LONDON: Saudi Arabia's threat to sell its oil in currencies other than the dollar if the United States enacts anti-OPEC legislation is an empty one, but it illustrates the extent of tensions between the two governments over oil prices.
Senior Saudi officials have discussed a plan to stop invoicing oil in dollars and switch to other currencies if the No Oil Producing and Exporting Cartels Act (NOPEC), recently introduced in Congress, becomes law.
The threat has been communicated to top officials in Washington and leaked to signal the strength of the kingdom's opposition ("Saudi Arabia threatens to ditch dollar oil trades to stop NOPEC", Reuters, April 5).
Invoicing oil sales in euros or yuan would aim to damage the US dollar's status as the petro-recycling currency and its reserve status more generally, weakening its value and taking aim at US financial dominance.
In practice, the threat is not credible since the kingdom relies almost totally on the United States for its security, including purchases of armaments and training, intelligence sharing, and support in its conflict in Yemen.
The kingdom could not afford to jeopardise its security relationship and close ties with the present US administration.
But it does illustrate the strain on relations that has emerged between the kingdom and the United States, especially the White House, over the desirable level of oil prices.
Those tensions are likely to intensify as the United States gears up for congressional and presidential elections in November 2020.
On most issues, Saudi Arabia's rulers and the White House are more closely aligned than ever before - especially in their shared commitment to confronting Iran.
Saudi Arabia is central to the regional security system the Trump administration has been trying to assemble to contain Iran's influence in the Middle East.
In turn, Saudi Arabia has become increasingly dependent on the United States for its internal and external security as its conflict with Iran escalates, both in the diplomatic arena and in wars being fought by proxy in the region.
The U.S and Saudi governments need each other. On the issue of oil prices, however, the two disagree sharply.
President Donald Trump has made clear he wants oil prices to remain below $70 per barrel in a series of messages posted on Twitter and delivered in television interviews.
Saudi Arabia, by contrast, needs prices well over $70 and probably over $80 to shore up its government finances, pay for an expensive economic transformation and stem the deterioration in its own balance of payments.
Like most first-term presidents, Trump's over-riding priority is to be re-elected. All other policy considerations will be subordinated to that aim.
Other US officials may pursue various policy priorities. But the president's and vice-president's names are the only ones on the ballot which puts re-election at the forefront of their calculations.
Since the oil shocks of the 1970s, gasoline prices have often been a high-profile issue in election campaigns and the run-up to November 2020 will be no different.
The president has calculated, correctly, his marginal voter next year will be a motorist in the Midwest, so he needs moderately low gasoline prices, at least until after election day.
Trump is not the first president who has tried to exert pressure on Saudi Arabia to lower oil prices in the run up to a vote.
In 2000, Energy Secretary Bill Richardson mounted a very public campaign to press Saudi Arabia to increase oil output and lower prices ("US urges OPEC to increase oil production", New York Times, Sept. 7, 2000).
So far, NOPEC bills introduced into the US House of Representatives and Senate have made little progress, and the administration has adopted a non-committal attitude to them.
If oil prices rise to $80 or more, however, the bills may start to make more progress through the legislative process as lawmakers respond to pressure from their constituents.
The higher the prices rise and the nearer election day comes, the greater the prospect the NOPEC legislation will start to move forward.
At $85-$90, Congress will take more notice. At $90-$95 the bill could make it to the president's desk. And at $95-$100, the president might direct the attorney-general to initiate legal proceedings.
Saudi Arabia cannot be sure whether the president would sign or veto a NOPEC bill if it was approved by both chambers and presented to him.
In fact, the president has every incentive to maintain constructive ambiguity since it provides a useful source of leverage to ensure Saudi Arabia cooperates with his re-election effort.
In circumstances where oil prices are high and rising, the president might demand an output increase and lower oil prices in exchange for vetoing the bill.
NOPEC is therefore a useful bargaining chip for the White House, and the threat to switch invoicing away from the dollar is the kingdom's response, an attempt to develop a form of counter-leverage.
More importantly, the threat to the dollar's reserve currency status is intended to give the kingdom's lobbyists in Washington a talking point to raise with lawmakers and within the administration.
While the threat may not be credible, it is meant to signal the kingdom's concern and is intended to help create a firewall to keep NOPEC legislation bottled up in Congress and as far from the president's desk as possible.