The Problem of Success

By all accounts the Saudi economy is in decline. Low oil prices are forcing the Kingdom to live off savings, a process which can only last for so long. "The International Monetary Fund in January slashed its forecast for Saudi economic growth this year to 0.4 percent from 2 percent. ... Net foreign assets, though still above $500 billion, are shrinking as the government uses savings to plug a budget deficit that reached $79 billion last year -- $107 billion if delayed payments to contractors are included." The Saudi government has a six-point plan aimed at tightening its belt and minimizing economic unrest as it tries to shift away from oil but it may be too little, too late to sustain it in the same old style.

The Citizen’s Account is a programme meant to soften the impact of austerity measures on low and middle-income Saudis ... The government began a multiyear programme of gradual reductions to fuel, water and electricity subsidies with a surprise announcement in late 2015, sending Saudis rushing to petrol stations to fill up. ... From July, the government will charge an unprecedented monthly fee for foreign workers with dependents in the kingdom.

Although Riyadh has tried to reinvent itself as an "arsenal of Arabia" with an arms industry taking the place of oil, the Islamic Military Alliance  whose arsenal it was to have been built around a Turkish-Saudi Army based in Riyadh  has been less than impressive. Actions by the Trump administration to drive back Iran in Yemen and Syria may be aimed less at ensuring Saudi victory than a rearguard action against too swift a Russian and Iranian advance.

One person who understood the growing strategic weakness of the Saudi position was Rex Tillerson. Speaking in October 2016 as the chairman of Exxon Mobile, when a president Hillary was still universally anticipated, "Tillerson told Saudi Arabia's energy minister ... that fears of a new global oil supply crunch were exaggerated as the U.S. oil industry was adapting to the low price shock and was set to resume growth."  The Saudis had cut oil prices in the belief that it would bankrupt American producers. Instead innovation turned North America into the big swing producer.

The remarks by Tillerson ...  come as the Saudis have effectively abandoned their strategy to drive higher cost producers out of the market by ramping up cheap supplies from their own fields ... shale oil producers' resilience in cutting costs to make some wells profitable at as low as $40 a barrel means that North America has effectively become a swing producer that will be able to respond rapidly to any global supply shortage.

"I don't quite share the same view that others have that we are somehow on the edge of a precipice. I think because we have confirmed viability of very large resource base in North America ... that serves as enormous spare capacity in the system," Tillerson told the Oil & Money conference.