David Horgan on Saudi, the killing of Khashoggi, and price of oil
On one Kremlin trip, we spotted two Orthodox nuns praying over the tomb of Soviet dictator Stalin. Most Russians suffered under the Vozhd but still utter his name with reverence.
It seems that all that matters is results. The canny Stalin observed: “One death is a tragedy; One million is a statistic.” So it seems with the killing of journalist Jamal Khashoggi in Istanbul.
Many who seemed untroubled with Middle Eastern chaos, at least until the migrants appeared on their shores, demand punishment for state-sponsored execution of a lone journalist.
What can the world do about Saudi excesses? Very little. There is a boycott, divestment, sanctions movement against Israel, but not against its Arabian co-accused. Britain and the US value Saudi cash too much to withhold spare parts or offensive weapons used to kill Yemeni children. It is not just the huge volume of sales, but also the high margins on such transactions — which effectively underwrite research and development, though some of these profits are recycled as commissions.
The spending has worked. For decades experts predicted the fall of the House of Saud but though apparently mightier monarchs like the Iranian Shah fell, the Saudi royal family survived. Exporters did not cut arms sales no matter how many Yemeni civilians died. But ironically the Saudi Crown Prince might himself deploy this weapon by reducing the volume or margin of purchases. What seems to be a Saudi vulnerability is actually a strength.
About 40% of Saudi Arabia’s near-cash stash is held as US government debt — Saudi purchases helped to offset recent sales by Russia, Japan, and China. Disposal of US bonds could precipitate a crisis at a time when US tax cuts need funding.
Cutting oil exports, as in 1973, is again the greatest Saudi threat and because of limited spare capacity in the market, an increase in price is likely to compensate for reduced volumes. But Riyadh will likely curtail its foreign adventures, especially the brutal and counter-productive war in Yemen.
Since Saudi output is key to facilitating renewed US sanctions on Iran, worsening relations will undermine the legitimacy and effectiveness of those sanctions, another unintended outcome. This effectively restores the 2015 Iranian non-proliferation deal. Ironically, Saudi atrocities will have rescued its rival Iran. Another irony is that the west’s oil vulnerability is self-inflicted and there is little surplus capacity. Investment has been shut. Even though traders smuggle, sanctions kill new investment.
Mohammed bin Salman, the crown prince of Saudi Arabia, has demonstrated how the oil market has entered a crisis phase.
The supply-demand balance is tight and much of the Middle East, from Libya to Iraq, remains chaotic. Hopefully, President Donald Trump’s non-interventionist instincts will prevail. One consequence of sanctions on Iran, Russia, and Venezuela, is they can do little about Saudi Arabia. The west can’t sanction everyone. And even without action against Saudi Arabia, expect the price of crude oil to soar above $100 next year.
The only increased production is coming from the US “fracking miracle”, which adds one million barrels of daily capacity every year but involves high-grading the best US basins. Though helped by a rising oil price, the dramatic output surge remains dependent on high levels of debt and cheap money and lenders are becoming more nervous as the US Fed hikes interest rates.
Mohamed bin Salman’s Istanbul shenanigans seem to echo how Archbishop Thomas Becket was set up for assassination by overly zealous knights. In this case, the crown prince is causing the turbulence.
