The US-Saudi deal – A strategic win or a deal with the devil?
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The war in Gaza initially halted negotiations around a US-Saudi defence pact and the process of SA normalising ties with Israel. But bilateral talks between the US and Saudis have continued behind the scenes, and a deal is said to be near.
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Saudi Arabia is the second largest oil producer and the second largest weapons importer in the world. Located in the strategically important Gulf region, it’s a desired partner for both the US and China, and a central player in power politics.
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The unprecedented deal is likely to entail US security guarantees and support for Saudi civil nuclear program in exchange for limiting investments from China. The deal is unlikely to involve Israel which raises a question: who’s the real winner?
Saudi Arabia, the leading Gulf oil-exporter and a newly joined member of the BRICS+, is the key middle power to watch in the new era. In this note, we explain why Saudi Arabia is such an important player. We also discuss what the deal-in-the-making with the US could entail and what its implications could be for the war in Gaza, as well as its potential consequences for regional security and for the global balance of power.
It’s the Oil, stupid
Saudi Arabia remains the second largest oil producer in the world after the US. Its share of OPEC oil production is just below 34%, and the majority of OPEC spare production capacity lies in Saudi Arabia. China is nowadays Saudi Arabia’s main trading partner, and that is solely thanks to the energy trade. Non-oil exports to China have not grown in recent years, while imports have steadily increased. Trade with the US, on the other hand, is clearly on decline, again mostly due to less hydrocarbons exports.
But even if the US is no longer reliant on Saudi oil, it still cares about the country’s role in the global oil market. During his tenure, US President Joe Biden has several times emphasized the importance of gasoline prices to Americans. In the early days of the pandemic, President Biden pleaded to the kingdom to increase production, but the Saudis refused. The recent tensions between Israel and Iran that have raised alarm of a regional war, are a concern for the Americans not only because they undermine peace in the region, but also because they jeopardize the most important route for seaborne energy trade, risking a substantial increase in oil and fuel prices globally.
For the Saudis, oil still accounts for close to 70% of government revenues. Most of its oil is being sold to Asia and transported through the Strait of Hormuz, the key logistical chokepoint that Iran has threatened to close ‘if an enemy came to disrupt them’. Based on an IEA estimate, if all traffic via the Strait would stop, only around 20% of the regional oil exports could be rerouted, meaning that prices would spike. The world economy would face yet another energy shock more severe than the one following Russia’s invasion of Ukraine. American voters would face higher gasoline prices potentially during the most heated phase of the US presidential campaigns. Unsurprisingly then, both the US and Saudi Arabia have huge incentives to de-escalate regional tensions.
Author
Danske Research Team
Danske Bank A/S
Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.
