Opinion

Saudi Arabia Lost the Oil War, but Don’t Expect the Crown Prince to Go

Mohammad bin Salman was playing a game of high-stakes poker with Russia, but he didn’t have the hand to risk it

David Rosenberg
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Saudi Arabia's Crown Prince Mohammed bin Salman, September 18, 2019.
Saudi Arabia's Crown Prince Mohammed bin Salman, September 18, 2019. Credit: Mandel Ngan/Pool via REUTERS
David Rosenberg

The term Pyrrhic victory has had a good four-century run in the English language, even though the event it refers to is not quite borne out by history.

Recounting the defeat of the Romans by King Pyrrhus of Epirus, the (not particularly reliable) historian Plutarch quoted the king as saying, “If we are victorious in one more battle with the Romans, we shall be utterly ruined.”

The truth was more complicated: The Romans suffered greater casualties than the Pyrrhus in two key battles, but they had bigger reserves of men to draw on to keep fighting. That’s why there was a Roman Empire, not an Epirus empire.

On the other hand, it is safe to say that Crown Price Muhammed Bin Salmin’s defeat of the Russians this week in their month-long oil price war will go down as an authentic Pyrrhic victory.

True, the crown prince did finally force Russia to make the cuts in oil production he had sought – in fact, they made even bigger ones than they had initially refused. But the victory was so costly that future dictionaries may consider replacing the term Pyrrhic victory with “Mohammed’s triumph.”

What happened? As some of you may have noticed, the coronavirus pandemic has had a profound effect on the global economy, among other things causing energy demand to crash through the floor. I say some because apparently Russian leader Vladimir Putin appeared to think otherwise when he rejected at the beginning of March coordinated petroleum production cuts with OPEC, meaning, in effect, Saudi Arabia.

Prince Muhammed could have done the wise thing and held out. The coronavirus’ toll on the world economy was growing quickly and the Russians were far from united on opposing cuts. They almost certainly would have come back to the negotiating table in pretty short order. But that’s not the crown prince’s way. Instead, he chose to raise the ante by boosting Saudi production to the limit and offering customers big discounts.

The result was that he turned a dismal situation for oil into a disastrous one: In one fell swoop, the price of Brent crude fell 24% and at the end of March was at its lowest in nearly two decades.

With the help of Donald Trump (another late convert to the coronavirus threat), a deal was finally reached to cut production. But the consensus, as evidenced by the downward price of oil and oil futures, is that the deal is too little, too late.

Panic and glut

It’s not just that the crown prince’s strategy set off a market panic and a bigger price drop than patient diplomacy would have created, Prince Mohammed glutted the market to the point that there’s literally no place to store all the oil that’s been pumped.

The last time the kingdom engaged in this kind of brinksmanship was in 2014, before Prince Mohammad’s rise to power but certainly recent enough for him to have watched from the sidelines and learned. Then, too, world demand was weak but the Saudis decided to turn on the spigots anyhow in the hope of pushing American shale producers out of the market. The plan failed miserably and prices never recovered.

Saudi Arabia is no longer in a position to engage in this kind of high-stakes poker. The kingdom is a low-cost producer and is swimming in oil, but it has big financial commitments, too – and even bigger ones since Prince Mohammad embarked on his Vision 2030 plan to diversify the economy.

Fitch Ratings estimates that the kingdom’s breakeven point, the minimum oil price it needs, to cover its expenses will this year be $91 a barrel. No one expects the price to reach anywhere near that in the foreseeable future.

Since its 2014 miscall, Saudi foreign reserves have fallen from $740 billion to $500 billion. It’s cut subsidies to Saudi citizens who had grown used to a seemingly limitless state largesse and began borrowing money abroad. A new round of budget cuts are on the way. In short, Saudi Arabia doesn’t have the money to buy its way out of social discontent as it has in the past. What money it does have will go to mitigating the economic impact of the coronavirus.

Meanwhile, the crown prince's plans to turn his country into a global center of technology and tourism under Vision 2030 are now effectively dead in the water. The kingdom’s coffers are too dangerously low to fritter away on long-term investments like cities of the future, and the foreign investment he was counting on to help finance his ambition hadn’t been materializing even before the coronavirus pandemic.

On almost every other front – war with Yemen, the campaign to isolate Qatar, the assassination of the journalist Jamal Khashoggi and now his generalship in the oil-price war – he has proven to be a serial bungler. Vision 2030 was the only thing the crown prince was doing that showed any real strategic leadership. His other missteps have now doomed that, too. If Saudi could vote for their leaders, he’d be a one-term prince.

Saudi Arabia in 2030 will in all probability not be a Middle East Silicon Valley and the Cote d’Azure combined but a struggling oil producer led by a man who got his job, not by a track record of achievement and effective leadership, but by dint of birth.