As the coronavirus crisis continues to shake up global economies, it seems that Saudi Arabia is on the front line of countries that can see their economy falter … and their political model with it.
Can the resurgence of the oil crisis – and the growing independence of the United States on oil issues – cause Saudi Arabia to fall, be it politically, geostrategically or economically? If so, in what ways?
Francis Perrin: The current oil crisis, a consequence of the health crisis and the economic crisis it has caused, is major. It is hitting hard all oil producing and exporting countries, which face a sharp fall in their export and budget revenues, and Saudi Arabia is no exception. But some producing countries are suffering and will suffer more than others. Among the criteria that differentiate producing countries in such a difficult context, one of the main ones is the level of their financial reserves from which they will be able or not to draw to face this crisis. However, Saudi Arabia has very large foreign exchange reserves and its sovereign fund, the Public Investment Fund (PIF), is very well endowed. The kingdom therefore has the means to get through the current crisis at the cost, of course, of a fall in its reserves. It is not the same for Venezuela, Iran, Iraq or Libya, to take the case of four other member countries of the Organization of the Petroleum Exporting Countries (OPEC).
Another key criterion for differentiating between producing countries is the standard of living and the wealth / poverty of their populations. The lower this average standard of living, the more difficult it will be to make additional sacrifices for the population and potentially generate social and political unrest. From this point of view, Saudi Arabia is not in the same situation as Nigeria or Angola, two other OPEC member countries.
The United States, Saudi Arabia’s main ally and protector, has been producing more and more oil for years, importing less and less and exporting more and more. In this regard, they have less need than in the past for Saudi oil and that of the Middle East more generally. That said, it would be going too fast to work to deduce that Washington no longer considers Saudi Arabia and the Middle East as strategic issues. The very good relationship between the Trump administration and the Saudi kingdom at the highest level clearly shows that this is not the case. If the words of President Donald Trump are sometimes very contradictory on this subject, the State Department and the Defense Department have no doubt about the strategic character of this bilateral relationship which dates back at least to 1945, even in the 1930s .
Jean-Pierre Favennec: The price of oil has collapsed in recent weeks. The Coronavirus crisis has caused demand for black gold to fall by more than 15% as production continues to decline. On March 6, a meeting of OPEC member countries and the organization of 10 other producer countries, foremost of which Russia was a failure. Saudi Arabia, the undisputed leader of OPEC, wanted a significant reduction in production to rebalance the market, but Russia opposed this reduction, not wishing to let the production of American shale oil, partly responsible for the glut of oil, to maintain itself. In retaliation, Saudi Arabia decided to increase production. In the face of a huge potential glut the price of crude collapsed
Faced with a double threat: economic collapse due to the Coronavirus crisis and collapse of American oil production, relatively expensive and in the hands of thousands of producers, small or medium, President Trump asked Saudi Arabia and the Russia to sharply reduce their production. After a brief rebound, the price of oil fell again.
Sébastien Boussois: We are facing an unprecedented crisis: what is called in geopolitical terms, a “perfect storm”, and which affects all sectors of a society at the same time. In a cascade, everything seems on the verge of collapse: politics, economy, society. Saudi Arabia is anything but prepared for these types of systemic crises because it has always put all its eggs in one basket: that of black gold. Kind of like Algeria. We are not in the case of Qatar, which has resisted the embargo that was imposed on it in 2017 very well by its very diversification and its global development strategy, and which is trying to help European countries by difficulty like Italy; or the United Arab Emirates which knew on the basis of a programmed “vision” and multiple investments to count on other resources. Not subject to the variations imposed by Riyadh and OPEC since it left it, Qatar is moreover in control of its own destiny since the end of 2018. Can Saudi Arabia drag in its wheel countries more powerful than it like Russia and the USA in the name of its own interest? Unlikely. And she risks losing everything at this game.
Until now, Riyadh has been waiting for the olives to fall: oil rent has provided it with the means of its ambitions for decades, just like the American umbrella since the Quincy Pact signed in 1945. Mohamed Ben Salmane, who dreams of being the leader of the region, it is actually his main project, supported by his sponsor, yet did not anticipate anything that was happening in the world: regional destabilization with the rise of Iran, fratricidal wars that cost him very dear as in Yemen and who ruined his reputation, regional protest against his authoritarian leadership which still passed before, scandalous assassinations of opponents like Jamal Khashoggi, crisis of legitimacy within the country to complete the whole despite the dubiousness of the USA. The one who was supposed to save the country from ruin on the one hand did not succeed, but on top of that it widened the deficits, and today Saudi Arabia is a colossus with feet of clay who leaves in rushing ahead. With a catastrophic reputation, it is not his decision to try to restore his coat of arms by hosting a few planetary sporting events like the Dakar Rally which at this stage will change something. Because there too, Riyadh had to pay.
The latest events resonate like a frantic race towards an impassable wall. Saudi Arabia’s decision, in the name of its survival, to increase oil production recently and quickly, is glaring evidence that it has no other leverage. Otherwise, why would it seek to destabilize the United States, one of its last supporters in the world with the United Arab Emirates and Egypt, and reduce production of their shale oil at the same time which suddenly costs far too much to Washington to produce? Riyadh deliberately lowered the price of a barrel of crude by flooding a market in the midst of a recession, thereby affecting all of the producing countries already in great difficulty, because the country needs money. While the world is hard pressed in the face of the Coronavirus pandemic and the system must be stabilized as best as possible without pushing countries to ruin, certain countries are trying to go it alone to ensure their own existence, as does Arabia Arabia today.
As if it had not been able to foresee other sources of economic wealth since time to survive? Unfortunately, the 2030 “Vision” has remained on paper after the series of failures by Mohamed Ben Salmane since his arrival as crown prince in 2016. And the services of former British Prime Minister Tony Blair $ 12 million have not changed anything. No short-term diversification would have made it possible to bring enough returns to the country anyway, and no wind of liberalization has taken place: which is unlikely to favor and reassure foreign investors. As for issuing tourist visas, it was a joke before. It is becoming one more dead end today.
The country remains more closed than ever, and now the coronavirus is raging, and even affects at least 150 members of the royal family . After the country’s closure to hosting Mecca pilgrims, it is also a huge financial windfall that is drying up and missing from the national budget. This is the beginning of the ordeal for this country of 33 million inhabitants who already seem to be quickly affected by the Covid-19. Without any strategy, resources or sufficient infrastructure to overcome it. We are now talking about a potential rate of 200,000 people infected in the coming weeks.
Oil – which represents 2/3 of the country’s income – has it become a poison for the country when we see – in particular – that countries are seeking to adopt more “eco-friendly” strategies in the world for example? How can Saudi Arabia adapt to change?
Francis Perrin: Oil is a very important source of wealth, but it is essential to know how to manage it and redistribute it well. Admittedly, it is a fossil fuel and it is increasingly questioned with regard to the fight against climate change but it remains essential at the global level because of its key role in the transport sector and in petrochemicals. This remains a considerable asset for the Saudi kingdom even if it is essential to diversify its economy, which is the object of the strategy “ Vision Saudi Arabia 2030 ” carried by the crown prince Mohammed Ben Salmane. This strategy also includes the development of natural gas, unconventional gas, renewable energies, in particular solar, and nuclear energy.
To achieve this diversification, very significant investments will be required, including in human capital. Funding for these investments will come largely from revenues generated by the oil sector and by the Saudi national company Saudi Aramco, 98.5% state-owned. The paradox is that it is oil and the income from it that will allow it to diversify relative to oil. But this will require a strong political will over time, a real cultural change in the kingdom and a lot of time. The directions are good but success is not guaranteed.
Jean-Pierre Favennec: The impact of this drop in the price of oil on Saudi Arabia is dramatic. Like most oil-producing countries, Saudi Arabia relies heavily on sales of its black gold to balance its budget. Even if the production costs of Saudi oil are very low, it takes a price per barrel above 80 dollars to balance the finances of the Kingdom. But in recent days the price of oil has hovered around 30 dollars
The crisis is compounded by the feeling that the end of oil is near. Many analysts, rightly or wrongly, blame pollution, global warming, … in the spread of the virus. Fossil fuels are therefore targeted. Can we do without it quickly? It’s unlikely, but the spirit of the times is undergoing significant changes in our lifestyles after the crisis. Among these changes, a more frugal society, oriented towards green energies. Is it possible ? This is an other story.
What consequences for Saudi Arabia? Is this a new blow for the Kingdom, an essential geopolitical actor after the Second World War when President Roosevrelt met, in February 1945, on the battleship Quincy, in the Red Sea, King Ibn Saud, founder of the Kingdom to ensure it protection of the United States in exchange for an abundant production of Saudi fields, at the time controlled by the four big American companies (Socal, today Chevron, Texaco, Exxon and Mobil).
Sébastien Boussois: Attraction-repulsion: Saudi Arabia secretes two poisons. The oil that drove him to political and economic laziness but also the American support that pays big. Because if Donald Trump is likely to be re-elected in November against Joe Biden, given the context and his side of constant popularity even with the pandemic, this only pushes the capacity that Riyadh will have to finally gain its independence. In fact this country spends its time trying to put countries under the globe to turn them into satellites or put a stick in the wheels of some who have strayed from it like Qatar, while its independence every day is greatly jeopardized .
There are several issues to discuss here. The country’s already deficit: in 2020, Saudi Arabia’s budget deficit, estimated at $ 50 billion, will be financed up to 40% by debt issues. Oil will not be enough to pay off. Because the war in Yemen waged by the 7th year of the world since 2014 which has lasted is a total failure and that we must continue to finance it even if a cease-fire was announced a short time ago. Mohamed Ben Salmane will not give up. Then, the inability for Riyadh to anticipate the post-oil era and the fall in the consumption of fossil fuels over time for “eco friendly” green energies as you say and that some countries of the already diversified Arab-Muslim world are already putting forward. Like Morocco, which on the one hand is the world’s leading producer of highly polluting phosphate, but which at the same time is building the largest solar power plant in the world in Ouarzazate. It’s all about balance. For Riyadh nothing. Aramco’s failed IPO in September 2019 after the drone attack on Saudi oil infrastructure showed the fragility of the regime, its security and that of its facilities, which should a priori be ultra-protected. Another problem: that of the influence of the USA in the region. It is not rumored that after Trump, even after Trump 2, gives all powers in Riyadh without consideration for modernization, liberalization and diversification. Especially after what Riyadh has done recently that does Donald Trump a disservice, him the champion of hyper-polluting shale oil and gas but ensuring the American energy independence so dreamed of. The USA has always risen but is fighting with China. Saudi Arabia as it stands is only thanks to the parameters mentioned above: but what about in the coming years while Iran resists, that its regional rivals resist, that the USA may soon have other priorities once out of the Coronavirus pandemic which risks causing up to 200,000 deaths?
How can the country overcome these problems? Is it doomed or will it have to make new economic and political pacts even if it means putting aside its sovereignty? Can the oil market recover?
Francis Perrin: The oil market will recover with the global economic recovery. When we gradually move away from confinements and movement restrictions, the consumption of fuels for road, air and maritime transport will start to increase again. Oil remains the engine of the global economy and will remain so for quite some time. No economic recovery without an increase in oil consumption.
In terms of alliances, the most important for Saudi Arabia remains that with the United States because it is the most strategic for the kingdom. Despite problems such as the war in Yemen, the assassination of Jamal Khashoggi or the sanctions against Qatar, relations between the two countries remain strong because they have been based on interests and complementarities for a very long time. It is clear that Saudi leaders would not be unhappy to see Donald Trump re-elected for a second term because a Democratic president could be more critical of human rights, but Joe Biden is not unknown to them.
On the petroleum front, OPEC, which currently includes 13 countries, is an organization that has existed since 1960. Since the end of 2016, OPEC has been cooperating with ten non-OPEC countries, including Russia and Russian-Saudi bilateral cooperation. is reinforced even if it does not present the same strategic character as that with Washington. And, faced with the crisis linked to the Covid 19 pandemic, the challenge is to widen, at least temporarily, this alliance often called OPEC + to include producer countries like Canada, Brazil, Norway, the United Kingdom. – United Kingdom, Egypt and, perhaps, the United States.
Finally, economic rapprochement with Asia and, in particular, China is still relevant. Saudi oil exports are increasingly directed to Asia. Similarly, the development of petrochemical projects, another strong point of the Saudi economy, also goes partly through Asia.
Jean-Pierre Favennec: In the short term, the Saudi Kingdom can cope with the crisis, whatever the evolution of the price of oil. Its financial reserves are solid. He can count on the support of a few neighbors, the United Arab Emirates, Kuwait, who can resist the crisis and support Riyadh.
In the medium term, the Kingdom can also count on a rise in prices because the other two large producers, whatever they say, cannot be satisfied with current prices. The United States, Russia and Saudi Arabia together represent nearly 40% of world production, but Saudi Arabia, which in fact has the largest reserves (Venezuela’s reserves are difficult to exploit) produces its oil at very low costs. low, much lower than Russian or American costs. In a context of price war, Russians and Americans will suffer very quickly
For the moment, Saudi Arabia is benefiting from the weakening of Iran and Iraq, from the de facto convergence of its interests with those of the United States and Israel. Saudi Arabia’s ability to regain its power will depend on its ability to diversify its economy. A vast program, to use a famous formula, when we know the difficulties of all countries to get out of a rent economy.