King Salman Moves Up Second-Generation Princes In Succession Line

Three months after ascending to the Saudi throne, King Salman Bin Abdul-Aziz is making bold moves that will have a profound impact on the direction that the Kingdom takes in the coming years, setting the stage for the next two rulers of the Gulf country to be grandsons of founder Ibn Saud. Ironically, the two princes that are now in line to succeed King Salman share the same name, meaning that one day a King Mohammed could potentially succeed a King Mohammed.

In addition to significantly altering the leadership landscape for the coming decades, the new Saudi monarch also shook up his cabinet, including ending the 40-year career of the Gulf nation’s Foreign Minister and naming a new Health Minister, who curiously also becomes the new chairman of the board of state oil giant Saudi Aramco.

For the traditionally conservative Saudi Arabia, the move to the next-generation of leaders within the Al-Saud family has been a source of much debate within the Kingdom as well as among Gulf watchers for the last decade or more, as those aging sons of Ibn Saud in the succession line began to die. King Salman appears to be continuing to consolidate his power and formally moving to ensure that one of his sons is now directly in line for assuming the throne one day.

In January, upon King Abdullah Bin Abdul-Aziz’s passing, King Salman immediately dealt with the question of when the next generation of Al-Saud princes would appear in the line of succession. In following with the established succession put in place by his predecessor, on January 23rd King Salman named his half-brother, 69-year-old Prince Muqrin, the youngest surviving son of Ibn Saud, as his Crown Prince and Deputy Prime Minister. But he also appointed his nephew, 55-year-old Interior Minister Prince Mohammed Bin Nayef, as Deputy Crown Prince and Second Deputy Prime Minister, not only setting the stage for a return of the Sudairi clan to the throne but also making Prince Mohammed Bin Nayef the first grandson of the Kingdom’s founder to be officially placed in the line of succession. At the same time, King Salman elevated his 34-year-old son, Prince Mohammed Bin Salman, as the Kingdom’s new Defense Minister, the job the new King himself had held since 2012.

In several surprise decrees issued early today, April 29th, King Salman abruptly removed Crown Prince Muqrin, appointing Prince Mohammed Bin Nayef as his new Crown Prince and the Deputy Prime Minister, and naming his son, Prince Mohammed Bin Salman as Deputy Crown Prince and Second Deputy Prime Minister.

When King Salman had immediately named Prince Muqrin as Crown Prince upon taking the throne in January, it was seen as the monarch maintaining the status quo for those conservatives within the Kingdom fearing change and assuring the domestic population and the world of a smooth succession, by honoring the wishes of his late half-brother as well as the ruling echelon within the Al-Saud clan.

Crown Prince Muqrin was clearly King Abdullah’s man. Crown Prince Muqrin did not have a support network of full brothers to establish a power base and he hadn’t reportedly particularly distinguished himself when he served as Saudi Intelligence Minister from 2005 to 2012.

What is clear is that the new Crown Prince and Deputy Crown Prince have enhanced their statures quickly and strengthened their individual power bases, appearing for now to be in agreement on dividing leadership in key areas. In addition to his new titles and responsibilities, Crown Prince Mohammed Bin Nayef will continue as Interior Minister and chairman of the Political and Security Affairs Council, while Deputy Crown Prince Mohammed Bin Salman will continue to oversee the Defense portfolio while also chairing the Economic and Development Affairs Council.

As Interior Minister since 2012, Crown Prince Mohammed Bin Nayef has taken a hard line on combatting internal threats from Islamist radicals, notably al-Qaeda and more recently attacks believed to be instigated or supported by the Islamic State of Iraq and Syria (ISIS).

The new Crown Prince became Assistant Interior Minister in 1999 and forcefully moved against Islamic militants within the Kingdom after September 11, 2001 while surviving an assassination attempt by an Al-Qaeda suicide bomber in 2009. He has become the public face in the Kingdom and abroad of overseeing domestic counterterrorism policy, responding swiftly to internal attacks and thwarting potential threats.

Just yesterday, on April 28th, the Saudi Interior Ministry announced that in arresting 93 people in the last several months that were linked to ISIS, it had prevented several terrorist attacks from occurring within the Kingdom, including a planned suicide car bombing plot to strike the U.S. Embassy in Riyadh, as well as threats to residential compounds, prisons and security forces. Perhaps most worrying to the Saudi leadership should be that of the 93 individuals that were arrested, 65 of them were Saudi nationals.

In November 2014, following an attack on a Shi’ite shrine in the town of Dalwah in the al-Ahsa region of the Eastern Province that killed seven Saudis, raids across the Kingdom resulted in the arrests of 77 people in a terrorist cell believed to be responsible for the attack. The Interior Ministry subsequently announced that ISIS had ordered the attack in Dalwah and that the cell’s leader as well as three others in the group had direct links to ISIS.

As for the young Defense Minister, the relatively untested Prince Mohammed Bin Salman has seen his profile prominently raised since March 26th, when a Saudi- led coalition began its airstrikes and shipping blockade against the Houthi rebels in neighboring Yemen, in what is in effect a proxy war between Riyadh and Tehran over Saudi Arabia’s perception of Iran’s power moves and rising Shi’ite influence in the region.

The Saudi Defense Ministry announced on April 21st that the coalition had ended Operation Decisive Storm because its goals had been reached and was moving into a second phase, Operation Restore Hope, the goal of which is to find a political solution to the crisis in Yemen. However, on April 28th, coalition jets bombed the runway at Sana’a airport as a means to prevent an Iranian aircraft from landing and effectively making the runway unusable for scheduled aid flights, a coalition spokesman stated, claiming that the plane had not coordinated with the coalition and refused to turn back when it ignored a warning.

In the most significant of the several cabinet changes and other appointments he made through his royal decrees early on April 29th, King Salman let go the world’s longest-serving foreign minister, Prince Saud Al-Faisal, replacing him with Saudi Ambassador to the United States Adel Al-Jubair. The decree announcing the departure of Prince Saud, who was appointed Saudi Foreign Minister by King Khaled in March 1975, cited that the 75-year-old prince “had asked to be relieved from his duties due to his health condition.” King Salman has retained Prince Saud on the Saudi cabinet by naming him a Minister of State and adviser on foreign affairs. Al-Jubair has served as Saudi ambassador to Washington for the past eight years and from 2000 to 2005 had been foreign affairs advisor to then Crown Prince Abdullah before serving as advisor to King Abdullah from 2005 to 2007. He will be the first non-royal to oversee the Saudi foreign ministry.

In what is causing a lot of head scratching and reading of tea leaves today, Saudi trackers are attempting to make sense of King Salman’s appointment of Saudi Aramco CEO and President Khalid Al-Falih as the new Health Minister as well as the chairman of the state oil firm. This means that Al-Falih takes over the chairmanship of Saudi Aramco from long-serving Saudi Oil Minister Ali Naimi. Both the positioning of Al-Falih on the cabinet and overseeing the board of the state oil firm suggests that he is next in line to replace Naimi. Traditionally the Oil Minister also serves as chairman of Saudi Aramco, so this is a bit of unchartered territory.

Al-Falih, who has worked at Saudi Aramco for his entire career that spans more than 30 years, has served as President and CEO since January 2009 and was appointed as a member of the Saudi Aramco board in 2004. Nothing in his professional background shows involvement or experience in medical or health-related issues.

It well could be that the reasoning behind appointing him to the Health portfolio was to give him ministerial ranking and more public exposure domestically and allow him to give input at ministerial meetings on energy issues, paving the way for him to succeed Naimi. However, there are believed to be other potential candidates for the job of Oil Minister, including King Salman’s son, Prince Abdulaziz Bin Salman, who is currently Saudi Deputy Oil Minister.

Increasingly in recent years, there was expectation that King Abdullah was going to relieve his long-serving oil minister from his job, but Naimi has proven resilient, in large part due to his technical knowledge and great understanding of the oil markets. Certainly, when King Salman came to the throne in January of this year, most anticipated that he would be replaced, given that Naimi was perceived as specifically King Abdullah’s man. But, as the country was in the midst of sponsoring an oil price war with help from its Gulf OPEC allies against U.S. shale producers and fellow OPEC and non-OPEC producers, it appeared that the new monarch did not want to rock the boat by firing Naimi at that time.

There is speculation that Naimi may be replaced following the upcoming scheduled OPEC conference on June 5th in Vienna, or more likely, that he will remain in place until he has seen the price war run its course, however long that is to take.

Three Months In, No Sign of Saudi Wavering on OPEC Strategy

As February has drawn to a close—marking three months since OPEC agreed to hold to production levels of 30 million b/d—there is a widening fissure within the group over the impact that low oil prices are having on member countries’ economies. With Nigeria joining the ranks of its fellow disgruntled member countries Iran and Venezuela in trying to publicly and privately pressure the group to convene an emergency meeting to discuss production cuts for a price recovery, the divide between OPEC’s “haves” and “have nots” is glaringly obvious. Nigeria’s oil minister even alluded to the differences among members in an interview with the Financial Times on February 23rd, essentially pointing the finger at the GCC contingent within the organization as feeling less of a financial pinch than everyone else.

However, it’s clear that without the go-ahead of Saudi Arabia, an emergency OPEC meeting will not occur before the next scheduled gathering of the oil ministers in Vienna on June 5th. As far as Riyadh is concerned, things are exactly where OPEC’s largest producer wants them to be. With oil prices in the $50-$60 range, some 60% lower than June 2014, Saudi Arabia’s wish to see high production from both independent producers and errant OPEC members start to wane as they cede valuable market share is happening.

Saudi Oil Minister Ali Naimi even reinforced the notion that the Kingdom has no plans to change its current strategy of focusing on market share rather than worrying about high production and oil prices in comments he made on February 25th. Speaking to reporters on the sidelines of a conference in southwestern Saudi Arabia, the veteran Saudi oil official noted that the markets have calmed down, with the price of Brent stabilizing at around $60 a barrel and that demand is growing, with lower oil prices beginning to foster demand particularly in China and the United States.

The Saudis are losing little sleep over that fact that among the hardest hit financially are independent producer Russia and fellow OPEC member and regional antagonist Iran. Indeed, should Riyadh’s fear that the United States and its five negotiating partners will broker an historic agreement with Iran on its nuclear program in the coming weeks be realized, Saudi Arabia is unlikely to want to give Tehran another reward in the guise of higher oil prices anytime soon.

In an interview with The Financial Times on June 23rd, Nigerian Oil Minister and current OPEC President Diezani Alison-Madueke stated that she had been in consultations with other members within the group and that if the price of oil fell any further, “it is highly likely that I will have to call an extraordinary meeting of OPEC in the next six weeks or so.” According to the Nigerian oil official, most of the OPEC member nations, with the exception perhaps of the Arab Bloc (meaning Saudi Arabia and its fellow GCC members within OPEC—Kuwait, the U.A.E. and Qatar), “are uncomfortable.”

Not surprisingly, Alison-Madueke’s public insistence that an emergency OPEC meeting was in the offing was quickly shot down by Gulf delegates, according to reports. According to one OPEC source in the Gulf, no extraordinary meeting was slated and there is “no price target to trigger” such a meeting. To underscore the point, the source said that any change in the organization’s current policy of quota-free high production would require some independent producers to agree to cut back on their output and that doesn’t appear likely.

Oil prices experienced quite a bit of volatility in the latter part of the last week of February thanks to conflicting reports about supply and demand. Based in part on inventory data released on February 25th by the U.S. Energy Information Administration (EIA) that indicated that U.S. oil stockpiles had reached heightened levels not seen in nearly 80 years and that U.S. oil output had hit a new weekly high of 9.3 million b/d amid an oversupplied market, crude prices took a dive on February 26th, with U.S. April crude plunging $2.82 to settle at $48.17 and the price for Brent falling $1.58 to settle at $60.05. However, on February 27th, oil prices rebounded, bolstered by surging demand for refined gasoline and diesel, with the U.S. benchmark oil contract adding $1.59 to settle at $49.76 a barrel and the contract price for Brent jumping $2.53 to settle at $62.58 a barrel.

The markets shrugged off news on February 27th from Baker Hughes that its count for U.S. oil rigs drilling for oil had fallen by 33 the last week of February to 986, the first time the rig count had slid below 1,000 since June 2011. In addition, JBC Energy suggested that the rig count decline should translate into U.S. crude levels shedding 200,000 to 250,000 b/d in the second half of 2015.

Some reports have suggested that U.S. shale producers are scaling back so dramatically on drilling and capital spending as a result of the sustained low oil prices that U.S. crude output could start to take a hit sooner rather than later. In fact, a number of U.S. shale producers have reported 25-70% reductions in drilling and collectively at least $25 billion in spending cuts.

Succession In Saudi Arabia: King Salman Assumes Throne Upon King Abdullah’s Passing

This post has been revised on January 23rd to reflect key changes in the Saudi government following several decrees announced by new King Salman, namely the move to appoint his nephew, Interior Minister Prince Mohammed Bin Nayef, as Deputy Crown Prince and second deputy prime minister, formally establishing a grandson of Ibn Saud in the line of succession.

Three weeks after he was hospitalized for pneumonia, Saudi King Abdullah Bin Abdul-Aziz, age 90, died in the early morning hours of January 23rd Riyadh time, according to a statement issued by the Saudi royal court.  As expected, his successor to the Saudi throne is his half-brother, 79-year-old Crown Prince Salman Bin Abdul-Aziz. As mentioned in my previous post about Saudi succession following the late king’s hospitalization, the throne returns to the powerful Sudairi line with the ascension of King Salman Bin Abdul-Aziz. Upon assuming the throne, King Salman immediately named his half-brother Prince Muqrin Bin Abdul-Aziz as his Crown Prince and heir.

And, in a surprise move for the traditionally cautious Saudi regime, King Salman appointed his nephew, Interior Minister Prince Mohammed Bin Nayef, as Deputy Crown Prince and second deputy prime minister in one of six decrees the new monarch issued on January 23rd. This bold step ensures that the 55-year-old Prince Mohammed, a grandson of founder Ibn Saud and another member of the Sudairi branch, is in place to one day become King and eliminates speculation about the future of governing in the OPEC country presumably for decades to come. Prince Mohammed, who had been named Interior Minister in November 2012, had been perceived as one of the leading contenders in the line of succession among the next generation of Saudi princes.

The smooth succession of Crown Prince Salman to the throne upon King Abdullah’s death is not surprising as it had been well-choreographed and intended to signal continuity in leadership and to reassure global oil markets about stability in the world’s largest crude exporting nation. Defense Minister Prince Salman had been named Crown Prince and deputy prime minister in June 2012, following the death of his brother, Crown Prince Nayef Bin Abdul-Aziz. And, in March 2014, King Abdullah appointed his half-brother, 69-year-old Prince Muqrin Bin Abdul-Aziz—the youngest surviving son of founder Ibn Saud—as Second Crown Prince (a new position) and second deputy prime minister.

Because of the intense jockeying for power among the sons and grandsons of Ibn Saud, the position of second deputy prime minister—traditionally the indicator of who is next in line behind the Crown Prince—had remained vacant for more than two years between the time that Prince Nayef had been named Crown Prince in October 2011 and King Abdullah appointed Prince Muqrin as second deputy prime minister and Second Crown Prince early last year. That King Salman moved so quickly to appoint Prince Mohammed to that post as well as designate him Second Crown Prince suggests that this had been in the works and that Prince Mohammed had the blessing of the inner circle of leadership. It also means that the Sudairis have extended their powerful reach into the next generation of Saudi governing.

In another important decree he issued, King Salman appointed his son, 34-year-old Prince Mohammed Bin Salman, as the country’s new defense minister, the job the new King had previously held since 2012. King Salman also named Prince Mohammed as chief of the royal court, replacing Khaled Al-Tuwaijri, who had been a key advisor to King Abdullah. King Salman also decreed that all other cabinet positions would remain unchanged. The cabinet had just experienced  a major overhaul by King Abdullah in early December, which left long-serving Oil Minister Ali Naimi in place.

Though oil prices have jumped on the news of King Abdullah’s passing, this is likely only a temporary boost. Indeed, oil markets should not expect to see a sudden and dramatic shift in current Saudi strategy regarding its oil policy or OPEC’s agenda as the Kingdom is in the throes of a calculated production push and price war to gain back market share that is just starting to see results that Riyadh wants.

Maduro’s Tour Comes Amid Proof That Saudi Strategy Is Beginning To Sting

The glaring divide between OPEC’s “haves”—those member countries who are pumping at near full production capacity and have a buffer of substantial financial reserves to withstand a sustained price decline—and OPEC’s “have nots”—those within the group with declining capacity from lack of investment and little if no financial buffer to weather the current price collapse— has become more readily apparent in the past several weeks. No greater sign of this divide was Venezuelan President Nicolas Maduro’s feverish tour of several OPEC nations as well as China and Russia to seek support in shoring up oil prices and to secure financial aid for his struggling economy.

While Maduro reported  he was successful in gaining $20 billion in new Chinese investment for a number of projects in the Latin American country and that the Qatari government had pledged to lend him “various billions”, his pleas to Riyadh and Doha to moderate OPEC’s current strategy and agree to cut the group’s production to begin an oil price recovery most certainly fell on deaf ears.

And why not, giving that the strategy pushed by Riyadh and supported by the other member countries of the Gulf Cooperation Council (GCC) in OPEC apparently is beginning to see results, particularly in terms of hitting non-OPEC producers where it hurts and reclaiming market share. Reports show that in the past six weeks, the U.S. oil rig count has fallen by 209, marking the sharpest six-week drop since tracking began in 1987, with the oil rig count falling by 55 in the week ending January 16th and the count for horizontal rigs that are used in shale production dropping 48 in the same week, reflecting its biggest single-week decline.

OPEC also got encouraging news from the latest monthly oil market report from the International Energy Agency (IEA)—at least in the short term. In its report released on January 16th, the IEA pointed to declining oil prices cutting into non-OPEC production growth in 2015, with the organization reducing its estimates for non-OPEC supply growth by 350,000 b/d. The IEA now forecasts non-OPEC supply growth at 950,000 b/d for this year.

However, in its report, the IEA did suggest that “A price recovery—barring any major disruption—may not be imminent, but signs are mounting that the tide will turn.” And, interestingly enough, the IEA indicated that U.S. oil output for 2015 will remain pretty strong, with supply growth falling by a mere 80,000 b/d. The market watchdog sees larger losses in production growth during the year from Colombia (175,000 b/d) and Canada (95,000 b/d).

The IEA now puts its call for OPEC crude at 29.2 million b/d for 2015, a tad higher than OPEC’s own adjusted call of 28.8 million b/d announced a day earlier, which was reduced by about 100,000 b/d from OPEC’s December monthly report. And, OPEC itself boosted its previous estimate for U.S. oil production for 2015 by 90,000 b/d to 13.81 million b/d in its latest report, but it also lowered its forecast for U.S. supply growth for the year from 1.05 million b/d to 950,000 b/d, which is now in line with the IEA’s new forecast.

There are no indications that OPEC’s GCC contingent is wavering on its stance on maintaining the group’s high production levels, currently over 30 million b/d for the seventh consecutive month. In the midst of Maduro’s touring of OPEC nations and China and Russia, U.A.E. Oil Minister Suhail Mohamed al-Mazrouei, speaking at an energy event in Abu Dhabi, argued that OPEC “cannot continue protecting a certain price … We are concerned about the balance of the market but we cannot be the only party that is responsible to balance the market.”

Venezuela has been a strong opponent of Riyadh’s plan to stem non-OPEC production through a painful price war and market share battle, given that the Latin American producer’s economy is in shambles. Maduro is facing increasing heat at home, where inflation has risen to 64 percent, the country appears close to defaulting on its foreign bonds, food shortages are on the rise and the latest polls suggest he only has support from 22% of the population. The Venezuelan leader, admitting last month that his country is in recession, has insisted that the financial crisis  is the result of an “economic war” waged by political foes.

Maduro received the full royal treatment during his visit to Saudi Arabia on January 11th, meeting with Saudi Crown Prince Salman Bin Abdul-Aziz, Deputy Crown Prince Muqrin Bin Abdul-Aziz, Intelligence Chief Prince Khaled Bin Bandar and several sons of the ailing King Abdullah Bin Abdul-Aziz, who has been hospitalized since December 31st, as well as Saudi Oil Minister Ali Naimi. While the official Saudi Press Agency gave no details about Maduro’s visit with the Saudi leadership, the Venezuelan government released a statement saying that, “We agreed to work to recover the market and oil prices with state policies between the two energy powerhouses.”

In Doha on January 12th, Maduro spoke to Venezuelan state television, declaring that, “We’re finalizing a financial alliance with important banks from Qatar that will give us sufficient oxygen to help cover the fall in oil prices and give us the resources we need for the national foreign currency budget.” He indicated that the financing would involve billions of dollars covering 2015 and 2016.

Maduro met more kindred spirits for supporting a return to higher oil prices through production cuts while visiting Iran. In Tehran on January 10th, Maduro first met with Iranian President Hassan Rouhani and later with Iranian Supreme Leader Ayatollah Ali Khamanei. Both Iranian leaders took the opportunity of Maduro’s stop in Tehran to again accuse Saudi Arabia (and ostensibly the United States) through veiled references of instigating the price rout for political reasons. Rouhani called on OPEC members to “neutralize schemes by some powers against OPEC and help stabilize an acceptable oil price in 2015.” The Ayatollah, on his part, insisted that, “Our common enemies are using oil as a political weapon and they definitely have a role in the sharp fall in oil price.”

The fact that Maduro turned to Beijing and Moscow for financial help is no great surprise, although Russia—also hard hit by oil prices that have collapsed 60% since last summer—may not be in the strongest lending position currently to help bail out Caracas and it is questionable how much aid Maduro was pledged when he met with Russian President Vladimir Putin on January 15th. Following that meeting, the Venezuelan leader declared that, “I have got the funds needed so that the country can maintain its rhythm of investment, of imports and economic stability.” 

While Maduro announced during his visit to Beijing earlier this month that he had signed bilateral deals with the Chinese government for $20 billion in new Chinese investments in projects in the Venezuelan energy, industrial and housing sectors, he gave few details and it is unclear if these deals will entail a loan-for-oil arrangement that has come to typify Chinese-Venezuelan agreements.

The Chinese government had cultivated a strong relationship with Maduro’s predecessor, Hugo Chavez, beginning in 1999, and it was Beijing that Chavez increasingly turned to when his Bolivian Revolution started hitting tough financial times and the Venezuelan president had to boost borrowing to cover government spending and debts. Since 2007, China has offered Caracas as much as $50 billion in credit in exchange for dedicated oil supplies.

Indeed, in April 2010, the Chinese government stated that it had signed seven cooperation deals with Venezuela, including a framework agreement for financing that entailed the China Development Bank offering Venezuela a $10 billion loan and an additional credit worth approximately $10.4 billion. As required by the Venezuelan law that was passed to endorse the financing, Caracas was to repay China with no less than 200,000 b/d of crude in 2010, no less than 250,000 b/d in 2011, and no less than 300,000 b/d in 2012. The question today is how much of Venezuela’s crude output is already committed to repaying existing Chinese loans and how much more will be heading to Asia’s largest market from the latest deals?

Saudi Budget: Optimistic or Calculating?

It is fitting that the first post of this blog addresses the 2015 Saudi budget. As a fledgling oil journalist more than 20 years ago, I was assigned the OPEC beat, and because I had lived and worked in the region, my particular focus was on the Gulf producers within the organization. I began reporting on and writing about Saudi budgets back then and over the past two decades have continued to closely monitor them. Without understanding what the Kingdom is doing, you can’t get a true gauge of where OPEC is heading.

In announcing its new budget on December 25th, Saudi Arabia may have signaled that it is willing to hunker down for a year of relative austerity based on ongoing low crude prices. Or the Kingdom is bluffing as it presumes errant fellow members of the Organization of Petroleum Exporting Countries (OPEC) and independent producers like Russia and U.S. shale producers will be forced to reduce or shut in output, allowing Riyadh and its Gulf allies to begin curbing production themselves to strengthen oil prices.

In fact, it likely is a combined strategy that the Kingdom is taking with its new budget, given that the budget appears to be based on higher average oil prices than analysts had predicted Riyadh would use. Although the expectation among some market watchers was that the Kingdom would base its new budget on a conservative average oil price of $60 a barrel, it appears the Saudi leadership wants to reassure the markets that oil prices will rebound, with a presumed average price of $80 a barrel needed to balance the Kingdom’s 2015 budget.

In the aftermath of the November 27th OPEC meeting in which the Saudi-led move to maintain the group’s current production ceiling of 30 million b/d won out over a push by others to reduce output, Saudi Oil Minister Ali Naimi has stressed that OPEC (and one can easily read Saudi Arabia itself) should not cut its production at the expense of others who have already benefitted from increased market share.

In an interview with the Saudi Press Agency (SPA) on December 18th, Naimi, noted that OPEC’s output, including that of the Kingdom’s, has remained relatively static for several years, while production from outside the organization continues to increase. Said the Saudi Oil Minister; “In a situation like this, it is difficult, if not impossible, for the kingdom or for OPEC to take any action that would reduce its market share and increase the shares of others, at a time when it is difficult to control prices.” A few days later, in an interview with the Middle East Economic Survey (MEES), Naimi suggested that the Kingdom was willing to play hard ball even if it meant a return to oil prices of the late 1990s. As quoted by MEES, the long-serving Saudi official said “…it is not in the interest of OPEC producers to cut their production, whatever the price is. Whether it goes down to $20, $40, $50, $60, it is irrelevant.”

Naimi continues to stress that he believes the slump in oil prices is temporary and that as the global economy begins to improve and high-cost producers are forced to trim output, prices will recover. However, the short-term prospects for crude prices certainly don’t bode well as the International Energy Agency (IEA) cut its forecast for the call on OPEC crude for the first half of 2015 on December 12th, warning that if the oil cartel maintained its present production levels, oversupply in the market would hit 2 million b/d in the coming six months, when seasonal demand is traditionally weak.

The Kingdom’s 2015 budget, which was signed off on by the recently reshuffled Saudi cabinet, projects a whopping $38.6 billion deficit, which the government has suggested will be tackled by the regime tapping into its well-padded reserves. The budget for next year calculates spending at $229.3 billion and revenues at $190.7 billion. Projected income will be down some $88 billion or one third from 2014, largely attributed to the collapse in oil prices.

Riyadh can handily meet such a deficit, thanks to sustained oil prices averaging more than $100 a barrel from 2011 into the summer of 2014 that allowed Saudi Arabia to boost its foreign exchange reserves to $739 billion. Though the Saudi Finance Ministry claimed that the government would attempt in the coming year to reduce government salaries, wages and allowances, which contribute to about 50 percent of total budgeted expenditures, one has to wonder whether the leadership will indeed risk incurring more discontent within portions of the population already chafing over economic disparity, the government’s failure to move forward with political and social reforms and high unemployment.

The Saudi government will have posted its first budget deficit in 2014 since 2009, as total expenditures ran 29% higher to help generate a budget shortfall of $14.4 billion, according to the Finance Ministry.

The projected spending for 2015 of $229.3 billion is up nearly one percent from the planned 2014 budget. Finance Minister Ibrahim Al-Assaf had suggested the week before the new budget’s release that government expenditures would fund massive development plans in 2015, with spending on health care, education, social services and security as priorities.

One assumes that spending on security has been beefed up over the last year, both from the regime’s ongoing tensions with its minority Shi’a population and increasing threats from the Islamic State, as evidenced by the November attack on a Shi’ite mosque in the al-Ahsa region of the Eastern Province for which the Saudi government has claimed militants associated with the Islamic State are responsible. Saudi Arabia’s overall defense expenditures are not publicly disclosed and it’s not uncommon for some defense purchases to become off-budget items. But regional threats have prompted Saudi Arabia to boost its arms spending in recent years, with the Kingdom becoming the fifth largest arms importer in the world between 2009 and 2013, just behind fourth-place United Arab Emirates, according to the Stockholm International Peace Research Institute (SIPRI).

While basing their 2015 budget on $80 oil may have temporarily given the oil market confidence and provided a slight bounce in prices, the Saudis must recognize that reaching that price point is unrealistic given the demand picture for the coming year unless a lot of oil is taken off the market. But those chronic over producers within and outside of OPEC need only look at past history if they think Saudi Arabia will blink first and move to rein in its own barrels.

Back in the late 1990s, the Saudis were willing to endure several  years of budget deficits (without the safety net of the hefty financial reserves they have today) to get OPEC and non-OPEC members to come together on a joint agreement to reduce production rather than bear the brunt of the work themselves. On December 30th, 1998, Riyadh released its projected budget for 1999 amid a price collapse that saw Saudi revenues from oil sales plunge 30 percent from $43 billion in 1997 to $30 billion in 1998 and the price of Saudi benchmark Arabian Light decline from $17 in 1997 to $11 in 1998. In its 1999 budget, the Saudi government had forecast a deficit of $11.7 billion, based on expected revenues of $32.26 billion and projected spending of $44 billion. The Saudis were believed to have based their 1998 budget on an expected price of $15-$16 a barrel for their crude exports, and for their 1999 budget appeared to use $9 a barrel for their budget base, with the price of West Texas Intermediate (WTI) having averaged $14.42 a barrel for 1998.

The Saudi heir apparent, Crown Prince Abdullah Bin Abdul-Aziz, had famously warned his fellow GCC leaders at a summit in early December of 1998 that “The period of boom has gone and will not come back. We must all get used to a different way of life, which does not stand on total dependence on the state.”

History is telling. In the spring of 1998, it took the diplomatic initiative of non-OPEC producer Mexico to cobble together an accord that eventually brought OPEC and several non-OPEC producers together to reduce overall production and allowed crude prices to slowly recover over several years. The question is whether the Saudis will be able to get that type of cooperation this time around.