Saudi Arabia's Empty Oil Threats

By On November 02, 2018

Saudi Arabia's Empty Oil Threats

U.S. Secretary of State Mike Pompeo and Saudi Crown Prince Mohammed bin Salman in Riyadh, October 2018

The brazen murder of Washington Post journalist and U.S. resident Jamal Khashoggi has elicited that rarest of reactions in contemporary U.S. politics: bipartisan consensus. Both Republicans and Democrats in the House and the Senate have condemned Saudi Arabia for the assassination operation in Istanbul, with the ever-colorful Lindsey Graham urging that the United States “sanction the hell out of” the Saudi government.

President Trump’s administration, however, has adopted a notably restrained response thus far: it is considering sanctioning the low-level operatives who carried out the killing but has given little indication that it will hold Cro wn Prince Mohammed bin Salman personally responsible. One explanation for this reticence is that the administration fears that punitive steps could complicate its Iran policy. Senior administration officials, including Secretary of State Mike Pompeo and Treasury Secretary Steven Mnuchin, have alluded to such concerns when pressed on the Khashoggi case.

Administration officials reportedly worry that by applying too much pressure on the kingdom, they could inadvertently “jeopardize plans to enlist Saudi help to avoid disrupting the oil market.” The Trump administration has been counting on Saudi Arabia, as the world’s swing producer, to increase its oil production to help offset the anticipated loss of Iranian supply come November 5, when sanctions lifted under the Iran nuclear deal are re-imposed.

Khashoggi's murder has elicited that rarest of reactions in contemporary U.S. politics: bipartisan consensus.

U.S. officials reportedly fear that an offended Saudi Arabia could undermine this plan by refusing to increase its oil productionâ€"or even cutting production (to spite its face). Such action would likely cause a dramatic spike in global oil prices. The American people would be forced to pay more for fuel; European countries displeased with the U.S. withdrawal from the nuclear deal would have further incentive to subvert sanctions; and Iran would enjoy greater revenues from whatever oil it could still sell. This chain of events would pose a fundamental challenge to President Trump’s entire plan for confronting Iran, of which a key component is ramping up economic pressure in an attempt to alter Tehran’s policies.

Elements of the Saudi monarchy are well aware of the administration’s fixation on Iran and seem to want to stoke these fears. In an October 14 statement, the official Saudi Press Agency alluded to the so-called “oil weapon,” reminding the United States that “the kingdom’s economy has an influential and vital role in the global economy.” The general manager of the Saudi-owned Al Arabiya news network went even further, threatening that the kingdom would reconcile with Iran in response to U.S. pressure and warning, “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.”

While Saudi Arabia does have the ability to impose costs on the United States if it is displeased by forceful action on the Khashoggi affair, Saudi threats to sabotage President Trump’s Iran policy through manipulating the oil market do not appear credible, for two primary reasons. First, Riyadh has been acutely sensitive to the potential danger posed by its larger Persian Gulf neighbor for decades, and the Saudi leadership has increasingly indicated that it perceives Iran as an existential threat. Bin Salman has spoken of Iran in stark terms, likening the Islamic Republic to Hitler and accusi ng it of following an “extremist ideology.”

Indeed, the crown prince has emphasized the urgency of the putative Iranian threat, saying, “We are a primary target for the Iranian regime,” and suggesting that the kingdom “won’t wait for the battle to be in Saudi Arabia.” Bin Salman’s fixation on Iran is also evident in his destructive bombing campaign against Iranian-backed Houthi rebels in Yemen, which has caused a humanitarian disaster and costsSaudi Arabia at least $50 billion per year. The crown prince appears intent on continuing that war until Iranian influence is not just minimized or contained but, as he reportedly told former Deputy Secretary of State Tony Blinken, completely “eradicated.”

Saudi Arabia has spent years encouraging Washington to take more aggressive action against Iran, including reportedly urging then Secretary of Defense Robert Gates to initiate military action against Tehran in 2010. Saudi support for the Trump administrationâ €™s Iran campaign is not a favor to the United States but a reflection of Riyadh’s own authentic anxiety regarding Iranian intentions. Saudi Arabia is therefore highly unlikely to take any step that would deliberately relieve pressure on Tehran and disrupt the kingdom’s partnership with the Trump administration to counter its regional rival.

Although Saudi Arabia’s use of the “oil weapon” would indeed cause short-term harm to the U.S. and global economy, it would ultimately do more harm to the Saudi economy.

The economic logic for Saudi intransigence is equally unconvincing. Although Saudi Arabia’s use of the “oil weapon” would indeed cause short-term harm to the U.S. and global economies, it would ultimately do more harm to the Saudi economy in the medium to long term. The reason for this is not that the United States has achieved energy independence but that Saudi influence over the global oil market has been in steady decline. A major increase in the price of oil would lead higher-cost producers of energy, such as frackers and the alternative energy industry, to take advantage of a more favorable market by producing more fuel. The net effect would be to drive oil prices back down, while at the same time robbing Saudi Arabia of market share.

Simply put, Saudi Arabia would end up selling less oil at close to present prices, which means it would lose revenue. The kingdom is already suffering lower than expected revenues, such that it has been forced to scale back services and benefits for its burgeoning young population. With public debt surpassing 20 percent, Saudi Arabia can ill afford to sacrifice additional oil-based revenue.

Even if Saudi Arabia were self-destructive enough to behave as the Trump administration fears, the impact on Washington’s sanctions policy might not be as dramatic as anticipated. Putting significant additional pressure on Iran does not require every major purchaser of Iranian oil to reduce i ts imports to zero or near zero. When the Obama administration implemented similar sanctions in the 2012â€"15 period, many countries zeroed out their imports, but others gradually reduced purchases over time, based on oil supply projections. Nonetheless, Iran’s exports of crude oil and lease condensate dropped to their lowest levels in decades, and the Islamic Republic lost billions of dollars in revenues.

The administration’s goal of zeroing out Iranian oil exports was always an ambitious one and unlikely to come to fruition by the November deadline, particularly given that the United States is currently relatively isolated on Iran. The United States may even face a point of diminishing economic and political returns if it pushes its allies too far in this context. Already, the E.U., Russia, and China have united in an unprecedented manner with the intention of skirtingU.S. secondary sanctions. The effectiveness of that effort remains to be seen.

The Trump adminis tration’s Iran policy is indeed in danger of failing, but not because of Saudi Arabia’s oil production levels. The policy’s prospects depend much more on the very allies, in Europe and the P5+1, that the administration has alienated through its unilateral withdrawal from the nuclear agreement, despite Iran’s continued verified compliance with its terms. To shift Iran’s dynamic and complex strategic calculus has historically required that the United States and its allies present a sustained, united front. This will be particularly crucial in regard to the Iranian policies that the administration aims to change.

The Trump administration’s Iran policy is in danger of failing, but not because of Saudi Arabia’s oil production levels.

But the Trump administration has given Iran the strategic adv antage by fracturing this unity, relying instead on unilateral threats and pressure, while failing to offer a viable path for diplomacy. Washington’s approach has fed the perception among Iran’s leaders that the United States is intent on pursuing regime change. Inflaming Iranian threat perceptions has unhelpfully foreclosed valuable bargaining space, making it even more difficult for the United States to offer the sorts of credible assurances that might secure concessions.

It would be a strategic miscalculation for the United States to absolve the Saudi leadership of responsibility for Khashoggi’s murder, especially if it did so in order to avert retaliation on its Iran policy. Such retaliation is unlikely and would in any case be manageable. But the outcome of the Khashoggi affair is in fact very relevant to U.S. Iran policyâ€"perhaps just not in the way senior U.S. officials seem to believe.

As Secretary of Defense Jim Mattis recently stated in reference to Khas hoggi’s murder, “Failure of any one nation to adhere to international norms and the rule of law undermines regional stability at a time when it is needed most.” In the past, demonstrating that it is Iran that is defying international norms has been important to mobilizing international pressure against the Islamic Republic. To the extent that U.S. allies appear to act in a manner similar to Iranâ€"but without meaningful reproachâ€"the task of containing Iranian threats to U.S. interests, and speaking credibly in support of those facing injustice inside Iran, will be all the more difficult.

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