The historic US-Saudi relationship cannot bounce back

“Our allies in the Gulf no longer honor the deal that was made decades ago even though we still have a big physical military presence in the Gulf, bigger than ever before, and we keep giving Gulf nations a pass on human rights violations. Too often our Middle East allies act in conflict with our security interests.”

– Chairman of the Subcommittee on Near East, South Asia, Central Asia, and Counterterrorism of Committee on Foreign Relations in the US Senate, Senator Chris Murphy, July 2022.

The war in Ukraine and the intensification of Great Power competition have cast a shadow over global markets and prompted some surprising changes in the foreign policies of states. The Kingdom of Saudi Arabia is among those countries, and its relationship with the US is currently passing through a very critical period. Today, Riyadh seeks a more conditional relationship with Washington, one that takes into account converging Saudi interests with non-western states.

There are many reasons why the kingdom is adopting a more pragmatic foreign policy. One of the key factors is energy relations, particularly as Riyadh seeks to preserve and grow its mutual interests with other major powers, such as China and Russia.

The birth of the petrodollar

The “Nixon Shock” in 1971 marked a shift in economic policy for the US, which sought to prioritize its own economic growth and stability over that of other states. This led to the end of the Bretton Woods Agreement and the convertibility of US dollars into gold. Washington moved instead to establish a new system in which the US dollar was pegged to a commodity with global demand in order to maintain its position as the world’s dominant reserve currency.

In 1974, the petrodollar agreement was struck, in which Saudi Arabia agreed to sell oil exclusively in US dollars in exchange for US military, security, and economic development assistance. The deal effectively tied the value of the US dollar to global demand for oil and ensured its continued dominance as the world’s primary reserve currency.

US dependence on Saudi oil

After the petrodollar agreement, Saudi oil exports to the US surged, making Saudi Arabia’s security all the more critical for Washington. By 1991, the US imported 1.7 million barrels per day (bpd) of Saudi oil, a sharp increase from 438,000 bpd in 1974.

This represented 29.5 percent of the total US oil imports in 1991, and 26.4 percent of the total Saudi oil exports – further emphasizing for Washington the importance of maintaining Saudi Arabia’s security and stability. But the staggering dependence on foreign – and Saudi – oil imports also created political blowback in the US, which launched plans to reduce its imports and ramp up domestic oil production.

This was motivated by several factors, including the potential negative impact of any energy market shocks – such as the decline in Iranian oil exports after the 1979 Islamic Revolution – on the US economy, the potential impact of geopolitical disputes on West Asian oil exports, and technological advances that facilitated increased oil production in the US.

Over the following decades, Washington was able to successfully reduce its oil imports from Saudi Arabia: In 2020, the US only imported 356,000 bpd of Saudi oil, which accounted for just 6 percent of all US oil imports and 4.8 percent of all Saudi oil exports.

Changing oil market dynamics

In this process, Saudi Arabia lost much of its value as a market for the Americans, and the US is no longer dependent on Saudi Arabia as a significant oil source. Furthermore, the US’ significant increase in shale oil production created a major new competitor in the energy market, which raised concerns in Riyadh about its declining influence as a strategic supplier of oil to the world.

To diversify its oil export options, Saudi Arabia began turning eastward to China, the world’s largest oil importer. Over the past two decades, Saudi Arabia has gradually become China’s primary source of oil, with Chinese oil imports from Saudi Arabia increasing by 16.3 percent between 1994 and 2005, reaching 1.75 million bpd in 2022.

Strengthening economic and diplomatic relations with Beijing has become a necessity for Riyadh, which derives 70 percent of its export revenues from oil. The same applies to China, a global power that actively seeks to diversify its oil sources to prevent reliance on a single country.

In recent years, Russia has also emerged as an essential oil industry partner for the Saudis. The creation of OPEC+ was a response to falling crude oil prices caused partly by the substantial increase in US shale oil production since 2011.

Russia and Saudi Arabia are the world’s top oil exporters, and their cooperation has proven vital for controlling prices by coordinating the quantities of oil pumped into the markets. This led to the 2016 expansion of OPEC – which is controlled by Saudi Arabia – and the establishment of OPEC+ to include Russia.

OPEC+ cooperation after price war

After the negative consequences of the 2020 price war among key oil producers, both Riyadh and Moscow recognized the importance of cooperation to safeguard their energy interests.

In March of that year, OPEC+ had convened in Vienna to address the decline in oil demand caused by the COVID-19 pandemic. At the meeting, Saudi Arabia, the organization’s largest producer, proposed reducing production to stabilize prices at a reasonable, higher level, while Russia, the largest non-OPEC producer in OPEC +, opposed the cuts and moved to increase its oil production.

In response to Moscow’s move, the Saudis increased their own production and announced unexpected cuts in oil prices ranging from $6 and $8 per barrel for importers in Europe, Asia, and the US. This announcement triggered a sharp drop in oil prices, with Brent crude plummeting by 30 percent – marking the biggest decline since the 1991 Gulf War – while the WTI benchmark fell by 20 percent.

On 9 March, global stock markets experienced significant losses, and the Russian ruble declined by 7 percent against the US dollar, reaching its lowest level in four years.

The oil price war lasted for approximately a month before OPEC+ members reached a new agreement in April that included historic oil production cuts of 10 million bpd. This experience marked the beginning of uninterrupted energy cooperation between Moscow and Riyadh.

Saudi Arabia: prioritizing its interests

Since the outbreak of the Ukraine war in February 2022, the US has pressured its allies to comply with western sanctions against Russia. Washington has sought to persuade OPEC leader Riyadh to increase oil production to curb the price hike caused by the conflict, but so far, the Saudis have refused these demands.

This has led to heightened US-Saudi tensions, which prompted US President Joe Biden’s unsuccessful visit to Jeddah in July 2022 to try to convince Crown Prince Mohammed bin Salman (MbS) to raise oil production levels.

Furthermore, western attempts to establish a price ceiling on Russian oil served only to alarm Saudi Arabia, as it would open the door for customers to impose oil prices on sellers. Despite aggressive attempts to undermine Russia’s energy sector, the US-European western alliance has been unable to do so, and in fact, led to an increase in Russian energy exports to Europe, China, and India last year.

A number of countries, including Saudi Arabia, have helped buoy Russian energy exports by purchasing Russian oil and re-exporting it to needy European markets – or using it locally to boost their export revenues. As Russia is the second-largest exporter of oil worldwide, its isolation from the markets would otherwise have significant repercussions, especially for oil-exporting states.

The war in Ukraine demonstrated that Riyadh is prepared to confront Washington when it feels its energy interests are under threat. Today, the US is no longer an energy partner for Saudi Arabia, but rather a competitor. In its stead, Beijing and Moscow have risen to become essential partners for Riyadh, and the mutual energy interests are a major factor behind MbS’ efforts to diversify his country’s foreign policy options.

The US and Saudi Arabia: No longer energy allies

Since the Cold War era began, oil has been a key pillar of the Russian (and former Soviet) economy. It has long been a US priority to be able to influence prices as a pressure tool against Moscow. Since Saudi Arabia is considered an oil superpower, Washington’s cooperation with Riyadh – despite its own dramatically reduced Saudi oil imports – is at the heart of US economic strategies to counter Russia.

For example, in the mid-eighties, during the Soviet invasion of Afghanistan, the US asked the Saudis to flood oil markets in order to lower prices and undermine the oil revenue-reliant USSR. In 1986, oil prices dropped by two-thirds, from $30 per barrel to nearly $10 per barrel, ultimately crippling the Soviet economy and its geopolitical reach.

But attitudes have sharply altered during the intervening 37 years. Saudi Arabia now views the US as an energy market competitor due to Washington’s increased shale oil production and disinterest in boosting oil imports.

Between 2010 and 2021, US shale oil production grew from approximately 0.59 million bpd to 9.06 million bpd. Riyadh’s response to this new geo-economic development was to raise oil production in 2016, with the aim of lowering prices to undercut the US shale industry, which operates at significantly higher costs.

The Saudis indeed fear a declining role as a strategic supplier of global oil, in large part due to expanded US shale production and energy self-sufficiency. This has driven the Saudis to try and reimpose their oil superiority by lowering prices to undercut competitors with higher production costs – despite the short-term domestic damage caused by increased Saudi oil production.

To this day, Saudi Arabia continues to present an obstacle to US energy interests, and has instead found most common ground with Washington’s main adversaries – Russia, China, Iran – with whom Riyadh’s energy interests intersect.

Contrary to expectations since the outbreak of the Ukraine war in February 2022, all US efforts to persuade Riyadh to flood global oil markets have failed, and the Russians have managed to maintain both their exports and their economy. It has become manifestly clear to Washington’s decision-makers that Saudi Arabia today is not the Saudi Arabia of 1985, willing to undermine its own revenues and energy interests in order to serve a US geopolitical agenda.

Discussions in Washington today have likewise turned to the feasibility of maintaining the US commitment to Saudi Arabia’s security, particularly since Riyadh neither provides Americans with energy nor follows its political diktats.

Some believe that the US’ role of acting as a security guarantor in the Persian Gulf merely serves Beijing’s interests by securing China’s main energy sources. Yet others argue that a US military withdrawal from the Persian Gulf will create a vacuum filled by Beijing, which will keenly seek to ensure its own energy security.

The one point of clarity, however, is that US-Saudi energy interests are no longer synergistic and that Riyadh’s interests line up far more closely with those of Beijing and Moscow. This remains a key factor driving Saudi Arabia’s foreign policy and economic diversification today.

What remains to be seen is how far the Saudis – deeply and historically bound to western interests – will be willing to challenge the US’ regional hegemony as their goals diverge and Riyadh finds common cause with Washington’s rivals.