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.
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.
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.