The Saudi Succession Pipeline

Todd Stein & Steven McIntyre
The Texas Hedge Report

July 12, 2005
Courtesy of www.texashedge.com

Saudi Arabia's King Fahd suffered a devastating stroke in 1995 that confined him mainly to a figurehead role. His 82-year old half brother, Crown Prince Abdullah, has been the gulf kingdom's de facto leader since then. Just several weeks ago, on May 27, King Fahd was again hospitalized for suffering from pneumonia and a high fever.

Since Saudi Arabia has 25% of the world's proven oil reserves, we thought it would be wise to take a quick glance at the Saudi succession outlook and the potential for crisis. First of all, the likelihood of a Saudi Democracy taking hold is slim. There is little chance of a Thomas Jefferson or James Madison emerging out of a collection of puritanical Sunni Islamist tribes hostile to their Shia neighbors in Iraq & Iran. (Only 5% of Saudi Arabia is Shia) Despite all the talk about changes in the Middle East, the royal family's hold on the thrown is quite secure. The problem is that there is a split among the factions of the Al Saud royal family - the most important one being the fracture between the progressive Sudairi branch & and the traditionalist Shammar branch. Should Crown Prince Abdullah (Shammar leader) officially take over, as only a half-brother of the "Sudairi Seven", the Sudairi brothers might see it as a threat to their power base.

Having seen other monarchs in the region fall to coups in the twentieth century, the Saudi royal family at some point decided to maintain two parallel armies. The Shammar-controlled Saudi Arabia National Guard (the SANG is led by Abdullah) is charged with protecting the royal family from internal revolt. The Sudairi-controlled Royal Saudi Land Forces protects the country from outside threats, but also counterbalances the SANG.

Prince Sultan (the eldest of the "Sudairi Seven" after King Fahd) had been involved in a fierce power struggle against half-brother Crown Prince Abdullah during the 1990s. Despite talk of assassination attempts, coup plots and a path to civil war, Sultan was unable to replace Crown Prince Abdullah as Fahd's successor. However analysts remain concerned that once Fahd passes, the Abdullah/Sultan power struggle could resume. While this is certainly a possibility, the larger concern is who comes next in the line of succession after Abdullah and after that Sultan. (Sultan is only a few years younger than Abdullah)

King Fahd's father, King Abdulaziz Alsaud, had over 60 children; but the "son-to-son in order of seniority" rule of succession had always been pretty clear. However in 1992, King Fahd changed succession policy basically ruling any one of his dad's sons or grandchildren may take his place. In other words, there are now a couple of hundred potential candidates (King Abdulaziz had well over 150 grandsons) to be the next ruler of Saudi Arabia. Many of these candidates are western-educated and would do just fine as king. The problem is that there is no clear frontrunner and we now have a situation where dozens of potential leaders are backstabbing and double-crossing their own brothers and cousins. Expect to hear certain members of the royal family referred to as "Abdullah loyalists" or "part of the Sudairi wing". We are not going to speculate on who the next leader will be, rather, keep our eyes open for more signs of fracture within the royal family. When false rumors of Fahd's death appeared in May, oil and stock markets were rattled. Markets do not like uncertainty, so the sooner a clear line of succession emerges, the better - that is, if you prefer low crude prices.

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Todd Stein & Steven McIntyre
Texas Hedge Report
email: info@texashedge.com

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Todd Stein & Steven McIntyre are internationally known analysts and editors of The Texas Hedge Report, a market newsletter that highlights under and overvalued securities in the equity, bond, currency, and commodity markets.