Saudi Arabia gets it right — finally
Facts are horrid things. And it was cold, hard facts that moved Saudi Arabia, the Gulf region's biggest economy, to give up its battle to maintain market share last week in Algiers.
Why? Because it just wasn't working.
U.S. shale oil producers have all-too-successfully proven that that they can adapt to price shocks.
And whether it was the growing recognition in Riyadh that government finances were under enormous pressure, bleeding over into the region's private sector and impacting investor confidence, or simply worries over just how much lower oil prices might impact the valuation of Saudi Aramco's highly anticipated 2018 flotation, the willingness of the Saudi Minister Khalid al-Falih to cut a deal in Algiers created just the kind of buzz to move markets and - at least for a while - push prices back up.
It also signaled that Saudi Arabia's role as the undisputed leader of the OPEC cartel is changing.
It is no secret that the Kingdom today faces a new reality as cuts to subsidies, salaries and spending impact a population unaccustomed to feeling the financial pinch. No one in Riyadh has missed the fact that growing economic uncertainty accelerated recent events in Egypt, Syria and Libya resulting in violent regime change.
The government has spent millions of dollars on reports detailing how the country can survive in a world where petrodollars no longer fuel economic growth. Analysis from consultancy McKinsey alone advises the Kingdom to invest as much as $4 trillion in order to effect the economic transformation needed.
And while billions of dollars are being spent on Western weapons-systems and an ongoing conflict in Yemen, Saudi Arabia's role as a regional powerhouse is itself evolving.
The Kingdom was mentioned four times in last week's U.S. presidential debate – and not in a positive light. With Americans no longer directly dependent on Saudi oil, the political narrative has shifted, with Congress overriding a presidential veto to pass a bill that would allow victims and their families to sue the Kingdom for the alleged financial support of the 9/11 hijackers.
Millions of dollars spent on lobbying and repeated trips to Riyadh by Secretary of State John Kerry and others have done little to stop the rapid deterioration of a decades-old relationship built on mutual trust, defense and oil. And even as Riyadh works to develop a more amenable set of allies, the level of politicking put into bringing the Kingdom's regional rival, Iran, to the table in Algiers only served to highlight the importance to Saudi Arabia of cutting a deal.
A lot has changed since Henry Kissinger's historic meeting as US Secretary of State with His Majesty King Faisal when the Kingdom famously turned off the taps in 1973 – then it was the Saudis who held the cards, prompting the King's famous response that his ancestors came from the desert and could return there. Today no one expects Saudis to return to survive on milk and dates.
Dealing with today's challenges requires a total overhaul of the Kingdom's educational and societal construct.
What happens next will impact the financial stability of the region and require a generational shift to achieve. It's certainly encouraging that the Kingdom's brain trust is willing to take a more nuanced approach when it comes to oil prices as they look to attain that goal