Financial analysts play close attention to politics in the countries they monitor — it’s crucial that they keep track of potential policy changes coming down the pipe.
When the country you’re looking at is Saudi Arabia, that’s a different sort of challenge. There aren’t any elections to keep track of, but there’s constant turmoil in the country’s monarchical system, which often looks more like medieval Europe than anything else.
Right now, there’s a surge of interest in Deputy Crown Prince Mohammad bin Salman — the 30-year old son of the current King — who has at least one team of analysts talking about Riyadh’s “game of thrones.”
Royal Bank of Canada’s global head of commodity strategy, Helima Croft and her team lay out their concerns in a note published Friday:
Since Salman ascended to the throne in January, the outsized influence of his favourite son, Deputy Crown Prince Mohammad bin Salman (MBS), has reportedly been a primary driver of discontent within the royal family. The young prince, who is thought to be between the ages of 29 and 32, controls some of the most prized political real estate in the country despite having a shorter resume than many of his older relatives. Not only is MBS in the immediate line of succession as Deputy Crown Prince, he is the world’s youngest defence minister, Chair of the Council on Economic and Development Affairs, and Head of the Supreme Council for Saudi Aramco.
Croft is keen to note that a dramatic power struggle isn’t RBC’s base case, but tensions have risen to such a level that they’re no longer able to rule it out. Mohammad bin Salman (referred to as MBS) has ruffled a lot of feathers during his sudden climb to the top. As defence minister, he also has significant responsibilities over the country’s war in Yemen.
He’s not next in line to the throne officially. Muhammad bin Nayef, the 79-year-old King’s nephew, is Crown Prince, and the designated successor. A grandson of Ibn Saud, who founded the Kingdom had a series of letters published recently calling for all three of them to be replaced.
Croft notes that Saudi Kings have been assassinated as recently as the 1970s, so a violent succession isn’t out of the question. Under normal times, discontent in the enormous royal family might be dismissed as gossip.
But that any regime change or instability could bring about a tremendous change in the global order when it comes to oil.
The oil price plunge that began in the second half of 2014 is a major economic event for Saudi Arabia — the International Monetary Fund has suggested that the country has about six years of fiscal buffers left if oil prices stay near where they are now.
The country is enormously reliant on oil for tax revenues. The fiscal buffer refers to the country’s enormous currency reserves, which will quickly dwindle if prices don’t rise again. That’s not just an issue for the public finances — two-thirds of the country’s men are employed by the government, and social stability is maintained in part through the generosity of the state.
But that’s partly a conscious decision made in the Saudi corridors of power. OPEC, the cartel of oil-producing nations, agreed not to cut production in the face of slumping oil prices, and the overproduction has cut prices to less than half of what they were in the middle of last year.
That had a clear knock-on effect on the world’s advanced economies, sending inflation to zero and below in the US, UK and the eurozone
The strategy’s intention is to cripple the US oil boom, which has been gaining an increasing market share, to the extent that the country is now practically self-sufficient in terms of energy.
Here’s what the RBC note says:
Depending on his path to power, a new monarch might feel the need to quickly generate additional revenue to fund popular infrastructure projects and social welfare programs, as well as boost the overall mood of the populace and the private sector, which depends heavily on government largesse. Market share might therefore take a back seat to maintaining public support in a power shift scenario.
That would be an enormous shift not just for Saudi Arabia or the region, but the world. The country produces about a third of OPEC’s 30 million barrels per day, and other countries tend to fall in line when decisions are made in Riyadh.