August 26, 2015
By Guy Taylor
The sharp drop in oil prices is starting to bite for the world’s longtime top oil-producing nation, Saudi Arabia, and could threaten the seemingly unshakable social contract that has seen the kingdom’s royal family rule for nearly a century with almost no opposition or oversight from the nation’s masses.
While concerns soar that a sustained slide in global crude will cause mayhem in such less-stable producing nations as Nigeria, Venezuela and Russia, a growing number of national security insiders say the situation is also creating a difficult predicament for the Saudis, long seen as immune to market pressures given its vast low-cost reserves.
Analysts say internal strains on the royal family, which has spent recent years pouring billions of dollars into social programs in the hope of staving off Arab Spring-style democratic pressures, will only increase the longer oil stays cheap.
Crude continued to drop Wednesday, hovering at roughly $43 a barrel after selling for more than $100 a barrel just last year.
The same period saw Riyadh, for the first time in nearly a decade, begin borrowing from local markets to cover the cost of its domestic spending and to pay for an increasingly adventurous foreign policy that now features a proxy war against Iran-backed rebels in neighboring Yemen.
The economic strains come at a time of political uncertainty as well.
The royal family underwent an internal power transition following the death of ailing King Abdullah in January. The oil market woes also come as the Obama administration is pursuing a major nuclear accord with Iran – a deal that has sent speculation that Washington is moving away from its decades-old alliance with Sunni Muslim Saudi Arabia in favor of a diplomatic thaw with the Shiite-dominated government in Iran.
Saudi-U.S. ties will be under scrutiny again when 79-year-old King Salman bin Abdulaziz Al Saud makes an expected visit to Washington next month, his first since ascending to the throne.
While most Middle East experts agree a Saudi money crunch remains a more distant prospect than imminent possibility, many also warn that the fallout from an economic crisis will be hard to predict for the rigid Saudi system.
“It’s not over the next two or three years, but 10 or more, and it’s going to put some real strain on the royal family,” said Joshua Landis, who heads the Center for Middle East Studies at the University of Oklahoma, and who grew up in Saudi Arabia. “Once the financial strain really does eventually hit, the Saudis are going to have to do some radical social and political re-engineering.”
At issue specifically, according to Meghan L. O’Sullivan, who heads the Geopolitics of Energy Project at Harvard’s Kennedy School, is the so-called “social contract” that the royal family has preserved by providing the Saudi masses with “essentially a high standard of living in exchange for limited say in how the country is governed.”
“With fewer revenues and eventually (not immediately) dwindling financial reserves, the Saudis could decide that they need to ‘renegotiate’ the social contract that has existed and/or pull back on its newly activist – and very expensive – regional foreign policy,” Ms. O’Sullivan said in an email exchange.
“Perhaps citizens will need to take on more responsibility in the system, but they will only likely do so in exchange for more say in how it is run,” she said.
And renegotiating the contract, she added, is “easier said than done, due to the existence of the longstanding relationship between the royal family and the conservative clerical establishment, which might object to many of the reforms required in any renegotiation.”
In the interim, the already ultraconservative Wahhabi establishment is likely only to become even less flexible because of pressure from the nearby rise of the extremist Islamic State movement, which Ms. O’Sullivan said is vying “to represent the true face of Islam.”
“If a renegotiation of the social contract is not possible, and more revenues [are] not forthcoming, Saudi Arabia may become more and more repressive as social instability becomes more likely,” she said.
Spending money to preserve power
It’s a potential dynamic that the royal family has already attempted to counter, said F. Gregory Gause, who heads the international affairs department at Texas A&M University’s Bush School of Government and Public Service.
“One of the things we learned about the Saudis in the Arab Spring,” said Mr. Gause, “is that, unlike Moammar Gadhafi, they’ll spend the money to stay in power.”
Following the social upheaval that toppled the former strongman in Libya, as well as the authoritarian governments in Tunisia and Egypt beginning in late 2010, Saudi leaders have approved a series of record annual budgets for domestic spending.
An April Congressional Research Service report detailed how Riyadh has launched “major additional spending programs to meet economic and social demands that some feared could fuel stronger calls from citizens for political change.”
“Actual spending reached an all-time high in 2013, and the 2014 budget set a higher spending target than 2013, with 38 percent of total spending earmarked for education and health care initiatives,” according to the CRS report, which maintained that the kingdom “ran a budget deficit of $14.4 billion in FY2014 as a result of a more than 28 percent increase in expenditures and declining oil revenues.”
According to the CIA’s World Factbook, some 47 percent of the kingdom’s citizens are under the age of 25. And there is debate about what the majority of them actually want. “I’m not sure that what they want is what we would consider more freedoms,” said Mr. Gause.
“A lot of these folks are very Salafi-minded Muslims, and if there is upheaval in Saudi Arabia, I think what we would see is moves for fewer freedoms and a rise of potentially more conservative social norms,” he said.
When the Arab Spring began in late 2010, the “royal family was gripped by fear that they could be next, and so they began to just throw money at their youth bulge problem,” said Mr. Landis. “They locked themselves into this megaspending based on $100 oil, and then the market collapsed.”
More broadly, he said, “Saudi Arabia is a nation that went from zero to 60 in terms of development since World War II, and the way they did it was through this extraordinary social contract where women don’t work, the Koran is the constitution, the Wahhabi mullahs have a veto power over lots of legislation, and religious police continue to sort of roam the land [hitting] people on their hands with rulers.”
Keeping the contract in place, Mr. Landis said, is a major drain on the kingdom’s resources.
“They’ve got to have two classrooms for everybody, because men can’t be taught in the same room as women. There have to be different hospitals for both,” he said. “There’s basically double spending on everything, and money gets thrown at domestic servants and drivers because women aren’t allowed to drive.”
As a result, any serious move to cut domestic spending, perhaps by limiting the number of visas for millions of foreign workers who take on menial jobs, runs the risk of delivering a “radical jolt” to the Saudi way of life, Mr. Landis said.
Ms. O’Sullivan said there are “several scenarios” that could play out if oil prices stay low for an extended period of time.
It’s possible, though unlikely, that “the Saudis will get lucky and be able to diversify their economy before this day of reckoning,” she said. “Perhaps, in this way, they will be able to maintain the social contract in the absence of sustained oil revenues.”
Mr. Gause predicted that any serious change in the kingdom is likely a long way off given the financial cushion the kingdom’s vast oil wealth provides.
“Not only do the Saudis have some $600 billion in the bank, they have a really, really low debt-to-GDP ratio,” he said. “They’ve started to borrow, but I think they have the capacity to borrow a lot more money before they have to [consider] serious cuts.”
“I have a feeling this past year is unusual on two counts,” he said, adding that the Saudi intervention in Yemen and the recent transition of power in the royal family resulted in an unexpected increase in government spending.
“The new king came in and gave everybody two months’ salary,” said Mr. Gause. “So I think this is a relatively high-cost year for the Saudis, and I think they’ll probably be able to cut spending without really going down to the bone.”