Challenges for Saudi Arabia

Greater Accountability amongst many other things . . .

Stratfor developed this article backed up by a report of which some excerpts are extracted and reproduced here for their obvious intellectual interest.   It is the global oil prices slump that created a series of Challenges for Saudi Arabia.   The consequent challenges that arose on several fronts, are driving pragmatic decision-making by the country’s leaders.

The downturn in global oil prices has created a series of challenges for Saudi Arabia. . .               . . .These challenges on the domestic front, are for Saudi Arabia that is accustomed to energy booms and busts, with a trail of incomplete reform efforts when prices topped $100+ a barrel has a subsidy programme that has grown and developed with each subsequent bust over the decades.

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. . . The kingdom as must find a way to carefully re-calibrate its domestic spending, without stirring up a social backlash from a population that has grown to expect such subsidies.   Meanwhile, despite facing a supply-side glut in the global markets, Saudi Arabia has pursued a policy of keeping production high.   The re-entrance of regional rival Iran to the oil markets will be closely tied to the kingdom’s oil policy decisions in the future.   If Iran is willing to embark on a production freeze, Saudi Arabia will consider it, too, but both countries face deficits that require them to continue to produce – and obviously, neither country operates in a global vacuum.   Although OPEC states may agree to freeze production at already-high levels when they meet in June, some of the largest producers – including Saudi Arabia – will refuse calls to cut production to stabilize prices, recognizing that Iran is waiting in the wings to build up market share.   Iranian production is set to return to pre-sanctions levels as production slowly comes back online, even though much investment is needed in the sector.   Rather than scaling back their own output, Saudi Arabia and its Gulf allies have preferred to see a market correction play out in the next few months.   For its part, Iran’s government cannot commit the political suicide of reducing production after years of a sanctions-incurred freeze, lifted only when the U.S.-backed nuclear deal – known as the Joint Comprehensive Plan of Action – was signed in 2015.   Against this backdrop of market forces, then, we see Saudi Arabia forced into pursuing a hybrid strategy: simultaneously scaling back domestic spending and seeking new sources of funding from state-owned assets and the populace (a program outlined in the National Transformation Plan, announced by Deputy Crown Prince Mohammed bin Salman on April 25), while also emphasizing the Saudi defense industry and the kingdom’s network of alliances with Sunni states and entities in the region. . .

. . . The shift in Riyadh’s policies will be more pronounced on the home front. For decades, Saudi Arabia – government and citizens alike – has operated under terms of a social contract, one that bartered material comfort (or at least satiety) purchased by oil wealth in return for unquestioning support for an absolute monarchy. But in an era of depressed oil prices, far below what Riyadh requires to keep government budgets balanced, it is clear to Saudi leaders that all the terms of this contract are no longer tenable. . . Saudi Arabia must find a way to carefully recalibrate its domestic spending, without stirring up a social backlash from a population that has grown to expect such subsidies.

 

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