Why Saudi Arabias King Salman Is Holding Strong on Oil Prices - [It is nearly a truism to say that nothing is more respected than strength in the Middle East. And, in the wake of a transition of power at the highest levels, projecting strength is more important than ever. Despite the smoothness with which the dynasty has passed on to Salman, many inside and outside the kingdom have spent years fretting about the possibility of domestic unrest at this juncture. Moreover, with the region more volatile than at any point since the collapse of the Ottoman Empire, understanding the importance of projecting strength is key to accurately anticipating Saudi actions. If the need to project strength is your touchstone for analysis, youll conclude the Saudis are most likely to hold course in the near term. If you believe that the Saudi policy is first and foremost inspired by a desire to undermine the Iranian regime, youll conclude that now would be the worst time to modify that approach. Some observers have suggested that the new king could cut oil production unilaterally, to relieve the economic vise squeezing Tehran and start a more constructive dialogue between the two countries. Indeed, since Abdullahs death the Iranian regime has been on a PR campaign pushing a good neighborly approach to regional problems. Don’t count on it. In the region, such a Saudi gesture would be seen not as an olive branch extended from a position of strength, but as an indication that the new king will lack the resolve of Abdullah. What to expect, then, if you believe (as I do) that the Saudis are not primarily driven by geopolitical reasons? Then you will still come to the conclusion that change is unlikely in coming months. Saudi officials remain singed by the experience of the 1980s, when, in the face of a non-OPEC supply surge, Saudi Arabia cut production -- yet was still unable to bolster price. Looking at the changing dynamics of the oil market, particularly in light of the boom in U.S. shale production, Saudi officials are concerned about a repeat performance of that 1980s dynamic. Even before Abdullah’s death, these same Saudi decision-makers almost surely worried that a unilateral cut in production, with no resulting boost to price, would suggest that Saudi Arabia had lost control of the oil market. Better not to try, than to try and not succeed. Nothing would project weakness more definitively. Now, as a new king assumes the thrown, this logic holds more than ever. So much for short-term change. But it would be over-confident to assume that the status quo will remain for the indefinite future. Technically, perhaps, Saudi finances can withstand low prices for many years. The budget for 2015 is expansionary, with a predicted $40 billion deficit. (And it appears to assume a slightly higher oil price than the currently sub-$50 per barrel levels, so the deficit could be even larger.) But running such deficits year after year is only sustainable if one assumes that oil prices will eventually rebound to higher levels, allowing Saudi Arabia to restore its coffers. So, what if these recent market trends are not outliers but the new normal? Saudi Arabia’s most astute decision makers certainly have that possibility on their minds. Moreover, despite recent pronouncements that the succession will not result in cabinet changes, there are some good reasons to anticipate new ministers over the next half year, with resultant changes in policy, although not necessarily regarding oil.]
Posted on: Tue, 27 Jan 2015 14:53:54 +0000
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