• The US government has responded to an oil production quota cut announced by the OPEC+ grouping of oil exporters by vowing to “re-evaluate” its relationship with Saudi Arabia.
• EIU believes the US response will be carefully calibrated to avoid undermining key areas of bilateral interest—for instance certain types of weaponry supplied to the kingdom may be restricted but only temporarily.
• The bilateral relationship may become increasingly transactional, in an unstable global geopolitical environment, while opposition to Iranian influence will remain a common theme.
• The Saudi riyal’s long-standing peg to the US dollar will remain in place but Saudi Arabia will explore alternatives, including a shift to a reference basket of currencies and a potential sale of oil in currencies other than the dollar.

The OPEC+ grouping of oil exporters—comprising an OPEC bloc led by Saudi Arabia and a non-OPEC bloc led by Russia—agreed in October to cut production quotas and curb international oil supplies. This is likely to keep oil prices high, above US$90/barrel, even as Western interest rates rise and global demand slows. This latest move comes just ahead of the US midterm elections in November, amid a cost-of-living crisis in Europe—largely fuelled by the war in Ukraine and sky-high energy costs—and to the consternation of political leaders in Washington, Brussels and London. Saudi Arabia, and other OPEC members, point to the fact that they are merely acting in their own economic interests by making a pre-emptive policy to put a floor under prices in a volatile market situation.

The administration of the US president, Joe Biden, had been calling for assistance from Gulf partners to help to reduce global energy prices, ease domestic price pressures and deny Russia burgeoning energy sector revenue—all of which incidentally could help the Democratic Party at the upcoming US midterm elections. The latest OPEC+ move and the evident lack of co-operation between Saudi Arabia and the US, together with Saudi Arabia’s unwillingness to condemn Russia’s invasion of Ukraine, have further strained relations between Saudi Arabia and the US.

Saudi Arabia claims OPEC is driven by economic rather than political motives

Although the OPEC+ production cut will support oil prices to the advantage of Russian state finances during the Ukraine war, Saudi Arabia and other oil producers claim that they simply need to put a floor under oil prices. Rather than “siding with Russia” in the Ukraine war, OPEC members claim that they are acting apolitically, in order to ensure budget stability. Saudi Arabia’s Vision 2030 economic development plan requires hundreds of billions of dollars of investment, with the aim of diversifying away from oil production. Renewable energy, housing, healthcare, cultural and tourism projects as well as the building of Neom, a futuristic new city, are all part of the kingdom’s plans. High oil prices play a central role in funding the kingdom’s development ambitions, with strong rises in expenditure expected throughout 2022‑25. However, from the US’s point of view, an oil production cut at a time when oil prices were already over US$80/b (albeit having fallen from about US$120/b in June) represents the boldest move ever by OPEC to support prices—previous output cuts have been made at much lower price levels.

Friction in the bilateral relationship

Whatever the rationale for OPEC’s move, growing tensions have been evident in the US‑Saudi relationship for some time. A key turning point was the 2018 murder (and dismemberment) of a Saudi journalist, Jamal Kashoggi, in the Saudi consulate in Istanbul (Turkey). The US government has stated that the murder was ordered by Saudi Arabia’s crown prince and de facto ruler (now prime minister too), Mohammed bin Salman al‑Saud. Mr. Biden rowed back on his pledges to shun the crown prince in July, when he visited Saudi Arabia and sought a commitment to raise oil production to ease soaring oil prices. Ultimately he has nothing to show for it: OPEC+ briefly raised oil production quotas marginally, before reversing the rise, and then on October 5th announcing a 2m‑barrel/day cut. As many oil producers are already producing below quota, owing to production constraints, the full drop in oil output may only be half of the October target. Nevertheless, the organisation’s decision to flout US demands marks another low point in US‑Saudi relations.

Other difficulties in the relationship include Mr Biden’s opposition to Saudi Arabia’s involvement in the civil war in Yemen, where the Houthi rebels are believed to have links with Iran. Although a ceasefire in Yemen briefly took hold earlier this year, the ceasefire expired in early October. An expected resumption in fighting in Yemen may raise tensions between Saudi Arabia and the US, which already restricts the supply of some military equipment to the kingdom owing to concerns over Saudi Arabia’s role in Yemen. Conversely, Saudi Arabia has concerns that the US is relinquishing its role as the kingdom’s regional protector by intermittently scaling back arms and reducing its regional military presence, while earlier this year seeking a nuclear deal with Iran (lifting economic sanctions on Iran in exchange for a reduction in enrichment of uranium and a redesign and conversion of nuclear facilities). The nuclear deal is currently off the immediate agenda, but Saudi Arabia is unsettled and opposes any negotiations at all with Iran.

Shifting to the East

Another emerging wedge between Saudi Arabia and the US relates to the global shift in Saudi trade and investment relations. Closer commercial ties with countries in Asia, and especially China—which is already the largest single market for Saudi oil exports and buys more 25% of the kingdom’s total goods exports—will draw political attention and prompt new policy initiatives most likely at the expense of relations with the West. Earlier this year, Saudi Arabia considered changing the pricing of oil sales to China from US dollars to Chinese renminbi (also known as yuan). To date the kingdom’s rulers have resisted the currency switch for oil trade, but the temptation will grow along with China’s expected rise as a global economic powerhouse. Such a move would threaten the long-standing petrodollar agreement between Saudi Arabia and the US that requires the Saudi state to sell its oil only for US dollars and to reinvest excess dollar reserves in US treasury securities and US companies, all in return for US security guarantees. In addition, this would probably contribute to a decoupling of the Saudi riyal from the US dollar, to which it has been pegged at SR3.75:US$1 since 1986. The decline of the petrodollar (and the concomitant rise of the “petro yuan”) is a long-term risk, rather than a short- or medium-term one. For now, Saudi officials have repeatedly restated their commitment to the dollar peg and implemented economic policy to reinforce the arrangement. This stance will not change for the foreseeable future and most likely following a gradual and lengthy period of adjustment that aims to minimise economic damage as the Saudi economy weans itself off US dollars.

“Consequences” for Saudi Arabia

The strategic alliance between the US and Saudi Arabia has always been one of convenience. Saudi Arabia—which is not a democracy—has escaped many of the possible forms of punitive action that the US applies to some other undemocratic countries because of the strategic role of the kingdom’s oil exports and Saudi Arabia’s role in maintaining the balance of power in the Middle East, mainly against Iran. The US has stated that Saudi defiance of the US at a key juncture in global politics, as the stakes for all sides are raised to the highest level by the Ukraine war, will lead to unspecified “consequences”, which are still being worked out. US members of Congress have proposed a number of measures, including restricting arms sales and re-examining the so-called NOPEC bill that would allow anti-trust actions against countries operating an oil price cartel. Neither is an easy option, which suggests punitive initiatives will be watered down in the end.

Saudi Arabia is the largest customer for US arms exports, and large sales contracts are already in the process of being fulfilled. US arms manufacturers, an important vested interest in the US political landscape, are unlikely to welcome restrictions on arms sales. If they happen, we believe they will be limited in scope and timeframe. Support for the NOPEC bill is at the highest level yet, but we still think it is unlikely to be enacted. Legislation of this type is opposed by the US oil industry for complicating joint ventures and investments. The US Chamber of Commerce has stated that it believes the NOPEC bill would have “zero impact” in terms of bringing down US petrol pump prices. Saudi government officials have stated that they have options too: if such legislation were introduced, the kingdom could limit the exchange of information with the US that has helped to foil many terrorist attacks. In addition, equipment restrictions would have the knock‑on effect of harming the security relationship at the heart of the alliance—and encourage Saudi Arabia to look elsewhere, especially to China and Russia, for supplies. Similarly, calls from some quarters in the US for the US to withdraw troops from Saudi Arabia simply defeat the purpose of US foreign policy in the region, which is to protect oil supplies and oppose Iranian influence.

Mutually beneficial strategic relationship to remain intact

Crucially, Saudi Arabia and the UAE both oppose Iranian influence within the Middle East, and to that extent the US strategic alliance is a must. Claims that closer Saudi military ties with Russia and China could replace the US—a development that would require the country to forego US military hardware and servicing—seem fanciful. The US, for its part, cannot put meaningful restrictions on Saudi Arabia without diminishing its own Middle East policy. There is also the fact that the role of Saudi Arabia in arms purchases is too significant for the US military establishment to willingly forego. The US and Saudi Arabia retain many economic and strategic interests in common, which will support an admittedly more fractious alliance between them over the 2023‑27 forecast period. At worst, we believe that some restrictions on military trade with the kingdom, albeit largely symbolic, will be imposed temporarily.

The analysis and forecasts featured in this piece can be found in EIU Viewpoint, our new country analysis solution. EIU Viewpoint provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.

Credit: ECONOMIC INTERLLIGENCE UNIT, EIU.

• The US government has responded to an oil production quota cut announced by the OPEC+ grouping of oil exporters by vowing to “re-evaluate” its relationship with Saudi Arabia.
• EIU believes the US response will be carefully calibrated to avoid undermining key areas of bilateral interest—for instance certain types of weaponry supplied to the kingdom may be restricted but only temporarily.
• The bilateral relationship may become increasingly transactional, in an unstable global geopolitical environment, while opposition to Iranian influence will remain a common theme.
• The Saudi riyal’s long-standing peg to the US dollar will remain in place but Saudi Arabia will explore alternatives, including a shift to a reference basket of currencies and a potential sale of oil in currencies other than the dollar.

The OPEC+ grouping of oil exporters—comprising an OPEC bloc led by Saudi Arabia and a non-OPEC bloc led by Russia—agreed in October to cut production quotas and curb international oil supplies. This is likely to keep oil prices high, above US$90/barrel, even as Western interest rates rise and global demand slows. This latest move comes just ahead of the US midterm elections in November, amid a cost-of-living crisis in Europe—largely fuelled by the war in Ukraine and sky-high energy costs—and to the consternation of political leaders in Washington, Brussels and London. Saudi Arabia, and other OPEC members, point to the fact that they are merely acting in their own economic interests by making a pre-emptive policy to put a floor under prices in a volatile market situation.

The administration of the US president, Joe Biden, had been calling for assistance from Gulf partners to help to reduce global energy prices, ease domestic price pressures and deny Russia burgeoning energy sector revenue—all of which incidentally could help the Democratic Party at the upcoming US midterm elections. The latest OPEC+ move and the evident lack of co-operation between Saudi Arabia and the US, together with Saudi Arabia’s unwillingness to condemn Russia’s invasion of Ukraine, have further strained relations between Saudi Arabia and the US.

Saudi Arabia claims OPEC is driven by economic rather than political motives

Although the OPEC+ production cut will support oil prices to the advantage of Russian state finances during the Ukraine war, Saudi Arabia and other oil producers claim that they simply need to put a floor under oil prices. Rather than “siding with Russia” in the Ukraine war, OPEC members claim that they are acting apolitically, in order to ensure budget stability. Saudi Arabia’s Vision 2030 economic development plan requires hundreds of billions of dollars of investment, with the aim of diversifying away from oil production. Renewable energy, housing, healthcare, cultural and tourism projects as well as the building of Neom, a futuristic new city, are all part of the kingdom’s plans. High oil prices play a central role in funding the kingdom’s development ambitions, with strong rises in expenditure expected throughout 2022‑25. However, from the US’s point of view, an oil production cut at a time when oil prices were already over US$80/b (albeit having fallen from about US$120/b in June) represents the boldest move ever by OPEC to support prices—previous output cuts have been made at much lower price levels.

Friction in the bilateral relationship

Whatever the rationale for OPEC’s move, growing tensions have been evident in the US‑Saudi relationship for some time. A key turning point was the 2018 murder (and dismemberment) of a Saudi journalist, Jamal Kashoggi, in the Saudi consulate in Istanbul (Turkey). The US government has stated that the murder was ordered by Saudi Arabia’s crown prince and de facto ruler (now prime minister too), Mohammed bin Salman al‑Saud. Mr. Biden rowed back on his pledges to shun the crown prince in July, when he visited Saudi Arabia and sought a commitment to raise oil production to ease soaring oil prices. Ultimately he has nothing to show for it: OPEC+ briefly raised oil production quotas marginally, before reversing the rise, and then on October 5th announcing a 2m‑barrel/day cut. As many oil producers are already producing below quota, owing to production constraints, the full drop in oil output may only be half of the October target. Nevertheless, the organisation’s decision to flout US demands marks another low point in US‑Saudi relations.

Other difficulties in the relationship include Mr Biden’s opposition to Saudi Arabia’s involvement in the civil war in Yemen, where the Houthi rebels are believed to have links with Iran. Although a ceasefire in Yemen briefly took hold earlier this year, the ceasefire expired in early October. An expected resumption in fighting in Yemen may raise tensions between Saudi Arabia and the US, which already restricts the supply of some military equipment to the kingdom owing to concerns over Saudi Arabia’s role in Yemen. Conversely, Saudi Arabia has concerns that the US is relinquishing its role as the kingdom’s regional protector by intermittently scaling back arms and reducing its regional military presence, while earlier this year seeking a nuclear deal with Iran (lifting economic sanctions on Iran in exchange for a reduction in enrichment of uranium and a redesign and conversion of nuclear facilities). The nuclear deal is currently off the immediate agenda, but Saudi Arabia is unsettled and opposes any negotiations at all with Iran.

Shifting to the East

Another emerging wedge between Saudi Arabia and the US relates to the global shift in Saudi trade and investment relations. Closer commercial ties with countries in Asia, and especially China—which is already the largest single market for Saudi oil exports and buys more 25% of the kingdom’s total goods exports—will draw political attention and prompt new policy initiatives most likely at the expense of relations with the West. Earlier this year, Saudi Arabia considered changing the pricing of oil sales to China from US dollars to Chinese renminbi (also known as yuan). To date the kingdom’s rulers have resisted the currency switch for oil trade, but the temptation will grow along with China’s expected rise as a global economic powerhouse. Such a move would threaten the long-standing petrodollar agreement between Saudi Arabia and the US that requires the Saudi state to sell its oil only for US dollars and to reinvest excess dollar reserves in US treasury securities and US companies, all in return for US security guarantees. In addition, this would probably contribute to a decoupling of the Saudi riyal from the US dollar, to which it has been pegged at SR3.75:US$1 since 1986. The decline of the petrodollar (and the concomitant rise of the “petro yuan”) is a long-term risk, rather than a short- or medium-term one. For now, Saudi officials have repeatedly restated their commitment to the dollar peg and implemented economic policy to reinforce the arrangement. This stance will not change for the foreseeable future and most likely following a gradual and lengthy period of adjustment that aims to minimise economic damage as the Saudi economy weans itself off US dollars.

“Consequences” for Saudi Arabia

The strategic alliance between the US and Saudi Arabia has always been one of convenience. Saudi Arabia—which is not a democracy—has escaped many of the possible forms of punitive action that the US applies to some other undemocratic countries because of the strategic role of the kingdom’s oil exports and Saudi Arabia’s role in maintaining the balance of power in the Middle East, mainly against Iran. The US has stated that Saudi defiance of the US at a key juncture in global politics, as the stakes for all sides are raised to the highest level by the Ukraine war, will lead to unspecified “consequences”, which are still being worked out. US members of Congress have proposed a number of measures, including restricting arms sales and re-examining the so-called NOPEC bill that would allow anti-trust actions against countries operating an oil price cartel. Neither is an easy option, which suggests punitive initiatives will be watered down in the end.

Saudi Arabia is the largest customer for US arms exports, and large sales contracts are already in the process of being fulfilled. US arms manufacturers, an important vested interest in the US political landscape, are unlikely to welcome restrictions on arms sales. If they happen, we believe they will be limited in scope and timeframe. Support for the NOPEC bill is at the highest level yet, but we still think it is unlikely to be enacted. Legislation of this type is opposed by the US oil industry for complicating joint ventures and investments. The US Chamber of Commerce has stated that it believes the NOPEC bill would have “zero impact” in terms of bringing down US petrol pump prices. Saudi government officials have stated that they have options too: if such legislation were introduced, the kingdom could limit the exchange of information with the US that has helped to foil many terrorist attacks. In addition, equipment restrictions would have the knock‑on effect of harming the security relationship at the heart of the alliance—and encourage Saudi Arabia to look elsewhere, especially to China and Russia, for supplies. Similarly, calls from some quarters in the US for the US to withdraw troops from Saudi Arabia simply defeat the purpose of US foreign policy in the region, which is to protect oil supplies and oppose Iranian influence.

Mutually beneficial strategic relationship to remain intact

Crucially, Saudi Arabia and the UAE both oppose Iranian influence within the Middle East, and to that extent the US strategic alliance is a must. Claims that closer Saudi military ties with Russia and China could replace the US—a development that would require the country to forego US military hardware and servicing—seem fanciful. The US, for its part, cannot put meaningful restrictions on Saudi Arabia without diminishing its own Middle East policy. There is also the fact that the role of Saudi Arabia in arms purchases is too significant for the US military establishment to willingly forego. The US and Saudi Arabia retain many economic and strategic interests in common, which will support an admittedly more fractious alliance between them over the 2023‑27 forecast period. At worst, we believe that some restrictions on military trade with the kingdom, albeit largely symbolic, will be imposed temporarily.

The analysis and forecasts featured in this piece can be found in EIU Viewpoint, our new country analysis solution. EIU Viewpoint provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.

Credit: ECONOMIC INTERLLIGENCE UNIT, EIU.

• The US government has responded to an oil production quota cut announced by the OPEC+ grouping of oil exporters by vowing to “re-evaluate” its relationship with Saudi Arabia.
• EIU believes the US response will be carefully calibrated to avoid undermining key areas of bilateral interest—for instance certain types of weaponry supplied to the kingdom may be restricted but only temporarily.
• The bilateral relationship may become increasingly transactional, in an unstable global geopolitical environment, while opposition to Iranian influence will remain a common theme.
• The Saudi riyal’s long-standing peg to the US dollar will remain in place but Saudi Arabia will explore alternatives, including a shift to a reference basket of currencies and a potential sale of oil in currencies other than the dollar.

The OPEC+ grouping of oil exporters—comprising an OPEC bloc led by Saudi Arabia and a non-OPEC bloc led by Russia—agreed in October to cut production quotas and curb international oil supplies. This is likely to keep oil prices high, above US$90/barrel, even as Western interest rates rise and global demand slows. This latest move comes just ahead of the US midterm elections in November, amid a cost-of-living crisis in Europe—largely fuelled by the war in Ukraine and sky-high energy costs—and to the consternation of political leaders in Washington, Brussels and London. Saudi Arabia, and other OPEC members, point to the fact that they are merely acting in their own economic interests by making a pre-emptive policy to put a floor under prices in a volatile market situation.

The administration of the US president, Joe Biden, had been calling for assistance from Gulf partners to help to reduce global energy prices, ease domestic price pressures and deny Russia burgeoning energy sector revenue—all of which incidentally could help the Democratic Party at the upcoming US midterm elections. The latest OPEC+ move and the evident lack of co-operation between Saudi Arabia and the US, together with Saudi Arabia’s unwillingness to condemn Russia’s invasion of Ukraine, have further strained relations between Saudi Arabia and the US.

Saudi Arabia claims OPEC is driven by economic rather than political motives

Although the OPEC+ production cut will support oil prices to the advantage of Russian state finances during the Ukraine war, Saudi Arabia and other oil producers claim that they simply need to put a floor under oil prices. Rather than “siding with Russia” in the Ukraine war, OPEC members claim that they are acting apolitically, in order to ensure budget stability. Saudi Arabia’s Vision 2030 economic development plan requires hundreds of billions of dollars of investment, with the aim of diversifying away from oil production. Renewable energy, housing, healthcare, cultural and tourism projects as well as the building of Neom, a futuristic new city, are all part of the kingdom’s plans. High oil prices play a central role in funding the kingdom’s development ambitions, with strong rises in expenditure expected throughout 2022‑25. However, from the US’s point of view, an oil production cut at a time when oil prices were already over US$80/b (albeit having fallen from about US$120/b in June) represents the boldest move ever by OPEC to support prices—previous output cuts have been made at much lower price levels.

Friction in the bilateral relationship

Whatever the rationale for OPEC’s move, growing tensions have been evident in the US‑Saudi relationship for some time. A key turning point was the 2018 murder (and dismemberment) of a Saudi journalist, Jamal Kashoggi, in the Saudi consulate in Istanbul (Turkey). The US government has stated that the murder was ordered by Saudi Arabia’s crown prince and de facto ruler (now prime minister too), Mohammed bin Salman al‑Saud. Mr. Biden rowed back on his pledges to shun the crown prince in July, when he visited Saudi Arabia and sought a commitment to raise oil production to ease soaring oil prices. Ultimately he has nothing to show for it: OPEC+ briefly raised oil production quotas marginally, before reversing the rise, and then on October 5th announcing a 2m‑barrel/day cut. As many oil producers are already producing below quota, owing to production constraints, the full drop in oil output may only be half of the October target. Nevertheless, the organisation’s decision to flout US demands marks another low point in US‑Saudi relations.

Other difficulties in the relationship include Mr Biden’s opposition to Saudi Arabia’s involvement in the civil war in Yemen, where the Houthi rebels are believed to have links with Iran. Although a ceasefire in Yemen briefly took hold earlier this year, the ceasefire expired in early October. An expected resumption in fighting in Yemen may raise tensions between Saudi Arabia and the US, which already restricts the supply of some military equipment to the kingdom owing to concerns over Saudi Arabia’s role in Yemen. Conversely, Saudi Arabia has concerns that the US is relinquishing its role as the kingdom’s regional protector by intermittently scaling back arms and reducing its regional military presence, while earlier this year seeking a nuclear deal with Iran (lifting economic sanctions on Iran in exchange for a reduction in enrichment of uranium and a redesign and conversion of nuclear facilities). The nuclear deal is currently off the immediate agenda, but Saudi Arabia is unsettled and opposes any negotiations at all with Iran.

Shifting to the East

Another emerging wedge between Saudi Arabia and the US relates to the global shift in Saudi trade and investment relations. Closer commercial ties with countries in Asia, and especially China—which is already the largest single market for Saudi oil exports and buys more 25% of the kingdom’s total goods exports—will draw political attention and prompt new policy initiatives most likely at the expense of relations with the West. Earlier this year, Saudi Arabia considered changing the pricing of oil sales to China from US dollars to Chinese renminbi (also known as yuan). To date the kingdom’s rulers have resisted the currency switch for oil trade, but the temptation will grow along with China’s expected rise as a global economic powerhouse. Such a move would threaten the long-standing petrodollar agreement between Saudi Arabia and the US that requires the Saudi state to sell its oil only for US dollars and to reinvest excess dollar reserves in US treasury securities and US companies, all in return for US security guarantees. In addition, this would probably contribute to a decoupling of the Saudi riyal from the US dollar, to which it has been pegged at SR3.75:US$1 since 1986. The decline of the petrodollar (and the concomitant rise of the “petro yuan”) is a long-term risk, rather than a short- or medium-term one. For now, Saudi officials have repeatedly restated their commitment to the dollar peg and implemented economic policy to reinforce the arrangement. This stance will not change for the foreseeable future and most likely following a gradual and lengthy period of adjustment that aims to minimise economic damage as the Saudi economy weans itself off US dollars.

“Consequences” for Saudi Arabia

The strategic alliance between the US and Saudi Arabia has always been one of convenience. Saudi Arabia—which is not a democracy—has escaped many of the possible forms of punitive action that the US applies to some other undemocratic countries because of the strategic role of the kingdom’s oil exports and Saudi Arabia’s role in maintaining the balance of power in the Middle East, mainly against Iran. The US has stated that Saudi defiance of the US at a key juncture in global politics, as the stakes for all sides are raised to the highest level by the Ukraine war, will lead to unspecified “consequences”, which are still being worked out. US members of Congress have proposed a number of measures, including restricting arms sales and re-examining the so-called NOPEC bill that would allow anti-trust actions against countries operating an oil price cartel. Neither is an easy option, which suggests punitive initiatives will be watered down in the end.

Saudi Arabia is the largest customer for US arms exports, and large sales contracts are already in the process of being fulfilled. US arms manufacturers, an important vested interest in the US political landscape, are unlikely to welcome restrictions on arms sales. If they happen, we believe they will be limited in scope and timeframe. Support for the NOPEC bill is at the highest level yet, but we still think it is unlikely to be enacted. Legislation of this type is opposed by the US oil industry for complicating joint ventures and investments. The US Chamber of Commerce has stated that it believes the NOPEC bill would have “zero impact” in terms of bringing down US petrol pump prices. Saudi government officials have stated that they have options too: if such legislation were introduced, the kingdom could limit the exchange of information with the US that has helped to foil many terrorist attacks. In addition, equipment restrictions would have the knock‑on effect of harming the security relationship at the heart of the alliance—and encourage Saudi Arabia to look elsewhere, especially to China and Russia, for supplies. Similarly, calls from some quarters in the US for the US to withdraw troops from Saudi Arabia simply defeat the purpose of US foreign policy in the region, which is to protect oil supplies and oppose Iranian influence.

Mutually beneficial strategic relationship to remain intact

Crucially, Saudi Arabia and the UAE both oppose Iranian influence within the Middle East, and to that extent the US strategic alliance is a must. Claims that closer Saudi military ties with Russia and China could replace the US—a development that would require the country to forego US military hardware and servicing—seem fanciful. The US, for its part, cannot put meaningful restrictions on Saudi Arabia without diminishing its own Middle East policy. There is also the fact that the role of Saudi Arabia in arms purchases is too significant for the US military establishment to willingly forego. The US and Saudi Arabia retain many economic and strategic interests in common, which will support an admittedly more fractious alliance between them over the 2023‑27 forecast period. At worst, we believe that some restrictions on military trade with the kingdom, albeit largely symbolic, will be imposed temporarily.

The analysis and forecasts featured in this piece can be found in EIU Viewpoint, our new country analysis solution. EIU Viewpoint provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.

Credit: ECONOMIC INTERLLIGENCE UNIT, EIU.

• The US government has responded to an oil production quota cut announced by the OPEC+ grouping of oil exporters by vowing to “re-evaluate” its relationship with Saudi Arabia.
• EIU believes the US response will be carefully calibrated to avoid undermining key areas of bilateral interest—for instance certain types of weaponry supplied to the kingdom may be restricted but only temporarily.
• The bilateral relationship may become increasingly transactional, in an unstable global geopolitical environment, while opposition to Iranian influence will remain a common theme.
• The Saudi riyal’s long-standing peg to the US dollar will remain in place but Saudi Arabia will explore alternatives, including a shift to a reference basket of currencies and a potential sale of oil in currencies other than the dollar.

The OPEC+ grouping of oil exporters—comprising an OPEC bloc led by Saudi Arabia and a non-OPEC bloc led by Russia—agreed in October to cut production quotas and curb international oil supplies. This is likely to keep oil prices high, above US$90/barrel, even as Western interest rates rise and global demand slows. This latest move comes just ahead of the US midterm elections in November, amid a cost-of-living crisis in Europe—largely fuelled by the war in Ukraine and sky-high energy costs—and to the consternation of political leaders in Washington, Brussels and London. Saudi Arabia, and other OPEC members, point to the fact that they are merely acting in their own economic interests by making a pre-emptive policy to put a floor under prices in a volatile market situation.

The administration of the US president, Joe Biden, had been calling for assistance from Gulf partners to help to reduce global energy prices, ease domestic price pressures and deny Russia burgeoning energy sector revenue—all of which incidentally could help the Democratic Party at the upcoming US midterm elections. The latest OPEC+ move and the evident lack of co-operation between Saudi Arabia and the US, together with Saudi Arabia’s unwillingness to condemn Russia’s invasion of Ukraine, have further strained relations between Saudi Arabia and the US.

Saudi Arabia claims OPEC is driven by economic rather than political motives

Although the OPEC+ production cut will support oil prices to the advantage of Russian state finances during the Ukraine war, Saudi Arabia and other oil producers claim that they simply need to put a floor under oil prices. Rather than “siding with Russia” in the Ukraine war, OPEC members claim that they are acting apolitically, in order to ensure budget stability. Saudi Arabia’s Vision 2030 economic development plan requires hundreds of billions of dollars of investment, with the aim of diversifying away from oil production. Renewable energy, housing, healthcare, cultural and tourism projects as well as the building of Neom, a futuristic new city, are all part of the kingdom’s plans. High oil prices play a central role in funding the kingdom’s development ambitions, with strong rises in expenditure expected throughout 2022‑25. However, from the US’s point of view, an oil production cut at a time when oil prices were already over US$80/b (albeit having fallen from about US$120/b in June) represents the boldest move ever by OPEC to support prices—previous output cuts have been made at much lower price levels.

Friction in the bilateral relationship

Whatever the rationale for OPEC’s move, growing tensions have been evident in the US‑Saudi relationship for some time. A key turning point was the 2018 murder (and dismemberment) of a Saudi journalist, Jamal Kashoggi, in the Saudi consulate in Istanbul (Turkey). The US government has stated that the murder was ordered by Saudi Arabia’s crown prince and de facto ruler (now prime minister too), Mohammed bin Salman al‑Saud. Mr. Biden rowed back on his pledges to shun the crown prince in July, when he visited Saudi Arabia and sought a commitment to raise oil production to ease soaring oil prices. Ultimately he has nothing to show for it: OPEC+ briefly raised oil production quotas marginally, before reversing the rise, and then on October 5th announcing a 2m‑barrel/day cut. As many oil producers are already producing below quota, owing to production constraints, the full drop in oil output may only be half of the October target. Nevertheless, the organisation’s decision to flout US demands marks another low point in US‑Saudi relations.

Other difficulties in the relationship include Mr Biden’s opposition to Saudi Arabia’s involvement in the civil war in Yemen, where the Houthi rebels are believed to have links with Iran. Although a ceasefire in Yemen briefly took hold earlier this year, the ceasefire expired in early October. An expected resumption in fighting in Yemen may raise tensions between Saudi Arabia and the US, which already restricts the supply of some military equipment to the kingdom owing to concerns over Saudi Arabia’s role in Yemen. Conversely, Saudi Arabia has concerns that the US is relinquishing its role as the kingdom’s regional protector by intermittently scaling back arms and reducing its regional military presence, while earlier this year seeking a nuclear deal with Iran (lifting economic sanctions on Iran in exchange for a reduction in enrichment of uranium and a redesign and conversion of nuclear facilities). The nuclear deal is currently off the immediate agenda, but Saudi Arabia is unsettled and opposes any negotiations at all with Iran.

Shifting to the East

Another emerging wedge between Saudi Arabia and the US relates to the global shift in Saudi trade and investment relations. Closer commercial ties with countries in Asia, and especially China—which is already the largest single market for Saudi oil exports and buys more 25% of the kingdom’s total goods exports—will draw political attention and prompt new policy initiatives most likely at the expense of relations with the West. Earlier this year, Saudi Arabia considered changing the pricing of oil sales to China from US dollars to Chinese renminbi (also known as yuan). To date the kingdom’s rulers have resisted the currency switch for oil trade, but the temptation will grow along with China’s expected rise as a global economic powerhouse. Such a move would threaten the long-standing petrodollar agreement between Saudi Arabia and the US that requires the Saudi state to sell its oil only for US dollars and to reinvest excess dollar reserves in US treasury securities and US companies, all in return for US security guarantees. In addition, this would probably contribute to a decoupling of the Saudi riyal from the US dollar, to which it has been pegged at SR3.75:US$1 since 1986. The decline of the petrodollar (and the concomitant rise of the “petro yuan”) is a long-term risk, rather than a short- or medium-term one. For now, Saudi officials have repeatedly restated their commitment to the dollar peg and implemented economic policy to reinforce the arrangement. This stance will not change for the foreseeable future and most likely following a gradual and lengthy period of adjustment that aims to minimise economic damage as the Saudi economy weans itself off US dollars.

“Consequences” for Saudi Arabia

The strategic alliance between the US and Saudi Arabia has always been one of convenience. Saudi Arabia—which is not a democracy—has escaped many of the possible forms of punitive action that the US applies to some other undemocratic countries because of the strategic role of the kingdom’s oil exports and Saudi Arabia’s role in maintaining the balance of power in the Middle East, mainly against Iran. The US has stated that Saudi defiance of the US at a key juncture in global politics, as the stakes for all sides are raised to the highest level by the Ukraine war, will lead to unspecified “consequences”, which are still being worked out. US members of Congress have proposed a number of measures, including restricting arms sales and re-examining the so-called NOPEC bill that would allow anti-trust actions against countries operating an oil price cartel. Neither is an easy option, which suggests punitive initiatives will be watered down in the end.

Saudi Arabia is the largest customer for US arms exports, and large sales contracts are already in the process of being fulfilled. US arms manufacturers, an important vested interest in the US political landscape, are unlikely to welcome restrictions on arms sales. If they happen, we believe they will be limited in scope and timeframe. Support for the NOPEC bill is at the highest level yet, but we still think it is unlikely to be enacted. Legislation of this type is opposed by the US oil industry for complicating joint ventures and investments. The US Chamber of Commerce has stated that it believes the NOPEC bill would have “zero impact” in terms of bringing down US petrol pump prices. Saudi government officials have stated that they have options too: if such legislation were introduced, the kingdom could limit the exchange of information with the US that has helped to foil many terrorist attacks. In addition, equipment restrictions would have the knock‑on effect of harming the security relationship at the heart of the alliance—and encourage Saudi Arabia to look elsewhere, especially to China and Russia, for supplies. Similarly, calls from some quarters in the US for the US to withdraw troops from Saudi Arabia simply defeat the purpose of US foreign policy in the region, which is to protect oil supplies and oppose Iranian influence.

Mutually beneficial strategic relationship to remain intact

Crucially, Saudi Arabia and the UAE both oppose Iranian influence within the Middle East, and to that extent the US strategic alliance is a must. Claims that closer Saudi military ties with Russia and China could replace the US—a development that would require the country to forego US military hardware and servicing—seem fanciful. The US, for its part, cannot put meaningful restrictions on Saudi Arabia without diminishing its own Middle East policy. There is also the fact that the role of Saudi Arabia in arms purchases is too significant for the US military establishment to willingly forego. The US and Saudi Arabia retain many economic and strategic interests in common, which will support an admittedly more fractious alliance between them over the 2023‑27 forecast period. At worst, we believe that some restrictions on military trade with the kingdom, albeit largely symbolic, will be imposed temporarily.

The analysis and forecasts featured in this piece can be found in EIU Viewpoint, our new country analysis solution. EIU Viewpoint provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.

Credit: ECONOMIC INTERLLIGENCE UNIT, EIU.

• The US government has responded to an oil production quota cut announced by the OPEC+ grouping of oil exporters by vowing to “re-evaluate” its relationship with Saudi Arabia.
• EIU believes the US response will be carefully calibrated to avoid undermining key areas of bilateral interest—for instance certain types of weaponry supplied to the kingdom may be restricted but only temporarily.
• The bilateral relationship may become increasingly transactional, in an unstable global geopolitical environment, while opposition to Iranian influence will remain a common theme.
• The Saudi riyal’s long-standing peg to the US dollar will remain in place but Saudi Arabia will explore alternatives, including a shift to a reference basket of currencies and a potential sale of oil in currencies other than the dollar.

The OPEC+ grouping of oil exporters—comprising an OPEC bloc led by Saudi Arabia and a non-OPEC bloc led by Russia—agreed in October to cut production quotas and curb international oil supplies. This is likely to keep oil prices high, above US$90/barrel, even as Western interest rates rise and global demand slows. This latest move comes just ahead of the US midterm elections in November, amid a cost-of-living crisis in Europe—largely fuelled by the war in Ukraine and sky-high energy costs—and to the consternation of political leaders in Washington, Brussels and London. Saudi Arabia, and other OPEC members, point to the fact that they are merely acting in their own economic interests by making a pre-emptive policy to put a floor under prices in a volatile market situation.

The administration of the US president, Joe Biden, had been calling for assistance from Gulf partners to help to reduce global energy prices, ease domestic price pressures and deny Russia burgeoning energy sector revenue—all of which incidentally could help the Democratic Party at the upcoming US midterm elections. The latest OPEC+ move and the evident lack of co-operation between Saudi Arabia and the US, together with Saudi Arabia’s unwillingness to condemn Russia’s invasion of Ukraine, have further strained relations between Saudi Arabia and the US.

Saudi Arabia claims OPEC is driven by economic rather than political motives

Although the OPEC+ production cut will support oil prices to the advantage of Russian state finances during the Ukraine war, Saudi Arabia and other oil producers claim that they simply need to put a floor under oil prices. Rather than “siding with Russia” in the Ukraine war, OPEC members claim that they are acting apolitically, in order to ensure budget stability. Saudi Arabia’s Vision 2030 economic development plan requires hundreds of billions of dollars of investment, with the aim of diversifying away from oil production. Renewable energy, housing, healthcare, cultural and tourism projects as well as the building of Neom, a futuristic new city, are all part of the kingdom’s plans. High oil prices play a central role in funding the kingdom’s development ambitions, with strong rises in expenditure expected throughout 2022‑25. However, from the US’s point of view, an oil production cut at a time when oil prices were already over US$80/b (albeit having fallen from about US$120/b in June) represents the boldest move ever by OPEC to support prices—previous output cuts have been made at much lower price levels.

Friction in the bilateral relationship

Whatever the rationale for OPEC’s move, growing tensions have been evident in the US‑Saudi relationship for some time. A key turning point was the 2018 murder (and dismemberment) of a Saudi journalist, Jamal Kashoggi, in the Saudi consulate in Istanbul (Turkey). The US government has stated that the murder was ordered by Saudi Arabia’s crown prince and de facto ruler (now prime minister too), Mohammed bin Salman al‑Saud. Mr. Biden rowed back on his pledges to shun the crown prince in July, when he visited Saudi Arabia and sought a commitment to raise oil production to ease soaring oil prices. Ultimately he has nothing to show for it: OPEC+ briefly raised oil production quotas marginally, before reversing the rise, and then on October 5th announcing a 2m‑barrel/day cut. As many oil producers are already producing below quota, owing to production constraints, the full drop in oil output may only be half of the October target. Nevertheless, the organisation’s decision to flout US demands marks another low point in US‑Saudi relations.

Other difficulties in the relationship include Mr Biden’s opposition to Saudi Arabia’s involvement in the civil war in Yemen, where the Houthi rebels are believed to have links with Iran. Although a ceasefire in Yemen briefly took hold earlier this year, the ceasefire expired in early October. An expected resumption in fighting in Yemen may raise tensions between Saudi Arabia and the US, which already restricts the supply of some military equipment to the kingdom owing to concerns over Saudi Arabia’s role in Yemen. Conversely, Saudi Arabia has concerns that the US is relinquishing its role as the kingdom’s regional protector by intermittently scaling back arms and reducing its regional military presence, while earlier this year seeking a nuclear deal with Iran (lifting economic sanctions on Iran in exchange for a reduction in enrichment of uranium and a redesign and conversion of nuclear facilities). The nuclear deal is currently off the immediate agenda, but Saudi Arabia is unsettled and opposes any negotiations at all with Iran.

Shifting to the East

Another emerging wedge between Saudi Arabia and the US relates to the global shift in Saudi trade and investment relations. Closer commercial ties with countries in Asia, and especially China—which is already the largest single market for Saudi oil exports and buys more 25% of the kingdom’s total goods exports—will draw political attention and prompt new policy initiatives most likely at the expense of relations with the West. Earlier this year, Saudi Arabia considered changing the pricing of oil sales to China from US dollars to Chinese renminbi (also known as yuan). To date the kingdom’s rulers have resisted the currency switch for oil trade, but the temptation will grow along with China’s expected rise as a global economic powerhouse. Such a move would threaten the long-standing petrodollar agreement between Saudi Arabia and the US that requires the Saudi state to sell its oil only for US dollars and to reinvest excess dollar reserves in US treasury securities and US companies, all in return for US security guarantees. In addition, this would probably contribute to a decoupling of the Saudi riyal from the US dollar, to which it has been pegged at SR3.75:US$1 since 1986. The decline of the petrodollar (and the concomitant rise of the “petro yuan”) is a long-term risk, rather than a short- or medium-term one. For now, Saudi officials have repeatedly restated their commitment to the dollar peg and implemented economic policy to reinforce the arrangement. This stance will not change for the foreseeable future and most likely following a gradual and lengthy period of adjustment that aims to minimise economic damage as the Saudi economy weans itself off US dollars.

“Consequences” for Saudi Arabia

The strategic alliance between the US and Saudi Arabia has always been one of convenience. Saudi Arabia—which is not a democracy—has escaped many of the possible forms of punitive action that the US applies to some other undemocratic countries because of the strategic role of the kingdom’s oil exports and Saudi Arabia’s role in maintaining the balance of power in the Middle East, mainly against Iran. The US has stated that Saudi defiance of the US at a key juncture in global politics, as the stakes for all sides are raised to the highest level by the Ukraine war, will lead to unspecified “consequences”, which are still being worked out. US members of Congress have proposed a number of measures, including restricting arms sales and re-examining the so-called NOPEC bill that would allow anti-trust actions against countries operating an oil price cartel. Neither is an easy option, which suggests punitive initiatives will be watered down in the end.

Saudi Arabia is the largest customer for US arms exports, and large sales contracts are already in the process of being fulfilled. US arms manufacturers, an important vested interest in the US political landscape, are unlikely to welcome restrictions on arms sales. If they happen, we believe they will be limited in scope and timeframe. Support for the NOPEC bill is at the highest level yet, but we still think it is unlikely to be enacted. Legislation of this type is opposed by the US oil industry for complicating joint ventures and investments. The US Chamber of Commerce has stated that it believes the NOPEC bill would have “zero impact” in terms of bringing down US petrol pump prices. Saudi government officials have stated that they have options too: if such legislation were introduced, the kingdom could limit the exchange of information with the US that has helped to foil many terrorist attacks. In addition, equipment restrictions would have the knock‑on effect of harming the security relationship at the heart of the alliance—and encourage Saudi Arabia to look elsewhere, especially to China and Russia, for supplies. Similarly, calls from some quarters in the US for the US to withdraw troops from Saudi Arabia simply defeat the purpose of US foreign policy in the region, which is to protect oil supplies and oppose Iranian influence.

Mutually beneficial strategic relationship to remain intact

Crucially, Saudi Arabia and the UAE both oppose Iranian influence within the Middle East, and to that extent the US strategic alliance is a must. Claims that closer Saudi military ties with Russia and China could replace the US—a development that would require the country to forego US military hardware and servicing—seem fanciful. The US, for its part, cannot put meaningful restrictions on Saudi Arabia without diminishing its own Middle East policy. There is also the fact that the role of Saudi Arabia in arms purchases is too significant for the US military establishment to willingly forego. The US and Saudi Arabia retain many economic and strategic interests in common, which will support an admittedly more fractious alliance between them over the 2023‑27 forecast period. At worst, we believe that some restrictions on military trade with the kingdom, albeit largely symbolic, will be imposed temporarily.

The analysis and forecasts featured in this piece can be found in EIU Viewpoint, our new country analysis solution. EIU Viewpoint provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.

Credit: ECONOMIC INTERLLIGENCE UNIT, EIU.

• The US government has responded to an oil production quota cut announced by the OPEC+ grouping of oil exporters by vowing to “re-evaluate” its relationship with Saudi Arabia.
• EIU believes the US response will be carefully calibrated to avoid undermining key areas of bilateral interest—for instance certain types of weaponry supplied to the kingdom may be restricted but only temporarily.
• The bilateral relationship may become increasingly transactional, in an unstable global geopolitical environment, while opposition to Iranian influence will remain a common theme.
• The Saudi riyal’s long-standing peg to the US dollar will remain in place but Saudi Arabia will explore alternatives, including a shift to a reference basket of currencies and a potential sale of oil in currencies other than the dollar.

The OPEC+ grouping of oil exporters—comprising an OPEC bloc led by Saudi Arabia and a non-OPEC bloc led by Russia—agreed in October to cut production quotas and curb international oil supplies. This is likely to keep oil prices high, above US$90/barrel, even as Western interest rates rise and global demand slows. This latest move comes just ahead of the US midterm elections in November, amid a cost-of-living crisis in Europe—largely fuelled by the war in Ukraine and sky-high energy costs—and to the consternation of political leaders in Washington, Brussels and London. Saudi Arabia, and other OPEC members, point to the fact that they are merely acting in their own economic interests by making a pre-emptive policy to put a floor under prices in a volatile market situation.

The administration of the US president, Joe Biden, had been calling for assistance from Gulf partners to help to reduce global energy prices, ease domestic price pressures and deny Russia burgeoning energy sector revenue—all of which incidentally could help the Democratic Party at the upcoming US midterm elections. The latest OPEC+ move and the evident lack of co-operation between Saudi Arabia and the US, together with Saudi Arabia’s unwillingness to condemn Russia’s invasion of Ukraine, have further strained relations between Saudi Arabia and the US.

Saudi Arabia claims OPEC is driven by economic rather than political motives

Although the OPEC+ production cut will support oil prices to the advantage of Russian state finances during the Ukraine war, Saudi Arabia and other oil producers claim that they simply need to put a floor under oil prices. Rather than “siding with Russia” in the Ukraine war, OPEC members claim that they are acting apolitically, in order to ensure budget stability. Saudi Arabia’s Vision 2030 economic development plan requires hundreds of billions of dollars of investment, with the aim of diversifying away from oil production. Renewable energy, housing, healthcare, cultural and tourism projects as well as the building of Neom, a futuristic new city, are all part of the kingdom’s plans. High oil prices play a central role in funding the kingdom’s development ambitions, with strong rises in expenditure expected throughout 2022‑25. However, from the US’s point of view, an oil production cut at a time when oil prices were already over US$80/b (albeit having fallen from about US$120/b in June) represents the boldest move ever by OPEC to support prices—previous output cuts have been made at much lower price levels.

Friction in the bilateral relationship

Whatever the rationale for OPEC’s move, growing tensions have been evident in the US‑Saudi relationship for some time. A key turning point was the 2018 murder (and dismemberment) of a Saudi journalist, Jamal Kashoggi, in the Saudi consulate in Istanbul (Turkey). The US government has stated that the murder was ordered by Saudi Arabia’s crown prince and de facto ruler (now prime minister too), Mohammed bin Salman al‑Saud. Mr. Biden rowed back on his pledges to shun the crown prince in July, when he visited Saudi Arabia and sought a commitment to raise oil production to ease soaring oil prices. Ultimately he has nothing to show for it: OPEC+ briefly raised oil production quotas marginally, before reversing the rise, and then on October 5th announcing a 2m‑barrel/day cut. As many oil producers are already producing below quota, owing to production constraints, the full drop in oil output may only be half of the October target. Nevertheless, the organisation’s decision to flout US demands marks another low point in US‑Saudi relations.

Other difficulties in the relationship include Mr Biden’s opposition to Saudi Arabia’s involvement in the civil war in Yemen, where the Houthi rebels are believed to have links with Iran. Although a ceasefire in Yemen briefly took hold earlier this year, the ceasefire expired in early October. An expected resumption in fighting in Yemen may raise tensions between Saudi Arabia and the US, which already restricts the supply of some military equipment to the kingdom owing to concerns over Saudi Arabia’s role in Yemen. Conversely, Saudi Arabia has concerns that the US is relinquishing its role as the kingdom’s regional protector by intermittently scaling back arms and reducing its regional military presence, while earlier this year seeking a nuclear deal with Iran (lifting economic sanctions on Iran in exchange for a reduction in enrichment of uranium and a redesign and conversion of nuclear facilities). The nuclear deal is currently off the immediate agenda, but Saudi Arabia is unsettled and opposes any negotiations at all with Iran.

Shifting to the East

Another emerging wedge between Saudi Arabia and the US relates to the global shift in Saudi trade and investment relations. Closer commercial ties with countries in Asia, and especially China—which is already the largest single market for Saudi oil exports and buys more 25% of the kingdom’s total goods exports—will draw political attention and prompt new policy initiatives most likely at the expense of relations with the West. Earlier this year, Saudi Arabia considered changing the pricing of oil sales to China from US dollars to Chinese renminbi (also known as yuan). To date the kingdom’s rulers have resisted the currency switch for oil trade, but the temptation will grow along with China’s expected rise as a global economic powerhouse. Such a move would threaten the long-standing petrodollar agreement between Saudi Arabia and the US that requires the Saudi state to sell its oil only for US dollars and to reinvest excess dollar reserves in US treasury securities and US companies, all in return for US security guarantees. In addition, this would probably contribute to a decoupling of the Saudi riyal from the US dollar, to which it has been pegged at SR3.75:US$1 since 1986. The decline of the petrodollar (and the concomitant rise of the “petro yuan”) is a long-term risk, rather than a short- or medium-term one. For now, Saudi officials have repeatedly restated their commitment to the dollar peg and implemented economic policy to reinforce the arrangement. This stance will not change for the foreseeable future and most likely following a gradual and lengthy period of adjustment that aims to minimise economic damage as the Saudi economy weans itself off US dollars.

“Consequences” for Saudi Arabia

The strategic alliance between the US and Saudi Arabia has always been one of convenience. Saudi Arabia—which is not a democracy—has escaped many of the possible forms of punitive action that the US applies to some other undemocratic countries because of the strategic role of the kingdom’s oil exports and Saudi Arabia’s role in maintaining the balance of power in the Middle East, mainly against Iran. The US has stated that Saudi defiance of the US at a key juncture in global politics, as the stakes for all sides are raised to the highest level by the Ukraine war, will lead to unspecified “consequences”, which are still being worked out. US members of Congress have proposed a number of measures, including restricting arms sales and re-examining the so-called NOPEC bill that would allow anti-trust actions against countries operating an oil price cartel. Neither is an easy option, which suggests punitive initiatives will be watered down in the end.

Saudi Arabia is the largest customer for US arms exports, and large sales contracts are already in the process of being fulfilled. US arms manufacturers, an important vested interest in the US political landscape, are unlikely to welcome restrictions on arms sales. If they happen, we believe they will be limited in scope and timeframe. Support for the NOPEC bill is at the highest level yet, but we still think it is unlikely to be enacted. Legislation of this type is opposed by the US oil industry for complicating joint ventures and investments. The US Chamber of Commerce has stated that it believes the NOPEC bill would have “zero impact” in terms of bringing down US petrol pump prices. Saudi government officials have stated that they have options too: if such legislation were introduced, the kingdom could limit the exchange of information with the US that has helped to foil many terrorist attacks. In addition, equipment restrictions would have the knock‑on effect of harming the security relationship at the heart of the alliance—and encourage Saudi Arabia to look elsewhere, especially to China and Russia, for supplies. Similarly, calls from some quarters in the US for the US to withdraw troops from Saudi Arabia simply defeat the purpose of US foreign policy in the region, which is to protect oil supplies and oppose Iranian influence.

Mutually beneficial strategic relationship to remain intact

Crucially, Saudi Arabia and the UAE both oppose Iranian influence within the Middle East, and to that extent the US strategic alliance is a must. Claims that closer Saudi military ties with Russia and China could replace the US—a development that would require the country to forego US military hardware and servicing—seem fanciful. The US, for its part, cannot put meaningful restrictions on Saudi Arabia without diminishing its own Middle East policy. There is also the fact that the role of Saudi Arabia in arms purchases is too significant for the US military establishment to willingly forego. The US and Saudi Arabia retain many economic and strategic interests in common, which will support an admittedly more fractious alliance between them over the 2023‑27 forecast period. At worst, we believe that some restrictions on military trade with the kingdom, albeit largely symbolic, will be imposed temporarily.

The analysis and forecasts featured in this piece can be found in EIU Viewpoint, our new country analysis solution. EIU Viewpoint provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.

Credit: ECONOMIC INTERLLIGENCE UNIT, EIU.

• The US government has responded to an oil production quota cut announced by the OPEC+ grouping of oil exporters by vowing to “re-evaluate” its relationship with Saudi Arabia.
• EIU believes the US response will be carefully calibrated to avoid undermining key areas of bilateral interest—for instance certain types of weaponry supplied to the kingdom may be restricted but only temporarily.
• The bilateral relationship may become increasingly transactional, in an unstable global geopolitical environment, while opposition to Iranian influence will remain a common theme.
• The Saudi riyal’s long-standing peg to the US dollar will remain in place but Saudi Arabia will explore alternatives, including a shift to a reference basket of currencies and a potential sale of oil in currencies other than the dollar.

The OPEC+ grouping of oil exporters—comprising an OPEC bloc led by Saudi Arabia and a non-OPEC bloc led by Russia—agreed in October to cut production quotas and curb international oil supplies. This is likely to keep oil prices high, above US$90/barrel, even as Western interest rates rise and global demand slows. This latest move comes just ahead of the US midterm elections in November, amid a cost-of-living crisis in Europe—largely fuelled by the war in Ukraine and sky-high energy costs—and to the consternation of political leaders in Washington, Brussels and London. Saudi Arabia, and other OPEC members, point to the fact that they are merely acting in their own economic interests by making a pre-emptive policy to put a floor under prices in a volatile market situation.

The administration of the US president, Joe Biden, had been calling for assistance from Gulf partners to help to reduce global energy prices, ease domestic price pressures and deny Russia burgeoning energy sector revenue—all of which incidentally could help the Democratic Party at the upcoming US midterm elections. The latest OPEC+ move and the evident lack of co-operation between Saudi Arabia and the US, together with Saudi Arabia’s unwillingness to condemn Russia’s invasion of Ukraine, have further strained relations between Saudi Arabia and the US.

Saudi Arabia claims OPEC is driven by economic rather than political motives

Although the OPEC+ production cut will support oil prices to the advantage of Russian state finances during the Ukraine war, Saudi Arabia and other oil producers claim that they simply need to put a floor under oil prices. Rather than “siding with Russia” in the Ukraine war, OPEC members claim that they are acting apolitically, in order to ensure budget stability. Saudi Arabia’s Vision 2030 economic development plan requires hundreds of billions of dollars of investment, with the aim of diversifying away from oil production. Renewable energy, housing, healthcare, cultural and tourism projects as well as the building of Neom, a futuristic new city, are all part of the kingdom’s plans. High oil prices play a central role in funding the kingdom’s development ambitions, with strong rises in expenditure expected throughout 2022‑25. However, from the US’s point of view, an oil production cut at a time when oil prices were already over US$80/b (albeit having fallen from about US$120/b in June) represents the boldest move ever by OPEC to support prices—previous output cuts have been made at much lower price levels.

Friction in the bilateral relationship

Whatever the rationale for OPEC’s move, growing tensions have been evident in the US‑Saudi relationship for some time. A key turning point was the 2018 murder (and dismemberment) of a Saudi journalist, Jamal Kashoggi, in the Saudi consulate in Istanbul (Turkey). The US government has stated that the murder was ordered by Saudi Arabia’s crown prince and de facto ruler (now prime minister too), Mohammed bin Salman al‑Saud. Mr. Biden rowed back on his pledges to shun the crown prince in July, when he visited Saudi Arabia and sought a commitment to raise oil production to ease soaring oil prices. Ultimately he has nothing to show for it: OPEC+ briefly raised oil production quotas marginally, before reversing the rise, and then on October 5th announcing a 2m‑barrel/day cut. As many oil producers are already producing below quota, owing to production constraints, the full drop in oil output may only be half of the October target. Nevertheless, the organisation’s decision to flout US demands marks another low point in US‑Saudi relations.

Other difficulties in the relationship include Mr Biden’s opposition to Saudi Arabia’s involvement in the civil war in Yemen, where the Houthi rebels are believed to have links with Iran. Although a ceasefire in Yemen briefly took hold earlier this year, the ceasefire expired in early October. An expected resumption in fighting in Yemen may raise tensions between Saudi Arabia and the US, which already restricts the supply of some military equipment to the kingdom owing to concerns over Saudi Arabia’s role in Yemen. Conversely, Saudi Arabia has concerns that the US is relinquishing its role as the kingdom’s regional protector by intermittently scaling back arms and reducing its regional military presence, while earlier this year seeking a nuclear deal with Iran (lifting economic sanctions on Iran in exchange for a reduction in enrichment of uranium and a redesign and conversion of nuclear facilities). The nuclear deal is currently off the immediate agenda, but Saudi Arabia is unsettled and opposes any negotiations at all with Iran.

Shifting to the East

Another emerging wedge between Saudi Arabia and the US relates to the global shift in Saudi trade and investment relations. Closer commercial ties with countries in Asia, and especially China—which is already the largest single market for Saudi oil exports and buys more 25% of the kingdom’s total goods exports—will draw political attention and prompt new policy initiatives most likely at the expense of relations with the West. Earlier this year, Saudi Arabia considered changing the pricing of oil sales to China from US dollars to Chinese renminbi (also known as yuan). To date the kingdom’s rulers have resisted the currency switch for oil trade, but the temptation will grow along with China’s expected rise as a global economic powerhouse. Such a move would threaten the long-standing petrodollar agreement between Saudi Arabia and the US that requires the Saudi state to sell its oil only for US dollars and to reinvest excess dollar reserves in US treasury securities and US companies, all in return for US security guarantees. In addition, this would probably contribute to a decoupling of the Saudi riyal from the US dollar, to which it has been pegged at SR3.75:US$1 since 1986. The decline of the petrodollar (and the concomitant rise of the “petro yuan”) is a long-term risk, rather than a short- or medium-term one. For now, Saudi officials have repeatedly restated their commitment to the dollar peg and implemented economic policy to reinforce the arrangement. This stance will not change for the foreseeable future and most likely following a gradual and lengthy period of adjustment that aims to minimise economic damage as the Saudi economy weans itself off US dollars.

“Consequences” for Saudi Arabia

The strategic alliance between the US and Saudi Arabia has always been one of convenience. Saudi Arabia—which is not a democracy—has escaped many of the possible forms of punitive action that the US applies to some other undemocratic countries because of the strategic role of the kingdom’s oil exports and Saudi Arabia’s role in maintaining the balance of power in the Middle East, mainly against Iran. The US has stated that Saudi defiance of the US at a key juncture in global politics, as the stakes for all sides are raised to the highest level by the Ukraine war, will lead to unspecified “consequences”, which are still being worked out. US members of Congress have proposed a number of measures, including restricting arms sales and re-examining the so-called NOPEC bill that would allow anti-trust actions against countries operating an oil price cartel. Neither is an easy option, which suggests punitive initiatives will be watered down in the end.

Saudi Arabia is the largest customer for US arms exports, and large sales contracts are already in the process of being fulfilled. US arms manufacturers, an important vested interest in the US political landscape, are unlikely to welcome restrictions on arms sales. If they happen, we believe they will be limited in scope and timeframe. Support for the NOPEC bill is at the highest level yet, but we still think it is unlikely to be enacted. Legislation of this type is opposed by the US oil industry for complicating joint ventures and investments. The US Chamber of Commerce has stated that it believes the NOPEC bill would have “zero impact” in terms of bringing down US petrol pump prices. Saudi government officials have stated that they have options too: if such legislation were introduced, the kingdom could limit the exchange of information with the US that has helped to foil many terrorist attacks. In addition, equipment restrictions would have the knock‑on effect of harming the security relationship at the heart of the alliance—and encourage Saudi Arabia to look elsewhere, especially to China and Russia, for supplies. Similarly, calls from some quarters in the US for the US to withdraw troops from Saudi Arabia simply defeat the purpose of US foreign policy in the region, which is to protect oil supplies and oppose Iranian influence.

Mutually beneficial strategic relationship to remain intact

Crucially, Saudi Arabia and the UAE both oppose Iranian influence within the Middle East, and to that extent the US strategic alliance is a must. Claims that closer Saudi military ties with Russia and China could replace the US—a development that would require the country to forego US military hardware and servicing—seem fanciful. The US, for its part, cannot put meaningful restrictions on Saudi Arabia without diminishing its own Middle East policy. There is also the fact that the role of Saudi Arabia in arms purchases is too significant for the US military establishment to willingly forego. The US and Saudi Arabia retain many economic and strategic interests in common, which will support an admittedly more fractious alliance between them over the 2023‑27 forecast period. At worst, we believe that some restrictions on military trade with the kingdom, albeit largely symbolic, will be imposed temporarily.

The analysis and forecasts featured in this piece can be found in EIU Viewpoint, our new country analysis solution. EIU Viewpoint provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.

Credit: ECONOMIC INTERLLIGENCE UNIT, EIU.