On May 17, 2016, Wikistrat held a webinar for journalists and commentators to consider Saudi Arabia’s “Vision 2030” proposals, which include leadership changes at the Saudi oil ministry and the partial privatization of Saudi Aramco in order to create a sovereign wealth fund capable of supporting diversification of the domestic economy.

Participants in the webinar included:

» Prof. Shaul Mishal, Director of the Middle East Division at the Lauder School of Government at IDC Herzliya, Professor at Tel Aviv University

» Dr. Ariel Cohen, Non-Resident Senior Fellow at the Global Energy Center at the Atlantic Council  

» Dr. Thomas O’Donnell, Fellow at the American Institute of Contemporary German Studies, global energy and international affairs analyst

The session was moderated by Dr. Shay Hershkovitz, Wikistrat’s Chief Strategy Officer and the Director of the Analytic Community.

INTRODUCTION

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All three analysts considered the components of Vision 2030, with Prof. Mishal suggesting that the Saudis are trying to “adjust the country to a new era” and bring about “independence from oil revenues” through pursuit of an indigenous defense industry, the development of a tourism industry, and the adoption of a more liberal immigration policy.

He noted that Vision 2030 remains simply a vision and that it is unclear how successfully it can be turned into reality. He also commented that great efforts will be needed to mobilize support from the public due to many Saudis being employed in closed, inefficient public-sector organizations that will be resistant to economic restructuring.

Prof. Mishal suggested that success will be dependent upon more than financial and economic changes, as the plan is contingent upon psychological and cultural shifts within a Saudi society that may be unready. “It’s the first time the Saudis [the government] have been ready to think in drastic terms about their future.” Accordingly, he concluded that Riyadh is embracing uncertainty on the basis that it is better to “take a big risk without knowing where they’re heading” rather than risk a disastrous situation resulting from adherence to an outdated status quo. Dr. Cohen broadly shared this analysis, concluding that the key question is whether the new plan offers a sustainable vision. For instance, Dr. Cohen said the notion that Saudi Arabia can create competitive non-oil and non-petrochemical industries is questionable, given that many niche industries in the region have already been claimed by others. With Dubai as the Mideast’s financial and transportation hub, and Doha the media hub, he noted that few opportunities are left for Saudi Arabia as it pursues diversification.

Dr. Cohen also noted further tensions within the plan. For instance, the stated goal of producing 50 percent of military equipment domestically would require an education base, industrial tradition and corporate culture that can only be achieved through an increase in the expatriate population – which would have significant political implications. The plan, according to him, is predicated on the contradictory aims of reducing unemployment while simultaneously increasing female labor force participation.

Finally, Dr. Cohen cast doubt on the claim that Saudi Arabia would be able to raise $2 trillion from its Aramco IPO (initial public offering), noting that the figures seemed

questionable when compared to the market capitalization of other national energy firms such as Russia’s Rosneft. On this basis, he concluded that Vision 2030 derived

FEASIBILITY OF VISION 2030

It’s the first time the Saudis [the government] have been ready to think in drastic terms about their future.

Prof. Shaul Mishal

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from a mixture of legitimate need to improve the country’s economic performance as well as “wishful thinking” as to the ease with which this could be accomplished. Dr. O’Donnell echoed these concerns, noting that many (albeit less wealthy) countries from the “Global South” had put forward similar plans only to find that neoliberal market-oriented programs “crafted from the top” encountered significant opposition. He pointed out that there are already complaints within Saudi Arabia that the planned reorganization is centered around Riyadh, leading many in other regions to question their inclusion.

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Prof. Mishal drew attention to the regional dynamic, noting that any regional disparity in the distribution of benefits would feed existing tensions within the governing royal family. He also noted that this is a perilous time for Saudi Arabia, which is struggling to (a) find a suitable exit from the conflict in Yemen, (b) maintain good relations with other Gulf monarchies due to differing assessments of the role of political Islam, and (c) the desirability of Iran’s reentry into the global oil market.

Likewise, Dr. Cohen said that the power struggles within the royal family remain unresolved, as are the difficulties Saudi Arabia is facing in Bahrain and Syria. At the same time, it appears that the historic arrangement by which the U.S. protects the Kingdom – which has benefited both countries – is starting to unravel. If elected, Donald Trump would carry that process further by reviewing all U.S. commitments. With the election of Hillary Clinton, we can expect more of a “business as usual” approach.

However, irrespective of the results in November, the coming years will see tremendous instability in the Middle East in general and in Saudi Arabia in particular – made all the more difficult by the unavoidable transition of political power from the sons of Ibn Saud to his grandsons. Dr. O’Donnell was more cautious in his assessments of the geopolitical challenges Saudi Arabia will face as it attempts to restructure its economy. He said the Obama administration had told the Saudis that local problems would increasingly be their responsibility to resolve (given that they have sufficient money and arms to do so), and that Riyadh’s intervention in Yemen was a result of that. It had never been U.S. policy to favor Riyadh in all instances, and Washington’s primary aim is in fact to ensure that no single entity comes to control of the region’s oil resources – be it Iraq, Iran, Saudi Arabia or an external power. He stressed that the U.S. has invested enormous geopolitical capital in that effort, and that it would be a mistake to expect the U.S. to waver in maintaining that approach. Regardless of shale oil’s role in reducing U.S. oil imports, Washington will continue to have tremendous interest in maintaining the stability of the global oil market.

GEOPOLITICAL DIMENSIONS

If elected, Donald Trump would carry the bilateral unraveling further by reviewing all U.S. commitments. With the election of Hillary Clinton, we can expect more of a “business as usual” approach.

Dr. Ariel Cohen

Regardless of shale oil’s role in reducing U.S. oil imports, Washington will continue to have tremendous interest in maintaining the stability of the global oil market.

Dr. Thomas O’Donnell

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Dr. O’Donnell highlighted the fact that Saudi Arabia will be forced to cope with unfavorable realities in both the immediate and foreseeable future. The policy of Saudi Arabia since 2014 has been to fight for market share by keeping production high and prices low – even though the oil price collapse predated this policy. If OPEC were to cut production, it still would not have a significant effect on market prices due to spare stocks and a likely increase in production from marginal or “high-price” offshore and shale oil producers.

He also stressed that in previous years, Saudi Arabia has been able to play the role of a “swing producer,” forcing prices up by cutting production, but also forcing them down by overproducing. Performing the former role has become much harder due to the emergence of shale oil. The productivity of U.S. shale has improved by as much as 450 percent in the last year alone, and many more locations around the world where shale extraction could prove profitable have yet to be explored.

The Saudis will ultimately test this new market dynamic by lowering production in order to determine the price at which U.S. producers remobilize and return to the market. Dr. O’Donnell added that if U.S. producers were to respond by ramping up production, the Kingdom would be likely to adjust production to moderate their reentry. This back-and-forth may create a “see-saw” sort of volatility sometime next year. Dr. Cohen added that the Saudis’ ongoing commitment to protect their market share suggests that Riyadh will continue to produce as much oil as possible in order to hinder the efforts of Iraq, Iran and shale oil producers. Punishing Russia for its support of the Assad regime is a clear (albeit secondary) consideration, and this plan is succeeding due to the high costs of Russian extraction and exploration.

With respect to American competition, he noted that the break-even price making shale extraction profitable is somewhere between $45 and $55 per barrel, making low prices a necessity in order to deny profitability. He highlighted the fact that approximately 120,000 “mom and pop operations [have gone] bankrupt” as a result of Saudi policy, and that medium and large oil producers are laying off staff.

THE IMPACT OF SHALE AND IRANIAN PRODUCTION ON FUTURE PRICES

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The Saudis are fighting a price war on two fronts. On the one hand, it is holding down prices to drive high-cost U.S. producers out of business and retain market share. On the other hand, the Iranians are seeking to secure market share at the low-cost end of the spectrum. Dr. O’Donnell assessed the prospect of Iran – the world’s second- or third-largest producer – returning to the oil market due to the lifting of economic sanctions as creating unique problems for Riyadh: As a low-price producer trying to push out high-price producers, Iran’s full-capacity return to the market represents a real challenge.

In addition, Dr. Cohen stressed the enduring ideological and religious confrontation between Saudi Arabia and Iran, with the Kingdom fashioning itself as the flagbearer of the Sunni world. As there is little prospect of Saudi-Iranian tensions easing in the near future, it is unlikely that Riyadh will agree with Russia and Venezuela to curb production in order to boost prices. He added that this unwillingness is grounded in a historical experience of other OPEC members reneging on agreements and selling oil at a discount, something Riyadh is no longer prepared to tolerate. Where Dr. Cohen did see potential for rising prices was through increased global demand. Though small demand increases can be met through heightened Saudi, Iraqi and Iranian production, major economic growth in India or Africa could generate a need for oil at $50 to $60 per barrel – resulting in heightened demand for U.S. shale. Concluding the discussion of prices, Dr. O’Donnell reaffirmed the view that the fundamental strategy of former Minister of Petroleum and Mineral Resources Ali Al-Naimi is unlikely to change, unless King Salman attempts to block Iran’s reentry into the market in new ways.

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Prof. Mishal questioned the extent to which OPEC will remain relevant, and stressed the importance of technology in affecting both the price of oil and the actions of oil producers.

Dr. O’Donnell stressed that while analysts tend to think of OPEC as a monopoly player or as a cartel, the reality is that the group has never truly been cohesive. Traditionally, members have been divided between those with large populations dependent upon oil for their national revenues (e.g., Algeria, Iran, Iraq and Venezuela), and small-population

producers (e.g., Saudi Arabia and the Gulf states) which make five to ten times as much income per capita.

As a result, there has always been a split as to how to handle pricing. He noted that the split is presently very tense because the large-population producers have little ability to raise prices given that the market is flooded with supply. OPEC will remain relevant and regain market leverage when demand returns – and when it does, prices will likely spike and stay high. Dr. Cohen noted that the key division within OPEC between the various producers will not go away – especially given that Saudi Arabia has succeeded in taking market share away from countries that have not succeeded technologically (e.g., Venezuela) or that have suffered due to international sanctions (e.g., Iraq and Iran). The Saudis will indeed be unwilling to relinquish market share – though obligated to facilitate the increasing share of others under OPEC rules.

In addition, he stressed that Iran will be unwilling to curb production, given that Tehran is keen to reacquire the market share it lost during the period of sanctions. Accordingly, Dr. Cohen foresaw one million extra barrels per day on the market by early-to-mid 2017. This sentiment was echoed by Dr. O’Donnell, who stated that the Saudis will only start to moderate their production in combination with OPEC if supply and demand become balanced.

IMPLICATIONS FOR OPEC

OPEC will remain relevant and regain market leverage when demand returns – and when it does, prices will likely spike and stay high.

Dr. Thomas O’Donnell

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SAUDI ARABIA AND THEFUTURE OF OIL

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