How important is the kingdom of Saudi Arabia to the global economy? Does Riyadh hold the world’s economic destiny in its hands? These questions are not academic given the profound uncertainty over how the Jamal Khashoggi case will play out in the coming days and over how western governments could respond if credible evidence emerges that the dissident Saudi journalist’s killing was not a “mistake” made by “rogue” operatives but was, in fact, explicitly ordered by the all-powerful crown prince Mohammed bin Salman himself.
Donald Trump has threatened “very severe” consequences under those circumstances. And, for their part, the Saudi government also last week made it clear they would not passively soak up western sanctions or other forms of punishment.
“The kingdom emphasises that it will respond to any measure against it with an even stronger measure,” its Foreign Ministry said in a defiant statement. “The kingdom’s economy has an influential and vital role in the global economy.” Oil was not specifically mentioned. But then it doesn’t really need to be.
The Saudi-led oil embargo of 1973, when Gulf states stopped sales to the likes of the US, the UK, Canada and Japan in retaliation for western support of Israel, was one of the most significant economic shocks to the global economy since the end of the Second World War.
It is branded in the memory of politicians and civil servants of a certain age, but also on the inherited folk memory of the current generation. The Saudi embargo quadrupled world oil prices, pushed consumer inflation into double digits and tipped the US and states across Europe into painful recessions. Some argue that it even helped wreck the credibility of centre-left governments in the 1970s, clearing the way for the neoliberal revolution of the following decade.
So would we be going back to the 1970s? How much economic and political disruption would a Saudi oil embargo actually do today? It would certainly be painful, but far less so than in the past, is the best guess.
The global energy market has evolved significantly over the past half century. Western countries have strategic reserves of oil and a wider range of suppliers. Recent years have highlighted the market’s resilience in the face of handbrake supply and demand turns.
The recent spike in oil prices in 2010, when prices hit $125 a barrel, stimulated the domestic US shale oil and gas production sector. The industry grew so fast that domestic energy production today is almost 90 per cent of US consumption. A decade ago the US had net daily imports of 10 million barrels of oil and petroleum products. In 1973 it was 6.4 million. Today that is down to just 2.3 million.
When the oil price collapsed in 2016, falling all the way down to $30, Saudi Arabia held off from supporting the global price by moderating production for a long time precisely because it hoped the low price would help push highly indebted US shale producers into bankruptcy and restore the Saudi global market share for the long term. By and large that strategy was a failure and US shale production survived.
It’s true that the UK and western Europe are still heavily reliant on imported energy and therefore appear particularly vulnerable to a sudden jump in global oil prices. But the European share of renewables as a source of final energy consumption has also been rising rapidly, hitting 17 per cent in 2016. A spike in oil prices would be likely to accelerate this switch away from fossil fuels (just as the 1973 embargo encouraged western energy conservation measures such as the Nixon administration’s 50mph US highway speed limit). Again, while this could actually be beneficial in the medium term for the west, it would hardly be in the Saudi economic interest.
The oil price has been rising since the middle of last year and is now close to a four-year high at $80. One Saudi newspaper columnist has suggested that, if faced with severe western sanctions, Riyadh could slash its roughly 10-million-barrel-a-day production by two-thirds, sending the global price back to $100, or perhaps even on to a record $400 a barrel.
Yet there was little of that kind of sabre waving at the Saudi “Davos in the Desert” business investment event in Riyadh last week. The Saudi business folk to whom I spoke were, instead, keen to see western alliances preserved and almost desperate for the present crisis to dissipate.
It’s clear why. An act of economic warfare like an extreme oil production cut would destroy Mohammed bin Salman’s “Vision 2030” economic reforms. The crown prince’s $500bn dream of a high-tech city in the desert will never materialise without tapping western expertise, implying a free flow of knowledge, people and investment. And Saudi will not become a tourist destination, as the current leadership fervently hopes, if relations with the west utterly disintegrate. Saudi Arabia itself has the most to lose economically in any standoff.
There are certainly reasons why the west should tread carefully with Saudi Arabia, from state-to-state cooperation on terror intelligence, to considerations of geopolitical stability. But fears of a repeat of the 1970s oil embargo should not, whatever folk memory holds, be high on the list.