A change without consequences
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The change in succession to the Saudi throne following the naming of Mohammed bin Salman as crown prince is not expected to lead to any significant changes in the Kingdom's economic and energy policies, although observers are waiting to see what decisions will be taken on the diplomatic front

Saudi King Salman bin Abdulaziz has promoted his son, Mohammed bin Salman to Crown Prince, putting him next in line for the throne. MbS was previously the Deputy Crown Prince and has replaced his older cousin, Mohammed bin Nayef (MbN). There has been speculation that such a move might occur since Salman became king in January 2015 and MbS has been increasing his control over the last two years, so no significant policy shifts are expected. Furthermore, MbN has publicly declared his allegiance to MbS, signalling that he will not challenge the move to side-line him.

Architect of the economic austerity plan

Saudi policy has undergone significant changes under King Salman, largely guided by MbS. A wide-ranging set of reforms to diversify the economy and reduce dependence on oil revenues has been launched under the banner of ‘Vision 2030’. This has included reductions in energy subsidies and cuts to public spending, although the momentum showed signs of slowing in April when various allowances for civil servants and military personnel were reintroduced. Saudi foreign policy has also become more assertive since 2015, with the ongoing intervention in Yemen, heightened tensions with Iran, and the recent dispute with Qatar. MbS has been the architect of these policies and already had control of the relevant government portfolios in his previous position—he may feel even less constrained following his elevation to Crown Prince, but no significant shifts in these areas are expected beyond the potential for some short-term easing of austerity measures to ensure public support for the changes to the line of succession. All allowances, bonuses and financial benefits for civil servants and military personnel suspended in September 2016 have been restored and backdated.

Saudi policy has undergone significant changes under King Salman, largely guided by Mohammed bin Salman. A wide-ranging set of reforms to diversify the economy and reduce dependence on oil revenues has been launched under the banner of ‘Vision 2030'

An oil policy in need of reform

There has been less change in oil policy under King Salman. MbS already effectively oversees this area, which is in the hands of energy minister Khalid al-Falih, who is an industry professional rather than a member of the royal family. The Kingdom is playing a leading role in the OPEC/non-OPEC production deal, and reports have suggested MbS was involved in behind the scenes diplomacy to line up other OPEC and non-OPEC members ahead of the November 2016 meeting. In particular, contrary to years of mistrust, MbS has been able to foster cordial relations with Russia, which has been key to bringing the non-OPEC countries to the table for the deal. The main interest MbS has shown in oil policy has been his support for an IPO of up to 5% of Saudi Aramco, as fundamental part of Vision 2030 and key to transforming the Saudi economy. That policy was already moving ahead and now looks even more certain to occur, although many decisions are still needed such as where to list and how much information to disclose about reserves. The desire to achieve a high valuation and the likelihood that MbS will want to increase public spending means the Kingdom will need higher oil prices. Even if Saudi foreign policy remains assertive as MbS expands his influence, we do not see a change in oil policy at this time. The market’s fear of a breakdown in OPEC due to a more confrontational Saudi foreign policy (vis-a-vis Iran for instance) is unjustified in this regard.

Market expectations and internal order

Meanwhile, MbN has gradually lost influence and become less visible over the last few years. His policy responsibilities were confined to internal security, which will also now transition to MbS. This is an important topic, particularly with self-titled Islamic State (IS) continuing to threaten attacks inside the Kingdom, and the restive Shia minority in the eastern province that is home to most of Saudi Arabia’s oil and gas reserves. But as long as this portfolio is transferred smoothly, which seems likely, it will have little impact on global markets. The new interior minister is a young prince from the Nayef branch of the royal family and the fact that he will effectively be under the control of MbS indicates how far the latter has extended his influence. Indeed, the priority will now be to ensure the elevation of MbS occurs smoothly. The move is not a great surprise given MbS was widely perceived to be too impatient to remain behind MbN in the line of succession, particularly with the 81-year old King Salman’s health in question. The main risk was that supporters of MbN would resist the change, but the public declaration by MbN significantly diminishes the potential for this and suggests that a deal has been struck to secure his support. Still, the Saudis will want to avoid public dissatisfaction. The Eid al-Fitr public holiday has already been extended for a week, and we could also see the fuel price increases—which were planned for 1 July—delayed until later in the year, when they will have less impact on consumers than during the summer when electricity consumption peaks. That delay would avoid a further drag on Saudi demand, which is lower y/y by an average of 50 thousand b/d over the first four months of 2017, despite a better performance in April.