After Al-Naimi: Mirage and reality

After Al-Naimi: Mirage and reality
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Ali Al-Naimi, long regarded as the most powerful man in oil, was dismissed on May 7th as part of a sweeping reorganization of the Saudi Arabian governing apparatus. The implications of his dismissal are of transformational importance, and mark a pivotal moment in the history of Saudi Arabia and global oil markets.

Government reshuffle

Al-Naimi’s tenure as head of Petroleum and Mineral Resources, a post he had held since 1995, was characterized by sober policy-making. His tenure witnessed Saudi Arabia, OPEC’s swing producer, play a decisive role in stabilizing volatile oil markets by coordinating production cuts across the cartel, most notably in 1997 and 2008. More recently, he was the architect of a controversial Saudi response to the shale boom in the United States which emphasized defending market share at the expense of higher oil prices, the success or failure of which will ultimately shape his legacy.

Al-Naimi is to be replaced by Khalid Al-Falih, former head of Aramco, as head of the newly formed Ministry of Energy, Industry, and Mineral Resources. This ministry will bring the Saudi Department of Electricity and Power under its jurisdiction. The erstwhile Water and Electricity Ministry will be disbanded, with the re-named Ministry of Environment, Water and Agriculture appropriating the supervision of the Kingdom’s water resources. Other agencies, such as General Authority for Culture, have been newly-established while others, like the Ministry of Labour and Social Development, have been re-named and streamlined, with most of their Ministers being replaced.

Vision 2030

Al-Naimi’s fall and the afore-mentioned reorganization of the Saudi bureaucratic framework should be viewed as the first of a series of political and operational reforms aimed at implementing Vision 2030, an economic blueprint designed to trim a bloated public sector and excessive dependence on oil revenue by the year 2030. The brainchild of McKinsey and Deputy Crown Prince Mohammed bin Salman, favored son of the King and increasingly influential at court, the scope and ambition of Vision 2030 is breathtaking and will fundamentally alter Saudi life to a degree unprecedented in the Kingdom’s history.

It projects a doubling of GDP following full-scale diversification of the economy to the extent that sectors such as tourism, mining, construction, and health care will account for over 60% of the national economy by 2030. The price tag of all this comes to an estimated $4 trillion, which will be funded in part by a limited IPO of Saudi Aramco, the establishment of a sovereign wealth fund, and the progressive elimination of generous subsidies for water, fuel, and electricity.

Obstacles

Bin Salman has offered a sanguine appraisal of the project’s potential, asserting that the Kingdom will be able to live without oil by 2020 (a claim many veteran Saudi watchers dismiss as fanciful), but offered little in the way of concrete details with regard to the implementation process. Uncertainties abound – how will a nation governed by Wahabbi fundamentalism which executed a record number of dissidents in the last year attract significant numbers of non-pilgrim tourists?

How precisely will the culture of corruption and inefficiency embedded in the Saudi public sector be reformed? Can the House of Saud enact painful reforms without angering a population long accustomed to government largesse? In any event, what we do know is that Bin Salman’s blithe declaration that Vision 2030 will soon render Saudi Arabia indifferent to the price of oil is specious at best, and that a coherent oil policy backed by sufficient revenues will be crucial to both the eventual success of the plan and to the financial health of the country for many years to come.

New era in Saudi oil

An outsider to the Saudi royal elite and palace intrigue, Al-Naimi had managed the nation’s oil resources largely independently of foreign policy considerations, preferring to let market dynamics inform policy decisions . His dismissal signals an end to the technocratic age of Saudi Oil and the emergence of a new era in which the reins of power have passed to Bin Salman and his Committee for Economic and Development Affairs.

The ascendancy of Bin Salman and the passing of the old order was cemented at Doha in April. This is where Bin Salman scuttled an Al-Naimi-brokered agreement which would have frozen OPEC member oil production on the grounds that Iran had declined to take part. Henceforward, oil policy is likely to be increasingly subordinated to broader foreign policy goals and employed as a political weapon in service to the Kingdom’s ongoing proxy conflicts with Iran in Syria, Yemen, and the Gulf.

Both Al-Naimi’s dismissal and the wider government reshuffle also serve to strengthen the hand of Bin Salman and consolidate his position. Many newly-appointed ministers, Khalid Al-Falih in particular, are thought to be personally loyal to the Deputy Crown Prince and to senior members of the ruling family. Furthermore, the fact that the reorganization went forward at all suggests that Bin Salman’s reformist vision has the tacit support of King Salman, which points to an emerging consensus in the royal family and likely foreshadows a further centralization of power in the future.

High stakes

While many have praised the plan’s audacity and scope, Vision 2030 is best viewed as a belated attempt born of desperation on the part of the Saudi ruling classes in order to address profound structural problems laid bare in an era of low oil prices. Without a clear and decisive implementation process, the inherent contradictions plaguing Saudi Arabia will only grow more acute.

These include a skyrocketing, restive youth population with little prospect of private sector employment which demands an ever greater share of the country’s dwindling energy and water resources.  Additional causes of concern include costly military adventurism in a volatile region, as well as a sharply deteriorating financial position, with reserves projected to dip to $460 billion by 2019 amid rising debt levels and record budget deficits. Lastly, with Brent Crude projected to languish in the $40 – 60 range in 2017 and beyond, the margin for error is slim.

In the end, Ali Al-Naimi was a victim of the low oil prices he helped orchestrate. Whether the Kingdom can survive them in coming years remains to be seen and will depend in large part on the competence and cunning of his de facto successor – Mohammed bin Salman.

About Author

David Lee

David is based in London and holds a bachelors degree in International Relations from the University of California, Santa Barbara and a MSc in Energy Management from ESCP Europe. He focuses on the intersection of natural resources and sovereign risk in Africa and the Middle East.