Oil Prices and the Saudi Conundrum

Crude prices fell on Monday after Saudi Arabia said it was prepared to ramp up production to compensate for the loss of Iranian oil exports. This runs somewhat contrary to Saudi’s recent threat to weaponize oil following the West’s response to the disappearance of Jamal Khashoggi.

Crude Prices Dip

Oil markets were down in early trading, with U.S. crude futures briefly falling below $79 a barrel. The West Texas Intermediate (WTI) benchmark has since recovered to around $79.74 a barrel, where it was down 0.2% compared with Friday’s close.

Brent crude, the international futures benchmark, declined by as much as 1.2% to trade at $68.27 a barrel. At press time, Brent was priced at $69.01 a barrel, down 0.2% from the previous sclose.

The dip in price comes after Saudi energy minister Khalid al-Falih told a Russian news agency that his country had no intention to implement an oil embargo on the West. Instead, the Saudis remain focused on ramping up production to offset the loss of Iranian crude following the resumption of U.S. sanctions on Tehran.

Weaponizing Oil

Despite al-Falihi’s reassurance, the Saudis have already threatened to use their abundance of crude to inflict economic damage on the West – something they have not done in 45 years. The threat was issued earlier this month amid suspicion that Riyadh was involved in the disappearance of Jamal Khashoggi, a journalist who was often critical of the kingdom’s policies. Riyadh have denied direct involvement in the disappearance and later claimed Khashoggi died following an altercation at a Saudi embassy in Istanbul, Turkey. This position has been met with skepticism in the West, with some U.S. lawmakers calling on the Trump administration to reconsider the nation’s economic ties with the kingdom. Meanwhile, Turkey has vowed to expose Saudi Arabia’s direct role in the disappearance and eventual death of Khashoggi.

Conceivably, Saudi Arabia’s plan to “weaponize oil” would involve limiting crude exports to Western nations, thereby creating a sharp spike in global prices. While this would create short-term gains for the Saudi government, which according to the International Monetary Fund (IMF) requires a per-barrel price of $85-$87 to balance its budget, the long-term consequences on the kingdom would be much more severe.

For starters, Saudi production is not as vital for the world economy as it was during the previous oil shock in the 1970s. In addition to Russia being the world’s largest oil producer, the United States has emerged as a key player in the energy equilibrium. According to some estimates, the shale boom has already made the U.S. the world’s largest energy producer. Domestically, the U.S. has also diversified into nuclear, natural gas and renewable energy, which means the world’s largest economy is less dependent on foreign crude. In 2017 alone, renewables accounted for 18% of all electricity in the United States thanks to a sharp drop in wind and solar costs.

As we’ve seen before, prohibitively high oil prices lead to innovations in other segments of the energy market, which ultimately work against Saudi Arabia. Although the kingdom is trying to pivot away from oil, the transition is likely to be slow and cumbersome. Crude is still very much the lifeblood of the Saudi economy and diversification away from it could expose a myriad of other issues, such as weak labor force mobilization and heavy dependence on a generous welfare state funded by abundant petrodollars.

Featured image courtesy of Shutterstock.

Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi