If threats are anything to go by, Saudi Arabia may just have breached a long-standing orthodoxy of dissociating oil from oil politics. Following recent developments, Riyadh made statements that came across as a veiled threat to deploy the Kingdom’s oil wealth in a political warfare – an unprecedented turn since the Arab embargo in 1973 that galvanized the first and unarguably paradigm shifting oil crisis.
On Sunday, Saudi Arabia, global leaders of oil exports, said it would make an even more consequential, retaliatory move should punitive measures be sanctioned on the nation over the disappearance of Jamal Khashoggi – the Washington Post columnist reported missing over the past week, hinting that it had the economic clout to retaliate with ”stronger ones.” This was regarded to subtly refer to the nation’s petroleum wealth which, the statement noted, “has an influential and vital role in the global economy.”
But this threat wasn’t going unnoticed, with longstanding OPEC watcher at consultant IHS Markit Ltd Roger Diwan stating that the Saudi comments violated a key taboo in the oil market.
Even though not many expect Saudi Arabia to follow through this threat, the mere suggestion of employing oil as an economic or political weapon is detrimental to the kingdom’s bid to advance itself as a reliable force for world economic stability. Head of commodities research at Goldman Sachs Inc. Jeffrey Currie noted that Middle East tensions ravaging the oil market have even skyrocketed and “broadened to include Saudi Arabia.”
To compound anxieties, head of state-owned Arabia news network Turki Al Dakhil wrote an opinion piece wherein he explicitly discussed the possibilities of resisting threats by weaponizing oil.
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In his piece, Dakhil concludes “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.”
However, Saudi embassy in Washington subsequently quashed such fears, stating that Al Dakhil’s statements were not parallel to the leanings of the kingdom, with Saudi officials affirming, in private, that no change to the long-running policy of dissociating oil from politics was in the offing. Speaking in India on Monday, Saudi energy minister Khalid Al-Falih reiterated the Kingdom’s commitment to maintaining stability in steering oil markets in the right direction.
“I want to assure markets and petroleum consumers around the world that we want to continue to support the growth of the global economy, the prosperity of consumers around the world,” he said.
However, given that Saudi Arabia’s press release was shortly followed by the publish of the Arabiya article within minutes, many considered the message as either emanating from outside official diplomatic channels or a political stunt gone wrong.
Expectedly, Brent crude, the global benchmark, witnessed an early rise of up to 2% to sell at $81.92 a barrel, with concerns about growth brewing in the global equity markets.
The Kingdom has launched an inside investigation to unravel the disappearance of Khashoggi at its consulate in Istanbul, with sanctions on people found wanting not ruled out if evidence shows their involvement, a Saudi official says.
In any case, the statement of the Kingdom’s leadership, regardless of it’s intended meaning, failed to pass the country’s diplomatic principle: oil and politics do not mix.
For instance, while other economic ties were significantly severed, the kingdom stayed committed to it’s “firm and long-standing policy” of separating political dealings and petroleum exports, allowing Aramco, a state-owned company, to continue to supply a Canadian refinery.
The mere suggestion of Saudi Arabia weaponizing oil echoes memories of longwinded queues and crippled economies in the Western world, but it’s also pretty obvious why the oil-rich nation hasn’t actually stormed the political scene by brandishing oil-market dominance. Basically, it resonates with a not-so-fancied relic that plagued the 1970s – the Cold war orthodoxy of mutually assured destruction.
Sure, the global economy will go down south should Riyadh cut supply to the oil market, causing prices to snowball up north. The nation, apart from pumping one in every ten oil barrels produced globally, also holds virtually all reserves needed to stem any shortfall in oil production. So, suggesting it won’t compensate for losses due to U.S sanctions in Iran could trigger price escalation toward $100 a barrel.
A Saudi retaliation using oil, Stephen Innes of Oanda Corp notes, 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.”
And this would inevitably result, over the medium-term, to a massive drop in oil demand and fastracked transition into electric cars and renewable energy alternatives. Noteworthy is that the oil crisis in the 1970s sparked a drastic reduction in oil demand in industrialized countries ever since, with increased taxation on gasoline and diesel and advancement of conservation policies. Today, oil consumption is significantly lower than was recorded in 1974 in countries like the United Kingdom, Germany, France, Japan and Italy.