Saudi Arabia

[dan_s]

I just received an update from RBC Capital. Here are a few comments cut from it. - Dan

"There have been several alarming security incidents in Saudi Arabia this week, raising
fresh concerns about extremism in the Kingdom. On Monday, masked gunmen opened
fire on worshippers departing a Shiite mosque in the eastern town of Dalwah, leaving
eight people dead. The attack coincided with the annual Ashoura commemoration, one of
the most revered Shiite religious ceremonies. News reports indicate that the attack was
led by an individual who had recently returned from fighting in Iraq and Syria. On
Tuesday, security forces raided several suspected militant safe houses in six cities. Four
people were killed in the firefights, including two policemen. There were reports today of
an oil pipeline explosion, but Aramco officials insist that it was a maintenance issue, not a
security issue."

The attack on Dalwah mosque comes at a particularly tense moment in the oil-rich eastern
provinces, where the country’s Shiites reside. Last month, a prominent Shiite cleric was
sentenced to death for being disloyal to the royal family and for leading public protests in the
restive city of Qatif. The Shiite community, which represents no more than 15% of the total
population but is close to being in the majority in the east, has long complained of
marginalization and discrimination in employment, education, and housing. The Saudi
government in turn has frequently accused Iran of fomenting unrest in the region and in
neighbouring Bahrain, which is connected to the eastern provinces by a 15-mile causeway.
Given the concentration of energy assets in the east, the government is acutely concerned
about keeping the region quiet. In September, a fire broke out on a gas pipeline in the east
after gunmen opened fire on a security patrol. While no supplies were disrupted, it was the
first confirmed physical attack on the Saudi energy infrastructure since the 2006 attempted
Al Qaeda bombing of the Abqaiq oil processing facility. Since then, the only other attack on
oil infrastructure in Saudi was a 2012 cyber-attack disabling 30,000 Aramco computers.

Between a rock and a hard place
This latest unrest also comes as the government grapples with how to respond to the slide in
oil revenue, which funds 80–90% of the government budget. As we have noted before, due
to a surge in post Arab Spring spending, we believe that the Saudi government actually needs
oil prices north of $100 a barrel in order to balance its budget, and if Brent prices remain in
the $80s, it will be forced to a run a deficit. A large component of the new spending has been
on the security sector. Defence spending climbed by 12% in 2012, a year in which global
defence expenditures declined for the first time since 1998. In 2013, the Kingdom ranked as
the fourth-largest defense spender globally (Figure 2) and the second-largest as a percentage
of GDP. In addition, a significant portion of the new social spending has also been aimed at
keeping Saudi’s large youth cohort (Figure 3) occupied and away from extremist groups. In
the wake of the 2003 terrorist attacks in Riyadh carried out by nationals, King Abdullah
identified youth unemployment as the country’s number one national security challenge.
Sixty-five percent of the Saudi population is under the age of 30 and youth unemployment
runs at around 28%, one of the highest in the OPEC group and more than double the global
average.

Saudi Arabia has run deficits—including in 2009—but officials have, in the past, expressed
unease about making this a recurrent practice. Also, surveys have shown that public mood
and business confidence in the Kingdom are correlated with oil prices, with sentiment
shifting south when prices decline. Given that the country will likely be facing succession
issues soon, and with so much turmoil in its immediate neighbourhood, allowing prices to
continue to fall or even stabilize at the current level is not without risks for the royal family.
Moreover, with thousands of young Saudis reportedly filling the ranks of ISIS, concerns about
the country’s restless youth are likely taking on added urgency in security circles. Hence, we
reiterate our view that security considerations will likely be front and center as the King and
his advisors weigh all of their options on oil policy over the next weeks and months.
Furthermore, we maintain that the King would not sacrifice domestic and regional stability
in order to punish Iran and Russia or bankrupt US shale producers.