitution. But then when demonstrators started getting killed, tens of thousands of unemployed and disenfranchised Bahrainis converged on a place called the Pearl Roundabout to call for the fall of the ruling Al Khalifa family.
The KSA must put their youth to work at jobs with growth potential if they want to keep the status quo intact. King Abdullah allowed women to receive a higher education and some women have run in municipal elections and won (these are small local elections but are the only real elections to be held in the KSA). The Sharp decline in oil prices, cost of subsidies and military spending, including the war in Yemen and supporting rebels in Syria, are all factors that will continue impacting the Kingdom’s financial position (Energy Security and Climate Change in the Trilateral Context).”
King Abdullah was a wise king and under his rule the KSA built up $700 billion dollars in surplus. However these rainy day funds have dwindled rapidly. When the “Arab Spring” broke out in Egypt in 2011, King Abdullah gave over $130 billion in bonuses, tuition funds, home and business repairs, virtually anything to keep the masses content and loyal to the regime. This trend continued under King Salman who spent another $130 billion upon taking the throne in 2015, paying bonuses, tuition funds etc.
Deputy Crowned Prince/ Minister of Defense Prince Mohammed bin Salman has spent over $140 billion dollars since the start of the “conflict” in Yemen and has little to show for it. The war, intended to stop the progress of local Houthi militias will not end without boots on the ground. If the KSA doesn’t change their military tactics, Yemen will be their Vietnam and it wouldn’t be the first time.
During the 1960s, Egyptian president Gamal Abdel Nasser intervened in the North Yemen Civil War to stop a dethroned imam from reclaiming power, and quickly found himself trapped in a quagmire. Afghanistan may be the “Graveyard of Empires,” but Yemen has also bogged down its share of foreign invaders.
Military metaphors aside, the real problem now is that Yemen is starving to death. Already the poorest country in the Middle East, Yemen has for months been subjected to a Saudi blockade, creating shortages of essential goods, including food. This has, not surprisingly, bred hostility—Riyadh is now losing the battle of hearts and minds, as it were. So why would the Saudis do this? Why pulverize a country to stop the Houthits? Given the devastation that’s been wrought, it seems like overkill. But the ends justify the means and the KSA has big plans for the untapped oil reserves of Yemen.
Yemen is too poor to build refineries and sell their oil wealth on the open market. If a Pro-Saudi regime were installed and a pipeline from Yemen, through Djibouti to the oil refineries of the KSA was constructed, it would replenish Saudi coffers in a big way.
In recent months Saudi Arabia has signed economic and military pacts with Pakistan and China. While many have tried, Russia, Japan etc. China has shown the most interest in the KSA regardless of the indefinite 5% Aramco IPO. The Chinese realize that the KSA’s Aramco may never go public (if Aramco does have and initial public offering it could be as far off as 2018).
China wants to be partners with the KSA on many levels. Helping to modernize their infrastructure as well as put up the necessary capital to build a pipeline from Yemen through Djibouti to the KSA.
The KSA has already pivoted to the East and with a Trump Administration an unknown quantity, the Saudis already know they are being thrown under the bus, their gold stolen, their image vilified and the Petro-Dollar a thing of the past. The OPEC cartel will have to deal with the fact that the days of $100 a barrel oil are over.
“The gold owned by the KSA is being seized, confiscated, pilfered, and stolen for the unspoken purpose of continuing the fiat paper currency regime with the US Dollar at the center.
The US Military is being superseded by the Chinese Military in the important protectorate role throughout the Persian Gulf region. But no nation will step forward to defend the Saudis or to prevent their gold wealth from being pilfered. The Anglo-American Elite will justify the thefts by claiming the Saudis gained the riches at the command of the West (Willie, Jim).”
While the KSA signs economic and military assistance pacts with China, they don’t seem to realize that their London and Swiss gold accounts were pilfered to pay back the Chinese, perhaps giving them the capital to invest in Saudi Arabia, whose “Vision 2030” prospectus will never come to fruition in its’ present form.
The truth is the KSA is not a very fun place and trying to use the U.A.E. business model to make it a tourist “mecca” will never work. While building a Six Flags theme park and some other entertainment attractions may stem the tide of wealthy Saudi Arabian citizens from going abroad to spend their millions. Saudi Arabia is too strict a regime to bring in European tourists or business as the U.A.E. has done so brilliantly.
Saudi Arabia’s foreign holdings peaked in August 2014 at $737 billion falling with oil prices and are down over 16%. Their assets are likely to consist of US dollars, securities like US Treasury bonds and deposits with banks abroad.
These deposits reduced by $8 billion to $125 billion in July, but holdings in foreign securities grew by $2 billion to $371 billion after 10 straight months of contraction (Bloomberg).
In an attempt to corner the global market and oust high-cost oil producers like US shale, Saudi-dominated OPEC introduced predatory prices for its oil, pushing crude from $114 a barrel in the summer of 2014 to the current low.
Last year, the Saudi budget deficit hit an historic high of $98 billion. Riyadh expects this figure to drop to $87 billion. To cover some part of the deficit, the government has been borrowing domestically and abroad.
The situation that Saudi Arabia now finds itself in is, largely of its' own doing. You cannot support terrorism abroad without worrying about the young and poor at home. You cannot introduce predatory pricing and wonder why oil doesn’t go for $100 a barrel anymore and most of all you cannot treat your Shiite neighbors with hostility and disdain when Iran and Iraq have teamed up together and are working hard to overthrow Saudi Arabian oil dominance. Both Iran and Iraq are seen by the west as more constructive and more peaceful. The odd bedfellows of Iran and Iraq have instigated a plot for an all out oil revolution against the now unchallenged and dominant Saudi Arabians.
This will prove to be an interesting and perhaps violent undertaking as the entire Middle East is dragged kicking and screaming into the 21st century (the U.A.E. excluded).
Bloomberg News 11/26/16
Colleta, Michael, USA TODAY, 11/11/16