In Saudi Shocker, Al-Falih Ousted As Energy Minister, Replaced By MbS' Half-Brother

For years, Ali al Naimi was the most important person in the world of oil: the former CEO of Saudi Aramco ascended to the post of Saudi oil minister in 1995, and over the past 21 years had the power to send the price of oil soaring or plunging with one word. To be sure, for much of the period between 2014 and 2016, oil was mostly plunging because as is well-known, Saudi Arabia's policy ever since the 2014 Thanksgiving OPEC meeting in which Saudi Arabia broke off from the rest of the petroleum cartel to pursue its intention of putting US shale and high cost OPEC production out of business.

Ali al-Naimi

Then things unexpected, and dramatically, changed in April 2016 when Bloomberg published a detailed interview on the present and future of Saudi oil policy, which however took place not with al Naimi but with a young man few had heard of at the time: Deputy Crown Prince Mohammed bin Salman, barely 30 years old, who just happened to be the favored son of Saudi Arabia's new King Salman who took control in 2015 following the death of his half-brother, King Abdullah, and who quickly became the defacto new ruler of Saudi Arabia and the brains behind the oil-rich nation's energy strategy.

Crown Prince Mohammed bin Salman

This sudden new power struggle came to a dramatic culmination on May 7, 2016 when Saudi Arabia announced it had fired its long-serving oil minister Ali al-Naimi, replacing him with Khalid al-Falih, then chairman of Saudi state oil giant, Aramco.

Khalid A. Al-Falih

Al-Falih's role, while secondary to that of the Crown Prince, or MbS as he became known, was to telegraph a radical departure from the previous Saudi strategy of sending oil prices plunging in hopes of putting shale out of business. When it emerged that that would not happen, largely thanks to cheap junk debt and private equity firms with tens of billions in dry powder able to sustain US shale companies for years even without a dollar in profitability or cash flow, Saudi Arabia flipped its strategy, and instead of a war of attrition with the US decided to send the price of oil as high as possible by restoring the OPEC cartel and severely limiting the output of its members (the fact that Venezuela's economic catastrophe meant that the country with the world's largest crude oil deposits could barely produce oil, or that Iran was the target of crippling oil sanctions by the US that virtually halted its exports, only helped the Saudi strategy... here some cite the oddly close friendship between MbS and Jared Kushner as the catalyst for the latter, but we digress). Al Falih was also one of the chief architects of the kingdom’s attempt in recent years to diversify its revenues away from oil.

This strategy worked for several years, until the summer of 2018, but then failed dramatically roughly around the time the US-China trade war escalated, and the price of oil resumed its decline amid fears of shale oversupply and sliding Chinese demand and/or a global economic recession.

And so, with Saudi Arabia facing another major overhaul to its oil strategy, and in keeping with the pattern of replacing the current energy minister scapegoat every time it does that, late on Saturday the Saudi King shocked the energy world when he named his son as energy minister, replacing Khalid al-Falih, who was in that role for just over three years.

While the new minister, industry veteran Prince Abdulaziz bin Salman, is a half-brother to Crown Prince Mohammed bin Salman, the pair according to Bloomberg aren’t believed to be close and are quite far apart in age.

AbS, or Abdulaziz bin Salman - not to be confused with MbS - has served in the energy ministry for decades - most recently as state minister for energy affairs - is seen as a capable and experienced technocrat: "Prince Abdulaziz is a very seasoned veteran of Saudi and OPEC policy-making. He won’t have a learning curve. I don’t expect any big rupture in current Saudi oil policy or relations with Russia," Bob McNally, president of Rapidan Energy Advisors LLC, told Bloomberg.

Abdulaziz bin Salman Al Saud

The countdown to Al-Falih's exit started several days ago after he was stripped of his responsibility for overseeing industrial development and for chairing Saudi Aramco as the government prepares to sell shares in the state-owned oil company. On Sept. 4, Al-Falih said that he would be replaced at Saudi Aramco by Yasir Al-Rumayyan, head of the kingdom’s sovereign wealth fund, who’s an Aramco board member and a key adviser to the crown prince.

Still, few see any dramatic shifts in Saudi oil strategy following the latest personnel shift: this month’s decision to restructure the energy ministry was seen as having little or no immediate impact on Saudi oil policy. As the world’s largest crude exporter, the kingdom has continued to cut output to balance global market demand.

“The priority remains removing the lingering threat of another crude price swoon by preventing stock builds,” McNally said.

And while it remains unclear why Al-Falih fell out of favor, some speculate that it has to do with his inability to push the price of oil higher even though Saudi has substantially curbed its output in the past two years in hopes of provoking a supply shortage. Indeed, as Bloomberg confirms, "it has been speculated that there was dissatisfaction with the low price of oil as the vital Saudi Aramco IPO nears."

Saudi Arabia has cut production to less than 10 million barrels a day as part of its agreement with the Organization of Petroleum Exporting Countries to limit output. Al-Falih helped broker the deal that brought other producers like Russia into the effort to balance markets by curbing production. The Saudis are doing the most to support the deal, pumping about 500,000 barrels a day less than they pledged.

And so AbS now has the unenviable task of sending oil price spiking, something which will be put to the test as soon as next week, when OPEC and OPEC+ are scheduled to meet on Sept. 12 in Abu Dhabi to review their strategy to shore up global oil markets. Oil traders will be waiting to see whether the change of ministers will mean a change in Saudi policy.

Alas, since the ongoing oil price weakness has little to do with supply and everything to do with declining global demand for oil, especially by China, not to mention an energy independent America, Abdulaziz bin Salman's reign as Saudi energy minister may be the shortest yet as the prospect for sharply higher oil prices - absent a war in the Middle East of course - is virtually nil.