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MbS and a Surfeit of Crises: Balancing Act or the End of Disruption?

by Senior Analyst Talal Kapoor

So far, Saudi has been hit the hardest among the Gulf States by the novel coronavirus, and the response has been aggressive. There is a curfew in Riyadh, while four governates and five major cities have been placed under 24-hour lockdown. After early, tentative safeguards to prevent the spread of the disease in the Holy Cities of Makkah and Madinah looked to be insufficient, the unprecedented step was taken to close the sites entirely, with the 'umrah' pilgrimage cancelled, and the annual Hajj scheduled for July called off. This order came despite opposition from religious hardliners, demonstrating again how little influence the clerics retain in the current political climate. The pilgrimages, with millions of visitors, are an important source of revenue for the Kingdom as well, which will add to the economic pain caused by the more general shutdown.

The royal family has not been immune, with reports indicating that many from both the senior line and cadet branches have been sickened, possibly as a result of their more extensive travel abroad. Riyadh Governor Faysal bin Bandar, now in intensive care, is the most high profile prince to have been stricken, and indeed, preparations are underway for the elite King Faysal Specialist Hospital to focus on the royals exclusively. Doctors there are preparing 500 more beds for an expected influx of patients, while others will need to be relocated to make room. "Directives are to be ready for VIPs from around the country," operators of the facility, wrote in a "high alert" note sent out electronically to senior doctors. "We don't know how many cases we will get but high alert," said the message, instructing "all chronic patients to be moved out ASAP", and saying that only "top urgent cases" would be accepted. As a precaution, King Salman has already secluded himself on an island palace near Jiddah, while Crown Prince Muhammad bin Salman (MbS) has moved to NEOM city, a remote site on the Red Sea coast.

Concurrently with the pandemic, Saudi is facing a crumbling economy aggravated by the decision to embark on an oil "price war". When agreement with Russia proved elusive, the Kingdom made the decision to unilaterally ramp up crude production, and the result was a cratering of the energy market. Although Energy Minister Abd al-Aziz bin Salman insisted the intent was not to crush U.S. shale oil producers, whose cost of extraction is roughly three times that of the Kingdom, the Saudis also indicated that they were willing to see oil drop to as low as $15/barrel, if need be, which certainly would have put most of the privately owned shale companies out of business, since they are heavily reliant on debt financing, often through so-called junk bonds, and need a steady stream of income to meet interest demands. The decision was also remarkable, given that Saudi itself needs around $85/barrel to balance the budget, and has been dipping into reserves for some time now. Coming at the very moment the global economy was heading into recession, with energy demand predicted to plummet, it was alarming.

In the end, the Americans saved the day with a two-pronged approach - members of Congress and President Trump threatened action, including tariffs on Saudi oil, while also brokering a deal with Russia and others that saw significant cuts in production, and a possible pause in the price war. MbS will not have wanted to buckle under pressure, but may have been relieved at being given an escape route. The viability of his Vision 2030 project, which was to have weaned the country off a dependence on oil, is seriously in doubt, and the current economic headwinds are in danger of turning it into a pipe dream. Was the oil gambit another example of recklessness on the part of MbS, or did he really take into account all the rapidly changing factors and believe it would still be a success? And how much of his decision was based on the belief that Trump, as always, would have his back?

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