RIYADH: The US-Iran war has reached a crisis point for Saudi Arabia and its de facto leader, Crown Prince Mohammed bin Salman (MBS).
The kingdom was spared the worst of the Islamic Republic’s counterstrikes against the United States and Israel early in the conflict, and was even benefiting from higher crude prices as it used a land pipeline to bypass the Strait of Hormuz.
That all changed when the Houthis started firing at Saudi Arabia on a near-daily basis this month.
The Iran-backed militants have also captured more territory in Yemen, where they are based, tightening their control over Bab el-Mandeb, another vital strait for shipping and energy markets.
Drone strikes by pro-Tehran militias in Iraq, meanwhile, forced the kingdom to close the pipeline, which carries oil to its Red Sea ports, last week. The hostilities had already pushed Saudi oil production to the lowest level in decades.
They now threaten to complicate the kingdom’s multi-trillion dollar plans to diversify the economy, and come just weeks before a flagship investment conference in Riyadh set to feature JPMorgan Chase & Co chief executive officer Jamie Dimon and David Solomon of Goldman Sachs Group Inc.
United Kingdom authorities fear the East-West pipeline, as it is known, may be mostly shut for six weeks, Bloomberg reported on Monday.
That would likely push up global fuel prices and add to inflationary pressures, said several senior European officials.
For Saudi Arabia, it may mean loss of tens of billions of dollars in export revenue.
“Saudi Arabia is facing mounting pressures, the likes of which it has not seen since MBS rose to power,” Tarik Yousef, senior fellow at the Middle East Council on Global Affairs, said of MBS, who has effectively led the kingdom for almost a decade.
“This convergence of looming economic pressures and mounting geopolitical risks must be creating a sense of urgency. They have major decisions to make.”
The Houthis opened a second front in the Iran war in July by threatening ships calling at ports in Saudi Arabia.
But beyond a few attacks on the kingdom that month, they largely avoided hostilities until around 10 days ago, when they ramped up strikes on energy sites and western towns.
They have injured more than 80 people in their most recent attacks.
On Tuesday, authorities there issued air alerts for the nation’s second largest city, Jeddah, as well as the holy site of Mecca and Al Ula, an ancient desert oasis that is key to MBS’s ambition to boost tourism.
Saudi Arabia has plenty of buffers to help its economy, not least its roughly US$1.4 trillion of wealth fund assets and foreign reserves.
The country has been able to raise debt on international markets easily this year, attracting plenty of demand. Still, the government’s dollar bonds are among the worst performers in emerging markets this month, according to Bloomberg indices.
The attacks risk hurting Saudi Arabia’s attempts to attract billions of dollars of foreign investment in everything from data centers to its energy industry and electric vehicles.
Monica Malik, chief economist at Abu Dhabi Commercial Bank, sees the Saudi economy contracting 3.1% this year.
The slump could deepen to as much as 4.5% to worse than during the height of the Covid-19 pandemic in 2020 – if the East-West pipeline is shut for a month and the government can’t send significant volumes of oil via Strait of Hormuz, she said.
“The developments are pretty bad economically and geopolitically for Saudi Arabia,” said Tim Callen, a former International Monetary Fund mission chief for Saudi Arabia. — Bloomberg
