This is the second part of a two-part series. The first part is available here.

Mohammad bin Salman’s (MBS) primary method of stoking the embers of secular Saudi nationalism has been his regional Cold War with Iran, as he has long cast the Islamic Republic as the root of all problems in the Middle East, arguing political — the battle for regional hegemonyand theological — with the Saudis primarily Sunni Muslims and Iranians despised Shiite ones — differences make negotiations between them impossible. MBS has compared Iran’s supreme leader, Ayatollah Ali Khamenei, to Adolph Hitler and threatened to instigate violence within Iran’s borders.

“We are a primary target for the Iranian regime,” MBS said in 2017. “We won’t wait for the battle to be in Saudi Arabia. Instead, we’ll work so that the battle is for them in Iran.”

But his efforts have been been thwarted by the Islamic Republic and its proxies in every country MBS has attempted to challenge Iranian influence, culminating in Iran’s cruise missile and armed drone attack on Abqaiq, the world’s largest crude oil processing plant, and the Khurais oil field in mid-September. The attack briefly slashed Saudi crude oil production by 5.7 million bbls/d, the largest disruption in oil market history, and was originally attributed to Iranian-backed Houthi rebels to the south of the kingdom in Yemen. It has since been ascribed to Iranian forces, as the attack appears to have come from the north, from either Iraqi or Iranian territory.

The Abqaiq attack was a wake-up call for MBS, given the refusal of U.S. President Donald Trump to have American military forces retaliate against Iran, and the realization that his kingdom’s multibillion-dollar investments in air defense systems were incapable of protecting not just Saudi oil installations, but by implication, all-important water desalination plants as well (see Drone Revolution Threatens Eastern Canadian Oil Imports).

This led MBS to enlist, within a month of the Abqaiq attack, the help of the Iraqi and Pakistani governments to reduce tensions with Iran, since the two countries have not had diplomatic relations since January 2016, following an attack on the Saudi embassy in Tehran. In recent months, Saudi Arabia imposed a six-week unilateral ceasefire in Yemen, and there has been talk of the kingdom reestablishing diplomatic relations with the Assad regime in Syria, furthering efforts by the crown prince to improve relations with the Islamic Republic.

Economic decline

To his credit, MBS appears to have seen the coming end to the Age of Oil sooner than most, leading him to propose Saudi Vision 2030 in April 2016, when he was “just” deputy crown prince, minister of defense and in charge of the kingdom’s economic and social affairs. The age of high price oil had already come to an end — barring a major geopolitical event in the Persian Gulf region in which the kingdom likely would not benefit — given the U.S. Shale Revolution, while the prospect of peak oil demand (POD) was beginning to knock on the door given the global campaign against carbon emissions and rise of electric and hydrogen-powered vehicles.

MBS was likely counting on at least moderate oil prices through 2030 to help finance his economic reform program, at an estimated cost of US$4 trillion based on McKinsey Global Institute analysis, as few oil forecasters were predicting POD before then. But the COVID-19 pandemic, in conjunction with the world falling into a New Cold War will push the timeline of POD forward, with the possibility global oil consumption may already have peaked at almost 101 million bbls/d last year, weighing further on oil prices.

The sustainable rate of global economic growth is likely to be significantly slower in the future for two reasons: the rise of trading blocs under the New Cold War; and lack of fiscal and monetary firepower. During the original Cold War from 1947 to 1991 the global economy grew an average of about three per cent per year, compared to 3.7 per cent annually since 2001, when China joined the World Trade Organization (WTO) and economic globalization took off in earnest.

However, since the 2007-09 Global Financial Crisis, global economic growth has been pushed higher by loose fiscal and monetary policies by the major powers, contributing to the lack of policy firepower moving forward, with China the prime example. Chinese non-financial debt has more than doubled to 310 per cent of GDP over the past decade, while prior to the pandemic and a large increase in government spending, the International Monetary Fund (IMF) was forecasting China’s general government deficit to be 6.3 per cent of GDP in 2020. Despite this, Chinese economic growth fell to 6.1 per cent in 2019, about half its pre-Global Financial Crisis rate.

The second factor leading to a lack of fiscal and monetary firepower moving forward is super loose fiscal and monetary policy by the major powers now to avoid financial and economic collapse. For example, the Congressional Budget Office (CBO) is forecasting the U.S. federal deficit to be $3.7 trillion in fiscal year 2020 based on current spending plans, or 17.9 per cent of GDP, the largest deficit since 1945 — the final year of World War II. In addition, assuming a deficit of $2.1 trillion in fiscal year 2021, federal debt will be 108 per cent of GDP by the end of the period based on CBO calculations, the highest in US history.

Improvement in global oil intensity has averaged roughly 2.5 per cent per year since 2001, despite relatively modest efforts to move away from oil in the all-important transportation sector, suggesting global economic growth will have to average at least 2.5 per cent annually to see growth in global oil consumption moving forward. At the same time, the base level of global oil demand may be less than 101 million bbls/d, with pandemic-induced behavioral shifts in business and commuter travel likely to permanently retard jet fuel and gasoline consumption.

And unfortunately for MBS, foreign and domestic capital spending in Saudi Arabia appears to be drying up, at least partially due to his repressive, and some would say, impetuous policies and actions. The flow of foreign direct investment (FDI) into the kingdom was a mere US$3.2 billion in 2018, compared to a peak of US$39 billion in 2008, with the latest figure a mere drop in the bucket compared to what is needed to help finance Vision 2030, and that’s assuming US$84/bbl for oil — the price required to balance the Saudi’s 2020 budget, according to the IMF — rather than US$40 or less. It has been reported that Saudi businessmen have also become increasingly reticent to invest in the kingdom, especially since the Riyadh Ritz Carleton detentions.

To conclude, it is only a matter of time before MBS becomes king of Saudi Arabia, especially with his octogenarian father in ill health and his potential rivals imprisoned. But his reign may prove short despite his youthful age, and could mark the end of absolute monarchy in Saudi Arabia. According to the Political Instability Task Force, supported by the Central Intelligence Agency (CIA) to carry out country risk assessments for the U.S. government, the cohesion of ruling elites — including business elites —is the most important factor determining whether a country is prone to regime change.

In addition, despite MBS gaining significant goodwill and support among much of Saudi Arabia’s youthful population through his social reforms, this will likely dwindle over time according to relative deprivation theory. Based on this sociological theory, large relative declines in the standard of living of people lead to regime change, not the absolute standard. Lower oil revenue combined with a rapidly rising population will lead to a substantially lower standard of living in the kingdom in coming years, especially given a lack of foreign and domestic capital to diversify the economy away from oil through a program such as Saudi Vision 2030.