US fears oil price shock over Khashoggi
Jamal Khashoggi is a Washington Post columnist and a prominent critic of Saudi prince Mohammed bin Salman – known as MBS. Earlier this month, Khashoggi was caught on camera entering the Saudi consulate in Istanbul, where he was due to collect paperwork that he needed to marry his Turkish fiancée.
The journalist’s subsequent disappearance has plunged Saudi relations with much of the Western world into acrimony and chaos. Leading powers have been demanding answers from Riyadh.
Formerly a senior editor in Saudi state media and an adviser to the Royal Court, 59-year-old Khashoggi was a close confidante of the House of Saud. For the past year, though, he’s been in self-imposed exile, becoming a US resident and loudly criticising the Saudi Crown Prince, the de facto ruler of the oil-rich desert kingdom.
Khashoggi’s attacks on the war in Yemen, and his condemnation of Saudi’s blockade on Qatar and “one-man rule” have challenged MBS’S recent rebranding attempts. And now, any credit Riyadh may have generated over recent months – by permitting women to drive and other “modernisation” efforts – has been replaced with outrage that Khashoggi may have been killed.
“We are going to take a very serious look at this – it’s a terrible thing,” tweeted Donald Trump, a few days after Khashoggi went missing, the President vowing to inflict “severe punishment” if Saudi is found to have harmed the journalist.
As the diplomatic tension has cranked up, fears have grown that Saudi, in retaliation against any US sanctions, may “weaponise” its oil production. Last weekend, the Riyadh government issued a not-so-veiled threat, emphasising Saudi’s “vital role in the global economy” and warning that “any action would be met with “greater action”.
An incendiary article in a state news outlet threatened “economic disaster” should the US sanction Saudi over Khashoggi. “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,” the article said. This clearly amounts to intemperate language. And it’s almost certainly an empty threat.
There is, of course, much nervousness about the crude price – which has doubled since January 2016 and is up 30pc since February. Rising fuel costs are feeding into US inflation and putting ever more pressure on the Federal Reserve to keep raising rates. If the US central bank moves too fast, fragile global financial markets could be upended. Even if that’s avoided, America’s recovery could stall.
It’s also not an exaggeration to say the impact of the last Saudi oil embargo is seared onto America’s collective historical psyche. The 1973 “oil price shock” – imposed to punish Western assistance to Israel in the Yom Kippur war – saw oil prices rise fourfold. The US was plunged into stagflation, the combination of high inflation and high unemployment rocking the world’s biggest economy to its core.
Saudi clearly enjoys a privileged position both in geopolitical and economic terms – and it is naive to think otherwise. It’s the world’s biggest oil exporter – pumping or shipping over 7 million barrels a day. Saudi also sits at the heart of the 13-country Opec exporters’ cartel – which accounts for over two-fifths of global production and no less than four-fifths of global reserves.
Yes, the US itself has pumped around 12m barrels daily over recent years, similar to Saudi. Shale beds now produce half of America’s oil and gas, compared with just 1pc at the turn of this century. But the US consumes around 20m barrels of oil every day, so is still heavily dependent on crude imports. Most Saudi exports go to Asia these days – particularly China. But
global oil prices massively impact the US, and Saudi plays a key role in determining those global prices.
Were the Saudis to generate a price spike, there would indeed be profound economic consequences, forcing up the costs of all goods that travel by road. Trump could also personally suffer during next month’s Congressional midterm elections, given that US voters, who drive long distances and often heat their homes with oil, detest high crude prices.
My hunch is that economic realpolitik means this controversy will fade and there won’t be major implications on global oil markets. Trump is ultimately likely to soft pedal because he’s relying on the Saudis to ramp up production when US measures come into force against Iran next month, replacing oil lost to world markets when sanctions on Tehran bite. Consider, also, that Saudi is the world’s second-largest arms importer after India – with America accounting for almost two-thirds of those imports.
US firms signed $17.5bn (£13.4bn) worth of Saudi arms deals last year, a trend that looks set to continue after Trump recently signed a $110bn defence deal in Riyadh. Firms such as Lockheed Martin and Boeing fear that if the White House gets too excited about Khashoggi’s disappearance, the Saudis could switch their arms deals to exporters like China and Russia.
Riyadh meanwhile understand that driving up oil prices risks a global recession. At the very least, much dearer crude would heavily incentivise other producers – including the US shale industry – to step in and “fill the gap.” The Saudi government, also, struggling with 13pc unemployment and diminishing financial reserves, is desperate to sell part of oil giant Saudi Aramco. The US could make that impossible, given its grip on the global banking system.
While investigations into the affair are ongoing, business leaders from around the world have begun distancing themselves from Saudi. Yet, oil prices have actually dropped slightly over the last week, with Brent dipping below $80 per barrel.
That fall was partly due to a timely report showing a sharp uptick in US domestic oil inventories. Soft crude prices also reflect pessimistic sentiment across broader equity markets, and a more general sense of economic concern.
I predict we’ll see token US sanctions against some Saudi individuals as a result of this Khashoggi scandal, with the White House accepting MBS wasn’t involved. Trump can then argue he’s punishing the bad actors, but not so much that Riyadh is forced to respond.
I’m not condoning this outcome, just conveying what I think will happen. After all, 15 of the 19 terrorists responsible for the 9/11 atrocities were Saudi. Yet America then attacked Iraq, and Saudi oil kept on flowing.
‘It’s also not wrong to say the impact of the last Saudi oil embargo is seared on to America’s collective historical psyche’