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