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April 27, 2016

Oil and Money: The New Sheriff in Saudi Arabia

There’s a new and different kind of leadership blossoming in Saudi Arabia thanks to Mohammed bin Salman Al Saud, the deputy crown prince, second deputy prime minister, and the youngest minister of defense in the world.
With Mohammed bin Salman in power, it won’t be business as usual for the strategic geopolitical relationship between Saudi Arabia and the United States
Salman’s policies mean that the country will address the oil trade from this new perspective. This could amount to a major change in the industry – a change that the players in the oil market have yet to factor into their market equation.

New “Sheriff” in Town

After King Abdullah died in January 2015, the Saudi throne was assumed by Salman bin Abdulaziz Al Saud.
King Salman named one of his sons, Mohammed bin Salman, as deputy crown prince. More importantly, the King put this son in charge of the Ministry of Defense, the national investment fund, all economic policies – and in control over the state’s oil monopoly.
In effect, Mohammed bin Salman was handed the keys to the Kingdom and a crown to match. Today, he’s the Saudi’s most visible and outspoken leader.
Deputy Crown Prince Mohammed bin Salman is not the Saudi leader of generations past. This 30 year old views the world quite differently from his predecessors.
Saudi citizens learned this lesson on April 25 when he revealed the largest economic shakeup since the Kingdom of Saudi Arabia was founded in 1932 – in a plan called Saudi Vision 2030 (@SaudiVision2030).
According to this, subsidies to Saudi citizens will be reduced substantially, and taxes will be raised. A key goal of this dramatic change is to raise non-oil revenue by $100 billion by 2020. Substantial investments will also be made into the country’s mining and military industries.
In addition to these subsidy changes, Salman’s “vision” includes creating a $3 trillion sovereign wealth fund. Plus, he plans on selling off about 5% of the state oil monopoly, Saudi Aramco, in an IPO supposedly valuing the company at over $2 trillion.
Other privatizations are also in the works.
His views on oil, as well as geopolitics in particular, are where it gets interesting in terms of the international energy market.

Geopolitical Wildcard

Prince Salman is not a fan of the Islamic Republic of Iran. He personally shot down the Doha oil freeze agreement as part of the ongoing tussle between the two countries.
MbS – as he’s been nicknamed in international discussion – doesn’t take BS from anyone. Not even from the United States.
Saudi Arabian authorities have warned, in no uncertain terms, that if Saudi officials are found complicit in the September 11 attacks on America, and Congress passes a bill allowing U.S. citizens to sue the Saudi government in response, the Saudis will take action.
Some are worried that Saudi Arabia may sell some of its vast holdings of U.S. Treasuries in retaliation.
Prince Salman is too smart for that, however. Proceeds from those sales may be blocked from being sent to the Saudis – instead, what may be at risk is the petrodollar.
The petrodollar, thanks to Henry Kissinger, came into being in the early 1970s. In exchange for U.S. military protection of the Saudi kingdom, the Saudis agreed to accept only U.S. dollars in payment for oil. That turned the dollar into the world’s reserve currency.
If Congress goes down its current path, MbS may be willing to consider ending the more-than-four-decades-long relationship between its oil and the U.S. dollar.
The Obama Administration isn’t helping the cause either – as the sanctions on Iran’s quest for nuclear power aren’t seen as definitive enough to keep Iran from building the atomic bomb. The Saudis and the Prince – in firm opposition of their rival – don’t appreciate the U.S. and its compliance with Iran’s quest for power in the region.
Even back in 2014, the Financial Times reported the late foreign minister Prince Saud al-Faisal telling U.S. Secretary of State John Kerry, “Daesh [Isis] is our [Sunni] response to your support for the Da’Wa.” The “Da’Wa” is the Iran-leaning Shia Islamist ruling party in Iraq.
Hopefully, the election of a new U.S. President will also increase regulations against Iranian nuclear power, which will help to repair that part of the relationship with Saudi Arabia.

Energy’s Wild Card

Geopolitical relations and the oil trade are inextricably linked under the rule of Mohammed bin Salman, who knows just how to play his cards to keep an upper hand in both realms.
He considers oil to be part of foreign policy, not economic policy. To that end, the Saudis will not consider a freeze or a cut in production until Iran does so first.
Prince Salman warned that Saudi Arabia could immediately raise its output by more than one million to 11.5 million barrels per day. And, ultimately, increase their productivity to 12.5 million barrels each day, within six to nine months.
He even speaks of investing in oil production in order to raise output by the end of the decade to 20 million barrels per day.
The players in the oil market have insisted that this is just bluff and bluster aimed at intimidating Iran. But MbS is not bluffing. He is quite serious about using oil as a weapon against the Iranian industry.
Saudi Arabia’s increased oil production would also drive out other producers – mainly U.S. shale.
Already, the Saudis have “spent” billions of their reserves in this effort. After putting U.S. shale on the ropes, the Saudis aren’t backing down. They’re not interested in wasting their efforts just for show. MbS wants to see results on a global scale.
The Prince will spend even more of the reserves to ensure future market shares for his Kingdom, as an investment for the future, if you will.
With much turmoil ahead, the oil market is sorely mistaken in its positive outlook for the future – predicting prices up by 50% in two months.
It won’t be shocking to hear, within 12 months’ time, an official announcement from Saudi Arabia that they’ll be pursuing their plan and raising oil production. And that order will come directly from Mohammed bin Salman.

Courtesy of Tim Maverick, Senior CorrespondentWall Street Daily (More from Wall Street Daily Here)  

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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