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Abdullah Wears the Crown

Saudi Arabia's King Fahd bin Abdul Aziz Al-Saud has died today at the age of 82 years old after 23 years on the throne. It's already known that the majority of decision-making powers in Saudi Arabia have been assumed by Fahd's Half brother Abdullah over the past 9 years. King Abdullah 81, is more of a conservative figure and is not seen as sympathetic to the US as Fahd. Despite Abdullah's general assumption of power, mounted speculation suggested that the death of Fahd could lead to a more abrupt change of Saudi foreign policy towards the US such as oil diplomacy and socio-economic currents.

In order to have a better perspective on what makes King Abdullah stand out from the rest of the pack of possible appointees, it's important to point out that King Abdullah's mother came from the Shammar tribe and is not the same mother as that of the late Fahd (Hassa bint Sudeiri). While Fahd and his 6 full brothers (Princes Sultan, Abdel-Rahman, Nayef, Turki, Salman and Ahmed) were known as the Sudairi Seven, Abdullah had no full brothers. In 1996, Abdullah was handed much of the executive powers after Fahd had a stroke. The transfer of led to much acrimony among the senior princes, but did not stop Abdullah of acquiring more control over the subsequent years.

Abdullah's growing dominance emanated from his closeness to the tribal chieftains, an essential attribute in governing the kingdom. The loyalty he had from the Tribes of the Najd region also enabled him to maintain dominance in the National Guard, most of which is made up from the tribal population of the Najd region. The Guard has also been considered as a counterweight to the Armed Forces.

King Abdullah's conservativeness stems from his innate closeness to the tribes, his observance of Bedouin traditions and his relative infrequency of trips to the US. King Abdullah is widely believed to have opposed the introduction of foreign forces into the Kingdom's holy soil during the 1991 Gulf War. He is also a more vocal supporter of the Palestinian cause. Few months after September 11, King Abdullah canceled a widely expected trip to Washington and ended up going to Canada. While vocal in denouncing terrorism, King Abdullah was just as explicit in criticizing Western interference with Saudi affairs, including US pressure on the Kingdom's security policy. The presence of US manpower forces in Saudi Arabia has now been reduced to about 200 contractor and technical advisors to the National Guard, from more than 5,000 troops in 2003.

Although US oil consumption from Saudi Arabia has now fallen below that from Canada, Mexico and Venezuela, bilateral relations remain more than cordial. Upon his visit to the US last April, King Abdullah discussed the salient topics of oil supply, war on terrorism, the war in Iraq and the Israeli-Palestinian peace initiative, which was proposed by Abdullah in 2002. While the US remains dependent on Saudi oil, Saudi Arabia remains dependent upon US support for its application to the World Trade Organization. The US continues to press Saudi Arabia for developing longer range investments in its oil sector so as to improve to its ability to stabilize world prices. Ryadh responded that it would aim for a production target of 12.5 million bpd by the end of the current decade from the current 9 million bpd.

Saudi Arabia's efforts to diversify its energy wealth have led it to place increased focus on natural gas. These efforts also include the intention to strengthen ties with China and Russia. Out of the 6 companies expressing interest in developing Saudi gas sector last year, the 3 winners were China's SINOPEC, Russia's Lukoil Holdings, and a consortium of European firms.

The Next Generation

With the death of King Fahd, Prince Sultan - Second Deputy Prime Minister and Minister of Defense becomes the eldest of the Sudairi Seven and the most likely successor of King Abdullah. While the latter has reined over the National Guard since the 1960s, Prince Sultan has done the same in the army, navy and air force over the same period. Sultan was notable for denying the US's use of Saudi bases to stage military attacks on Afghanistan in fall 2001, on the basis that no soldier will attack Muslims or Arabs on Saudi soil. Prince Sultan is also Chairman of the Higher Council for Islamic Affairs, a recently-formed organization dedicated to the service of Muslim affairs world-wide.

One of Sultan's sons is Prince Bandar, who occupied the powerful post of Ambassador to the US since 1984. Bandar resigned this summer should now that his father Sultan will step up the ladder in the monarchy. Sultan's other son is Prince Khalid, commander of the Saudi forces with the UN Coalition. Thus, it is interesting to note that while King Abdullah's son Mut'ib is a senior general in the National Guard, Prince's Sultan's son Khalid holds a key post at the armed forces.

While the 77-year old Prince Sultan is seen as the most likely next Crown Prince, the age factor may once again be a consideration in less than 10 years. This could leave some of his younger full brothers such as Prince Nayf (71)--Interior Minister, and Prince Salman -- Governor of Riyadh as possible successors. Although there have been concerns from Western observers that these two princes were involved in harboring charities linked to terrorism, the independence of decision-making within the Kingdom is sufficiently form to withstand external influences.

One Prince who does not hail from the Sudairi Seven and is seen as a major contender from the "second generation" is the 60-year old Turki Al Faisal -- the son of King Faisal (and not Abdul Aziz). He is currently Ambassador to the UK after being suddenly removed of his 25-year old post as head of foreign intelligence following allegations of ties to Osama Bin Laden.

Geopolitics & Petroeconomics

Saudi investments in US securities have spilled much media ink in the aftermath of the September 11 attacks. None of the reports arrived at accurate figures of capital repatriation by Saudi and other Arabic/Muslim investors, but some have suggested ranges of estimates from $1 to $3 billion. Considering the rising number of non-US banks from the Western world catering for Islamic Banking, the Federal Reserve is undertaking supervisory efforts to work with institutions seeking to implement Islamic Banking practices in the US that minimize the use of interest. Such moves by the leading bank supervisory body in the US could help stem the tide of capital repatriation that could have originated on ideological motives or averseness to excessive scrutiny.

Despite Saudi Arabia's efforts to diversify its energy initiatives to other nations such as Russia and China, and the simultaneous efforts by the US to rely on sources from Canadian sources, the bilateral monetary flows remain intact. The chart below shows that holdings of US Treasuries by OPEC hovered over $60 billion in May, not far from the record high of $67 billion reached in January. But unlike in the days of the petro-dollars of the 1970s, OPEC's windfall gains from the current oil rally are being pumped into USD as well as euro-denominated accounts. Many have attempted to claim a connection between falling US bond yields and rising oil prices. But the causality could very well be a result of the bond markets' concerns with the contractionary impact of rising energy prices.

On a relative basis, the Bank of International Settlements found that OPEC reduced the proportion of US dollar-denominated deposits from 75% in Q3 2001 to 61.5% in Q3 of 2004. Middle Eastern central banks have reportedly shifted reserves to euros and sterling assets to avoid the loss from the dollar's declines in 2002-4. But this finding is largely comparative in basis. Thus, even though the proportion of OPEC's currency reserves may have been altered, the absolute amount of dollar assets remains on the rise.

Another issue related to the world of currency geopolitics is the impending risk that Gulf nations would begin pricing oil in euros. Whether that would entail a total abandonment of the US dollar or a dual pricing in both currencies, either move would trigger the next phase of the dollar bear market. In 2000, Saddam Hussein decreed that Iraqi oil would be sold for euros. Two years later, Iran converted most of its currency reserves to euros in 2002-3 and still weighs options to price its oil revenues in euros. Venezuela's Cesar Chavez mentioned a similar possibility but has not acted on it.

Regardless of whether Russia, Venezuela or Iran aspires in pricing its fuel in euros, such a decision remains far-fetched as long as it is not backed by the Arab Gulf States. The current arrangement should remain for at least another decade-- as long as the Gulf States (led by Saudi Arabia) continue dollar pricing of oil, the US continues to provide the arm sales as well as the security support to these regimes. Such stability is as paramount to the US' economy as it is to Saudi Arabia's political future. With the Saudi Arabian National Guard and Armed forces safely under the hands of King Abdullah and Prince Sultan respectively, the likelihood of any shake up in the Monarchy remains slim--despite the sporadic bouts of attacks from militants. The Crown Prince has finally worn his crown, but the status quo should continue to rein.

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