Is Economic War Looming Between Saudi Arabia and America?
TRY as they might, the rulers of Saudi Arabia cannot seem to make Jamal Khashoggi go away.
Quite the opposite. The journalist’s apparent murder, inside the Saudi consulate in Istanbul on October 2nd, has dragged the kingdom into its worst diplomatic crisis in years. American politicians have spoken of sanctioning any Saudi officials found culpable in Mr Khashoggi’s murder. One senator even called for the removal of the crown prince, Muhammad bin Salman. The Saudis have responded with uncharacteristic bluster. “The kingdom also affirms that if it receives any action, it will respond with greater action,” warned a statement from the official news agency. But would it follow through?
Any discussion of Saudi Arabia’s economic clout starts with oil. It is no longer the world’s leading producer. America has pumped more of the stuff this year. But Saudi Arabia is still America’s second-biggest source of foreign oil, after Canada, delivering 955,000 barrels per day, or 9% of total imports. Beyond that, bilateral trade is limited. America exported $16.3bn worth of goods to Saudi Arabia in 2017, of which about $3bn was weapons and ammunition. Its non-oil imports from the kingdom were a mere $900m. Those figures are dwarfed, however, by Saudi investments in the United States. The Public Investment Fund (PIF), Saudi Arabia’s sovereign-wealth fund, has poured $4.9bn into American start-ups. Another Saudi-backed venture has made at least $17bn worth of deals. Banks have hauled in hundreds of millions of dollars in fees for advising on Saudi projects like the (now-stalled) public offering of Aramco, the state oil company.
If the Saudis are serious about their threats, they could halt all of this—but they would hurt themselves in the process. Oil might appear as a potent weapon. Venezuela is collapsing, and next month America will reimpose sanctions on Iran’s oil sector. If Saudi Arabia lowers output it could drive prices well above $100 a barrel. But this would throw a lifeline to its regional nemesis. Iran hopes to dodge sanctions by offering its oil at a discount. Higher prices would make this an attractive option for big customers like India and Turkey. They would also boost American shale-oil producers and investment in renewable energy, both of which will ultimately drive prices back down. Also unrealistic is the threat, voiced by a journalist close to Prince Muhammad, to make Russia the main supplier of arms to Saudi Arabia. The kingdom has spent decades buying kit from America and other NATO members. Abandoning that policy requires new supply chains, infrastructure and training—a long and expensive process. Even curtailing investments in Silicon Valley would be counterproductive. Saudi Arabia hopes its stakes in firms like Uber will pay huge dividends for the PIF, which is Prince Muhammad’s main vehicle for overhauling the economy.
None of this is to say the Saudis will not retaliate. By now Prince Muhammad has a track record of impulsive, self-defeating behaviour. But America has far more leverage in this dispute. The kingdom is desperate for both foreign investment and capital for the PIF. Its non-oil economy is sluggish, and the unemployment rate for citizens is still rising. And there is one final consideration: Donald Trump. The president complains often about the price of oil and about states that do not buy or invest enough in America for his liking. Mr Trump cares little about human rights. He might be willing to overlook the murder of a journalist. Expensive gasoline is a different story.