On Sunday, as Saudi stocks plunged amid speculation the Jamal Khashoggi drama will ultimately spark an international diplomatic backlash against the Kingdom, Riyadh promised to retaliate in the event it faces sanctions or other punitive measures.
“The kingdom emphasizes that it will respond to any measure against it with an even stronger measure”, state-run media said, adding that “the kingdom’s economy has an influential and vital role in the global economy.”
There’s no doubt about the veracity of that latter assessment – at least when it comes to crude.
Of course deploying the oil “weapon” is a fraught with risk. For one thing, higher prices would eventually deep-six demand and, likely, the global economy, which is already on shaky footing thanks to the trade war. Additionally, higher prices would embolden alternative suppliers that aren’t viable at lower price points.
The market is already concerned about the loss of Iranian barrels and the Trump administration has variously pleaded with Riyadh to commit to keeping the market well supplied as sanctions on Tehran force America’s allies to cut imports of Iranian crude to zero.
Were the Saudis to try and leverage their influence over oil prices to respond to diplomatic pressure stemming from the murder of a journalist, it would risk infuriating Trump, who has made no secret of his disdain for OPEC and has openly flaunted America’s role in protecting the Kingdom from regional threats.
So far, the President has insisted that the $110 billion arms deal with Riyadh should not be canceled regardless of whether the Saudis are responsible for Khashoggi’s untimely demise, which means Mohammed bin Salman has a staunch security ally in Trump.
But anyone who knows anything about Trump will tell you that “staunch” does not mean “reliable.” He has time and again demonstrated that he has no qualms whatsoever about throwing yesterday’s “friends” under the bus today, if he feels he’s been slighted. John Bolton’s mustache notwithstanding, Trump has also repeatedly insisted that he is, at heart, a non-interventionist when it comes to the Mideast. You might justifiably argue that his actions since becoming president cast considerable doubt on that characterization, but the fact remains that the “it’s not our problem” shtick plays well with a base that’s predisposed to despising the Arab world. You can be absolutely sure that “they raise oil prices, we stop protecting them” would be a hit line at any Trump stadium rally.
Given all of the above, it seems profoundly unwise for the Saudis to break with precedent by weaponizing crude.
An end around, though, could be refusing to recycle the proceeds from oil sales into USD assets. That would be a real kick in the balls for the Trump administration at a time when the ballooning deficit needs funding, China is seemingly predisposed to selling Treasurys (official protestations notwithstanding), Russia is liquidating and the world is rethinking whether it makes sense to remain committed to a dollar-centric system if the U.S. intends to implicitly and explicitly deploy the greenback as a weapon against allies and foes alike.
With all of the above in mind, I wanted to quickly note that yesterday’s data (which tipped a third consecutive month of selling from China), showed Saudi Arabia upping its holdings of U.S. Treasurys by $2.7 billion to a record $169.5 billion in August.
So if what you’re looking for is another reason to believe that the Trump administration will be loath to punish the Saudis for killing a dissident journalist, there’s one, right there.
Obviously, the Saudis’ Treasury stash is nowhere near that of China and Japan, but that kind of begs the question, because again, both the Chinese and the Japanese were sellers in August.