David Fuller's view -
Dr Alsweilem, now at Harvard University's Belfer Centre, said the Saudi authorities have taken a big gamble by flooding the world with oil to gain market share and drive out rivals. “The thinking that lower oil prices will bring down the US oil industry is just nonsense and will not work.”
The policy is contentious even within the Saudi royal family. Optimists hope that this episode will be a repeat of the mid-1980s when the kingdom pursued the same strategy and succeeded in curbing non-OPEC investment, and preparing the ground for recovery in prices. But the current situation is sui generis.
The shale revolution has turned the US into a mid-cost swing producer, able to keep drilling at $50bn a barrel, according to the latest OPEC report. US shale frackers can switch output on and off relatively quickly, acting as a future headwind against price rises.
The Energy intensity of global GDP is falling rapidly. Renewable technology and Energy efficiency have both made huge strides. The latest climate accords in Paris imply some form of carbon tax that will ratchet upwards over time, slowly changing the cost calculus for oil use.
“There is an overwhelming feeling among many in Saudi Arabia that this crisis is just cyclical and that it will reverse soon, so everything will be OK. But the danger is that what is happening is structural, and that means a country like Saudi Arabia can’t just sit still,” said Dr Alsweilem.
The Saudi government may have unveiled an austerity package of spending cuts and increased taxes, and be looking to slash electricity and water subsidies for the wealthy. But Riyadh has to tread with care. The country’s cradle-to-grave welfare system is what keeps a lid on dissent and binds the country’s fissiparous tribal polity.
Prince Mohammed bin Salman, the 30-year old deputy crown prince now running the country, is trying to push through radical reforms, firing princelings from sinecure positions and bringing in an elite team of technocrats to transform Saudi Arabia’s archaic oil-based economy.
He is drawing on a McKinsey study – ‘Beyond Oil’ - that sketches how the country can break its unhealthy dependence on crude, and double GDP by 2030 with a $4 trillion investment blitz across eight industries, from petrochemicals to metals, steel, aluminium smelting, cars, electrical manufacturing, tourism, and healthcare.
I do not know if Dr Khalid Alsweilem, the former head of asset management at the Saudi central bank, has much influence with King Salman. However, 30-year old and highly influential Prince Mohammed bin Salman may understand, given the concluding paragraph above.
However, Saudi governments remain compromised by their Faustian pact with the contemporary Wahhabis who have spread their intolerant faith far beyond the Middle East, in an effort financed by Saudi billions as the price of crude oil mostly rose from the 1970s until mid-2014. With that stream of funding now inevitably reduced, one might hope that intolerant Wahhabism was now in decline, although the outcome may be less reassuring.
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