America and Saudi Arabia are locked in a bitter battle over oil. The stakes are huge

Riyadh has been caught off guard by the thirst for revenge of US politicians. And Saudi officials are hinting at a return that could have a major impact on financial markets and the real economy, including dumping US debt.

Neither side is trying to hide the tension. After a senior Saudi official suggested the kingdom has decided to be the more mature party, a senior White House official responded: “It’s not like high school romance here.”

What happens next is critical.

If this decades-old relationship becomes a complete rupture, the consequences could be dire for the world economy, not to mention international security.

“This is a new low. We’ve seen the deterioration of US-Arab relations for years, but this is the worst it’s ever been,” said Clayton Allen, director of the Eurasia Group.

So much for that secret deal

The feud is tied to one of the biggest pain points among voters in the Biden era: inflation and high gas prices.

After trying and failing to convince OPEC to increase oil production, President Joe Biden rolled back his human rights record to make Saudi Arabia a “pariah” in the 2020 campaign. Biden visited Saudi Arabia this summer and punched Prince Mohammed bin Salman.

US officials believed they had reached a secret deal with Saudi Arabia to finally increase oil supplies until the end of the year, The New York Times reported this week.

They were wrong.

OPEC and its allies, known as OPEC+, responded by increasing oil production by just 100,000 barrels per day, the smallest increase in its history. The move was seen as a “slap” by the Biden administration.

What came next was worse.

In early October, OPEC+ announced plans to cut oil production by 2 million barrels per day, briefly boosting oil and gasoline prices at a time of high inflation and angering US politicians.

“Neither side seems to understand each other,” Allen said. “Riyadh underestimated the severity of the US reaction. And the US assumed we had an unspoken agreement.”

International Energy Agency Executive Director Fatih Birol called it “unprecedented” and “unfortunate” in an interview with CNN International on Thursday.

“When the global economy was on the brink of a global recession, they decided to raise prices,” said Birol.

Saudi official accuses US of manipulating markets

Tensions have not subsided, and officials from both sides have sharpened their criticism of each other in recent days. In a telling episode, a top Saudi minister went From defending Biden’s energy strategy to crushing it.

At an OPEC+ press conference in early October, Saudi Energy Minister Prince Abdulaziz bin Salman reportedly praised Biden’s decision to release an unprecedented amount of emergency oil reserves from the Strategic Petroleum Reserve.

“I wouldn’t call it a distortion. Actually, it was done at the right time,” Prince Abdulaziz told reporters. “If that didn’t happen, I’m sure things could be different than they are today.”

Fast forward three weeks, and that Saudi minister sang a very different tune.

“People are running out of emergency stocks, they’ve run out, they’ve been used as a mechanism to manipulate markets while their deeper purpose was to ease supply shortages,” Prince Abdulaziz said at a conference in Saudi Arabia this week. “However, it is my deep duty to make it clear to the world that the loss of emergency stock may be painful in the coming months.”

The criticism is noteworthy, especially considering that OPEC openly manipulates the markets in many ways by holding down supply to hold down prices.

OPEC is not popular

The danger is that tension turns into a debilitating cycle of revenge global economic stability, or current economic stability.

Lawmakers on both sides of the aisle have stepped up calls to pass the NOPEC (Oil Producing and Exporting Cartels) legislation, which would give the Justice Department the power to go after OPEC nations on anti-competitive grounds. While NOPEC is not new, it seems more possible now than at any time in recent memory. The Eurasia Group has a 30% chance of NOPEC going into effect and a 45% chance of a watered-down version of the bill.

“You can’t overstate how upset a large number of lawmakers are,” Allen said.

Lawmakers aren’t just angry, they realize that OPEC is not endearing itself to voters.

“This is familiar. American sentiment is anti-Saudi. This has domestic political utility for American policymakers today. That’s where we are now,” said Karen Young, senior research fellow at Columbia University’s Center for Global Energy Policy. “NOPEC would be harder to veto than in the past.”

Can Saudi Arabia Dump US Debt?

Saudi Arabia may respond to Washington’s sanctions with drastic steps, further escalating the conflict.

Saudi officials have privately warned that the kingdom could sell U.S. Treasury bonds if Congress passes NOPEC, The Wall Street Journal reported this week, citing people familiar with the matter.

At the very least, dumping US debt would create uncertainty in markets at an already risky time. A fire sale would raise Treasury rates, destabilizing markets and raising borrowing costs for households and businesses.

And of course it would damage Saudi Arabia’s properties in a fire sale.

Fetterman has criticized Big Oil for blowing up profits and failing to invest in new supply
Saudi Arabia owes the US $119 billion, according to Treasury Department data, and that’s why. world’s 16th largest holder of Treasuries.

Another risk is that Saudi Arabia, the de facto leader of OPEC+, may withdraw more supplies from global oil markets or at least refuse to respond to future price increases as the West continues to crack down on Russia.

Further cuts to OPEC supply would raise gasoline prices and worsen inflation, increasing the risks of an already recession.

All of which explains why a complete breakdown in relations between the United States and Saudi Arabia may be the last thing the fragile economy needs right now.