US fears oil price shock over Khashoggi

The Sunday Telegraph - Money & Business - - Business - LIAM HAL­LI­GAN Fol­low Liam on Twit­ter @liamhal­li­gan

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’

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