Saudi Arabia’s long-serving oil minister, Ali al-Naimi, lost his job this weekend. But while his successor is a respected technocrat, observers agree the real influence on oil prices will be the man already known as “the world’s most powerful millennial,” deputy crown prince Mohammed bin Salman.
Al-Naimi was arguably the single person most responsible for the slide in world oil prices that began in late 2014. In an undeclared war against US shale producers, he led the OPEC countries’ continued refusal to cut their own oil production, thus allowing global supply to rise and prices to fall. (At lower prices, shale oil becomes uneconomic.) His departure doesn’t represent a reversal of this policy, however—quite the opposite.
By last month, with prices hovering just above $30 a barrel—much lower than OPEC members had either expected or could comfortably tolerate—al-Naimi had started to show signs of softening. At a meeting on April 17 in Doha, OPEC and non-OPEC countries were planning to ink an agreement to hold output levels steady for a few months so as to rein in the global glut. Only one major oil producer refused to curb its production: Iran, which badly needs oil revenue to recover from the crippling international sanctions that were lifted last year.
Reportedly, al-Naimi was willing to let the agreement go ahead without Iran’s participation. But bin Salman, who already holds a raft of government posts including defense minister, overruled him and the deal collapsed. The 81-year old al-Naimi’s retirement had been (paywall) expected for a while, and this seems to have provided an opportunity. His replacement, Khalid al-Falih, was up to now the head of the state oil company, Saudi Aramco, and is close to bin Salman.
Without Doha deal gone, oil producers are free to keep increasing production. In practice Saudi Arabia is the only one with any serious spare production capacity. And bin Salman has pointedly said that the country is quite prepared to use it.
Bin Salman’s aggressiveness can be chalked up to two factors. One is that Saudi Arabia doesn’t want Iran, its chief regional rival, to be free to ramp up oil production (and enjoy the revenues) while OPEC members hold theirs in check. The other is that the prince is the champion of Saudi Arabia’s Vision 2030 program, which aims to wean the country off its dependence on oil production by selling off part of Saudi Aramco and using the money to invest in other, non-oil assets. So he doesn’t much care if oil prices don’t rise; indeed, lower ones might even help keep up the pressure for his reforms.
For watchers of the oil market, this is worrying. Al-Falih is respected, but he doesn’t have (paywall) the long-standing ties with OPEC that al-Naimi had, so his ability to keep the cartel working in concert is in question. Allowing Saudi Arabia’s power struggle with Iran to politicize global oil prices also makes people nervous.
That may not mean prices are about to start plunging again just yet. They might even rise at first, out of uncertainty about Saudi Arabia’s new policies and how other oil producers will react to them. But it does mean a new era of oil pricing has begun, in which balancing global supply and demand matters less to Saudi Arabia than it used to. That suggests we’re in for an bumpy ride.