Tensions in the Gulf are certain to escalate in the coming days with almost no chance Qatar will accede to Saudi Arabia’s thirteen “non-negotiable” demands, including a break in relations with Iran, closing the Al Jazeera television channel, and shutting down a Turkish military base, before the Saudi-declared deadline at midnight this Sunday.
*** There are mounting concerns in some quarters in both Washington and Riyadh that newly installed Crown Prince Mohammed bin Salman’s aggressive confrontation with Qatar is fast approaching the point of no return, threatening regional instability. There are indications the Saudi hardline stance is backfiring, with splits deepening within the GCC, as Kuwait and Oman quietly align with Qatar and towards Iran, and tensions likewise rising within the United Arab Emirates between Dubai and Abu Dhabi.***
*** Washington will be critical to ratcheting down the Gulf tensions, but the Trump Administration is sending confusing signals, with an understaffed and demoralized State Department jostling with White House political advisors for control of US Mideast policy. And barely weeks after some $100 billion in arms sales to the Kingdom were promoted during President Trump’s triumphant visit to Riyadh, the Republican-controlled Senate Foreign Relations Committee is threatening to withhold the future sale of munitions to the Saudis, pending resolution of the Qatar crisis. ***
*** Riyadh’s confrontation with Doha is so far having only a limited impact on oil prices. But while GCC unity on oil policy is likely to fray, the tensions should put a floor under oil prices with a geo-political risk premium. More importantly, the political stakes are even higher for the assertive Saudi Crown Prince, meaning Riyadh is doubling down and “all in” to defend the Vienna oil output agreement, including the offer of further Saudi output cuts this fall coupled to demands for stricter compliance and an end to OPEC exemptions. ***
Doubling Down on Oil Policy
The most important collateral effect of Riyadh’s showdown with Doha is its potential impact on energy prices, and to date it has been limited. And as long as oil and LNG exports continue to flow through the Straits of Hormuz and a military escalation remains unlikely, there is little reason crude oil prices should spike.
But our sense is that the confrontation, and in general, Saudi Arabia’s much more aggressive foreign policy and the consolidation of power into the hands of the Crown Prince should put a bid under oil prices and create something of a floor against further sustained oil price declines.
In the near term, while the unity within the GCC oil producers may fray under the pressures of the confrontation with Qatar, the Saudis will be doubling down on their commitment to the current Vienna output agreement between the participating OPEC and non OPEC oil producers. But by September, we expect the Saudis to press the case to end the exemptions from the agreement for Libya, Nigeria, and Iran and for the three OPEC members to agree to firm quotas that would entail at least some amount of cuts below capacity.
The Saudis along with the UAE, we believe, will offer the carrot of further cuts in their output, if needed, to speed the draining of the crude surplus, albeit only if the others member states also commit to at least some token cuts, especially the Russians, and again, with the three exempt OPEC oil producers adhering to new quotas.
The Saudis are said to be “all in” on the current oil policy to drain the crude surplus, with or without the output by the US shale producers. The stakes are even higher now for MbS now that he made his move to consolidate power, and especially since other policy initiatives, be they Yemen, Syria, the budget or the first round of the economic reforms have failed to produce the intended results.
We for now would downplay the probabilities of the Qatar crisis escalating to the point of spiking oil prices or forcing a wider confrontation between the Kingdom and Iran. For the most part, the Saudi Crown Prince’s objectives in confronting Doha seems mostly about putting down a marker that he won’t compromise as the new strong power in the region, and to vow more of a “with us or against us” regional and foreign policy stance.
The Iranians, for their part have largely stayed on the sidelines other than vows of support for Qatar, and the Iranians have even publicly called for further oil output cuts, which is more or less in line with Saudi oil policy thinking.
Oil prices have in fact been picking up to nearly $48 from $45, giving the Saudis some sense of relief the rebalancing is starting to show its effects alongside perhaps lower forecasts for shale-based output. That, in turn, if sustained, will make any output cuts by the Kingdom and UAE less needed and certaintly more drawn out from the end of the year rather than in one go if they felt they had to do it. It is also worth noting that Riyadh’s ambitious IPO of Saudi Aramco is premised on oil prices above $55 by early 2018.
But beyond the near to medium term effects on oil policy and oil market prices, the Saudi diplomatic offensive against Qatar is already having unintended collateral damage eroding the prospects of the GCC as a regional stabilizing influence, and there is some blowback internally as well.
The End of the GCC
It was less than a month ago that the Kingdom, under the direction of the son of King Salman bin Abdul Aziz and then Deputy Crown Prince, Mohammed bin Salman, opened an aggressive diplomatic offensive against neighboring Qatar, complaining of its “support for terrorism,” which immediately drew US President Donald Trump’s endorsement.
The state-controlled Saudi media first sharply criticized the Qatari ruling family’s claim to its Wahhabi religious roots that was little noticed outside the Arab world. Saudi Arabia, the United Arab Emirates, Bahrain and Egypt then imposed a boycott of Qatar, shutting down border and airspace, eventually issuing an ultimatum comprising 13 demands Doha must meet before a declared deadline of midnight this Sunday.
The demands are eerily reminiscent of Austro-Hungary’s demands on Serbia in 1914 in the sense of being crafted to ensure they would be impossible to meet. They include shutting down the al Jazeera media company, curbing diplomatic relations with Iran, closing a Turkish military base in Qatar, ending its support of the Moslem Brotherhood and Hamas, and even agreeing to external monthly audits of government finances.
Further sanctions and a Qatari “divorce” from the Gulf Cooperation Council are being threatened by the Saudi foreign ministry if Qatar fails, as is near certain, to comply with the demands.
Ejection from the GCC, however, cannot be forced on Qatar without a majority vote under the terms of the treaty founding the six member state council in the shadows of the Iran-Iraq war in the early 1980s. But Kuwait and Oman are making it clear to the Saudis no such vote will be forthcoming.
Kuwait and Oman in fact both maintain relations with Iran or share oil and gas fields with Tehran. In the UAE, Dubai meets most of its energy needs with Qatari LNG, and is an important export re-import trading center for Iran as well as the rest of the Gulf.
If anything, the Saudi diplomatic offensive looks to be backfiring, with half the GCC — Qatar, Kuwait and Oman – moving closer to Iran, which has not only been supplying food and medical supplies to Qatar, but on paper, has a mutual defense treaty with Doha. In any case, the rupture with Doha has all but effectively ended the GCC as a regional organization helping to ensure regional stability and shared economic and financial policies.
The Saudis have also indicated that one option after the deadline passes without a capitulation by Doha is a coordinated diplomatic effort by the Kingdom and the UAE to force Qatar’s trading partners to “choose sides.”
While that would escalate the confrontation into a major crisis that could spill over into the energy markets, we seriously doubt the Saudis would push Qatar’s major trading partners into such an either/or choice. Already, Japan, South Korea, Germany, and most of the Europe have protested that the Saudi demands are “unfair,” while Pakistan, a key ally of the Kingdom, has so far stayed silent, as has the UK.
Qatar has taken to hiring a human rights lawyer in Switzerland to present a case against Saudi Arabia for damages. It is unlikely, though always possible, that Qatar could cut off the flow of its natural gas to Dubai, or at minimum press the city state to pay market prices rather than the discounted natural gas it currently receives by pipeline.
Domestic Saudi Pressures
In Saudi Arabia, tensions are also surfacing over the confrontation with Qatar, despite the clampdown on the Saudi-controlled media reporting of families and students being forced to leave the Kingdom, or Qataris supposedly being taken out of Saudi hospitals. Saudi companies with export markets in Qatar — Qatar was importing most of its food from Saudi Arabia — are being hurt and working around the sanctions by working through Turkish companies. Even camels and sheep are being prevented from crossing the Saudi border to Qatar.
Another indication of the fall out over the Qatar crisis and, behind the scenes, the nervousness over Crown Prince Mohammed’s power play (see SGH 6/21/17, “Saudi Arabia: The “Blessed” Coup”) is the rumor that made their way into the Western press earlier this week that the former Saudi Crown Prince, Mohammed bin Naif, was under “palace arrest.”
The reports are almost certainly untrue. For one, it would be unusual for the new Crown Prince to feel such a move would be necessary after MbN had been removed from power. It was also during he Eid al Fitr holidays marking the end of Ramadan, when the Saudi royals are customarily receiving supplicants in their palaces, so MbN would hardly be traveling anyway.
And the reports that his royal guard were removed against his wishes is also unlikely; the previous Ministry of Interior security detail would be replaced anyway since he is no longer the Minister of the Interior. We would not be surprised to see MbN pictured before too long in the Saudi media with MbS, or going on a summer vacation abroad.
It is noteworthy, however, that the former Crown Prince, while sharing the Al Saud’s hostility towards Iran, had a much less confrontational view towards Qatar than MbS, and was quite close to Qatari Emir Sheikh Tamim bin Hamad Al Thani. But with MbN’s removal from power as well as his control over the Saudi internal security and intelligence apparatus, there are no longer any strong voices within the Royal Court or the Saudi Cabinet urging a more cautious stance towards Qatar.
MbS, in an adroit move to keep the power balance within the Al Saud, put MbN’s young nephew, Prince Abdulaziz bin Saud bin Naif in charge of the ministry to maintain loyalties. But without any experience in law enforcement or intelligence matters, he will be far more supportive of MbS and trusted than his Uncle MbN might have been. MbS also moved other sons and nephews of the senior Al Saud into senior government positions to cement family support, like naming Prince Khaled bin Bandar, the son of Prince Bandar bin Sultan, the former Saudi ambassador to Washington and son of Prince Sultan bin Abdul Aziz, to a new post as Saudi ambassador to Germany.
The Saudi Ulema, or religious establishment, has professed its loyalties to the King and to the new Crown Prince. The recently foiled ISIS planned terror attack in Mecca was believed to have been meant to undermine the wider religious support for the new Crown Prince who has recently reigned in some of the powers of the religious police and is seeking to loosen up some of the austere restrictions on Saudi lifestyles.
MbN also maintained very close working relations with his Washington counterparts in the Central Intelligence Agency, the FBI and Homeland Security, all of whom may still be unsure of MbS. The same may be said of what is left of the State Department’s career diplomats and civil servants who tend to have a more wary view of MbS due to his youth and reputation for impulsiveness than do White House advisors Jared Kushner or Steve Bannon.