Israel-Hamas war upsets ambitious Saudi plans

There is never an ideal time for a war but the Israel-Hamas war could not have come at a worse time for Saudi Arabia. The situation has been further aggravated by the announcement by the Iranian-backed Houthi rebels that they are blocking all ships entering the Bab-al-Mandeb Strait sailing for Israel.

Eight months ago the normalization process between Saudi Arabia and Iran resulted in a tense ceasefire in the Yemen civil war, which began in 2015, between the Yemenite government supported by the Saudis and the Houthis supported by Iran. The ceasefire held until the start of the Israel-Hamas war and there have since been deadly skirmishes between Saudi fighters and the Houthis, and Saudi forces have intercepted ballistic missiles launched from Yemen, according to foreign media reports, including to Israel.

“Bloomberg” reports that Saudi Arabia even turned to Iran and offered economic aid and investment to the country, which is under sanctions, in exchange for a commitment to ensure that the Israel-Hamas war does not expand into a regional conflict.

The latest development, “Bloomberg” reports, is that the Us has already begun talks with its Gulf partners about commencing a military operation against the Houthis, in the wake of the rebels’ impact on the region’s shipping lanes. The same report said that the US preferred to first explore diplomatic channels in an attempt to ensure quiet.

The US wants regional peace, just like Saudi Crown Prince Mohammed bin Salman, but in his case the interest is completely different. He is striving to position Saudi Arabia as a regional power, and not through an all-out war.

As part of bin Salman’s ambitions to strengthen the kingdom, the Saudi defense budget is set to rise in the coming years to $86.4 billion in 2028, according to the Global Data report. This will reverse the trend of the past few years, which saw the Saudi defense budget fall to $53.9 billion in 2021.

However, the change in direction does not stem from a budget earmarked for the army or for immediate war preparations, but rather from diverting huge sums to development tasks as part of Riyadh’s ambition that 50% of defense needs will be provided by domestically manufactured products. According to “Global Data”, Saudi Arabia will invest $7.4 billion in developing air defense systems. But a regional conflict involving the Saudis will require Riyadh to reconsider its course and adjust budgets for the war – just as Israel is doing.

The oil dilemma

Another dilemma for the Saudi Crown prince is oil. Riyadh has been trying in recent months to pressure Washington, using the rate of oil production, to approve a civilian nuclear program, a defense pact and the sale of F-35 stealth fighter jets, as part of normalization with Israel. They are doing this even though, according to their official data, the 17% reduction in the oil industry’s activity cost Bin Salman a 4.5% cut in GDP in the third quarter of this year, compared with the same period last year. It is possible that if the cut in production led by the OPEC Plus cartel, under joint leadership with Russia, would have led to a spike in oil prices, then there would have been a geopolitical logic to the move. However, the step actually led to a drop in oil prices by about 9% in eight days.

How did this happen? Firstly, even before the decision, the cartel had not presented a united front on cutting production. Secondly, more than half of the cut of 2.2 million barrels per day had already been undertaken – a cut of 1 million barrels by Saudi Arabia and 300,000 by Russia. In addition, global dependence on oil is waning, while overall supply of renewable energy worldwide grew 7.5% in 2022, when oil consumption stood at 97.3 million barrels per day, down 0.7% from 2019.

Looking ahead, it is likely that Russia’s President Vladimir Putin, who visited Saudi Arabia last week, would have been happy with a 1973-style pan-Arab oil boycott, when the price of a barrel jumped from $2.7 to about $11 in just a year. However, considering the many geopolitical developments in which Iran is seen as the biggest threat to the region today, Israel-Saudi Arabia relations, which are not official but known to everyone, the influence of the Houthis on the security of the Saudis themselves, as well as the Saudi growth which is at a low point, similar to the Corona pandemic period, it is unlikely that bin Salman would use the oil weapon to force a regional ceasefire.

“On the eve of the war, Saudi Arabia emerged as a regional leader with everything going for it, including a renewal of relations that looks very promising from its side.” Dr. Joseph Mann of Bar-Ilan University Department of Middle East Studies tells “Globes.” “On the other hand, last year the average price of oil was about $100 per barrel, now it is $76, and it is not stopping there. The Saudis had a vision for the region, and now they have slipped back in terms of the discussions.”

On diplomatic activity between Saudi Arabia and both Israel and Iran, he adds: “I am sure there will be an agreement with Israel, but the Saudis are looking in two directions. This is why there are serious reports that the Saudis are interested in investing in Iran’s energy infrastructure.”

2030 vision

Due to expectations that the world will run out of oil, and the revenue from it, Saudi Arabia created Vision 2030, which aims to diversify sources of income and attract foreign investments. At the same time, Riyadh also aims to diversify its own energy sources with the transition to renewable energies. It is investing, for example, in the “fuel of the future” – green hydrogen. The same fuel is already used today to power various vehicles, including trucks, instead of polluting fuels but it is still in its infancy.

Unfortunately for the Saudis, the dependence on oil revenues led to the realization last week that Riyadh will face budget deficits every year until 2026. According to the IMF, the Saudis need a price of $86 per barrel to balance the budget, but the price is currently $76. Therefore, Saudi Finance Minister Mohammed Al-Jadaan announced last week that some of the program’s projects, worth trillions of dollars, will be postponed beyond 2030. “The delay, or rather the extension, of some projects, will serve the economy,” the minister explained.

Riyadh already concedes that some of bin Salman’s projects will be postponed to 2033, and others will be moved to 2035 target, and there will even be some that will undergo “rationalization”, as the finance minister defines it. It is clear that if Saudi Arabia is forced to take part in a regional war, not only some of the Vision 2030 projects will be delayed, but most of them. “The Saudis want a ceasefire from Israel, and they will not agree to a coalition against the Houthis without it, because they may be criticized at home,” says Dr. Mann. “The Saudis are trying to find a political solution, because they have somewhat exhausted military solutions. The Saudis and the UAE tried everything possible in Yemen but were unsuccessful. They think Gaza is complicated, but don’t know the Yemeni topography.”

Published by Globes, Israel business news – en.globes.co.il – on December 11, 2023.

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