As Western leaders grapple with how best to respond to the attacks in Paris last week, few doubt that we are living in an age of fear and uncertainty. The bad news is that things are more likely to get worse than to get better. There are several reasons for that, but one of the main ones is the fragility of a key player in the Middle East – Saudi Arabia.
Over the course of the summer, tens of billions of dollars were pulled from global asset managers by Saudi Arabia, resulting in an unusually volatile August for global markets. The cause was the slump in oil prices.
The oil crash looks like great news if you are trying to stimulate stagnant economies, hit by nearly a decade of financial scandal and recession. But it’s not so helpful if you are a state with an undiversified economy that is heavily dependent not only on rising consumption of fossil fuels, but also on limited new reserves being discovered – the last thing you need is the rise of technologies (such as improved fracking) that challenge what has been the basis of energy production over the last century.
Many states are under serious pressure as a result of the oil collapse – Russia is atrophying at a worrying rate, for example. But the biggest threat to us all comes from Saudi Arabia: its budget balances when oil trades at more than $100 per barrel, more than double the current price. So the fall over the last 18 months has been painful for the Saudis. The International Monetary Fund (IMF) puts their reserves at just over $660bn. That sounds a tidy sum to have down the back of the sofa for a rainy day, but it’s a lot less than the $750bn Saudi Arabia had a year ago.
The problems facing Saudi Arabia are now threefold. First, how to rein in lavish spending by an elite that is used to the best things in life, and which has grown in size as the royal family has reproduced energetically. Keeping everyone close to the centre is not just a perceived privilege, but a mechanism of maintaining order in, and control of, a state that is huge in size, but also more disparate than most observers understand.
And it is not just the gilded elite who need to be kept happy: upgrading roads, and building hospitals, bridges and broadband is a way that the ruling house shows its benevolence to the wider population. In the short term, lower-than-anticipated revenues are being papered over by cash redemptions from abroad. But this cannot go on forever – which makes rising spending particularly concerning.
Saudi Arabia already has one of the largest defence budgets in the world, with spending estimated to be nearly $50bn this year alone. So acute is the gap between revenues and spending that the IMF warned last month in its World Economic and Financial Regional Survey that the country might go bust by 2020, unless spending is brought under control, or oil prices rise sharply.
Secondly, Saudi Arabia’s regional entanglements. These are not only proving expensive, but are sowing the seeds of long-term problems on its doorstep. Most obvious is Yemen, where 1.5 million people have been displaced. There are many reports of violations of international law, and, according to the UN’s World Food Programme, some six million people have been pushed to the brink of starvation.
Saudi Arabia is agitated, too, about the prospect of the rehabilitation of Iran on the global scene, as much for ideological and religious reasons as from concerns about the release of yet more oil onto the international markets: most of Saudi Arabia’s oil is produced in parts of the country with large Shi’ite populations, who are more receptive to leadership from Tehran than Sunni Riyadh.
This brings us to the third, and perhaps most serious problem. History teaches that failing states become increasingly volatile and dangerous as they come under pressure. Desperate times call for desperate measures, as the saying goes. And in the case of Saudi Arabia, the worry is that bad choices serve to make things worse, not better. Middle East watchers have long been alarmed about the iron grip Wahhabism has managed to exert, not just in Saudi Arabia, but across the region.
This virulent form of Islam rejects tolerance of other religious groups, promoting in its place a violent end to what its adherents see as an age of jahiliyyah (ignorance) similar to that of the pre-Islamic era. Saudi Arabia treads a precarious path, for while formally a Wahhabi state, it disavows groups such as Islamic State (IS) that espouse similar views – with the Grand Mufti recently asserting that IS is “enemy number one of Islam”.
This sits uncomfortably alongside some home truths regarding Saudi involvement in Islamic fundamentalism. It is not just that 15 of the 9/11 suicide bombers were Saudis; so too are all 12 of the divisional heads of IS. Money, support and sympathy help keep IS in business. The irony, of course, is that if the Saudi economy contracts to the point of paralysis (or worse), military engagements with Yemen and perhaps beyond continue, and the destabilising reach of IS gets ever longer, one thing is almost guaranteed to happen amid the resulting chaos: the price of oil will rise. It’s a strange world we live in.
• Dr Peter Frankopan is a senior research fellow at Worcester College, Oxford. His best-selling book, The Silk Roads: A New History of the World, is published by Bloomsbury.