June 20, 2016

What’s behind Saudi Arabia’s energy reshuffle?

Posted by Andrew Bradshaw
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The recent removal of Saudi Arabia’s long-standing oil minister, Ali al-Naimi, and his replacement by Saudi Aramco chairman, Khalid al-Falih, raises questions about the future direction of the kingdom’s energy policy.

It could be argued that the writing was on the wall for 80-year-old Naimi, who had been the oil minister since 1995, following the appointment of the extremely powerful Deputy Crown Prince Mohammed bin Salman to oversee energy and economic policies.

Naimi had reportedly been seeking to retire for some time. Ahead of last month’s gathering of representatives from 18 oil-producing countries in Doha, Naimi had initially suggested a deal on production levels could be reached without Iran’s involvement. However, he was effectively overruled at the table by 30-year-old Prince Mohammed who took a more hard-line approach to Iran’s no show. In fact, rather than coming to an agreement in Doha, Saudi Arabia upped the stress stakes by suggesting it could boost its production by a further two million barrels per day. 

Falih, who has previously argued against a production ceiling, is believed to be close to the prince, who has also supported a supply and demand-led policy. Immediately following his appointment, Falih made clear that the kingdom would not soften with regards to its policy on production and many believe he will take an even more hard-line stance. He will sit at OPEC’s regular half-yearly meeting in Vienna on June 2 where the notion of production capping now appears to be off the agenda.

So what is behind the ministerial shake-up in Saudi Arabia? Was it the need to introduce some younger blood to drive the prince’s ambitious reform programme, Vision 2030, which aims to steer the kingdom away from an over-reliance on oil revenues and has at its heart the part-privatisation of Saudi Aramco?

Was it really dissatisfaction with Naimi’s comments and performance in the run-up to Doha and at the meeting itself?

Was it intended to be a hard line riposte from Sunni-dominated Saudi Arabia to its bitter Shia rival Iran over the latter’s refusal to join in the Doha production capping negotiations?

When OPEC, led by Saudi Arabia, introduced its demand-led policy in the summer of 2014, Iran was still labouring under international economic sanctions. The lifting of those sanctions earlier this year has coincided with an escalation of hostilities between Iran and Saudi Arabia, particularly over Yemen. Remember that Prince Mohammed is also Saudi Arabia’s Minister of Defence.

So are the kingdom’s oil plans shifting from an economic base to an extension of its foreign policy as it concentrates ever more on the actions of its neighbour? Is Saudi Arabia’s refusal to cap production now more about standing up to Iran than a consideration of the bigger picture in terms of the international industry?

With OPEC’s two biggest players now squaring up against each other, what future does this increasingly irrelevant organisation hold? Back in February, Fifth Ring suggested that the Saudi Arabia/Iran relationship would stretch OPEC’s negotiating abilities to its limits and this is now the case. Those OPEC countries, which have argued unsuccessfully for months in support of production control, must be wondering what the point of their membership is.
 
More than ever OPEC appears to be serving merely as a vehicle for Saudi Arabia’s oil policy and, in terms of its credibility, it is very difficult to see a way back.

The meeting in June will be critical for this once highly influential organisation.

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