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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Will The U.S.-Saudi Spat Upend Oil Markets?

Saudi Arabia all but threatened to drive up oil prices if the U.S. took any action to penalize it over the apparent killing of a Saudi journalist. The not-so-subtle threat was the first time in decades that Saudi Arabia threatened to restrict supply for such naked political reasons.

President Trump vowed to impose “severe punishment” on Saudi Arabia if it was proved that Riyadh was behind the murder of Saudi Journalist Jamal Khashoggi earlier this month. The Saudi government quickly responded with a statement that “it will respond with greater action” if the U.S. moves forward with some sort of punishment. That threat was followed by a reference to Saudi Arabia’s “influential and vital role in the global economy,” which seems to be a veiled threat to use its oil supply as a weapon.

Goldman Sachs’ Jeffrey Curie said that oil market risk related to geopolitical uncertainties in the Middle East have now “broadened to include Saudi Arabia.”

Shortly after the government statement, Al Arabiya, a Saudi-owned outlet, ran an op-ed that alluded to the possibility of an oil price spike in retaliation to U.S. actions on Saudi Arabia. “If the price of oil reaching $80 angered President Trump, no one should rule out the price jumping to $100, or $200, or even double that figure,” Truki Aldakhil, General Manager of Al Arabiya News Channel, wrote. He went on to say that “[a]n oil barrel may be priced in a different currency, Chinese yuan, perhaps, instead of the dollar.”

He didn’t stop there, arguing that Saudi Arabia would simply turn to Russia and China for military hardware and a deeper strategic relationship, “without flinching an eye.” This could even include “a Russian military base in Tabuk, northwest of Saudi Arabia,” he said. He concluded with over-the-top bravado. “The truth is that if Washington imposes sanctions on Riyadh, it will stab its own economy to death, even though it thinks that it is stabbing only Riyadh!”

However, this is all bluster as it is highly unlikely that Saudi Arabia would actually follow through on such a threat. Cutting production would send oil prices skyward, which would likely tip the global economy into a downturn, something that a growing number of economists are worried might happen anyway. Oil prices in the $80s have already led to a slowdown in emerging markets. Pushing prices significantly higher as a means to inflict pain on the U.S. would be a blunt tool, leaving nobody unscathed. The ensuing price crash due to a global recession would be devastating for Saudi Arabia.

Related: What Will OPEC Do To Calm Stormy Oil Markets?

Moreover, to the extent that Saudi Arabia managed to keep prices high, it would merely accelerate an energy transition to electric vehicles and renewable energy, a long-term prospect that is inevitable, but also something that the Saudis are not keen to encourage.

In any event, it doesn’t seem like either side has an appetite for this fight. President Trump, despite his threat to mete out “severe punishment,” also said that he doesn’t want to cancel military hardware sales to Saudi Arabia, an indication of where his priorities are – selling bombs is clearly more important to the White House than responding to atrocities. “They are ordering military equipment,” Trump said of Saudi Arabia during a 60 Minutes interview. “Boeing, Lockheed, Raytheon —all these companies—I don’t want to hurt jobs. I don’t want to lose an order like that,” Trump said.

On Monday, Trump said that the Saudi king denied any knowledge of the event, and Trump appears eager to take him at his word. Trump even wondered if “rogue killers” might be at fault. Just as Saudi Arabia’s threat to drive up oil prices is clearly a bluff, so too is Trump’s promise to do anything in response to the murder of Khashoggi. Both Trump and the Saudi crown prince seem to hope that this will blow over.

Related: Iran’s New Gray Area Oil Trade Strategy

All that is needed is a bit of performative theater. Saudi Arabia is doing its part, announcing that it had launched an internal investigation into Khashoggi’s disappearance. Turkey says that it has video and audio evidence that proves Saudi guilt in his murder and dismemberment. However, Turkey and Saudi Arabia apparently agreed to conduct a joint investigation, which will probably mollify international outrage to some degree. Trump is dispatching Secretary of State Mike Pompeo to Riyadh to meet the Saudi King.

As for the oil market, the most important Saudi figure moved quickly to tamp down speculation that the Saudi government’s bellicosity meant a change in policy. “I want to assure markets and petroleum consumers around the world that we want to continue support the growth of the global economy, the prosperity of consumers around the world,” Saudi oil minister Khalid al-Falih said on Monday.

The slaying of Jamal Khashoggi might put a strain on what is otherwise a tight alliance between Washington and Riyadh, and it remains to be seen if the U.S. Congress will manage to muster a response. But in all likelihood, both governments will move to smooth things over.

By Nick Cunningham of Oilprice.com

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  • Peter Robert Breedveld on October 15 2018 said:
    I hope cooler heads prevail. Regardless of how outrageous this alleged murder was it does not justify the massive collateral damage that an economic war between Saudi Arabia and the United States would cause.
  • Mamdouh G Salameh on October 16 2018 said:
    The United States may underestimate Saudi Arabia’s ability to retaliate against any US punishment at its peril. A lesson in history dating back to 1973 indicates that Saudi Arabia never hesitated when the late King Faisal imposed an oil embargo on the United State inflicting heavy damage on the US economy and also the global economy for which he paid by his life.

    This is no bluster. Certainly President Trump took the Saudi threat seriously enough to start back tracking on his threat of severe punishment on Saudi Arabia by floating the idea that “rogue killers” might have been behind the murder of the Saudi journalist. Moreover, it speaks volumes about President Trump’s ethics refusing to cancel arms sales worth billions to Saudi Arabia.

    Saudi Arabia can indeed wield the oil weapon as it did successfully in 1973. By cutting its oil production drastically, it could push oil prices far above $100 a barrel and accelerate the use of the petro-yuan for its oil exports, something is going to happen anyway. The biggest casualty could be President Trump’s Republican Party in the mid-term Congressional elections in November. Another measure is that the Saudi could refuse to compensate for any possible loss by Iran oil exports resulting from US sanctions.

    President Trump stopped short of threatening the cancellation of US arms sales to Saudi Arabia because he knows that these could easily be replaced by Russian arms which are as sophisticated as US arms and cheaper.

    Still, If it is proven irrevocably that members of the Saudi royal family particularly Crown Prince Mohammed bin Salman were involved in the disappearance and possibly murder of the Saudi journalist in the Saudi Consulate in Istanbul, the implications for the Saudi family could be horrendous. Not only this will tarnish the image of Saudi Arabia in the world but it will also endanger the stability of the country and the House of Saud itself.

    To save his throne and the stability of Saudi Arabia, it would not be beyond the realms of possibility if King Salman decided to sacrifice his own son Prince Mohammed bin Salman by stripping him of all his powers and even have him punished.

    Weakened by the ongoing war in Yemen and the cancellation of the IPO of Saudi Aramco, the anti-Prince Mohammed bin Salman forces are sharpening their teeth with the generational change in leadership when king Salman departs the scene is back at the very forefront of problems facing Saudi Arabia currently.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • osmond on October 16 2018 said:
    why do we import anything we need go back developing hour own oil again we don't there oil we never did so it time to stop letting other country's push us around we need to get hour ball back

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