Khalid al-Falih has gone from holding three plum roles in Saudi Arabia to just one in the space of a week after being stripped of his responsibility for overseeing industrial development and for chairing Saudi Aramco, the state-owned oil company.
Falih, who remains the kingdom’s energy minister, has put a brave face on his sudden loss of status. But the question remains for the broader oil industry: what comes next?
Over the past three years, Falih has helped manage Saudi Arabia’s deepening relationship with Russia, meeting regularly with Alexander Novak, his opposite number, as the two oil titans have worked together to prop up the price.
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This Saudi-Russian axis has been embodied by the relationship between Crown Prince Mohammed bin Salman and Russian president Vladimir Putin, but the close ties between the two energy ministers should not be overlooked.
Most in the industry think that the Falih-Novak double act has been broadly successful. By bringing Russia into the fold, the expanded OPEC+ group of oil-producing economies has been able to cut output while keeping members such as Iran and Iraq broadly in agreement.
Holding the oil price near $60 a barrel has not been easy, in the face of rising U.S. shale output, threats from President Donald Trump not to jack prices higher, and a sputtering global economy.
The problem for Falih is his key audience is not the oil industry, but Prince Mohammed himself, who requires a higher oil price if his grand aim of overhauling the kingdom’s economy is to be met.
It is one of the great ironies of “Vision 2030”, the plan to reduce Saudi Arabia’s dependence on oil, that it first requires a higher crude price to help fund this diversification.
Falih will now feel additional pressure to meet the crown prince’s goals, given that he has been stripped of his other roles and is apparently more vulnerable than before. If the kingdom wants to balance its budget, while achieving the best possible price for its long-awaited listing of shares in Saudi Aramco, the target needs to be at least $70 a barrel.
This increases the chance that Saudi Arabia will push for deeper output cuts at the next meeting of OPEC and its allies in December. But this will not necessarily force oil prices to move up.
The U.S.-China trade war and associated recession risks are offsetting short-term supply constraints in the oil market. Longer term, OPEC and Russia may need to contend with the return of Iran’s barrels to the market. And in the age of shale, higher prices become self-defeating more quickly than before, as U.S. producers are able to respond more swiftly to incentives.
Pushing for deeper output cuts now, then, may be necessary just to support the price. Getting it to hold at higher levels remains a puzzle without a solution.
That is the uncomfortable reality Falih will need to contend with, whatever his boss wishes.
Editor’s note: Opinions expressed by the author are their own.
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