Oil, Debt and Iran: Weapons in Any U.S.-Saudi Fight Over Khashoggi

(Bloomberg) -- President Donald Trump threatened his most important Arab ally with “severe punishment” if it was shown to have killed a top regime critic. Saudi Arabia hit back with a not-so-veiled threat of its own to weaponize its vast oil exports.

The disappearance of Washington Post columnist Jamal Khashoggi after he stepped inside the Saudi consulate on Oct. 2 began as a tussle between regional heavyweights Turkey and Saudi Arabia. But it spread rapidly to threaten Trump’s Middle East policy that’s built around ever closer ties with the kingdom’s autocratic rulers.

With Saudi Arabia shifting away from its flat-out denials of involvement to announce an internal investigation, and Trump floating the theory of “rogue killers,” efforts to lower tensions appear to be underway. If they fail, what actions could the two sides take and what factors may hold them back?

SAUDI ARABIA

1. The Oil Weapon

The U.S. and Saudi Arabia are two of the world’s top oil producers. Saudi Arabia’s more than 7 million barrels a day of crude exports -- the most in the world -- give the kingdom a key role in balancing global energy markets.

Trump has urged Saudi Arabia to put more crude on the market to pull prices back from near four-year highs above $80 a barrel. He is also leaning on Saudi Arabia, a key ally in his stand-off with Iran, to replace barrels that will come off the market when sanctions on the Islamic Republic take effect next month.

Were the Saudis to back away from signals they are willing to meet global demand, prices could spike to $100 a barrel, just as Trump wants lower gas prices going into midterm elections that could help determine the rest of his presidency. It might also make it harder for U.S. sanctions to take as much Iranian oil off the market as he seeks. The Saudis, meanwhile, would collect the profits. If they cut output, oil prices could rise more sharply, but that would risk angering customers and harming the global economy.

Saudi Arabia last used its petroleum wealth as a political weapon in 1973-74, when it led an Arab oil embargo during a war between Israel and a coalition of Arab states.

2. U.S. Bond Holdings

In 2016, the U.S. released details of Saudi holdings of American debt for the first time. The numbers had been secret for four decades, part of a deal whereby the U.S. would buy Saudi oil and provide it with military aid and the kingdom would plow petrodollars into Treasuries to finance U.S. spending. The grand total of Saudi holdings in 2016? $117 billion, ranking Saudi Arabia among the top 12 foreign holders of U.S. bonds. Some analysts have speculated that it might hold even more indirectly.

Saudi Arabia could divest its Treasury holdings, and threatened to do just that when it faced pressure over the involvement of its citizens in the Sept. 11, 2001 attacks. But it is far from the biggest direct investor, limiting the impact. China and Japan hold over $1 trillion each of U.S. Treasuries, which are classed among the safest investments on Earth.

“The most powerful weapon Saudi has is oil and its investments,” said Fawaz Gerges, a professor of international relations at the London School of Economics. “I doubt Saudi will decrease the production of oil to the world economy because it will hurt itself, and I doubt that Saudi will withdraw its investments.”

3. Regional Rethink

Trump is counting on America’s strategic alliance with Saudi Arabia as he ramps up pressure on Iran following his decision to ditch the 2015 nuclear deal. The two allies do have some strategic differences -- Trump for example has demanded the Saudis pay more towards securing the Middle East, home to several U.S. military bases -- but ties are better than they were under the Obama administration.

Turki Al Dakhil, who heads the Saudi state-owned Arabiya news network, wrote on Sunday that if pushed, the Sunni Muslim monarchy could rethink its regional relationships, going as far as patching up differences with Shiite Iran and its Lebanese proxy Hezbollah.

Yet that would mark a seismic shift in regional policy and analysts say it’s extremely unlikely. Saudi Arabia has spent billions of dollars pushing back against what it says is growing Iranian influence in Yemen -- where a more than three-year Saudi-led offensive has contributed to the country’s descent into humanitarian disaster -- as well as Iraq, Syria and Lebanon.

“Saudi is unlikely to take any retaliatory steps,” said Gerges. It’s “waging battles on multiple fronts against Iran in the region and needs American and British support not just in military and arms but also in terms of the security umbrella. The Saudis would be left on their own.”

UNITED STATES

1. Cut Arms Sales

Trump has said it would be “foolish” to cancel arms deals over the Khashoggi case and that any measures taken should not jeopardize Saudi weapons contracts with the likes of Boeing Co., Lockheed Martin Corp. and Raytheon Co., which could put jobs at risk. If the U.S. abandoned what he estimated as some $110 billion in arms sales to the kingdom, the Saudis would turn to Russia and China instead, he said.

The president must also contend with the Senate, however, where some are urging a block on future arms sales to the kingdom. Analysts said military hardware deals could face growing scrutiny from Congress, as could U.S. support for the war in Yemen.

Though the Saudis can take their money elsewhere, Ian Bremmer, president of the Eurasia Group consultancy, said they’d want U.S. weapons as that would keep their respective systems integrated.

“With the U.S. as the world’s largest oil producer, the relationship is even more imbalanced than it was before,” Bremmer said in an email. “There’s not much the Americans need from the Saudis. The reverse is not true.”

2. Investments

The Khashoggi controversy has overshadowed a major business conference planned to start Oct. 23 in Riyadh. Several global executives have pulled out of the three-day Future Investment Initiative.

Even if the Trump administration responds with restraint, U.S. and European companies fearing reputational damage may feel compelled to shelve business plans pending the outcome of investigations. Most executives have not spoken out about Khashoggi, but a handful have.

British billionaire Richard Branson halted talks for the Saudi sovereign wealth fund to invest in a Virgin Group space venture.

“What has reportedly happened in Turkey around the disappearance of journalist Jamal Khashoggi, if proved true, would clearly change the ability of any of us in the West to do business with the Saudi government,” he said last week.

3. Political or Economic Sanctions

Economic sanctions, ejecting diplomats and reducing diplomatic relations could be on the table if top officials in Riyadh are found to be linked to Khashoggi’s demise, though proof could be difficult to establish.

On Wednesday, a bipartisan group of U.S. senators invoked the Global Magnitsky Act of 2016, triggering a human rights probe that could result in sanctions against Saudi officials and entities. Analysts said those found to be involved could have assets in the U.S. frozen.

“It is striking how senators who have viewed classified material appear to be the most hardline in their calls for holding Saudi Arabia accountable for Khashoggi’s disappearance,” said Kristian Ulrichsen, Middle East fellow at Rice University’s Baker Institute for Public Policy.

To contact the reporters on this story: Lin Noueihed in Cairo at lnoueihed@bloomberg.net;Zainab Fattah in Dubai at zfattah@bloomberg.net;Anthony DiPaola in Dubai at adipaola@bloomberg.net;Mark Niquette in Columbus at mniquette@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Mark Williams

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