Why US-Saudi relations might, but likely won’t, break down over oil cuts

The US and Saudi Arabia’s long and unlikely alliance, based on their oil and security interests, has been put on shaky ground in recent years
Yet, while the Saudi-led oil cartel’s latest decision to cut output has sparked a spat with the US, the odds are this too will be swept under the carpet

David Dodwell

Published: 11:00pm, 16 Oct 2022

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One of the world’s longest-standing, and least probable, alliances – that between the US and Saudi Arabia – has been put to the test over the past couple of weeks. It is anyone’s guess whether differences will be resolved, but the ramifications of diplomatic failure could be serious and pervasive.

As British statesman Lord Palmerston once said: “We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.”

The United States and Saudi Arabia have for 77 years – since president Franklin D. Roosevelt met king Abdul Aziz Al Saud on the USS Quincy in Suez – put aside huge differences in culture, religion and tradition to protect their interests: for the Americans, colossal oil interests in the region, and for the Saudis, a security umbrella in the context of toxic regional conflict.

But as the world changes and interests shift, so the foundations for this arrangement have over the past two decades begun to falter. Recent developments have raised serious questions over the future of the alliance. The countries may no longer be “eternal allies”, and it is uncertain how such a change in relations will affect the rest of us.

The spat that brought relations to boiling point almost seems trivial: it is over a decision at the October 5 meeting of Opec+ to cut oil output by around 2 million barrels a day – or 2 per cent of total global production. Opec+, set up in 2016, comprises the Organisation of Petroleum Exporting Countries, the 13 major oil producers led by Saudi Arabia that account for about 80 per cent of the world’s proven oil reserves, and a further 10 oil producers, headed by Russia, that account for 9.7 per cent of reserves.

The decision to cut output came after weeks of furious shuttle diplomacy between Washington and Riyadh, with the Biden administration pleading with Opec+ not to cut output, and arguing that such a move – in the middle of a global energy crisis triggered by Russia’s invasion of Ukraine – would aggravate inflation, and add to the danger of a deep global recession.

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The decision by Opec+ members to rebuff US pressure speaks volumes; a willingness to face down Washington implies a decline in US hegemonic power. Rebutting US complaints that the decision was “unhelpful and unwise”, Saudi officials have responded that it was based “purely on economic considerations”.

In response to US President Joe Biden’s threat of “consequences”, Saudis have indicated that they have other friends and allies, not least Russia. They are asserting their own interests and expecting the US to recognise and respect them.

While it may seem self-evident to Western powers that high oil prices would aggravate inflation and harm the global economy, the view among oil exporters is dramatically different.

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Climate change and the necessary shift away from fossil fuel consumption leaves them sitting on rapidly devaluing assets. If by 2050 demand for oil is set to decline sharply, then their self-interest is to maximise revenues while they can. Cheap petrol for affluent US car drivers is not their priority.

It is perhaps surprising to learn that Saudi Arabia needs oil prices of over US$79.2o per barrel to cover its costs, and that while oil revenues for the first half of 2022 are 74 per cent up from the first half of 2021, this will generate only its first fiscal surplus in about a decade.

Also, while Nigeria is earning much more for its exported oil, much of this seeming bonanza has to be spent on expensive gas imports. Iraq’s oil revenues may have doubled, but there is no effective government in place to authorise a federal budget. We are perhaps not the only ones facing existential challenges.

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Trust on both sides that the US and Saudi are truly committed to each other’s interests has been eroding for almost two decades, lurching sharply downhill with the US suspicion of direct Saudi support for a number of the hijackers responsible for the 9/11 attacks.

The rise of Crown Prince Mohammed bin Salman, widely known as MBS, has undoubtedly contributed to the collapse of trust, in particular because of his perceived role in the murder of journalist Jamil Khashoggi in Istanbul in 2018, and of a human rights record such that life remains difficult for Saudi women.

The chemistry between MBS and Biden has also been appalling, in contrast to the crown prince’s cosy affinity with former president Donald Trump and his son-in-law Jared Kushner. Not only did Biden during his campaign promise to make Saudi Arabia a “pariah”, but once in office he downgraded the US military presence in Iraq, pulled military installations out of the Gulf, withheld missiles for the Saudi war in Yemen, and worked to revive the Iran nuclear deal, and refused to communicate with MBS. Inevitably, the Saudis have come to question the US commitment to their security, and reflect on their dependence on US arms.

As one commentator noted, “neither the UAE nor Saudi Arabia has any appetite for helping the Biden administration with gasoline prices for the upcoming US election”.

Given how starkly different US and Saudi societies are, the longevity of their 77-year alliance is proof that when interests are strong enough, all manner of differences can be swept under the carpet. The odds are this recent spat may be resolved too. The cynical reality is that the US still shares strong security interests in the Gulf region, and Saudi Arabia still needs US arms.

David Dodwell is CEO of the trade policy and international relations consultancy Strategic Access, focused on developments and challenges facing the Asia-Pacific over the past four decades