What the purge in Saudi Arabia means for the price of oil

This weekend, a whole group of high-profile politicians and other powerful figures were detained by their government in an effort to crack down on potential troublemakers.

No, I'm not devoting another Money Morning to Catalonia, you'll be glad to know.

I'm talking about what's going on in Saudi Arabia.

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Saudi Arabia's surprise crackdown

The next-to-top man in Saudi Arabia (behind his father, King Salman), is Crown Prince Mohammed bin Salman. He has spent the weekend overseeing the locking up of a whole swathe of Saudi's most powerful players.

According to the FT, at least 11 other Saudi princes and "dozens of senior officials and prominent businessmen have been arrested". The private airport in Riyadh was shut down to prevent the people in question from leaping into their private jets and skipping town.

It's been labelled a "sweeping anti-corruption drive". Now, as we all know, if you want to get rid of your enemies fast, doing it under the cover of anti-corruption is one of the best ways to do it. Over in China, Xi Jinping has been doing it for years and it's apparently paid off for him (our latest cover story in MoneyWeek magazine is on this very topic in fact).

The nice thing about the sorts of places where you can lock people up overnight on suspicion of corruption, is that they also tend to be the sorts of places where it's very easy to find evidence of corruption on just about anyone, when you want or need to.

According to Reuters, detainees include billionaire Prince Alwaleed bin Talal, who is often labelled as Saudi Arabia's Warren Buffett. That's because he makes a lot of investments; he is very rich; and because journalists lack imagination.

Anyway, what's this all about? It's hard to say for sure. But let's run through the obvious candidates.

Firstly, it's all about consolidation of power. Bin Salman has had a bit of a reshuffle of the military too, which suggests that he's making sure everyone's on board with his way of doing things. His father, the king, is 81 and not terribly well, which means it's only a matter of time before he's likely to have to step up to the main job.

Secondly, it's about populism. Ordinary Saudis have felt the squeeze from falling oil prices, and that means they're angry. In democratic countries, they kick out the party in power. In non-democratic countries, the guys in charge know that they have to make a few heads roll in order to save their own. That's when being rich and prominent is particularly dangerous.

Thirdly, bin Salman has been pushing for reform on a number of levels. Allowing women to drive and attend the occasional sporting event is the least of it. He also plans to wean Saudi Arabia off oil and onto solar power (among other things) by 2030. Getting all that through without resistance won't be easy he may think that now's the time to make clear that said resistance is futile.

What this all means for the oil price

It's all interesting stuff. On the one hand, the crown prince has to realise that this is the sort of thing that puts off investors. Given that Saudi Arabia is keen to flog off a chunk of the state oil company, Saudi Aramco, this could look like odd timing.

On the other hand, perhaps that means this is part of a genuine attempt to reform aspects of the governing structure. Saudi Arabia could be viewed as a family business a relatively youthful one without professional management or any particularly coherent succession policy.

When the next generation takes over, the old guard and their advisors often get kicked out one way or another, either because they are genuine troublemakers, or because they simply get in the way of doing things differently.

So bin Salman may simply be clearing the decks early on, so that he can get on with whatever it is he wants to do. Then again, he may be over-reaching himself and this is all going to get extremely messy. I reckon we'll get a better idea when we see exactly what happens to the men who've been arrested.

But what does it all mean for investors? Realistically, most of you won't have much of your money invested in the Middle East, although so far, the news certainly hasn't been good for share prices in that neck of the woods. If you do have money in the region, I wouldn't do anything rash just monitor the situation.

The more obvious impact for most investors is on the oil sector. Saudi Arabia is the world's second-largest oil producer. On that front, it sits behind the US (which is a phrase that would have been utterly unimaginable when I started my journalism career near the turn of the millennium).

In any case, this all adds risk to the market. That means that all else being equal, you'd expect oil prices to rise as a result of the purge. Saudi Arabia is expected to maintain production cuts throughout 2018, notes the FT, and there's no reason for that policy to change now.

Given that the oil price is already on a bit of a roll, I can see this continuing until evidence of a big response from shale producers starts to build up. In short, your oil and energy investments are likely to continue enjoying the rally for some time to come.

We'll have more on the oil market in a forthcoming issue of MoneyWeek magazine. If you're not already a subscriber, get your first four issues free here now.