Saudi Arabia’s powerful deputy crown prince, Mohammed bin Salman, has been talking for months about the need to wean the kingdom’s economy away from oil, and over the weekend his father, King Salman, made his own statement by installing a new cabinet to carry out the policies.
The cabinet reshuffle included new economic officials, most notably replacing the 80-year-old oil minister Ali al-Naimi, who has held the post since 1995, with 55-year-old Khalid al-Falih, long seen as Naimi’s heir apparent.
Falih, chairman of the state oil giant Saudi Aramco and for the past year minister of health, will oversee an enlarged ministry, dubbed Energy, Industry and Mineral Wealth. Among his first tasks: Oversee the sale of up to 5 percent of Saudi Aramco, a goliath sitting atop 266 billion barrels, or more than an eighth of the world’s proved reserves.
But the cabinet shake-up is not likely to upend the production policy of the world’s largest oil exporter. Since late 2014, the kingdom has refused to reduce its own output in the face of weak demand, and it has flooded world markets, driving down prices and slowing investments by other countries in new energy projects.
Falih’s appointment promises a continuation of Saudi determination to protect its market share despite protests from other members of the Organization of the Petroleum Exporting Countries. Over the weekend, Falih issued a statement saying Saudi Arabia would “maintain its stable petroleum policies.”
Falih seems in no rush to change course. Earlier this year, when oil prices were near their bottom, he told an audience at the Davos World Economic Forum that “if oil prices continue to be low, we will be able to withstand them for a long, long time,”according to Bloomberg News.
But if Falih’s appointment promises continuity abroad, it suggests change at home. Prince Mohammed recently outlined a plan called Vision 2030 for broad reforms of the Saudi economy that would include an initial public offering for part of Saudi Aramco, increased investments in natural gas and an expansion of crude oil production capacity beyond the current level of roughly 12 million barrels a day.
“The prince has a vision of changing a lot of things. So this is a continuation of that process,” said Sadad al-Husseini, a consultant and former Aramco executive vice president. “I expect there will be a lot more.”
Edward Morse, Citigroup’s global head of commodities research, said the cabinet changes point to “the now clear intention of the Saudi government to march ahead with its Vision 2030 economic reform plans. These are designed to enable the kingdom . . . if not to prosper in a post-oil environment, then at a minimum to diversify the economy so as to minimize future market adjustments to changes in oil prices.”
Not that oil is disappearing. Prince Mohammed has floated the possibility of boosting Saudi oil production capacity to 15 million barrels a day, up from roughly 12 million barrels a day currently. The deputy crown prince also called the shots at the recent meeting of oil exporters in Doha, Qatar, overruling Naimi and refusing to consider even a freeze in current production unless Iran, which is recovering from recently lifted economic sanctions, did the same. Iran refused.
Falih, a graduate of Texas A&M University in mechanical engineering and of King Fahd University of Petroleum and Minerals in business administration, is also expected to continue a push he spearheaded to expand Saudi Aramco’s oil and petrochemical refinery capacity, soon to exceed 3 million barrels a day, said Jean-François Seznec, a political scientist of the Atlantic Council’s Global Energy Center. The state oil company has been able to lure joint venture partners including Sumitomo and Dow Chemical.
But as Saudi Arabia protects its hold on the natural resource, the prince wants the nation to become less dependent on oil’s revenues. The International Monetary Fund said in January that even after sharp drops in oil prices, the petroleum sector still made up half of the Saudi economy. Last year, oil accounted for more than 70 percent of government revenue.
Many of Mohammed’s diversification goals, such as making loans available to entrepreneurs and replacing foreign guest workers with Saudi citizens, make economic sense.
“The decline in oil prices has increased the importance of reforms to switch the focus of growth from the public sector to the private sector,” IMF Managing Director Christine Lagarde said during a visit to Riyadh in November. “It is important that the government accelerate reforms that increase the employment of nationals in the private sector and diversify the economy away from oil. Continued reforms to expand employment opportunities for women would also bring more well educated and motivated workers into the workforce and strengthen growth prospects.”
Some reforms are likely to be difficult for many Saudis to swallow. For example, the deputy crown prince is reducing subsidies in areas such as fuel, water and electricity. Saudi electricity usage has been growing 7.5 percent annually. With diesel and fuel oil providing more than half of that electricity use – nearly 1 million barrels a day during the summer air conditioning peak – that could drain critical amounts of petroleum away from global markets. But higher electricity prices could be a burden on poor and middle-class Saudis.
“The oil bargain has always been since the ’70s that we’re going to give you a lot of stuff – jobs, electricity and medical care – and in return you’re going to be loyal citizens of our state,” said F. Gregory Gause, professor of international affairs at the Bush School of Government and Public Service at Texas A&M University. “But if you privatize big chunks of health and education, does that mean the bargain is off the table?”
The privatization of up to 5 percent of Saudi Aramco could also prove difficult. Prince Mohammed has said it could be the biggest initial public offering on Earth.
But an IPO would require that Saudi Aramco – which Pavel Molchanov, oil analyst at investment firm Raymond James called a “complete black box” – to divulge key statistics such as its cost of production, believed to be under $5 a barrel according to Molchanov. The transparency needed would also put a stop to any corrupt dealings abroad or with the royal family.
Selling off bits of Saudi Aramco would also erode government revenues. The oil company pays a 20 percent royalty and an 85 percent tax rate on its oil profits, according to Nat Kern, president of Foreign Reports, a Washington, D.C.-based consulting firm devoted to the Middle East and oil markets.
Prince Mohammed has said selling chunks of Saudi Aramco would provide money for investment by the country’s sovereign wealth fund, which would then collect dividends. But Kern said that if the Saudi wealth fund bought all of Apple, Microsoft, Alphabet and Berkshire Hathaway, currently worth $1.8 trillion, it would receive only about $21 billion a year of dividends, less than a 10th of the estimated revenues from Saudi Aramco.
“As an entity, they’re more like the IRS than ExxonMobil,” Kern said.