Oil prices surge in response to Saudi purge

Even as the Western media ignores the political crisis in Saudi Arabia, the oil market is signalling its concern with a surge in oil prices, pushing prices of Brent crude up to $62 a barrel as of 6th November 2017.

Whether oil prices will remain at this level for very long will depend on whether and if so how quickly political stability in Saudi Arabia is restored.

Needless to say a prolonged political crisis in Saudi Arabia or – worse still – a total breakdown of the Saudi political system would quickly send the oil price spiralling, potentially triggering an energy shock the like of which has not been seen since the fall of the Shah in 1979 – requiring many to seek quick loans.

Though Saudi Arabia no longer dominates the oil market to the extent that it did in the 1970s and 1980s – oil production in the US and in Russia is roughly comparable – disruption of production in such an important producer would unavoidably have huge consequences for the oil price.

It might potentially also have major implications for the international position of the US dollar.  The key reason why the US dollar continues to be the world’s reserve currency despite the fact that in terms of purchase power parity the US economy has been overtaken in size by China’s is because of a longstanding agreement between the US and the Saudi monarchy that Saudi Arabia will accept payment for its oil in US dollars.

Since Saudi Arabia is the oil market’s key swing producer, and since oil is the world’s most widely traded commodity without which no industrialised economy can function, that obliges most states around the world to hold large quantities of dollars in order to pay for their oil imports.  That in turn secures the dollar’s position as the world’s reserve currency.

A prolonged political crisis in Saudi Arabia or a political breakdown there could call that arrangement into question, with massive implications for the global position of the dollar and of the US.

Indeed the crisis would be potentially so severe that it could conceivably trigger a decision to intervene in the Saudi crisis by the US, which despite denials already has a military presence within Saudi Arabia.

Armed intervention by the US in an internal crisis in Saudi Arabia – the religious centre of Islam – would however have explosive consequences.  The US – badly burnt by its past experiences fighting Muslim insurgents in countries like Iraq and Afghanistan – will be anxious to avoiding getting drawn into a conflict in Saudi Arabia compared to which its past conflicts in the Muslim world would be minor.

It is unlikely for the moment that the situation will come to that.  For the time being the crisis within Saudi Arabia is confined to a power-struggle within the Saudi Royal Family.  The chances for the moment are that it will remain so – whatever happens in the longer term – and the US will be hoping devoutly that that is the case.

However even allowing for the fact that the US’s diplomatic and intelligence agencies are currently immersed in the Russiagate scandal it is likely that they are watching the situation in Saudi Arabia carefully and anxiously.