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Saudi Arabia hinted at a U.S. oil embargo. It’s not 1973.

- October 16, 2018
Saudi Arabia’s King Salman, right, meets Oct. 16 in Riyadh with Secretary of State Mike Pompeo, who arrived in the Saudi capital for talks on missing journalist Jamal Khashoggi. (Leah Mills/Pool/AFP/Getty Images)

CNN reports that the Saudis are preparing to admit some knowledge of the suspected death of Jamal Khashoggi. Pressure is mounting on the Trump administration to impose sanctions on the Saudis. How much does the United States need to worry about the Saudi response?

The Saudi government issued a strong statement Sunday that “if it receives any action, it will respond with greater action.” Some prominent voices in Saudi Arabia are going further, calling for actions in the oil market against the United States.

Khashoggi, a Saudi dissident living in exile in the United States, disappeared after entering a Saudi consulate in Turkey. Saudi officials initially denied involvement but few experts believed them. Last week, 11 Republicans and 11 Democrats on the Senate Foreign Relations Committee signed a bipartisan letter, using the Global Magnitsky Act, to advise the Trump administration to sanction Saudi officials.

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In response, Turki Aldakhil, general manager of the Saudi-owned Al Arabiya news channel, wrote an aggressive op-ed on Sunday. He argued that if the United States imposes sanctions, “it will stab its own economy to death.” Specifically, he claimed that Saudi Arabia would cut oil production and raise the price of a barrel of oil to “$100, or $200, or even double that figure.” He also implied that Saudi Arabia might price its oil in the Chinese yuan or other currency, and move away from the dollar.

But is an oil crisis in 2018 a viable threat?

This evokes memories of the 1973 oil crisis, when a group of Middle East states refused oil sales to the United States. Gasoline shortages and higher prices followed. But Saudi Arabia’s bark is worse than its bite. Here’s why.

Most people misunderstand the events of 1973. Price controls imposed by the Nixon administration actually created the gasoline shortages — the Saudi oil embargo decreased world oil production by just 2 to 4 percent, and only for a few months.

Even more importantly, a lot has changed since 1973. Back then, the oil market functioned mostly on long-term contracts. Today’s more flexible global oil system mostly uses spot markets — meaning a buyer can easily find oil from another country. So the United States could replace its imports from Saudi Arabia relatively easily with imports from elsewhere.

The United States does not even import much oil from Saudi Arabia. It currently produces domestically more than half the oil it consumes. And its biggest foreign oil supplier, by far, is Canada. Of course, getting Canada’s help with oil might be harder after the Trump administration recently offended Canada by declaring its steel and aluminum a U.S. national security threat.

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The global market alone could probably adjust smoothly to a Saudi embargo, but there are other safeguards in place. For instance, in 1974, Secretary of State Henry Kissinger helped create the International Energy Agency. Its primary purpose is to redistribute oil in a crisis, ensuring that its members — mostly in Europe and North America — cooperate to share scarce oil.

The United States also has a massive Strategic Petroleum Reserve. It holds three months’ worth of U.S. imports from all countries — and Saudi Arabia represents less than 10 percent of those imports. If needed, the United States could calm market jitters by releasing oil from the reserve.

Saudi Arabia does have some market power

Still, Saudi Arabia could drive up the world price of oil in the short to medium term. It would have to restrict its own total oil production, not just sales to the United States. That could be costly to American consumers, although oil producers in the United States would benefit from higher oil prices.

In the long term, driving up the price of oil is a bad strategy for Saudi Arabia. It encourages other producers, including those in the United States, to produce more. Over time, that brings the price down while simultaneously eating into Saudi Arabia’s market share.

And high or volatile oil prices have another effect: They encourage consumers to consume less oil, by buying hybrid cars or switching to alternative fuels. For those reasons, Saudi Arabia has often argued against higher oil prices at the Organization of Petroleum Exporting Countries (OPEC).

A Saudi production cut or an embargo could also affect market psychology, driving up prices as buyers fear supply constraints. So far, however, global oil markets remain calm. After Saudi Arabia’s statement and Turki Aldakhil’s op-ed were published, oil prices did tick upward Monday, but by less than 1 percent.

Market psychology also adjusts quickly to events. Even during the 1991 Gulf War, when prices spiked in anticipation of the U.S. war with Iraq over Kuwait, they quickly settled down. Within a few weeks, oil prices returned to their pre-crisis levels.

Overall, the United States has little to fear from Saudi Arabia’s oil policies

And while Saudi Arabia could take other steps, like halting arms purchases, experts say this would inflict only minor damage on the U.S. economy. Indeed, with its ongoing war in Yemen, the Saudis needs those weapons more than the United States needs to sell them.

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That is true of the broader relationship. The United States is Saudi Arabia’s guarantor of military security, as it proved with Operation Desert Shield in 1990. The Saudis have no viable alternative for that protection — neither Russia nor China is yet capable. The United States could let Riyadh know, in blunt terms, that protection is conditional on Saudi behavior.

The Trump administration can afford to express its disapproval of recent Saudi actions — and not just on the Khashoggi disappearance. Saudi Arabia’s military incursion in Yemen’s civil war and reckless behavior toward Qatar and others are cause for global concern.

But research shows that the Trump administration has reason to be careful not to go too far. The United States could live without Saudi Arabia, but it would be costly. A positive relationship between Washington and Riyadh can help minimize interstate conflict in the Middle East — and keep a lid on volatility in global oil markets. A positive relationship would be easier, of course, if the Trump administration nominated an ambassador to Saudi Arabia.

Jeff Colgan, an expert on oil politics, is the Richard Holbrooke Associate Professor of Political Science and International and Public Affairs at Brown University. He is author of “Petro-Aggression: When Oil Causes War.” Follow him@JeffDColgan