Not that the market will care, but succession in Saudi Arabia is looming. At 90, King Abdullah has outlived several of his hopeful successors, but his health has rapidly deteriorated in recent years and the absolute monarch is currently hospitalized with pneumonia. An all out scramble for the throne is off the table for now, but the new ruler will not find the kingdom trouble free – low oil prices, extremism, and growing unrest among the domestic population pose significant threats to the world’s most important oil producer.
First, on this bear of a market – it’s not easily spooked. Last week, a fire at Libya’s largest port destroyed nearly two million barrels of oil, caused $213 million in damage, and was visible from low orbit. Neither this disaster, nor the port’s shutdown more than three weeks ago at the hands’ of Islamist militants, registered on the market as oil continued its freefall – West Texas Intermediate is inching closer to $45 per barrel and Brent crude may soon cross the $50 threshold. It’s no surprise then that traders paid little attention when King Abdullah checked-in to the hospital on January 2nd. It wasn’t always like this, however.
Oil prices spiked in 2005 following the death of King Fahd, despite a clear successor in his half-brother and then Crown Prince Abdullah. Such a reaction for Abdullah is unlikely, but questions remain regarding his successors.
First in line is current Crown Prince, and Minister of Defense, Salman. Prince Salman is himself 79 and is believed to be in poor health. Wary of the succession dilemmas brought on by his long life, King Abdullah installed Prince Muqrin as Deputy Crown Prince in March of last year to delineate a clear second in the line of succession. Prince Muqrin – viewed as unfit by some Saudi insiders – is 69 and is the youngest surviving son of King Abdulaziz (Ibn Saud), the first monarch of Saudi Arabia. After Prince Salman and Prince Muqrin, the kingship will likely jump to the next generation and the picture is considerably murkier.
Ibn Saud fathered some 45 sons. In total 12 eligible sons remain, all of which can claim seniority or superior bloodline over Prince Muqrin. The opportunity to secure a line to the throne for their sons is lost on few and underscores the importance of the final ruler of the second generation. Hundreds of princes comprise an eager third generation where the potential for discord and political posturing is high.
Dealing with what we know however, Salman and/or Muqrin must face a Saudi kingdom whose revenue stream has collapsed along with the price of oil. It is unlikely either will significantly alter policy and the country will continue to produce at high levels, allowing the market to push out more marginal suppliers – reducing the competitiveness of US shale and undermining Russian production are of course benefits. However, if the Saudi government is forced to cut state projects and reduce public employment, the will of the people may play a greater role in Saudi succession and subsequent oil policy. Several princes are said to be critical of the lack of production cuts.
What’s more, threats from outside will immediately test the heavy-handedness of Salman and Muqrin. ISIS is now at Saudi Arabia’s border with Iraq and the group has claimed responsibility for an attack on border guards Monday. Salman has publicly acknowledged the threat several times and strategic and security relationships with the US will remain for now – though US action in Iran and inaction in Syria are proving troublesome. Still, the Sunni Islamist rebel group will look to take advantage of any drawn out succession or ideological sympathies in the majority Sunni kingdom.
Saudi friends in OPEC are few and far between as no member nation can balance its budget at today’s prices. Saudi officials estimate they can hold out at least two years thanks to sizeable foreign exchange reserves, but most OPEC members are not so lucky. The pressure from both inside and out will be high for Salman and Muqrin as either’s succession to the throne will likely be met will still lower oil prices.
First published at www.oilprice.com