Saudi Arabia has a number of tools it can use to retaliate against any potential US sanctions related to the disappearance of Jamal Khashoggi, the Saudi journalist who went missing in Turkey this month. The kingdom's response could include halting oil exports, selling off its US treasury holdings and turning to new arms suppliers.
As the world’s largest oil exporter and second-largest crude supplier to the US after Canada, Saudi Arabia can roil oil markets if it were to halt its sale of crude and products to Washington. This would be the first such measure since the 1973 oil embargo.
The Saudi authorities “have at their disposal tens of options [to retaliate],” said Abdulkhaleq Abdulla, a political science professor at the UAE University. “Some are not to the liking of the American or the world economy: investment is one but there is the mighty oil weapon.”
Tensions between Washington and Riyadh over the disappearance of Mr Khashoggi on October 2 after his visit to the Saudi consulate in Istanbul increased over the past week. US President Donald Trump told CBS on Saturday he would inflict "severe punishment" against Saudi Arabia if it was found to be behind Mr Khashoggi's disappearance. The kingdom rebutted on Sunday, saying it would "respond with greater action" given its "influential role in the global economy", the state-run Saudi Press Agency reported, citing an unnamed Saudi official.
Oil prices have already risen in response to rhetoric, with benchmark Brent trading above the $80-mark after climbing to a three-year high of $86 per barrel last week.
Crude prices have surged over the last few months after the US decided to re-impose sanctions on Iran, a major oil producer, leaving Saudi-led Opec and members of a global oil pact with the task to replace lost Iranian barrels as countries boycott Tehran for fear of falling afoul of Washington.
Saudi Arabia, which pumps 12.9 per cent of the world’s oil, is the only Opec member with substantial spare oil capacity that could be used to meet market demand. The kingdom could tame oil prices if they were to hit $100 per barrel as some analysts have forecast with the onset of US sanctions against Iran on November 4.
Mr Trump's comments led to a market sell-off on the kingdom's Tadawul benchmark index this week. After shedding about 7 per cent on Sunday, the market rebounded at the end of trading the following day up 4.1 per cent. The uncertainty regarding Mr Khashoggi's fate has also led to a number of business executives like Virgin's Richard Branson and JP Morgan's Jamie Dimon as well as media partners withdrawing from an upcoming investment conference in Riyadh this month.
Possible US sanctions against Saudi Arabia could “unleash a wild bull [run] on oil prices,” said Iman Nasseri, managing director, Middle East at London-based Facts Global Energy.
“Should they decide to cut production by half a million or 1 million barrels a day, the market will be extremely tight and we should expect prices of $100+ easily.”
Any possible Saudi output cut would come as a blow to Mr Trump’s efforts to rein in prices ahead of his country’s mid-term elections in November. The possible curtailment of production by Saudi Arabia, which has in recent months boosted its exports to the US, partly in response to Mr Trump’s calls to slow the oil price rally will come amid declining supply from Iran.
Giovanni Staunovo, commodity analyst at Swiss bank UBS noted the market was pricing in some risk premium with traders closely watching Saudi crude exports until tensions between the US and Riyadh diffuse.
“Oil was not part of Saudi politics in recent years,” he said. “Considering that spare capacity is already extremely low, the oil market cannot afford another ‘accident’.”
The repercussions from potential US sanctions against Saudi Arabia will reverberate through the global economy as higher oil prices could stoke inflation.
“Naturally as a result of any sanctions inflation will rise in [the US] but given global economics this contagion in terms of impacts may spread to other countries who have renegotiated their tariffs and other trade issues with [the US],” said Theodore Karasik, senior advisor at Washington-based consultancy Gulf State Analytics.
Besides the oil weapon, Saudi Arabia is the tenth largest holder of US treasury securities as of July this year, with $166.8 billion, according to figures from the US Treasury Department.
The kingdom “is in much the same position as China is or perhaps Japan back in the 1980s when the ownership of US treasuries was used as a tool in terms of foreign policy and relationships,” said Mr Karasik. “Selling US treasuries coupled with adjustments in the oil market can create an impact on the US stock market. However the problem is that this may lead to a global flu.”
Saudi Arabia also has vast investments in the US. The Public Investment Fund, the Saudi sovereign wealth fund, has made 34 investments in the US, including a $3.5 billion stake in ride hailing firm Uber, a five per cent stake in car maker Tesla, and a $1bn investment in Tesla rival Lucid Motors.
Last year, US private equity firm Blackstone and PIF agreed to set up a $40bn vehicle to invest in infrastructure projects, mainly in the US.
If the situation escalates Saudi companies could also shun American firms and markets. There are already calls, most notably on Monday by Bahrain's top diplomat and UAE businessmen to boycott US companies like Uber whose chief executive pulled out of the upcoming Saudi investment conference. Amid such heightened times, Saudi companies like Prince Alwaleed's Kingdom Holding, which has stakes in Citi, Uber and Twitter could enter the fray and divest.
Another potential impact could come from Saudi Arabia’s arms purchases.
Last year Saudi Arabia was the third largest military spender in the world after the US and China, accounting for 4 per cent of global military expenditure, according to figures from the Stockholm International Peace Research Institute. The kingdom sources a big chunk of its military purchases from the US, which clinched a $350bn arms with Riyadh in May last year.