Why there are signs of a Saudi return to tradition
Recent confusing moves may be part of a realistic shift away from the grand vision
There are three possible explanations for what has been happening in Saudi Arabia over the past few weeks. Confusing moves include the fall in oil production in July, when it was supposed to be rising in line with public commitments. The long-promised IPO of the state oil company Aramco has been postponed indefinitely and meanwhile Aramco is reluctantly preparing to buy the state-controlled chemicals business Sabic.
An unnecessary conflict has opened up in response to some mild Canadian comments on Saudi’s human rights record. And the Public Investment Fund, the country’s sovereign wealth fund, may or may not have committed to provide the funds to help Elon Musk take Tesla private.
The first explanation for all this is that because of illness or some other incapacity neither King Salman nor his son, Crown Prince Mohammed bin Salman, are in full control, leaving the individual agencies that run the country without clear leadership.
The second is that MbS — as the crown prince is commonly known — has decided to accelerate his ambitious Vision 2030 plan, adopted in 2016.
The third is that, on the contrary, the leadership of the country — a much wider collective body based on the core royal family but extending to key officials and diplomats — is pulling back from Vision 2030 and reverting to a more traditional, cautious approach designed above all to ensure that the House of Saud remains in control.
The first of these explanations is much rumoured in the market but there is little substance to it. The crown prince has been known to behave erratically before.
The second seems unlikely given the failure of the Saudi government to deliver on any of the major plans announced in 2016. There has been no diversification of the economy, and the country remains as dependent on oil as ever. There has been no work on Neom , the $500bn city to be built in the north-west of the country.
Perhaps even more important: there is no spare money. The oil price increase has helped but the benefit has been limited by production cuts and the slowdown in the economy, which shrank last year by 0.7 per cent. Unemployment has risen to 12.7 per cent. The only advance delivered by the reforms to date is that a few highly privileged women are now able to drive cars.
The third possibility is the most likely, although reversion to traditional norms is certainly not complete.
The clearest evidence for this conclusion is the Aramco/Sabic deal, which raises money by borrowing rather than risking any sale of assets or loss of control: Aramco borrows the funds for the purchase, then hands the money over to the government, as Sabic’s owner. A messy Aramco IPO is avoided, saving the face that would be lost if the company were valued at $800bn or $900bn rather than the $2tn plus sought by MbS. The radical idea of making Aramco a genuinely independent company is put aside.
In the oil market, too, Saudi appears to have reverted to the role of swing producer, keeping prices within a range around $70 a barrel. With output elsewhere (for instance in Kuwait) higher than expected, the Saudis balancing the market by producing a little less would explain the unexpectedly low July numbers.
There is also a new degree of realism when it comes to natural gas, as shown by the acceptance last week of the need for major imports.
The new approach goes beyond energy. The policy of shrinking the number of people employed by the public sector — one of the key proposals in Vision 2030 — appears to have been reversed, with talk of another 500,000 jobs being created to reduce unemployment.
The spat with Canada suggests that internal security and repression of opposition is more important than human rights or improving the country’s image internationally. (The number of executions in the kingdom this year is 73.)
When it comes to Tesla , the explanation may lie in the US rather than Saudi Arabia. The prospective deal has been announced by Mr Musk but not endorsed by any Saudi official. The key question must be: who stood to gain from the idea that the Saudis were about to invest in Tesla?
The reversion to traditional behaviour has some way to run. The next likely step is a pause in the Yemen conflict, which has exposed the weakness of the Saudi military. It has become obvious that Saudi Arabia is in no position to take on Iran in a series of conflicts across the region.
Beyond that would come an end to the pointless disputes with Qatar and Canada and a return to the pragmatic policies adopted under the late King Abdullah.
Saudi is a complex society, with a leadership much more sophisticated and realistic than many in the west imagine. The last three years have been an aberration, a personality cult alien to the culture of a conservative society intent on its own preservation.
Reform was much needed, and still is, but it was never going to come through grand visions. Reversion to tradition will not be easy, and it will not solve all the country’s problems, but it may deliver a little more stability to the region and to the oil market.