Saudi Arabia's Bold New Oil Strategy Could Backfire
What also cannot be ignored is how the recalibration of Saudi strategy is strongly motivated by the renewed regional challenge of Iran. As demonstrated in Doha, Riyadh has little interest in allowing its rival to regain a solid foothold in the oil market. Meanwhile, the Saudis’ desire to renew their own economy, domestic social contract and overall regional dominance—including bankrolling the muscular foreign policy of Prince Mohammed—is in large part also motivated by Iran’s reemergence. Prior to the repeal of sanctions in January, Saudi officials were said to be directly concerned about Tehran’s sudden ability to build on a more diversified and adaptable economy. This was not unfounded: in February, ratings agency Moody’s noted, “International sanctions meant that Iran had to adapt to the reality of lower oil revenues and implement structural reforms much earlier than other oil exporters.” Some of these reforms created relatively sophisticated homegrown drones, tanks and ballistic missiles that stand in stark contrast to the import dependency of Saudi Arabia, which Riyadh is attempting to correct by lifting domestic military spending to about 50 percent of outlay, up from a paltry 2 percent at present.
The clear Western hand in the threats Iran has developed toward Saudi Arabia—both in terms of imposing and then lifting sanctions—ensures there remains an incredible amount invested in the future of the nuclear deal. It is thus telling that Tehran is showing signs of frustration with difficulties in unfreezing $100 billion in assets held in foreign banks during the sanctions era, and in gaining access to foreign investment necessary to rebuild its oil sector, both of which have been held up by a raft of U.S.-specific impositions that remain on its economy. Such cracks will not have escaped the view of the Saudis, who will likely do everything in their power to drive them wider and deeper. Continued oil market control that limits the short- and long-term worth of Iran’s output, and the concurrent incentive for foreign firms to invest in it, is one obvious means of doing so—and one with a fairly scattershot global effect.
Riyadh’s Last Laugh?
Of course, the greatest risks of the new Saudi oil game are borne by the kingdom itself. After all, its strategy is based on predicting and precipitating the decline of a resource and system to which the regime owes virtually all its prosperity and resulting power. This creates much higher exposure than that of the majority of the oil producers of the West and even the diversified Iran, and something more akin to those other countries and companies Saudi actions to date have helped sink. Though the selloff of Aramco is tipped to be one of the largest initial public offerings in history, many analysts have cast doubts over its long-term worth to investors, which is exacerbated by the company’s consistent secrecy around the revenues and reserves under its control. General levels of business confidence in Saudi Arabia continue to languish: just this month, Moody’s downgraded its official credit rating.
Even if initially well-funded, the Saudi drive for investment and diversification faces significant challenges. Previous attempts at increasing the country’s economic base have been limited to investments in areas, such as mining, that are still dependent on oil market fluctuations, and more ventures of this nature are expected under its new direction. Saudi Arabia’s ability to thrive as a tourist destination beyond the captive audience of Muslim pilgrims also seems minimal, as does its commitment to the labor market reforms that will be necessary to enact change. This is particularly so given the economy’s historical dependence on temporarily hosted foreign workers—many of whom have already been sent home under belt-tightening measures—and the fact that 70 percent of the domestic population are under thirty years of age.
The ability of Vision 2030 to overcome diminishing oil revenue and maintain Saudi supremacy is therefore in serious question. While that might comfort many concerned about where a reinvigorated Riyadh might direct a new resilient economy, the Saudi rush to further open its oil taps and monopolize market share—increasingly as a function of its competition with Iran—will likely greatly trouble regional and international policymakers even if it fails. The end of Saudi and wider Middle Eastern influence on the oil market has long been the dream of Western corporate interests and foreign policy thinkers alike; even mistier eyes have viewed the end of oil itself. While the Saudis now seems the unlikely fulfiller of both of these desires, they seem well positioned to enjoy a roaring last laugh while doing so.
James Bowen is an writer, editor and analyst on international affairs and a former energy-focused speechwriter for the Australian government. He edits the International Peace Institute’s Global Observatory and has contributed to publications including New Europe, World Politics Review, World Policy Journal, the Diplomat, and the Interpreter.
Image: Saudi Arabia's Deputy Crown Prince and Minister of Defense Mohammed bin Salman meets with Secretary of Defense Ash Carter. Flickr/Ash Carter