Saudi Arabia's oil chief was one of the industry's most powerful leaders. Why did he get fired?
Ali al-Naimi, Saudi Arabia’s just-deposed oil minister, once said he’d found out he had been named to the job while fly-fishing in Alaska. Over the two decades that followed, he certainly became a big fish in global energy markets: steering the world’s largest crude producer through price swings and regional conflicts, he presided over an era that saw OPEC revenues grow nearly tenfold.
He was also behind the Kingdom’s decision to maintain output despite falling oil prices in 2014, as part of a plan he designed to drive higher-cost producers out of business. The strategy seems to be working: US shale rigs have since dwindled by a record amount. And yet the 80-years-old former shepherd was dismissed this month – with little by way of farewell fanfare. Why?
His sudden downfall is partly rooted in personal differences. While al-Naimi enjoyed a relatively free hand under previous rulers, his wings seem to have been clipped since King Salman and his 30-year-old favoured son, Muhammad bin Salman, acceded power last year. That became glaring last April, when the prince thwarted a coordinated supply freeze by major oil producing countries, a deal al-Naimi intended to complete at an OPEC meeting in Doha. Ahead of the cartel’s June gathering, during which Saudi Arabia does not intend to deviate from its current strategy, the minister’s position had become untenable.
But his departure must also be seen in the context of the deteriorating economy. Saudi Arabia is being sucked dry by low oil prices: last month, the Kingdom raised international debt for the first time since 1991 to help plug this year’s budget deficit, forecasted at 19 percent of GDP.
The blame is not being pinned on al-Naimi, but he probably wasn’t seen as the most effective agent of change. To replace him, Prince Muhammad chose Khalid al-Falih, the chairman of state oil behemoth Saudi Aramco and a member of his inner circle. A respected technocrat, al-Falih will head an expanded ministry for energy, industry and mineral resources. Part of his job will be to boost manufacturing, which currently accounts for only a quarter of non-oil activity.
Crucially, he will preside over the part-privatisation of Saudi Aramco, the proceeds of which will go towards creating a $2 trillion sovereign wealth fund that will invest in domestic ventures. He will also inherit the electricity portfolio – previously part of a dedicated ministry – putting him in a strong position to forge on with cutting energy and utilities subsidies. The government targets $30 billion a year in savings by 2020.
Al-Falih is unlikely to hold the same sway over OPEC as his predecessor. But that’s not why he was chosen. As an apolitical figure, al-Naimi was keen to stick to his mantra of balancing supply and demand. His decisions, largely tactical, aimed at maintaining Saudi Arabia’s dominance over energy markets. By contrast, al-Falih agrees with Salman that the low price environment provides the required impetus for shifting the country away from its oil roots.
While this means a more politicised energy policy, the signal his appointment sends to the world is positive: luring foreign investment to the Kingdom was a key part of his previous role. As Prince Muhammad seeks to convince skeptics he can deliver on his ‘Vision 2030’ plan, rocking the fishing boat is probably a good place to start.