How Saudi Arabia is tying its oil and foreign policies together

For decades it has been standard Saudi practice to keep separate its oil and foreign policies as the Kingdom, the world’s top exporter and de facto leader of Opec, has regarded “economic energy purity” as the best strategy to sustain domestic growth and generate the international confidence needed to keep oil markets stable.

But last month, when Opec and non-Opec ministers met in Qatar, the Saudis signalled a significant policy change when they refused at the last moment to sign off on a production freeze that didn’t include the Iranians, who are still trying to recover from years of crippling sanctions.

The willingness of the new Saudi leadership to combine its oil and foreign policy for the first time indicates a major shift in Saudi approach toward the global energy industry that will be augmented by an upcoming massive Saudi global expansion spree that will transform Aramco into a fully fledged international oil company.

A number of causes lie behind Saudi Arabia’s new "Petro-politics" doctrine. First and foremost, the Saudis have clearly reached the limit of their patience when it comes to sheathing the “oil weapon” in their differences with Russia, and especially Iran, a nation openly supporting far too much chaos and bloodshed across the Arab Middle East.

From Shia terrorist militias in Iraq to Houthi and Saleh rebels in Yemen to support for Assad's killing machine in Syria, Iran's leadership is fomenting a deadly array of destabilizing proxy wars right on the Kingdom’s doorstep.

The Saudis, as the head of a newly created 37 nation Islamic coalition against terror, increasingly see it as their responsibility to take on Iran as the main exporter of terrorism in order to restore some semblance of order to their region.

In order to achieve this goal Saudi Arabia has undertaken an important shake-up in the bureaucratic structure of the Saudi oil industry that is certain to have global widespread repercussions in the coming few years. As a part of Vision 2030, the wide-ranging economic and social reform programme recently announced by King Salman, the long-standing oil minister Ali Al-Naimi has been replaced by Aramco chairman Khalid Al-Falih, who will head a new "mega" ministry entitled Energy, Industry and Mineral Resources.

The change will place an extremely competent and more aggressive-minded leader in charge of a wider set of industries so that the Saudis can seriously begin to explore post-oil options as well as foster a wider array of public-private initiatives that will channel oil revenues more efficiently into the development of other sectors of the Saudi economy.

The appointment of Al-Falih is also a sign that the Saudis will adopt new policy initiatives to maintain and consolidate their leadership of the rapidly changing petroleum markets. The entire structure of the oil industry is being completely transformed due to shale technology and only the large exporting low-cost states that cleverly adapt to the new reality will survive. The ones that will strive in this new environment will have to create efficient synergies through strategic consolidations and mergers, both domestically and globally.

In order to achieve continued domination of the new energy markets, the Saudis plan to sell about 5pc of Aramco in what would be the world’s largest ever IPO, to start acquiring considerable upstream assets around the globe in order to begin producing oil and natural gas outside the Kingdom’s borders.

Transforming Saudi Aramco into a global energy conglomerate to rival the likes of ExxonMobile and Royal Dutch Shell is now a priority for the Saudi leadership. And even if the IPO doesn’t ultimately occur, Aramco will easily be able to acquire the necessary domestic, regional and international financing for such grand ambitions.

Finally, despite the development of these new and exciting expansion plans, all the large investments the Kingdom has done and is doing vis-à-vis its massive oil reserves and production capacity is a continuation of its long-standing dedication to guaranteeing stable oil markets. Saudi Arabia will preserve current production levels in order to maintain market share and force out non-competitive producers so that the market can balance itself naturally.

The Kingdom will also increase its production capacity of 12.5 million barrels per day by at least another million barrels in the next few years. In other words, the energy future for the Kingdom is to dominate the market through competitive excellence rather than control the market through production adjustments as was the case in the past. The days of the "swing producer" are permanently over.

Following the Qatar energy summit and the valuation of Aramco at about $2.5 trillion in preparation for an IPO, there has inevitably been a degree of scepticism express in some media circles. The Saudis have been accused of seeking to provoke war with Iran; there have been doubts expressed about the valuation of Aramco; as well as suggestions that the Kingdom is politically unstable.

But as with past predictions of Saudi irrationality, over-valuation, and demise, I believe these criticisms will prove to be unfounded. The exact figure of Aramco’s valuation, if indeed an IPO does occur, will inevitably be decided by the markets.

The Saudi state is enjoying a period of political stability, and now that oil and foreign policies have been combined, that unity has just gained a powerful new tool for shaping the future of the Middle East and the global energy markets according to the strategic interests of the Saudis and their many Arab allies.

Nawaf Obaid is a visiting fellow at Harvard University's Belfer Center for Science and International Affairs. He is also a senior fellow at the King Faisal Centre for Research and Islamic Studies and a distinguished fellow at the National Council on US-Arab Relations.