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After Saudi Shake Up, Oil Watchers Want to Know What's Next

Will the Saudis keep oil prices low? And is cheap oil a good thing? That depends on how you feel about SUVs, the environment, Russia, Iran and the American shale industry.
Imagen vía AP Photo/Hasan Sarbakhshian

Saudi Aramco, the world's single largest oil producer, received a whole batch of new management last week. Although the biggest change in global oil markets over the past decade has been the dramatic rise of shale oil and gas production in the US, Aramco still holds a uniquely powerful place in the market. As opposed to US production, which is spread out across many different companies, Aramaco remains the reigning king of oil producers because it is a monolithic, single player and produces around one in every eight barrels of oil consumed globally. The company's ability to quickly cut or expand production, and therefore influence price, is without comparison.

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Since ascending to the throne in January, Saudi King Salman bin Abdulaziz al Saud has set about implementing a thorough change of personnel in most of the country's top jobs. Not only has he change the line of royal succession, but he also shook up the top political ranks when he changed the majority of officials holding seats in the king's cabinet, the Council of Ministers.

In Saudi Arabia, office politics, family politics, and regular old politics-politics are often one in the same because the country is a big family business. So these kinds of personnel changes often mean one member of the ruling al Saud family replacing another member of the al Saud family.

Last week these changes came to Aramco with the CEO being shuffled off to the position of chairman of the company, and a new CEO — Amin Nasser — being appointed from within the company to take the helm. The operations of the company will be overseen by a newly created Supreme Council of Saudi Aramco which will be headed by 34-year-old Prince Mohammed bin Salman Al Saud. A son of the new king, Prince Mohammed has also assumed the positions of Deputy Crown Prince, Deputy Prime Minister and Minister of Defense (which has him leading the Saudi military campaign in Yemen).

Related: The Saudi Royal Reshuffle Will Mean a Continued Hardening of Foreign Policy

These management changes coincided with the government announcement that Aramco would be split off from the oil ministry, thus separating the regulated company from the ministry regulator.

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Normally, this sort of move is designed to keep all sides of the equation honest, and by eliminating wasteful corruption, drive efficiency in the regulated companies. This is the stock explanation that's being given for the shakeup at Aramco, but the part that doesn't make a huge amount of sense here is that Aramco is already regarded as a reasonably efficient institution, especially compared to most Saudi institutions.

Alternately, it might make sense if there's a longer-term plan to break Aramco's monopoly on Saudi oil production. But there's no evidence that the government wants to split production up or wind back the state-owned Aramco's monopoly on Saudi production. Thus, creating an arms-length regulatory set-up in anticipation of some new production scheme doesn't seem add up to a very solid rationale either.

But if the split isn't being driven by a desire to put some daylight between regulator and regulated, then another possible explanation is that this is a move to eventually install a member of the royal family as oil minister, something that previously has not been done for fear of destabilizing the complex balance of power between the royal family's various lines and factions.

The king also promoted another of his sons — Prince Abdulaziz bin Salman — from Assistant Oil Minister to Deputy Oil Minister in a move that has had some analysts speculating that he is being readied to take on the job of oil minister from Ali Al-Naimi, who's held the job since 1995.  But this isn't a hugely satisfying explanation for many observers.

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So what have observers gleaned from all of this? Mainly that it doesn't matter how well run a company is or how it's structured, the fact that the world's largest oil producer is still a family business makes it incredibly difficult for any outsider to do much more than guess about the long-term motivations behind any changes.

This is causing all manner of agitation in the oil industry. Clearly this is huge shakeup of a giant player for reasons that are mostly unknown. This puzzle has has arrived in the middle of an even bigger mystery that's got the entire fossil fuels industry nervous: Namely, will the Kingdom keep Aramco pumping out historic volumes of cheap crude or not?

That questions brings up another question: Is it better to have cheap or expensive oil?

You get a bunch of highly contradictory results either way. If you're a big environmentalist, and fracking, digging up Canadian tar sands, and Arctic drilling are the kinds of thing that makes you angry, then low oil prices are awesome because those really messy ways of producing oil and gas are expensive compared to the Saudi stuff which is incredibly cheap to get out of the ground. Cheap Saudi oil makes these environmentally damaging extraction methods too expensive to be profitable.

Related: Saudi Arabia Is Driving Down Oil Prices, and That Might Be Good for the Environment

So low oil prices are great for the environment, except when they're terrible for the environment. Cheap oil makes for lower prices at the pump, which in turn makes road trips in gas-guzzling SUVs a lot more attractive. Which is awesome if you happen to own a SUV, but less so if you're into cutting fossil fuel use, because cheap oil reduces the incentives for investment in things like fuel-efficient and electric vehicles and related battery technology. Moreover, if your eye is on incremental rather than radical change when it comes to addressing global warming, then many would argue that shale gas is a lot better than burning coal.

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Another positive aspect of cheap oil is that it's slowly pushing a bunch of unsavoury regimes into being far less belligerent, or at least too broke to act up. High oil prices over the past decade or so gave some pretty mediocre presidents the appearance of economic competence and political popularity, most notably in places like Iran, Russia, and Venezuela. Dropping oil prices means that the economic and political smoke and mirrors that has kept a lot of these countries afloat is rapidly coming unstuck; governments are being forced to run budget deficits and cut public services. A combination of sanctions and cheap oil will do more to curb Russia in Eastern Ukraine and keep Iran at the nuclear negotiating table than any military deployments or threats.

Related: The End of Fracking Is Closer Than You Think

Alternately, there are some who think that long-term sustained low prices are a deliberate attempt by the Saudis to damage the rise of North American shale oil — a version of "we'll hurt ourselves but we know we'll hurt you more" strategy. This idea has some appeal, but keep in mind that that those same cheap oil prices are a major incentive for Iran to do a deal with the US over nukes in order to get some relief from crippling economic sanctions.

The Saudis and Iranians have been at loggerheads for a long time and are actively supporting opposing sides all over the Middle East (particularly in places like Syria and Yemen). This means the Saudis are probably about as enthusiastic as Congressional Republicans and Israeli Prime Minister Netanyahu about any US deal that reduces Iranian isolation or reduces sanctions.

This is generally about the point that the full scope of the question about cheap oil comes into focus and oil industry analysts start getting giant headaches. Simply put, if you're asking if cheap oil is good or bad, in terms of environment, politics, economics, or security, the answer in any given sector is always some simultaneous mix of "Yes! No… Maybe?" There is no excellent outcome that doesn't have a wicked downside as well, and those are the waters that the new generation of al Saud management now have to navigate.

Follow Sefton Darby on Twitter: @SeftonDarby