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SAUDI ARABIA'S ECONOMIC NEEDS AND THE PRICE OF OIL

  by: : Joseph Mann

 

 

SAUDI ARABIA'S ECONOMIC NEEDS AND THE PRICE OF OIL

 


Since the late 1990s, Saudi Arabia has faced increasing economic challenges. In order to address these problems and to improve the conditions of its citizens, the Saudi regime has gradually increased oil price targets. This article analyzes the factors that have influenced Saudi Arabia's considerations in setting a preferred oil price target. It also examines the option of diversification of the Arab economy and the creation of new industries as a means of reducing oil prices.

 


INTRODUCTION

 

 


Between 2003 and 2008, the West Texas Intermediate (WTI) crude oil spot price increased by 300 percent. However, the economic crisis that befell the world and reached its peak in December 2008 sent prices back to below the 2004 average. In reference to the crisis, the Saudi Arabian monarchy stated that the drop in the price of a barrel of oil to below $50 to $55 was damaging to its economy and that a continuing drop in prices would be detrimental to the growth the country had been undergoing since 2001. About five months after the crisis had reached its peak, evidence surfaced of a strong correlation between the price of oil and the Saudi government’s economic aspirations; the price of oil surpassed the $50 mark in May 2009 and reached over $60 in the second half of 2009.


The purpose of this article is to show the correlation between Saudi Arabia’s economic needs and the price of oil. The article begins with an analysis of Saudi Arabia’s status both in the world oil market and within the Organization of the Petroleum Exporting Countries (OPEC). It continues with an examination of the factors that influence Saudi Arabia’s oil policy, including the change in the country’s outlook since power was transferred to King Abdallah in 2005. In addition, the article explains the reasons behind the rise in the oil target price since 2001. Last, it focuses on Saudi efforts to diversify the economy in attempt to reduce dependence on oil and the effects this has had on its budget.

 

FACTORS INFLUENCING SAUDI OIL POLICY

 

Saudi Arabia is an absolute monarchy. Most of the kingdom's key posts are held by members of the Saud family whose legitimacy is based on the fact that they founded the country and on their commitment to Islam--more specifically to the Wahhabi movement. The Wahhabi movement originated in the Arabian Peninsula and conquered and unified the various provinces there, leading to the establishment of the modern day Kingdom of Saudi Arabia in 1932. Based on various estimates, there are approximately 30,000 Saudi princes total, though only a few hundred belong to the most prominent branch of the family. Since the late 1930s, the Saud family has gained an important international role due both to the religious duty of pilgrimage (Hajj) carried out under its patronage and to its control over the most influential oil industry in the world.[1]


Saudi Arabia’s status in the world oil market evolved from the state’s abundance of oil reserves as well as its high production capability, estimated at 10.5 to 11 million barrels a day in 2008. According to Oil & Gas Journal, Saudi reserves are estimated at 266.7 billion barrels, approximately one-fifth of world oil reserves. Members of the royal household claim that they have set aside an additional 100 billion barrels to ensure the kingdom’s economic well-being in the decades to come. The country also has more reserves that have not been designated for production, for the time being, due to high costs and a lack of technology.[2]


The royal family wields great influence over Saudi oil policy. The country is involved in the Supreme Council for Petroleum and Mineral Affairs, over which the Saudi king and several princes--including Crown Prince Sultan bin Abd al-Aziz and Foreign Minister Saud al-Faisal--preside. The presence of these three prominent figures on the council is far from coincidental; it is proof of the royal household’s highly vested interest in the energy market   as well as the influence that market has on Saudi domestic and foreign policies. Furthermore, the involvement of these three individuals in the council’s affairs is a show of power within the royal household, where there have been tensions over the issue of succession and disagreement over policies and decisionmaking. Crown Prince Sultan, for example, is the full brother of the deceased King Fahd and a member of the Sudairy Clan.[3] The clan has been an important source of power in the kingdom since 1975, when King Khalid, who was not interested in politics, gave effective control of the country to his half-brother, Crown Prince Fahd.

The Sudairy Clan is conservative and opposed to reform, which it fears could result in a loss of power for the elites and prove harmful to the country’s Wahhabi tradition. King Abdallah, on the other hand, is considered to have reformist tendencies and seeks to unite the kingdom under the general umbrella of Islam and not to abide only by Wahhabi rules. Unlike the members of the Sudairy Clan, he has no natural allies, because he has no full brothers. Therefore, Abdallah has had to form a coalition with different princes in order to obtain consent within the royal family for his policies. Foreign Minister Saud al-Faisal--son of the respected King Faisal who was assassinated in 1975 by his nephew–served as deputy oil minister in the 1970s and is thus considered knowledgeable on the subject of energy. He is popular in the West and is greatly respected by many members of the royal household.  He is also seen as a supporter of foreign involvement in developing the energy market and has worked toward promoting such involvement in the gas sector. Saud al-Faisal is therefore a balancing element both amid the princes who support the Sudairi Seven and among those who are close to King Abdallah.
[4]


Since the 1990s, an increasing number of government positions have been filled by people outside the royal family, who now make up two-thirds of the Supreme Council for Petroleum and Mineral Affairs that determines Saudi Arabia’s oil policies. In October 2007, King Abdallah issued a royal decree renaming a number of ministries and appointing six government ministers to the council. Among those who have served on the council are: Minister of State Dr. Muttlab al-Nafissa; Minister of Commerce and Industry Ghazi al-Gosaibi; Minister of Finance Dr. Ibrahim bin Abd al-Aziz bin Abdallah al-Assaf; Minister of Petroleum Ali al-Naimi; the late Minister of Economy and Planning Khalid al-Gosaibi; the president of the King Abd al-Aziz City for Science and Technology, Dr. Muhammad al-Suwaiyel; and Saudi Aramco President and CEO Abdallah Jum’ah. Although they work for the king, most council members have a wealth of international experience in and knowledge of oil-related economics. To give but a few examples, Minister of Petroleum al-Naimi studied in the United States and earned master's degree in geology at Stanford University, and Secretary General Muttlab al-Nafissa holds a Ph.D. in Physics from Harvard University.[5]


Even prior to the creation of the Supreme Council for Petroleum and Mineral Affairs, there was a perceptible change in Saudi policy toward the oil market. Due to King Fahd’s deteriorating health, most government authority was transferred to Crown Prince Abdallah in 1998. From the beginning, King Abdallah took a hard-line approach toward oil pricing and even more so after assuming full power in 2005.    He believes that Saudi Arabia should make strategic use of oil profits and reject the OECD states’ demands to lower oil prices, as long as it is not in Saudi Arabia’s interest to do so. King Abdallah’s policy proved to be beneficial to Saudi Arabia when, according to various sources, he instigated an OPEC production cut during the East Asian economic crisis of1998. He sought the cooperation of non-OPEC states in this matter--first and foremost Russia and Norway--as a means to secure an increase in oil prices. Furthermore, despite pressure from OECD states for Saudi Arabia to increase its oil production in order to bring down prices, King Abdallah announced on several occasions that he did not intend to do so as it could harm Saudi Arabia’s economic security in the future.[6]


There has been a feeling in the royal household that King Abdallah’s oil policies have become tougher since King Fahd’s death in 2005. Indeed, while his brother was alive, Abdallah felt committed to Fahd’s policy of preserving low oil prices as a means of maintaining good relations with the West. Following Fahd’s death, however, Abdallah became...

 

 

*Dr. Joseph Mann is a lecturer in the department of Middle Eastern Studies at Bar-Ilan University. Over the past few years, he has focused on the commodities market and on the renewable energy industry in EU countries. He now deals mainly with issues related to the oil and gas industries in the Middle East.