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King Abdallah's Illness, Political Change And The Oil Market

With King Abdallah of Saudi Arabia in serious condition, oil market participants are undoubtedly nervous that this could portend change and even upheaval in Saudi Arabia. Concern that his death could lead to a coup attempt or unrest in the Shi’ite population will no doubt be voiced, but is also likely to prove overblown.

The overthrow of the Shah of Iran in 1979 came as a great surprise to most pundits. Indeed, as street demonstrations were growing more violent, a group of European bankers visited to lend more money to the Iranian government, dismissing the protests as nothing the Shah couldn’t handle. Among the more shocking revelations, it came to be known that the CIA station didn’t even have a farsi-speaking agent. The US government was so close to the Shah that it avoided doing anything that might upset him, such as talking to the opposition.

Afterwards, there was a great rush to improve political risk analysis, much of which proved to be of little value. But the appeal and power of the Iranian Revolution and its new Islamic government was exaggerated by many, just as with ISIS last year. Saudi Arabia became ‘targeted’ by pundits as the next domino to fall, with some thinking its demise was imminent, in an excellent example of superficial political analysis. The joke became that most pundits’ views were based on the thoughts of the cab driver who drove them to the airport on their departure from the country.

The reality is that the Saudi monarchy is not modeled on European monarchies, where the monarch, as late as World War I in Germany and Austria, had few restraints on his power and could behave mercurially as Kaiser Wilhelm often did. The Saudi king relies heavily on the extended Saud family for support and advice, and based on Arab culture, listens to the public in continuous audiences, fueled by strong coffee. (Which is probably more productive than the McConnell-Obama bourbon summit.)

This has two important consequences: few political actions involve extreme change, with most measures being moderate and incremental; and support for the government is stronger than in the European monarchies was. There is unhappiness in many quarters with a variety of government policies, but there appears to be nothing like an organized opposition that would bring down the government as in countries like Egypt and Libya.

The possible death of King Abdallah could see brief concern in the oil market, but the leadership transition is unlikely to be any bumpier than in the past. Indeed, the situation in Caracas is a much greater potential source of upheaval and oil supply disruption. As they say in NewYork, Watch This Space…

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