Contagion kingdom

Saudi: Saudi Arabia isn’t immune to political contagion from Egypt. While the House of Saud itself isn’t under immediate threat, unrest is rising in two border states: Bahrain, which could come under Iran's influence; and Al Qaeda infested Yemen. Regime change in either would increase the Saudi risk premium, potentially driving up oil prices.

Investors seem to be betting on little or no change in Saudi. After all, the conservative kingdom is six times richer than Egypt on a GDP per capita basis. The country's stock market — roughly equal to the market capitalisation of Egypt, Qatar and the United Arab Emirates combined — is only down one per cent since the Egyptian protests began. And the oil price receded after Hosni Mubarak’s resignation.

But the dominoes are tottering in the immediate neighbourhood — and that could destabilise Saudi. Bahrain has experienced discontent for years as the government’s oil and financial reserves have dwindled. Linked to Saudi via a causeway, Bahrain is near much of the kingdom's key oil infrastructure. It is also a playground for Saudi businessmen.

Bahrain’s ruler is a Sunni muslim, like the Saudi royal family. But most of the population are Shi'ite, like Iran. That raises the risk that, in a regime change, Tehran could cause mischief. Saudi would then face unpalatable choices: risk infection; or close the causeway. Saudi has already tried to insulate itself from instability on its other flank, Yemen, by building a giant barrier to keep people, including Al Qaeda, out.

Even so, the current regime professes to be cracking down on the terrorists and to be an ally of the United States. If it falls, whatever replaces it may be less friendly to America and less able or willing to pursue Al Qaeda, which has been trying to sow dissent inside Saudi and blow up oil facilities. Yemen, which was only formed in 1990, could also disintegrate as there is already a strong secessionist movement.

While none of this means that Saudi itself faces imminent regime change, unrest inside its own borders could rise. The country’s own marginalised Shi’ite minority is located in the oil-rich eastern province close to Bahrain. And, although Saudi is rich, unemployment is high among its web-savvy young population and wealth is not evenly spread.

What’s more, Saudi’s King Abdullah is 87 years old and frail, while the crown prince is also an octogenarian and succession is a knotty issue. The unfolding drama elsewhere has increased the still small chance that the regime won’t endure in the long term - and a higher risk premium there could drive up oil prices in the short term.