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Home Climate & Society Energy / Carbon Pricing & Economics

Saudi Arabia Hints at Oil as Economic Weapon, Breaking ‘Essential Market Taboo’

October 16, 2018
Reading time: 3 minutes

Sergio Russo/Flickr

Sergio Russo/Flickr

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Saudi Arabia is setting out to calm frazzled international nerves this week after a news executive close to the Royal Court of Crown Prince Mohammed bin Salman hinted the country might begin weaponizing its fossil resources for political purposes—a move that broke what one analyst called “an essential oil market taboo.”

In an opinion piece published Sunday, Turki Al Dakhil, head of the state-owned Arabiya news network, wrote that if Donald Trump “was angered by US$80 oil, nobody should rule out the price jumping to $100 and $200 a barrel, or maybe double that figure.” The article appeared just minutes after a government news release that said Saudi Arabia would respond to any sanctions linked to the apparent murder of Washington Post columnist Jamal Khashoggi with even “stronger ones,” noting that the desert kingdom “has an influential and vital role in the global economy.”

That sequence of events “broke with the kingdom’s diplomatic orthodoxy: oil and politics are separate,” Bloomberg reports.

In Washington, the Saudi embassy said Al Dakhil wasn’t expressing official policy, and “speaking privately, said there wasn’t a change in the long-held policy that oil and politics don’t mix,” the news agency adds. In a speech in India the next day, Energy Minister Khalid Al-Falih set out to “assure markets and petroleum consumers around the world that we want to continue to support the growth of the global economy, the prosperity of consumers around the world,” by functioning as what Bloomberg calls a “responsible actor” to keep oil markets stable.

“Yet the fact that the Arabiya article was published only minutes after Saudi Arabia’s press release was issued led many to conclude it was either a message conveyed outside diplomatic channels or a trial balloon that quickly went flat,” Bloomberg notes. “While few think that Saudi Arabia is prepared to follow through, even the suggestion of using oil as a weapon undermines Riyadh’s long-standing effort to project itself as a force for economic stability.”

Stephen Innes, Singapore-based head of Asia Pacific trading at Oanda Corporation, said it would be a “calamity” if Saudi Arabia used its oil reserves to retaliate for political slights. “This would be so destabilizing for global markets that it would make the current trade tensions between the U.S. and China look like a game of Axis & Allies,” he said.

But “while the mere hint of Saudi Arabia using oil as an economic weapon still brings back memories of queues at the pump and stagflation in the western world, there are good reasons why Saudi Arabia hasn’t wanted to brandish oil market power as a political tool,” Bloomberg notes.

“True, Riyadh can bring the global economy to its knees in the short-term by cutting output and sending prices sharply up. The kingdom pumps one in 10 oil barrels produced worldwide, and holds nearly all the spare capacity available to respond to any supply outage.”

However, “over the medium-term, it would lead to massive oil demand destruction and an accelerated race into renewable energy and electric cars. The 1973-74 embargo, and the second oil crisis in 1979, destroyed oil demand forever, as industrialized countries taxed gasoline and diesel and embarked on conservation policies. Oil consumption is lower today than in 1974 in Germany, Japan, France, Italy, and the United Kingdom.”



in Energy / Carbon Pricing & Economics, Energy Politics, Middle East, Oil & Gas, UK & Europe

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