For decades, the pace of change in Saudi Arabia was practically geologic. During Organization of the Petroleum Exporting Countries (OPEC) meetings, desperate reporters would jog alongside the Saudi oil minister to catch nuanced hints of a change in thinking. Those days now look quaint.
When King Salman appointed his son, Mohammed bin Salman, as deputy crown prince, the old ways were upended. The arrival of the previously little-known 31-year-old has so shaken up the kingdom since 2015 that he may as well have flown in on a jetpack. Mohammed bin Salman, or MbS as he is commonly known, is now the kingdom’s crown prince, making him next in line for the ruler’s palace when his father dies or abdicates.
{mosads}As deputy to his now-deposed cousin Mohammed bin Naif, the energetic and forceful MbS opened the policy floodgates and pushed the boundaries of change. He launched a war in Yemen and joined proxy fights in Libya and Syria. He broke off relations with Iran and Qatar. He stripped away long-held social benefits of Saudi citizens and began replacing them with cash. He also demonstrated that he could get along famously with President Trump and a bevy of other world leaders.
What can the world expect now, with MbS all but certain to lead the third generation of al-Saud in the only country named for the family that rules it? Don’t expect things to calm down. Saudi Arabia has a lot riding on the success of its young crown prince, who, given the typical retirement age of a Saudi king, could be a fixture in world affairs for the next half-century.
Wars aside, the most difficult mission for the young leader is the revamping of the Saudi political economy — the economic and governance structures — without diluting the kingdom’s character as an absolute monarchy. This national transformation project is to be funded by the privatization of a piece of Saudi Aramco, the largest company on earth in revenue terms.
The Saudi Aramco IPO, which awaits a restructuring of the company and a more favorable oil market, is the linchpin of MbS’ prospects to reposition the Saudi system for long-term sustainability. Years of stagnant domestic policy coupled with a high birthrate brought about a youth bulge in a country with few jobs for young Saudi men and even fewer for young women.
In some countries, idle young adults turn to romance, movies or nightclubs. In Saudi Arabia, the options are fewer: religion and — for the boys — fast cars. By listing Saudi Aramco, MbS seeks the cash to put these underutilized subjects to work in new economic sectors based on plastics and light manufacturing, tourism, mining and financial services.
The Saudi leadership has tried and failed to diversify beyond oil in the past. This time, the boldness of the plan appears to offer better odds. Selling a piece of Aramco is a smart move in another sense because fossil fuels like oil face the impending arrival of peak demand and a future that is less accepting of the carbon dioxide emissions that are piling up in the atmosphere and warming the earth.
Saudi Arabia has discovered that it lies on the leading edge of the climate threat, facing temperatures expected to rise by 2070 to levels that humans can no longer withstand. The IPO doesn’t just allow for a diversification of the Saudi economy. It also diversifies the risk that a portion of the kingdom’s 260 billion barrels of crude oil reserves may someday be stranded, left underground.
The kingdom’s social reengineering will be difficult.
First, Saudi Arabia is in the midst of reforming patronage-based subsidies that see it selling oil at home for just over $5 per barrel. At those prices, demand for oil is high, and the kingdom consumes about a third of its production.
This state of affairs is unlikely to be popular with future shareholders of Saudi Aramco, who can be expected to push for fully-rationalized oil prices in the kingdom. Higher prices will be needed to rein in domestic demand so that all-important exports of Saudi oil can keep flowing to the world — at world market prices.
If MbS takes away cheap energy, Saudi citizens will need a new inducement to continue supporting the regime. MbS has launched a “citizens’ income” program that converts in-kind energy benefits to cash. A similar plan pioneered in Iran succeeded in mollifying the public. It could work in Saudi Arabia.
To pay for this new benefit, Saudi Arabia very much needs higher oil prices. It needs higher oil prices for fiscal reasons, because cheap oil hurts government revenues, leaving the crown prince with fewer patronage resources to maintain the support of his subjects.
Saudi Arabia also needs higher oil prices to make the IPO succeed. The Aramco selloff may not raise anywhere near the hoped for $50 billion or so if the value of a barrel of crude continues to wilt.
Unfortunately for the kingdom, the rest of OPEC knows how badly the Saudis need oil prices to cooperate. When future production cuts are needed, the rest of OPEC may well stand aside and let the Saudis do the heavy lifting.
Jim Krane is the Wallace S. Wilson fellow for Energy Studies at Rice University’s Baker Institute for Public Policy. Follow him on Twitter @jimkrane.
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