Since the oil embargo of the 1970s, Saudi Arabia has avoided threats to use its “oil weapon” in diplomatic affairs, insisting that it favors stable markets and separates oil and politics. That changed this weekend when, for the first time in over 40 years, the kingdom has offered a veiled threat to leverage its oil production, if pushed.
The threats came in response to growing global and U.S. outrage with the killing of dissident journalist Jamal Khashoggi in the kingdom’s consulate in Turkey, and Riyadh’s now admitted role in his disappearance, the Saudi government issued a strong statement warning other nations against imposing penalties. “The Kingdom also affirms that if it receives any action, it will respond with greater action, and that the Kingdom’s economy has an influential and vital role in the global economy and that the Kingdom’s economy is affected only by the impact of the global economy,” Riyadh wrote, a thinly-veiled threat to use its outsized role in global oil production in retaliation to any attacks, sanctions, pressure, or other attempts to punish it for the killing of Khashoggi. Also noteworthy was the message published by Turki Al Dakhil, who heads the state-owned Arabiya news network and is close to the Royal Court, who wrote, “If President Trump was angered by $80 oil, nobody should rule out the price jumping to $100 and $200 a barrel or maybe double that figure.”
“The Kingdom also affirms that if it receives any action, it will respond with greater action, and that the Kingdom’s economy has an influential and vital role in the global economy and that the Kingdom’s economy is affected only by the impact of the global economy”
The immediate price response was somewhat muted, with Brent crude oil rising modestly on the news. Analysts added Saudi Arabia to the list of geopolitical concerns currently impacting oil prices: In a note Monday morning, Goldman Sachs, referenced “…increased geopolitical risks, driven by elevated U.S.-Middle East tensions that have recently broadened to include Saudi Arabia.”
Others argued that if the Saudis retaliate using oil, it would lead to “calamity,” according to Stephen Innes, Singapore-based head of Asia Pacific trading at Oanda Corp. “This would be so destabilizing for global markets that it would make the current trade tensions between the U.S. and China look like a game of Axis & Allies.”
Despite the recent strong growth in U.S. production, America is unable to consign concerns about global oil production to history. Oil is a globally-priced commodity, subject to the outsized influence of Saudi Arabia, its fellow OPEC member countries and other OPEC+ petrostates like Russia. Despite the confidence of White House economic adviser Larry Kudlow, who told CBS on Monday the U.S. is “the dominant energy player… with our boom to cover any shortfalls,” the numbers do not back up this assertion. The U.S. recently reached historical production highs of 11 million barrels per day, as oil prices reach 4-year highs. We continue to import 3.3 million barrels per day from OPEC.
In a statement, SAFE CEO Robbie Diamond asked Washington to recognize the risk and take action. “Saudi Arabia’s threat to weaponize oil and use its leverage to bully the U.S. and destabilize the global economy demonstrates the Faustian bargain we have all been living with for 45 years by being dependent on oil for transportation in a global, mobile economy with little alternative fuel choices,” Diamond said. “Market watchers are reminding us that the Kingdom has the ability to send oil prices to $150 to $200—even if it is not acted upon, the fact that Saudi Arabia’s threat is credible should be sounding alarm bells in Washington that our oil dependence continues to constrain our foreign policy and undermine our economic sovereignty.”
When Saudi Arabia reminds us of its power over the global economy, we should be taking every measure to eliminate our oil dependence, rather that simply hoping for the best.
When faced with the risk of toppling the global economy if it followed through with its retaliation threats, and with mounting evidence that Saudi government was in fact responsible for Khashoggi’s death, the Kingdom admitted its role yesterday afternoon. But the story isn’t over and how Saudi will retaliate to consequences remains unclear. The Kingdom’s warning to use its oil as a weapon serves as the latest reminder of America’s exposure to this existential threat. When Saudi Arabia reminds us of its power over the global economy, we should be taking every measure to eliminate our oil dependence, rather that simply hoping for the best.