After taking over defense and economic planning, Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman has now stamped his authority over oil policy.

In so doing, the 30-year-old son of King Salman upended the Saudis’ decades-long approach of separating commercial from political considerations. Over the weekend, Saudi officials quashed an agreement among major oil producers in Doha to freeze output due to Iran’s refusal to participate, a sign the regional rivalry is infecting the market.
 

“Everything at Doha was about politics,” said Yasser Elguindi, an oil analyst at Medley Global Advisors, a consultant that advises large hedge funds.

The change means that everyone exposed to energy prices, from oil majors such as Exxon Mobil to traders like Vitol Group, will have to heed the opaque politics of the Middle East -- and the House of Saud. With Saudi Arabia and Iran weathering one of their worst diplomatic crises since the Islamic Revolution in 1979 installed a Shiite theocracy in Tehran, and both countries taking opposite sides in civil wars in Syria and Yemen, the oil market should brace for a wild ride.

“The fact that Saudi Arabia seems to have blocked the deal is an indicator of how much its oil policy is being driven by the ongoing geopolitical conflict with Iran,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University in New York and a former White House oil official.

Ali Al-Naimi, the Saudi oil minister, has been the pragmatist who separated oil policy from foreign policy for the past two decades, insisting that pricing considerations such as supply, demand and inventories were the main drivers of his decisions. The technocratic strategy was built on the experience of the 1973 oil embargo, which largely backfired as it led to weaker demand.

While the House of Saud has always kept control of oil policy, ministers drawn from outside the royal family -- spanning from Sheikh Yamani in the 1980s to Al-Naimi for the last two decades -- enjoyed significant room for maneuver.

Al-Naimi -- and his number two, Prince Abdulaziz bin Salman, an older half-brother of the deputy crown prince -- cooperated with Iran in the past to cut production to boost prices. Oil policy was an unusual oasis of stability in the convulsive politics of the Middle East.

That approach drove talks among Russia, Saudi Arabia, Venezuela and Qatar to agree to freeze oil production in recent weeks. As late as Saturday, officials from the four countries prepared a draft that they expected to be rubber stamped hours later by oil ministers in Doha. The deal would have marked the first collaboration between the Organization of the Petroleum Exporting Countries and Russia in 15 years, opening the door to the end of a glut that has driven oil prices from $100 a barrel to as low as $26.

It didn’t go according to plan. Instead, by Sunday morning, the Saudis insisted on the inclusion of Iran in any deal.

“Some countries from OPEC changed their positions in the morning -- right before the meeting began,” Russian Energy Minister Alexander Novak said after the talks in Doha broke apart.

Venezuela’s Oil Minister Eulogio del Pino said that Saudi representatives in yesterday’s meeting didn’t have the authority to negotiate and the summit had strained relationships within OPEC.

“We are going to try and recover the trust,” he told reporters during a visit to Moscow.

In fact, the U-turn was telegraphed weeks before the gathering. Prince Mohammed bin Salman, known in diplomatic circles as “MbS” and the emerging force in economic policy within the kingdom, said in two interviews with Bloomberg News that the participation of Iran was necessary for any deal.

The oil market took the warning more as a rhetorical warning intended for domestic consumption than a threat to the Doha talks. Since the four countries started the process to freeze output, oil prices rallied more than 35 percent.

“One thing we’ve learned in the oil markets: regarding the Saudis, we now have to listen to MbS,” said Michael Wittner, oil analyst at Societe Generale in New York and a former official at the Central Intelligence Agency. “He clearly had the final word on Saudi policy and on their stance in these talks, not Ali Naimi,” he added.

Prince Mohammed has accumulated power since his father’s ascension to the throne last year. He became defense minister and soon after launched a military campaign in Yemen. He also chairs the top economic planning body and the council that has authority over the kingdom’s giant state-owned oil company.

Although oil officials and OPEC watchers almost unanimously point towards the politicization of Saudi oil policy, there could be other reasons behind Prince Mohammed’s stance on Iran.

One is protecting Saudi Arabia’s oil-market share, which could be eroded if it froze production as Iran increased exports following the removal of sanction in January. The other is avoiding a sharp increase in oil prices, which could throw a lifeline to rival suppliers in the U.S. and also slow down the kingdom’s agenda of domestic reforms.

“We don’t care about oil prices,” Prince Mohammed told Bloomberg last week. “$30 or $70, they are all the same to us. We have our own programs that don’t need high oil prices.”

The unanswered question is: Why did Saudi oil officials negotiate for weeks on a draft accord for Doha, giving the impression that a deal was possible even without Iran?

One suggestion is that Riyadh tried to use the Doha meeting to force Russia, an ally of Iran, to choose between higher oil prices and supporting Tehran. In that thesis, Al-Naimi played the role of good cop, with Prince Mohammed acting as the bad cop. Another theory is that Prince Mohammed made a last-minute intervention, forcing his team, led by Al-Naimi, into a U-turn, with the same objective: Hurt Iran.

“Ultimately, Saudi oil policy has become extremely politicized,” said Amrita Sen, chief oil analyst at Energy Aspects, a London-based consultant. (Bloomberg)