The decline is here to stay for a while
Between the collapsing price of oil, a war in neighbouring Yemen, and general turmoil in the Middle East, the House of Saud has its hands full. Now, the kingdom is facing the beginnings of a revolt from its most important ally, the United States.
There’s growing bipartisan support for a Senate bill, sponsored by Democrat Chuck Schumer and Republican John Cornyn, to allow victims of the 9-11 terrorist attacks to sue the Saudi government for compensation for any involvement it may have had in the event. The bill has been motivated by the suspicion that Saudi officials or prominent citizens helped fund the attack, which was perpetrated mostly by terrorists from Saudi Arabia.
There’s growing bipartisan support for a Senate bill, sponsored by Democrat Chuck Schumer and Republican John Cornyn, to allow victims of the 9-11 terrorist attacks to sue the Saudi government for compensation for any involvement it may have had in the event
This bill is giving Saudi officials serious pause, leading the Saudi finance minister Adel al-Jubeir to warn members of Congress and administration officials that, if the bill passes, it would be forced to sell off $750 billion worth of US Treasury debt and other American assets, a move that the New York Times said could trigger “economic fallout.”
The Obama Administration is apparently taking these warnings seriously, as it has lobbied hard against the bill, with White House spokesperson Josh Earnest saying that President Obama would veto it if it were to reach his desk. So should we worry about Saudi retaliation?
No, we shouldn’t. The idea that it may be cause for concern is wrapped up in the misconception that foreign countries buy American debt as some kind of favour to the United States. In fact, Saudi Arabia owns US Treasury debt because the market for such assets is large and stable, because these holdings give international credit markets confidence in the country’s ability to pay off debt denominated in dollars, and it gives the Saudi government the ability to keep its currency pegged to the US dollar.
Even if the Saudis do follow through with the threat, there’s little reason to believe that it would have a negative impact on the United States economy. Of the $750 billion in American assets that the Saudis claim to own, less than half of that appear to come in the form of US Treasury debt. As the result of an obscure 1970s-era law, the Treasury department doesn’t disclose how much Saudi Arabia specifically owns, but instead groups their holdings along with other oil exporters,and that group owned roughly $280 billion in US government debt as of February 2016.
Even if the Saudis owned all that debt and dumped it on the market, the Federal Reserve would have more than enough capacity to offset this sell off. As recently as 2014, the central bank was buying $40 billion per month in treasuries as part of its quantitative easing program, with no apparent ill effects on the US economy in terms of inflation or on debt markets. At that pace, the Fed could absorb Saudi holdings of US debt in just seven months.
White House spokesperson Josh Earnest also argued on Monday that the Senate bill “could put the United States and our taxpayers and our service members and our diplomats at significant risk if other countries were to adopt a similar law.”
There is speculation that Saudi Arabia never planned to freeze production anyway, despite overtures ahead of the Doha meeting, and that it is content to pursue its strategy of pressuring non-OPEC producers until more leave the market
Support for an investigation into the possible involvement of Saudi officials in the September 11 attacks doesn’t appear to be going away anytime soon. Along with the Senate bill that would limit Saudi immunity, there have been consistent calls to make public 28 pages of the 9-11 Commission Report that discussed the US investigation into possible connections between Saudi officials and the 9-11 hijackers. Former US Senator Bob Graham told CBS’ 60 Minutes earlier this month that those pages show that outside support for the terrorists came from wealthy individuals and the government of Saudi Arabia, and that he believes they should be made public.
On the other side, after Saudi Arabia’s sudden insistence that Iran be part of a meeting in Doha last weekend to discuss an oil production freeze, global market analysts are scratching their heads over what the oil-rich kingdom’s next move could be.
Oil analysts and market watchers have noted with interest this week that Saudi Arabia’s policy when it becomes to oil is less predictable than it seemed in late 2014. Back then, the de-facto leader of oil-producing cartel OPEC refused to cut production in order to retain market share in the face of rival producers, notably in the US.
Eighteen months later, its strategy has appeared to pay off, with data showing that shale oil producers are closing down rigs every week and oil output is dropping. Although its own strategy has damaged the government revenues of all 13 countries within the OPEC family, which tends to rely on oil exports for the majority of its wealth, it has enabled the so-called cartel to retain its market share of just fewer than 40 percent.
There appears to be trouble brewing closer to home for the group, however with a meeting of highly-anticipated meeting of OPEC and non-OPEC producers in Qatar last weekend, at which it was hoped a production freeze could be agreed, failing due to growing friction between Saudi Arabia and fellow OPEC member Iran.
The Islamic Republic did not attend the meeting and had consistently said it is not willing to freeze production as it wants to restart its oil industry and economy after years of economic sanctions.
Oil prices fell following the meeting and Saudi Arabia was quick to lay the blame at Iran’s door but the country knew about Iran’s unwillingness to cut and so analysts are now questioning just how much Saudi’s regional rivalry with Iran is driving its latest strategy over oil.
With relations between Saudi Arabia and Iran hitting another low following the failure of the Doha talks, there are reports now that Saudi Arabia, Iran and non-OPEC producer Russia could all be about to ramp up production, rather than restrict it.
Last week, Russia’s energy minister said his country was prepared to push oil production to historic heights, Reuters reported, should Saudi Arabia engulf markets with more crude as it threatened to this week.
Mohammed Bin Salman told the press that the kingdom could increase output by around 10 percent a day if it wanted to, saying “If there is anyone that decides to raise their production, then we will not reject any opportunity that knocks on our door.”
There is speculation that Saudi Arabia never planned to freeze production anyway, despite overtures ahead of the Doha meeting, and that it is content to pursue its strategy of pressuring non-OPEC producers until more leave the market.
While Saudi’s threat to boost production could not be dismissed lightly, whether it could damage Iran’s aspirations to boost its own production and exports was uncertain. If his aim is to discourage oil companies from investing in new output in Iran, then it could be some considerable time before he can be sure that he is achieving his objective, implying that Saudi Arabia may indeed decide to boost output to protract the supply/demand imbalance.
One way or other, decline in prices appears to be with us for some time to come.