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Between Riyadh and Washington

Islamabad could have watched comfortably from the side as the historic US-Saudi security-for-oil deal of 77 years unraveled, yet it chose to side with Riyadh even at the cost of upsetting Washington while it still needs its leverage for a better deal with the IMF (International Monetary Fund) and to get off the FATF (Financial Action Task Force) grey list once and for all. It’s also a net oil importer with the government paying repeatedly at the polls for runaway inflation, which will only be made worse by the decision of OPEC+ to cut production by two million barrels per day.

That means it’s either got a Saudi guarantee for more oil on deferred payments or it’s fishing for one. Either way, it’s taken a clear stake as a defining partnership between the world’s biggest superpower and the central bank of black gold falls apart after enduring for more than three quarters of a century. It is rooted in the historic meeting in 1945 between US President Franklin Roosevelt and Saudi founder King Abdelaziz ibn Saud aboard the USS Quincy in the Suez Canal.

The two met to iron out differences over the fate of the British mandate in Palestine at the end of world war two, and the subsequent creation of the Zionist state in the heart of the Arab world, but ended up agreeing to work around a formula that kept the al Saud in power in return for fueling America’s post-war growth by pricing oil in dollars and keeping the end price controlled. It’s this arrangement that another US president, Donald Trump, referred to in 2018 when he addressed the Saudi king as “King, we are protecting you, you might not be there for two weeks without us, you have to pay for your military” in front of cheering supporters at a rally in Mississippi.

It’s not always been a smooth ride, but the two sides have found enough common ground to hold it together. The OPEC boycott of the US for siding with Israel in the 1973 Yom Kippur war was more than compensated by Saudi help in isolating Iran after the 1979 revolution, Saudi money in the so-called Afghan jihad that broke the Soviet Union, and Saudi partnership in America’s war on terror. Ties warmed to unprecedented levels during the Trump White House, when the romance between President Trump and Crown Prince Mohammad bin Salman (MbS) crystallised in a $200 billion arms deal and the US president justified not condemning the Saudi prince’s alleged role in the killing of Washington Post columnist Jamal Khashoggi because Saudi money was creating American jobs. Trump also convinced a number of Muslim and Arab states to formally recognise Israel, no doubt with the blessing of Riyadh.

Yet there were signs that things would change under Joe Biden as he promised to make Saudi Arabia “the pariah that they are” on the campaign trail and insulted MbS after becoming president by refusing to deal with him directly. The Democrats have believed for a while that America’s shale boom, which has made it the world’s largest oil producer, empowers it to alter the status quo.

But it didn’t, and Biden had to eat his words and go ask MbS to increase production when the Ukraine war ramped up prices in July. That Saudi responded with one of the smallest production increases in OPEC’s history, only 100,000 barrels per day, showed that Riyadh had also calculated that it didn’t need US favour quite like it used to. And now that OPEC+, the cartel’s alliance with another dozen states led by Russia, has delivered a 2mbpd cut, Washington will feel a lot of pressure to pull the plug on the whole deal if it wants to appear on the front foot. The production cut will favour Russia and dilute the effect of US-led sanctions besides raising domestic fuel prices just ahead of crucial midterm polls in the US; a double whammy for Biden.

Riyadh’s influence has been tilting the oil lobby towards Moscow since the start of the Ukraine war. If the diplomatic spat with the US worsens, it will find itself further entrenched in the other camp dominated by Russia and China; which also includes its traditional arch-rival Iran. Russia’s invasion of Ukraine is clearly creating an unprecedented geopolitical situation by dividing the world into groups once again, enabling even small countries like Pakistan to take sides and punch above their weight.

This approach will be better than non-alignment only if it delivers quantifiable dividends. So far there’s the prospect of cheap oil from Saudi Arabia, cheap grain from Russia and investment, infrastructural and financial support from China. But what pound of flesh the US will extract from it remains to be seen.

Shahab Jafry, "Between Riyadh and Washington," Business recorder. 2022-10-20.
Keywords: Economics , Monetary fund , Central bank , Oil importer , Economy , Donald Trump , Joe Biden , Pakistan , America , Ukraine , China , Russia , Saudi Arabia , FATF , OPEC , IMF

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