Moderate oil prices hold the key to Saudi Arabia’s future prosperity

The tenure of King Abdullah of Saudi Arabia comprised an oil boom bracketed by slumps.

King Abdullah, whose death was announced on Friday morning, took effective power in 1995, when King Fahd was incapacitated by a stroke, although his official rule did not start until 2005. Oil prices had already been low for a decade, as Saudi Arabia had tired of defending unsustainable price levels single-handedly and decided to protect its market share.

In 1998, in the face of the Asian economic crisis, the price slumped further, briefly touching US$10 per barrel. Government debt reached $130 billion in 1999, or 120 per cent of the country’s GDP.

In August 1995, the country’s oil minister Hisham Nazer, King Fahd’s man, was replaced by Ali Al Naimi, who from 1998 worked with the Venezuelans under the new president Hugo Chávez to restrict Opec production. Oil prices soared to record levels on the back of Chinese economic growth and upsets to output elsewhere.

During the 20 years that King Abdullah was effectively in charge, Saudi Arabia earned some $3.6 trillion in oil exports adjusted for inflation – more than the $3tn received by all previous rulers back to the kingdom’s founding. Some $2.7tn of that came from 2005 onwards.

The calls on Saudi money were extensive – supporting political allies in Egypt, Bahrain, Yemen and elsewhere and expanding social benefits to the Saudi population. The government paid down its debt and accumulated some $730bn of foreign assets.

Most importantly for the future, the model of state-led industrial diversification funded by oil revenue continued in gargantuan form, with the King Abdullah Economic City, just one of several such projects, expected to cost $86bn.

The last months of King Abdullah’s reign were a reprise of the opening, with oil prices falling sharply and the kingdom faced with deficits. On his death, though, he leaves a Saudi Arabia far better placed than in 1995 to weather the challenges of a downturn.

Indeed, the kingdom’s confidence in its vast financial and petroleum resources has led it to pursue its policy of volume over price, ready to survive for up to eight years to outlast its competitors.

Such is the remarkable continuity of Saudi oil policy that the kingdom has only had four oil ministers in its history. The three capable technocrats who succeeded the radical Abdullah Tariki were each closely associated with a Saudi king: the charismatic Zaki Yamani with King Faisal, Hisham Nazer with King Fahd after Yamani was sacked following the 1986 price crash, and the incumbent, Mr Al Naimi, with King Abdullah.

Although Mr Al Naimi, now 79, has for some time talked of retirement, there is no reason to expect major oil policy changes under King Salman, whose son Abdulaziz has been assistant oil minister since 2005. Pursuing moderate prices is the right and the inevitable policy.

But it should have commenced much earlier, the necessity masked by the temporary crises over Libya and Iran. Saudi Arabia has also moved much too slowly on cutting its own ravenous oil appetite, improving efficiency and introducing alternative energy. Last Monday at the World Future Energy Summit in Abu Dhabi, Hashim Yamani, the president of the King Abdullah City for Atomic and Renewable Energy, announced that the country's nuclear and solar power plans would be delayed by eight years.

The appointment of Mohammed bin Nayef, the interior minister, now 55, as deputy crown prince was notable for placing him first in line of the next generation. Whether he or another of the grandsons of King Abdulaziz eventually succeeds, the immediate economic crisis is not now. But now is the time for hard decisions on real reform and diversification.

Robin Mills is the head of consulting at Manaar Energy and the author of The Myth of the Oil Crisis

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