United States and Saudi Arabia Energy Relations

United States and Saudi Arabia Energy Relations

Updated November 19, 2018
United States and Saudi Arabia Energy Relations
Following the killing of journalist Jamal Khashoggi at a
U.S. energy companies also have business interests in Saudi
Saudi Arabia consulate in Istanbul, Turkey, some Members
Arabia. Exxon and Chevron have joint ventures and other
of Congress have expressed interest in taking action against
business agreements in the country. Oil field service
Saudi Arabia for its apparent role. The purpose of this In
companies such as Halliburton and Schlumberger have a
Focus is to provide a non-comprehensive overview of the
presence in the country, and in March 2018, Saudi Aramco
U.S.-Saudi Arabia energy relationship that dates back to at
announced oil field service deals reportedly valued at
least 1933, when Saudi Arabia granted an oil concession to
potentially more than $10 billion with U.S. firms. U.S.
Standard Oil Company of California (now Chevron). Since
companies are also in contention for a Saudi nuclear power
then, this relationship has witnessed the creation—founded
generation procurement program.
by U.S. oil companies—of the Arabian American Oil
Company (Aramco), nationalization and ownership transfer
Global Petroleum Prices
of Aramco to Saudi Arabia (renamed Saudi Aramco), a
The Kingdom of Saudi Arabia is the third largest producer
Saudi-supported embargo of crude oil shipments to the
of crude oil in the world (10.4 mbpd), after the United
United States, and various periods of energy cooperation.
States and Russia, and has the second largest reserve base.
Today, the U.S.-Saudi energy relationship includes interests
The United States is the largest petroleum-consuming
within three general categories: (1) energy trade, (2)
country at nearly 20 mbpd. Saudi Arabia is also the largest
business operations, and (3) global petroleum prices.
exporter of crude oil to world consumers at over 7 mbpd.
While these values alone would establish the kingdom as a
Energy Trade
major factor in the world oil market, Saudi Arabia’s
Energy commodity trade between the United States and
potential ability to directly influence global petroleum
Saudi Arabia is bilateral and is heavily weighted towards
prices lies in its spare production capacity—1.5 mbpd in
U.S. imports of Saudi Arabian crude oil, which have
September 2018, or 72% of global spare capacity. This
annually ranged between 132,000 and 1.73 million barrels
allows the kingdom to adjust oil output in response to
per day (mbpd) between 1973 and 2017. From January
Organization of the Petroleum Exporting Countries (OPEC)
through July of 2018, U.S. buyers imported approximately
policy, world political conditions, and other factors.
795,000 bpd of crude oil and 20,000 bpd of petroleum
products from Saudi Arabia. Crude oil from Saudi Arabia
For prices to remain stable, the world oil market must be in
during this period represented approximately 10% of total
balance between oil production and consumption in the
U.S. crude imports. Saudi Arabia purchases a small
short term. In the very near term, a wide variety of political
amount—approximately 1,000 to 4,000 bpd—of petroleum
and security factors (e.g., unrest in Libya) can affect prices,
products from U.S. companies.
but the underlying balance between supply and demand is
essential. Global petroleum prices respond to any imbalance
Business Operations
between demand and supply. Since neither oil demand, nor
Saudi Arabia has various energy-related business interests
oil supply quantities, adjust quickly in the short-run, price
located in the United States. Saudi Aramco—through its
response can be quite sharp. Excess demand can result in
Saudi Refining, Inc., subsidiary—is the parent company of
sharp price spikes, while excess supply can result in the
Motiva Enterprises, which owns and operates a 600,000
collapse of prices.
bpd refinery in Port Arthur, TX. Motiva accounted for
approximately 31% of U.S. crude oil imports from Saudi
In recent years, Saudi Arabia, through OPEC policy
Arabia between January and July 2018. Motiva also
decisions, has demonstrated how its ability to contract and
operates a network of petroleum-product storage terminals.
expand oil output can affect prices. In 2014, OPEC, led by
Other Saudi Aramco-affiliated businesses located in the
Saudi Arabia, adopted a policy to remove member-country
United States include Aramco Services. In addition to
production quotas and decided to not adjust oil production
providing technical, engineering, and management services,
levels at a time when the oil market was oversupplied. As a
Aramco Services also operates three research centers in
result, the price of oil declined from over $109 per barrel in
Houston, TX, Boston, MA, and Detroit, MI.
May 2014 to about $30 per barrel in January 2016. In
December 2016, OPEC and 11 non-OPEC countries, led by
Saudi Arabia’s petrochemical manufacturing company—
Russia, collectively agreed to reduce oil production by
Saudi Basic Industries Corporation (SABIC)—has multiple
nearly 1.8 mbpd. World oil prices began a steady increase
manufacturing and technology development facilities in the
to around $80 per barrel. Finally, oil market participants are
United States. As part of its long-term strategy, Saudi
also looking to Saudi Arabia to ease potential price
Aramco has indicated intent to expand into petrochemical
escalation associated with reduced global oil supply that
manufacturing and is reportedly planning to acquire a
might result from the re-imposition of U.S. sanctions that
controlling interest in SABIC.
target Iran.
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United States and Saudi Arabia Energy Relations
Measures and Countermeasures
Because of the nature of the demand for oil, the percentage
Any consideration, or analysis, of the effects of censuring
increase in prices is likely to be larger than the percentage
Saudi Arabia for its involvement, or lack of cooperation, in
decrease in production, resulting in increased total revenue
the investigation of the death of Jamal Khashoggi at this
(total revenue = price x quantity).
time must be considered highly speculative. Some in
Congress, along with the Administration, have called for
An increase in Saudi oil supplies could have a more
possibly restricting U.S. imports of Saudi Arabian crude oil.
targeted effect on the United States. The U.S. light, tight oil
Given the important political, military, and economic
supplies are characterized by high costs of production
relations between the United States and Saudi Arabia, it is
compared to Saudi oil. If increasing Saudi oil production
possible that no action might be taken by the United States.
drove down the world price of oil enough, it could result in
reduced U.S. oil production and financial difficulties for
The Saudi reaction to any action taken against it by the
U.S. producers. However, this result is not inevitable. It is
United States is also uncertain. On October 14, 2018, the
possible that reduced prices could result in a push for cost
Saudi Foreign Ministry said “The Kingdom emphasizes that
cutting efficiencies that have, in earlier periods of low
it will respond to any measure against it with an even
prices, resulted in lower breakeven points for U.S. oil. On
stronger measure.” While this statement was quite strong, it
the other hand, U.S. and world petroleum product
did not mention oil. About two weeks later, the Saudi
consumers would benefit from this strategy. While this
Energy minister Khalid Al Falih said that there is no
strategy might be viewed as favorable by consuming
interest in repeating 1973. This statement was in reference
nations, Saudi’s partners in the Organization of the
to the Saudi-led oil embargo against the United States in
Petroleum Exporting Countries would suffer financial
1973.
losses along with Saudi Arabia itself. This strategy is also
less likely to be identified with the use of oil as a political
Oil markets in 2018 are quite different from those of 1973.
weapon.
In 1973, most oil was being traded on long-term contract
and there was little trading infrastructure; no futures
Considerations for Congress: Restricting
contracts were traded; spot transactions were largely limited
Imports
to Rotterdam, the Netherlands; and the web of trading
U.S. actions to restrict crude oil imports from Saudi Arabia
companies that today manage the destination of oil cargos
would likely affect Saudi oil revenues as well as U.S.
around the world barely existed.
refinery costs/margins to some degree. Retaliatory actions
taken by Saudi Arabia could create additional negative
For sake of argument, suppose the United States decided to
market results. Initial market and price behavior that might
restrict the entry of all, or a part, of Saudi oil into the
result from an action restricting energy trade between the
country. The specific way this could be accomplished is
world’s largest oil consuming country and largest oil
unknown, but it is likely that the initial impact would be on
exporter is uncertain and could potentially be significant.
the U.S. refiners that use that oil. Unless they had
Further retaliatory measures could aggravate the situation
anticipated the restrictions they would find themselves
depending on the chosen actions. The Saudis would need to
facing a shortage which would have to be made up with
either increase sales to current buyers or locate new
other supplies. Saudi Arabia would have to find other
buyers—likely through price discounts—to absorb barrels
buyers for that crude oil, or simply produce less.
diverted from the United States. U.S. refiners would need to
secure alternative sources—likely through price
The retaliatory response that Saudi Arabia could take is
premiums—of crude oil with similar quality characteristics.
open, in the sense that either producing more, or less, oil
Premiums could potentially reduce refinery margins unless
could be effective in disrupting the market. If the Saudi
increased costs were passed to consumers through higher
response to a U.S. embargo were to produce less oil, U.S.
petroleum product prices.
gasoline consumers would see a quick rise in gasoline
prices. However, the price increases would not likely be
Higher petroleum product prices along with the effects of
limited to the United States. The oil market is a world
sanctions on Iranian oil, deteriorating trade relations
market, so every consuming nation would face higher
between the United States and China, and slowing
petroleum product prices. In addition, this strategy could
economic growth could create serious economic headwinds
have other deleterious effects from the Saudi perspective.
for the U.S. and world economies.
Higher oil prices have been linked to slower economic
growth and recession in oil importing countries. In addition,
Phillip Brown, Specialist in Energy Policy
the use of oil as a “weapon” could accelerate the use of
Robert Pirog, Specialist in Energy Economics
non-oil powered vehicles which would be contrary to long-
term Saudi interests.
IF11027
However, producing less oil and inducing higher prices
would be unlikely to cost the Saudi’s near term revenues.

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United States and Saudi Arabia Energy Relations

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