Trouble in the House of Saud

What's happened?

After years of high oil prices and government largesse, Saudi Arabia has announced a tighter budget, higher electricity prices for big users, and higher fuel and gas prices for everyone. It also signalled the start of what the economy minister agreed (in a frank interview with The Economist) would be a "Thatcherite revolution" that might even extend to a partial flotation of the state oil company, Aramco probably the most valuable firm in the world.

At the same time, Riyadh took the decision to execute (along with 46 other people) a prominent Shi'a cleric, Sheikh Nimr al-Nimr, for political dissent. The government's decision to kill Nimr appeared calculated to inflame tensions with Shi'a Iran (which it duly did) so as to rally the Sunni base and distract attention from other serious issues.

What issues?

First, fissures within the family: the past year since the accession of King Salman has seen persistent reports of unprecedented discord within the consensus-driven royal elite. Second, the Yemen war, where Saudi Arabia has become bogged down (say internal critics as well as foreign analysts) without a clear strategy or exit plan. Third is one of the factors driving Saudi involvement in Yemen, namely the fear that US disengagement from the Middle East is leaving the way clear for the rise of Saudi's great Shi'a rival for regional dominance, Iran. And last, underpinning it all, there is the increasingly shaky economy.

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What's shaky about it?

The collapse in the global oil price since summer 2014 has drilled a giant hole in the Saudi government's finances, leading analysts to wonder how long the Saudi social contract an authoritarian, kleptocratic, neo-feudal state is tolerated because it delivers a degree of wealth and security to its subjects can survive. Riyadh relies on oil sales for about 80% to 90% of its revenues (sources vary).

Last year, the IMF estimated that Saudi Arabia needs an oil price of $106 a barrel in order to balance spending with revenues. This week, oil prices were hovering around the $30 level, meaning that the budgetary hole will only get deeper. The kingdom's budget deficit (for 2015) has already ballooned to an astonishing 15% of GDP leading the government to spend $100bn of its $746bn foreign reserves in the past 18 months, and start to cut the lavish spending on welfare and other programmes. Austerity is a relative concept, however.

The cuts announced so far are mostly to spending on big building and infrastructure projects. Saudis will still pay no income tax; petrol and energy remain cheap, even by Middle Eastern standards. Meanwhile, there has also been speculation which the Saudis tried to dampen down this week that it will soon be forced to give up its 30-year currency peg to the dollar in order to let the riyal devalue (which, in effect, would let inflation do some of the retrenchment work now being done by austerity).

Didn't Saudi cause the price slump?

Certainly, the Saudi decision in 2014 to focus on protecting long-term market share rather than price is a big factor in the oil-price slump. But its strategy to maintain production in the hope that global oversupply will push high-cost rival producers out of business is unpopular with Sunni allies in Oman, Bahrain, Kuwait and the UAE. And it is increasingly seen by analysts as a risky gamble that may not be working out.

Oil prices might recover a bit, but analysts expect the big story this year to be one of continued oversupply keeping a lid on prices, especially as Iranian oil comes back onto global markets after the sanction-lifting deal on Iran's nuclear programme between Tehran and world powers including the US, China and Russia.

Is the regime at risk of collapse?

Probably not see the box. And the recent examples of Syria and Libya provide a major disincentive to potential rebels. Even so, internal strains are growing and are likely to be made worse by what Ben Chu in The Independent calls a "generational powder keg". The population of Saudi Arabia has quadrupled since 1970; almost half the 31 million population is under 24 and 70% under the age of 30. Youth unemployment is high, with almost a third of 15 to 24-year-olds out of work.

In a report last month, the consultancy McKinsey calculated that the upcoming demographic bulge could bring more than 4.5 million new working-age Saudis into the labour market, requiring jobs to be created at three times the current rate. If the House of Saud is to survive in the long-term, then we can expect a much broader economic shake-up: an economy and society predicated on redistributing oil money cannot work if there's less and less oil money to go round.

Tiptoeing up to the tipping point

"No one has got rich betting on the House of Saud's earlydemise," says John Hannah in Foreign Policy magazine.Over the decades, it has "shown remarkable resilience inthe face of political, ideological and military currents thathave swept away lesser regimes". Are we at a tipping pointwhere economic stress and other issues (elite fissures, risingpower of hostile foreign actors, declining power of foreignprotectors) lead to the collapse of the state?

Probably not.We may "still be at the very early stages where everythingremains quite manageable through wise and timely decision making".But at the very least what we can say is that "most ofthe key indicators now appear headed in the wrong directionsimultaneously perhaps for the first time ever".