Sanctions loom for Saudi Arabia as evidence mounts it may be behind Khashoggi murder
Investors are concerned about what happens if Saudi Arabia pulls the oil trigger. (Reuters: Regis Duvignau)
As evidence mounts that Saudi Arabia is responsible for the murder and dismemberment of dissident journalist Jamal Khashoggi, the potential for sanctions against the middle-eastern kingdom mounts.
- Saudi Arabia recently shut down new trade and investment with Canada over a diplomatic spat
- Investors are said to be worried any cutback on oil production by the kingdom could cause a global energy crisis
- A 1973 Saudi oil embargo against countries who backed Israel in the Yom Kippur war caused a US stock market crash
But if it’s hit with sanctions, Saudi Arabia says it will hit back.
Director at the Centre for Arab and Islamic Studies at the Australian National University, Amin Saikal, says there are two major cards Saudi Arabia can play.
“The instruments that Saudi Arabia has on its hand is of course oil and the sovereign funds.”
Saudi Arabia recently flexed the muscle of its sovereign funds, shutting down new trade and investment with Canada over a diplomatic spat.
But investors are more concerned about what happens it if pulls the oil trigger.
“Saudi Arabia currently produces something like 10 million barrels of oil a day and if it really cuts back that production by, let’s say, 10 per cent or 20 per cent, then that could cause an energy crisis,” said Dr Saikal.
Oil price shock in 1973-74 ravaged US economy
Donald Trump would be sensitive to the risks of imposing sanctions on Saudi Arabia — particularly with the US mid-terms just weeks away. (Reuters: Yuri Gripas)
The Middle East has form in using oil to make a political point.
In 1973, Saudi Arabia was party to the Organisation of Arab Petroleum Exporting Countries which proclaimed an oil embargo on those countries (including the United States) which had supported Israel in the Yom Kippur war.
The oil price shock and the accompanying stock market crash in 1973-74 ravaged the US economy. The embargo drove global prices up fourfold before it was lifted in March 1974.
Long queues formed at gas stations in the US. Rationing was implemented, whereby some vehicles were restricted as to when they could purchase fuel based on their number plates (ending in odd numbers meant you could purchase on odd days and vice versa).
US President Donald Trump would be sensitive to the risks, especially considering the crucial mid-term elections are just weeks away.
“The fact [is] that it could create a panic of energy crisis that could also affect the American consumers and could possibly really hurt the Trump administration,” Dr Saikal said.
“That’s why I think Donald Trump has been very careful to not jump on the bandwagon and declare that he is going to put sanctions on Saudi Arabia.”
Although Mr Trump initially promised “severe punishment” for Saudi Arabia if it was proven they were responsible for the death, he has since backtracked and said “rogue killers” might be to blame.
Former CIA agent and now analyst at RBC Capital Markets, Hilma Croft, says the disappearance of Jamal Khashoggi is “the most serious rupture in US-Saudi relations since 9/11” and that she “cannot entirely rule out that the leadership would dust off the 1973 playbook if the bilateral relationship with Washington deteriorates sharply from here”.
Even before Khashoggi’s disappearance, the world has seen a substantial oil price rise over the last two years.
Brent Crude doubled from around US$40 to over US$80 today, as political instability in Venezuela, in particular, has caused production to shrink.
Global Head of Credit Products Strategy at CitiGroup, Matt King, said an oil shock could roil global markets which have demonstrated their collective jitteriness of late.
“It does feel as though markets are sensitive to any and every shock this year, in a way they weren’t previously,” he said.
“So if this becomes just that catalyst which causes investors to want to pull back, or forces central banks to hike interests that little bit faster, then it could have a considerable impact.”
Mr Trump said he was waiting for a full report on Mr Khashoggi’s disappearance. (Reuters: Osman Orsal)
Will Saudi Arabia pull the trigger?
Markets seem to be downplaying the prospect of a sanction war erupting and forcing oil prices higher, and also to have mostly shrugged off the potential for Saudi Arabia to drastically curtail its production and put a rocket under prices.
Dr Saikal thinks that’s largely because it wouldn’t be in Saudi Arabia’s best interests to do so.
“If Saudi Arabia reduces its oil production, then that would mean a drop in its oil revenue and that will harm Saudi Arabia itself,” he said.
But perhaps the greatest consideration for Saudi Arabia is regional competition, Dr Saikal said.
“Saudi Arabia would not like to see its rival Iran gaining too much revenue from its oil resources because the more revenue Iran has, the more it can expand its regional influence.”
Mr Trump’s administration has withdrawn from the Iran nuclear deal and is continuing to ratchet up the pressure on the country.
But he was relying on Saudi Arabia to increase its production in oil to offset the expected loss from Iran as sanctions started to bite.
“If there is an energy crisis, then most of the countries that the United States has requested to not buy Iranian oil may well overlook the American threats and buy oil from Iran,” said Dr Saikal.
“Iran has the capacity to increase its production by 2 to 3 million barrels a day.”
Mr King believes the big difference between today and the 1970s is that the US now has plentiful supplies of shale oil which can be quickly turned on if the price rises.
He said he doesn’t think Saudi Arabia has the same ability to derail the global economy, “both because of the ability of shale to act as an offset and because of the reduced influence of OPEC”.
“It just feels like OPEC doesn’t have the same stranglehold over global oil prices that it had back then,” he said.