[Global Issue+] US-Saudi 77-Year Alliance Faces Greatest Crisis... Is the 'Petro Dollar' Shaking?

Saudi Arabia "US Requests One-Month Delay in Production Cuts"... Midterm Election Issue
US "No Market Conditions for Cuts"... Denies Allegations of Supporting Russia

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Hyunwoo Lee] Saudi Arabia and the United States have recently been engaged in diplomatic friction over the OPEC+ decision to cut oil production. Saudi Arabia, classified as the most pro-American country in the Middle East since 1945, rejected the U.S. government's request to delay the production cut, prompting the U.S. to consider reevaluating its relationship with Saudi Arabia, thereby intensifying the diplomatic dispute.

In the U.S., the Saudi government is being criticized for indirectly supporting Russia, which invaded Ukraine, through the production cuts. Conversely, Saudi Arabia claims that the decision is purely an economic measure due to concerns about an economic downturn and argues that the U.S. Democratic Party and the Biden administration want to delay the cuts for political reasons ahead of next month's midterm elections.

While the bilateral dispute is expected to reach some form of agreement around the U.S. midterm elections in the short term, the deepening rift is unlikely to be easily bridged. Saudi Arabia, which already exports more than 60% of its total oil to China, is increasingly emphasizing its ties with China and Russia. Consequently, there are even forecasts of significant changes to the 'Petro-Dollar' system, which has symbolized the economic ties between the U.S. and Saudi Arabia.

Saudi Arabia: "Purely Economic Decision" VS U.S.: "Anger Over Saudi Ingratitude"

[Image source=AP Yonhap News]

According to the Associated Press on the 13th (local time), the Saudi Ministry of Foreign Affairs issued a statement saying, "The U.S. government requested a one-month delay in the OPEC+ production cut decision. However, after continuous consultations with the U.S. administration and based on all economic analyses, we determined that the delay could lead to negative economic outcomes." They further explained, "This production cut decision was not based on a unilateral decision by a single country but was unanimously agreed upon by all member countries and is purely based on economic considerations."

The unusual direct disclosure by the Saudi Foreign Ministry of the U.S. government's request to delay the cut is interpreted as an effort to emphasize the view that the Biden administration requested the delay for political reasons ahead of the midterm elections on November 8. Although the Saudi Foreign Ministry did not explicitly mention the U.S. midterm elections in the statement, the public request to postpone the cut until a month after the elections reveals their perception that the Biden administration's demand is politically motivated.

The Biden administration has strongly opposed this. John Kirby, White House National Security Council (NSC) Coordinator for Strategic Communications, criticized Saudi Arabia at a press conference, saying, "There is currently little market-based reason to implement production cuts. Other OPEC member countries also disagree with Saudi Arabia's decision but have privately told us they felt pressured to support Saudi Arabia's direction."

Within the U.S., there is significant outrage over Saudi Arabia's decision not to expel Russia from OPEC+ and instead indirectly provide financial support to Russia through the production cuts. Criticism of Saudi Arabia's decision has poured in not only from the Biden administration but also from U.S. political circles, with increasing calls to suspend military cooperation. According to The New York Times (NYT), the U.S. Congress is considering a plan to ban arms sales to Saudi Arabia for one year if Saudi Arabia does not reverse the production cut decision.

Ro Khanna, a Democratic congressman from California and a critic, stated, "We provide Saudi Arabia with a lot, including weapons and defense cooperation. They obtain 73% of their weapons from the U.S. Many in Congress are angry about Saudi Arabia's ingratitude."

From Oil Hegemony Cooperation to Major Rivalry

[Image source=Reuters Yonhap News]

While the recent Saudi production cut decision has been the trigger for the diplomatic dispute, evaluations suggest that tensions have deepened since the 2010s. The U.S. has transformed from Saudi Arabia's largest oil importer to its biggest competitor, making it impossible to maintain the cooperative relationship of the past.

According to CNBC, the U.S. daily average imports of Saudi oil last year were 500,000 barrels, down to a quarter of the 2 million barrels average in the 1990s. In contrast, China's daily average imports of Saudi oil last year reached 1.76 million barrels, making China Saudi Arabia's largest oil customer. Since becoming the world's largest oil producer in 2018, the U.S. has become a competitor with Saudi Arabia for the top spot in oil production.

This is quite ironic considering that the U.S. was the first country to discover and actively develop Saudi oil. According to the British BBC, Saudi oil was discovered in 1938, and subsequently, four major U.S. oil companies, including ExxonMobil, formed a consortium called 'Aramco' to develop Saudi oil. In 1980, the Saudi government acquired 100% ownership of Aramco, making it a state-owned enterprise.

In this way, the U.S. formally established a cooperative relationship with the Kingdom of Saudi Arabia in February 1945, just before the end of World War II. For 77 years, Saudi Arabia has been the U.S.'s closest ally in the Middle East. The economic cooperation between the U.S. and Saudi Arabia strengthened further after the 1974 Petro-Dollar agreement, which mandated that all oil market transactions be conducted exclusively in U.S. dollars. Saudi Arabia and Arab League countries still conduct all transactions in dollars. This Petro-Dollar system also enabled sanctions against oil-producing countries like Iran and Russia.

Will Saudi Arabia Play the 'Petro-Yuan' Card? Expansion of China's Influence Expected

[Image source=EPA Yonhap News]

There is high expectation that the current diplomatic dispute between the U.S. and Saudi Arabia will be resolved through negotiations around the U.S. midterm elections. Since the bilateral cooperative relationship still significantly impacts mutual national interests, it is expected to be difficult to completely overturn the relationship that has lasted over 70 years.

According to The Wall Street Journal (WSJ), Saudi Arabia has recently faced increased security concerns over its major oil pipelines after failing to extend a ceasefire agreement with Yemen's Houthi rebels earlier this month. The Houthi rebels, backed by Iran, have launched a large number of Iranian drones threatening the pipelines.

From Saudi Arabia's perspective, which aimed to establish an integrated air defense system with the U.S. and major Arab League countries, the complete suspension of defense cooperation and a ban on arms sales for over a year by the U.S. would create a serious security vacuum. From the U.S. standpoint, given the international issues such as Russia's invasion of Ukraine and China's threat to Taiwan, it is expected to be difficult to decide to sever diplomatic relations with Saudi Arabia, which could destabilize the Middle East.

However, even if the short-term crisis is resolved, concerns remain that the deep-rooted conflicts will intensify over time. There are worries that Saudi Arabia may gradually move away from the Petro-Dollar system, symbolic of economic cooperation with the U.S., and increase the share of Petro-Yuan transactions.

If Saudi Arabia, which currently exports about 6.2 million barrels of oil daily exclusively in dollar settlements, allows yuan payments for exports to China, which account for more than 25% of its total volume, it could have a significant ripple effect. Especially as Saudi Arabia is the leading country in the Arab League in the Middle East, its decision would greatly influence other Middle Eastern oil-producing countries such as the United Arab Emirates (UAE) and Qatar. Consequently, China's influence in Middle Eastern affairs is expected to grow accordingly.