Saud’s royal house of cards
Restless youth, resurgent fundamentalism and a resentful middle class are an increasingly imminent threat to Saudi Arabia's rulers -- and to oil-addicted Westerners.
By Jon D. Markman
Saudi Arabia faces its gravest economic, social and political threat in years as hundreds of thousands of Muslims make their annual hajj to the nation’s holy sites this week. And if the House of Saud is threatened, so, too, are the price of oil and the great American right to own two SUVs, a Harley and an RV.
The menace, long simmering under the surface of a seemingly content society, has boiled to the surface recently with clashes between Saudi police and armed extremists in Riyadh and Mecca. And we’re not talking about the 250-plus pilgrims trampled while stoning Satan last weekend.
* Last week, the Independent newspaper of Great Britain reported “an extraordinary level of political violence” in the al-Jouf province, power base of the al-Sudairy branch of the royal family, including assassinations of the deputy governor, police chief and a judge.
* The Saudi government was forced Thursday to deny accounts in their own media of the existence of terrorist training camps in the kingdom. In a land already ruled with an iron fist, the German news service DPA reported that more than 1,000 surveillance cameras had been installed on roads to allow soldiers to monitor pilgrims’ every move.
* A South Africa newspaper, the Cape Argus, said police in its country had intercepted a Pakistani plot to use fake passports to fly to Saudi Arabia via Cape Town.
Check out your options.
Find the best rate
before you borrow.
* And Reuters reported that diplomats said the Saudi government was deeply worried the hajj could become a target for attack or be used as a cover for militants to infiltrate the kingdom. In 2003, more than 50 people died in suicide bombings in Riyadh.
Even if violent disruption is avoided this week, there is little doubt that extremist elements are gaining strength in the homeland of the West’s most reliable Arab partner. The problem is not just al-Qaeda, which recruited most of the 9/11 suicide hijackers there. According to veteran observer John Bradley of the Independent, it’s also merchant families and tribes who were prominent in the country before the Sauds consolidated power in the early part of the last century and now see a chance to reassert themselves upon the death of the aged, ailing King Fahd.
American investors ignore this danger at their peril. For if three disparate forces hook up -- the disenfranchised non-royal merchant class, religious fundamentalists and disaffected youths -- our cheap, easy access to the Saudis’ vast petroleum reserves could be threatened for anywhere from a few weeks to years, sending oil prices north of $60.
Next week, I’ll explain the many ways to hedge this menace by buying shares of small U.S. and Canadian energy producers. But for now, let’s try to better understand the Saudi turmoil.
Disillusionment of the young
On paper, the Saudi succession after Fahd dies is clear: His 81-year-old brother, Abdullah, the crown prince, is next in line, and after him is another brother, 80-year-old Sultan. Thomas Lippman, author of the terrific new book "Inside the Mirage: America’s Fragile Partnership with Saudi Arabia,” said it’s not clear there is a designated successor beyond those two. “There are just six people who have an idea of what would happen next, and I’m not one of them,” quipped the former Washington Post foreign correspondent.
Lippman puts the chance of civil war at less than 10%. But he confirms that the amount of guns and explosives seized in recent months in raids by Saudi police -- munitions smuggled across the border from Iraq and Yemen -- has been staggering. The unrest stems as much from social and political complaints as religion. The country suffers from an unemployment rate upward of 20%, as the petroleum-industry work that is not automated is run by foreigners. Lippman says today’s 24-year-old Saudi has two handicaps as he looks at the workplace: He grew up with a sense of entitlement because the country was rolling in cash, and his heavily religious education did not prepare him for a role in the world economy.
Like many developing countries, Lippman says, the Saudis have put too high a premium on having their elite kids get doctoral degrees, and not enough on having its middle-class kids get the sort of bachelor’s degrees that help create a modern services and petrochemical plant workforce. Saudi Arabia has world-class oil derivatives industries -- fertilizer, plastics and industrial feedstock -- to supplement its vast crude oil production. But you may be surprised to learn that agriculture is the country’s leading employer and its second-largest contributor to GDP, as it is self-sufficient in wheat, dairy products and poultry. Most of these jobs go to foreigners, also.
Historically, revolutions do not well up from the peasantry -- they come from the upwardly mobile class, like silversmith Paul Revere and lawyer John Adams in colonial America -- whose rising expectations are frustrated. Lippman points out that Saudi Arabia is plagued with a large swath of young people who have been “inculcated with the wrong kinds of ideas, don’t have enough to do, truly resent the dominance and incursion of Americans into their society and have learned from their textbooks about the duty of Muslims to wage jihad against infidels.” All the while, they face declining opportunities for personal economic advancement. “That’s a lot to think about as you sit in coffeehouses listening to recordings of rabble rousers,” Lippman said.
An extreme element in Saudi Arabia aspires to a Taliban-style state, a concept that has deep roots in the country’s past. As Middle East scholar Daniel Pipes pointed out in an interview, al-Qaeda is an ideological descendent of a turn-of-the-century religious army known as the Ikhwan, or “brotherhood,” which practiced a puritanical brand of Islam known as Wahhabism. Ibn Saud compromised with the Ikhwan by letting them run the country’s educational and judicial system while he tried to make a buck by allowing infidel Americans drill for oil. But the idea of a purer, pre-Western state has remained, and Osama bin Laden is the archetype of those who want the heathens to take their lipstick, lattes and Big Macs and go home.
Will the monarchy prevail?
Of course, there are key differences between Saudi Arabia today and the classic Middle East revolution that occurred in 1970s Iran: The middle class is largely content; the Saudi royal family has thousands of male members infiltrated into every corner of social, political and military life; and the fundamentalist mullahs are on the government dole, not independent. Also, virtually all Muslims in Iran were united in their loathing of the Shah, whom they viewed as a usurper who extravagantly glorified the country’s pre-Islam heritage, while Saudi citizens acknowledge the Bedouin roots of their own rulers. And also unlike Iran, or Nicaragua for that matter, there are few mountains or jungles in which insurgents can effectively hide except in the remote south.
However, this is a time of great uncertainty in Saudi Arabia as leaders look north across their border with Iraq and fret over the prospect of either a liberal secular democracy or Shiite theocracy (flip a coin) in Baghdad. Thus, they have allowed modest reforms, such as the limited municipal elections; economic reforms, such as the slow privatization of the telecommunications industry, national airline and postal system; and social reforms, such as the creation of independent courts to adjudicate commercial litigation.
The question is whether the Saudis can rev out of the 19th century fast enough to satisfy the yearnings of repressed GenNexters while at the same time not alienating their fundamentalist power base. Every time you hear about new incidents of explosive conflict within the kingdom, don’t toss if off as just another remote overseas quarrel. Read between the lines to determine whether it is one more step toward a civil war that will irretrievably alter our access to the lifeblood of our electronic and motorized way of life.
Both Lippman and Pipes are betting on the monarchy, which has proven relentless so far in crushing its opposition, and point out that even a resolutely anti-American post-Saudi regime would probably eventually sell oil to the West to keep the cash flowing anyway. But just in case al-Qaeda or its permutations prove more diabolically clever than expected, next week I’ll focus on the North American energy producers who would benefit most from higher oil prices and, at any rate, can do extremely well amid current supply uncertainty at $30 oil and $5.25 natural gas.
Lippman’s book, which was just published in January, is really a fascinating, fast read. You can find the book at MSN Shopping. Here’s a transcript of remarks he made at a Johns Hopkins University panel on U.S.-Saudi relations in November. . . . Daniel Pipes keeps an up-to-date Web site of his articles and speeches, and also a weblog. . . . Keep current on Saudi news at the Saudi Times Web site. . . . There are numerous independent sites on Saudi culture and history, such as www.alfaadel.com, as well as more official sites like the Saudi-US Relations Information Service. . . . Last week, I described Parlux Fragrances (PARL, news, msgs) as a relatively inexpensive small cap worth a look. Bill Mann, senior editor at Motley Fool, wrote to say he disagreed and referenced his Aug. 15, 2003 story; see it here. Meanwhile, Abraxas Petroleum (ABP, news, msgs), described in the same column, had a strong run last week. I spoke to chief executive and founder Robert L.G. Watson last week, who said his company is “very happy” in the current environment, is paying down the debt that pressured the stock last year, and expects to be profitable on a GAAP basis this year. . . . To follow commodity futures prices ranging from natural gas and gold to soybeans, live cattle and the euro, the best free page on the Web is this one at Barchart.com.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at email@example.com. At the time of publication, Markman did not have positions in any securities mentioned in this column.