Opinion |

Will Saudi Arabia Commit Economic Suicide Just to Save the Crown Prince's Skin?

Imposing an oil embargo to punish the world for disrespecting Riyadh is economically and politically foolish, but Mohammad bin Salman may be so powerful that the decision will revolve around him

David Rosenberg
David Rosenberg
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An 'Invest Saudi' advertisement sits on the stage backdrop during the opening day of the Future Investment Initiative (FII) conference at the Ritz Carlton Hotel in Riyadh, Saudi Arabia, on Tuesday, Oct. 23, 2018.
At the Future Investment Initiative conference in Riyadh, Tuesday, Oct. 23, 2018: Would Saudi Arabia be prepared to commit economic hara-kiri for the sake of MBS?Credit: Javier Blas/Bloomberg
David Rosenberg
David Rosenberg

Saudi Arabia has managed to revive the image so widespread during the 1973 oil embargo of wicked sheikhs threatening the West by withholding their oil.

It’s not the kind of image that the Saudis should be trying to cultivate these days, especially when their real power over the global petroleum market is nothing compared to what it was 45 years ago. But it seems the anger and embarrassment over the murder of the Saudi journalist Jamal Khashoggi killing has gotten the better of the regime, or more particularly of the crown prince and heir apparent, Mohammad bin Salman.

Officially, the word oil hasn’t been uttered in the threat over retaliation. A government statement put out last week made do with a veiled threat about its “influential and vital role in the global economy.”

But as everyone knows, Saudi Arabia’s “influential and vital role” is based on exactly one thing, which is that it produces about 10% of the world’s oil.

In any case, if anyone missed that, the government’s good-cop statement was followed quickly by the bad cop of an angry editorial appearing in al-Arabiya, written by the journalist Turki Al-Dakhil, who is close to the Royal Court and was assumed to be speaking in its name.

Al-Dakhil didn’t mince words: “We will be facing an economic disaster that would rock the entire world. If the price of oil reaching $80 angered President Trump, no one should rule out the price jumping to $100, or $200, or even double that figure.”

Ever the reformer, it appears that MbS is ready to abandon a policy of acting as the responsible adult of the world oil market that the Saudis have stood by since the 1973 embargo. All these years, Riyadh has refrained from using the oil weapon to advance its political interests in favor of ensuring an orderly a petroleum market.

And that has been no mean feat, considering the rogue’s gallery of fellow OPEC members (Libya, Iraq, Iran and Venezuela, to name some of the worst offenders over the decades) who sought to weaponize their oil and/or are too politically unstable to ensure their customers a sure and steady supply. The Saudis even came to the rescue of the market after the panic set off by 9/11 and when Obama tightened sanctions on Iran in 2012. With Trump’s renewed embargo, after some waffling the kingdom agreed to keep production up and prevent price rises.

Too big to fail?

The Saudis didn’t assume their adult role out of niceness, but out of need. For those in the West who can remember that far back, the soaring gasoline prices and lines of cars waiting at filling stations created by the embargo looked like a victory for Saudi-led OPEC.

In fact, it was a very brief victory, if one at all. Rising prices and the knowledge that OPEC was no longer a reliable supplier forced Western economies to develop alternative sources of energy and ways of conserving their consumption.

As a result, oil prices after adjusting for inflation were lower throughout much of the 1980s and 1990s than they had been when the embargo drove them higher in 1973 and 1974.

Mohammed bin Salman, Saudi Arabia's crown prince, March 20, 2018 Credit: Kevin Dietsch/Pool via Bloomberg

The reasoning behind MbS’ Vision 2030 economic reform drive is that Saudi Arabia can no longer rely on oil. It’s not just that the kingdom has gotten too big to be a company town for Saudi Aramco, it’s that the world is – slowly – reducing its dependence on oil. Thus, it’s no surprise that the Saudis have been investing in alternative industry.

If MbS is clueless about the rudiments of human rights, he understands that if his country is going to remain a global energy player, it has to be part of the energy revolution.

My guess is that the Saudis understand that even now, when they remain a powerful player in the world oil market, they can’t go around threatening their customers with an embargo.

It’s true that supply and demand in the market are pretty close to being in balance. It’s also true that Trump’s Iranian oil embargo is due to kick in, and that the supply from places like Libya, Iraq and Venezuela is unreliable.

But the G7 countries could release strategic reserves to make up for Saudi supply cuts, and a spike in prices would cause demand to fall, especially in emerging markets.

On Monday the Saudi energy minister, Khalid al-Falih, denied that the country had any intention of imposing a 1973-style embargo, but breathing a sigh of relief may be premature.

If Saudi Arabia operated like a democratic or even quasi-democratic government, MbS would have been politically weakened by the affair and would perhaps be on his way out altogether. He’s not just an obvious scapegoat to be sent off into the political wilderness. Given the concentration of power in his hands, many suspect he holds personal responsibility for Khashoggi’s death.

There is a real risk that Saudi Arabia's long-term interests could end up being sacrificed to keep MbS in his job, because he is too powerful to dislodge.

Declaring an embargo would be a perilous thing to do. The Saudis could achieve much the same thing by quietly reducing production and letting prices rise. Everyone would get the message that MbS should be left alone.

Alas, the message wouldn’t be just that: It would be yet another signal that, however many women are driving or high-tech mega-cities are being built, Saudi Arabia is heading down the wrong path.



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