The president has vowed “very severe” consequences if the Saudi government is found responsible for the murder of Jamal Khashoggi. He was last seen entering the Saudi consulate in Istanbul.
Wall Street is downplaying concerns that rising tensions between the U.S. and Saudi Arabia could spill over into U.S. businesses and the economy.
President Donald Trump has said the kingdom could face “very severe” consequences if its government is found responsible for the death of Jamal Khashoggi, a dissident Saudi journalist who wrote critically of the kingdom and royal family for The Washington Post. Khashoggi has been missing since entering the Saudi consulate in Turkey on Oct. 2 to obtain paperwork to marry his fiancee.
Saudi authorities claimed late Friday that the journalist died during a “brawl” inside the consulate in Istanbul, a reversal from earlier assertions by the regime that he had left the diplomatic facility unharmed more than two weeks ago.
President Donald Trump said he accepted the Saudi explanation as credible and called Friday’s statement from the regime “a good first step.”
He said his administration was waiting for results of other investigations before deciding what steps to take.
Sen. Richard Blumenthal, D-Conn., said the explanation given by the Saudis “absolutely defies credibility.”
If the U.S. hits Riyadh with sanctions, the Saudis have threatened to use their clout to hurt U.S. consumers by taking steps to push oil prices sharply higher.
They have warned of siphoning daily supplies of crude from the market in an effort to boost the price of oil, now trading around $70 per barrel, up above $100 or even as high as $200 a barrel. Oil at those exorbitant levels for an extended period, economists say, could tip the global economy into recession.
Still, despite the escalating crisis, the controversy isn’t likely to spiral out of control, largely because Saudi Arabia would basically inflict too much harm on itself if it took a so-called nuclear approach to disrupt energy markets.
“We think Riyadh would be hesitant to go down this route,” Jason Tuvey, senior emerging markets economist at Capital Economics said in a report.
The reason: Oil revenue is the main driver of Saudi Arabia’s economy, and its reputation as a reliable supplier of oil would be tarnished. In addition, any Saudi move to curtail production would force countries to seek out other oil suppliers, who likely would raise output to make up for lost demand, analysts say. Such a move would also risk angering President Trump, which could further fray ties with the U.S.
“It’s a double-edged sword,” says Christopher Smart, head of macroeconomic and geopolitical research at Barings. “It’s possible they could do near-term damage to the global economy if they did something very dramatic, but the long-term damage to themselves and their own reputation would be difficult to repair.”
That’s not to say there aren’t risks. But the threat level will only rise if Saudi Arabia takes an unexpected, overly aggressive retaliatory response, Smart adds.
Why Saudi retaliation could backfire
Working against the Saudis is the fact that their influence in the global oil market, while still considerable, is not nearly as sizable as it was in the 1970s. Back then, the Saudis and the Organization of Petroleum Exporting Countries (OPEC), wielded greater clout. In 1973-74, the OPEC oil embargo caused gas prices in the U.S. to more than double, helped thrust the U.S. economy into recession.
Today about 100 countries produce crude, with the Saudi’s accounting for 13 percent of daily production, according to the U.S. Energy Information Administration (EIA).
The emergence of the U.S. oil industry as a major player has also reduced Saudi dominance. U.S. production – which averaged 10.96 million barrels a day in July, nearly two times the amount a decade ago – now accounts for 12 percent of the world’s daily output, EIA data show.
As a result, U.S. reliance on foreign oil has declined. Saudi oil imports to the U.S. account for roughly 9 percent of total crude imports, EIA data show. In July, the latest data available, the U.S. imported 876,000 barrels of Saudi crude per day, down roughly 50 percent from 2008.
“They’re not nearly as powerful as they once were,” says Brad McMillan, chief investment officer at Commonwealth Financial Network.
When it comes to ranking risks facing the U.S. markets, Smart views the current Saudi crisis as a “relatively minor” one. Investors, he adds, have more to fear from an economic slowdown in China, the swelling U.S. budget deficit and the durability of the recent string of strong profitability of American companies.
Other Saudi retaliatory options
The Saudis have other options to punish the U.S. beyond deploying its “oil weapon,” according to Tuvey at Capital Economics.
They can dump their holdings of U.S. government bonds, threaten to pull planned investments in the U.S., or switch their purchases of defense equipment from the U.S. to Russia or China, Tuvey says.
The Saudis could also punish CEOs and companies that bailed out of its upcoming investment conference, causing U.S. businesses to miss out on future opportunities in Saudi Arabia.
Saudi Arabia is the 10th-biggest foreign owner of U.S. Treasurys, with holdings of $169.5 billion, according to U.S. government data. But Tuvey “doubts” that the Saudis selling their U.S. Treasuries would have any “major impact” on U.S. markets. Russia, he notes, has sharply reduced its U.S. Treasury holdings since the start of the year with “no noticeable impact.”
Similarly, Saudi Arabia’s sovereign wealth fund, known as the Public Investment Fund (PIF), is not a big owner of U.S. stocks, based on available data. So dumping shares to punish U.S. companies would have limited impact. According to PIF’s website, which doesn’t cite all of its holdings, it shows investments in ride-sharing company Uber and private equity firm Blackstone. In August, it reportedly bought a 3 to 5 percent stake in electric-car maker Tesla, according to the Financial Times and Reuters.
Backing out of deals
The Saudis may also threaten to back out of deals with the U.S. that already are set in motion, analysts say. Recent deals with U.S. companies announced by the Saudis include the PIF’s $20 billion investment in Blackstone’s infrastructure fund, the opening of a Six Flags theme park in Qiddiya by 2022 and a $400 million investment in Magic Leap, a tech company that is developing head-mounted virtual retinal displays.
Defense is the most exposed U.S. industry in Saudi Arabia. And there’s always a risk the Saudis will stop buying weapons from U.S. defense contractors such as Lockheed Martin, Raytheon, Boeing and Northrop Grumman. In 2017, President Trump announced $110 billion in future defense sales to the Saudis. Last year, U.S. defense companies sold weapons valued at $3.4 billion to the kingdom, according to Statista.
“Both steps,” Tuvey wrote in a report, “would undermine Trump’s domestic and foreign policy agendas and probably be enough to sway him away from escalating tensions further.”
Still, given the common security interests in the Middle East both countries share and the attractiveness of U.S. cutting-edge and specialized technology, most analysts don’t expect the current crisis to derail the current relationship between Riyadh and U.S. munitions makers.
Read or Share this story: https://www.usatoday.com/story/money/2018/10/19/saudi-arabia-market-risks/1694217002/