CNN Business  — 

Forty-five years ago, Saudi Arabia and its allies cut off oil supplies to the United States over its support for Israel. Oil prices quadrupled, delivering a huge shock to the global economy.

Smart Take

  • The world needs more Saudi oil to make up for a shortfall created by the reintroduction of US sanctions on Iran
  • Prices could hit $100 a barrel by the end of the year if Saudi Arabia doesn’t follow through on commitments to pump more
  • Boom could be followed by bust as rising oil prices feed inflation that saps economic growth, hurting demand for energy

  • Now the kingdom is facing threats of punishment over the unexplained disappearance of a Washington Post journalist, Jamal Khashoggi, and is talking of retaliation if America imposes sanctions. A leading Saudi commentator has even hinted that oil could once again be used as a weapon.

    Writing in a personal capacity, Turki Aldakhil, general manager of the Saudi-owned Al-Arabiya news channel, warned on Sunday that the United States would “stab its own economy to death” and oil prices would soar to $200 a barrel if Washington imposes sanctions on Riyadh.

    Oil prices were flat on Monday, suggesting markets have for now dismissed the risk that Saudi Arabia could restrict supplies. Speaking in India, Saudi energy minister Khalid al-Falih said Monday that the kingdom would continue to act as “the central bank of the oil market” to keep supply and demand in balance, according to media reports.

    But if the crisis over Khashoggi escalates, that commitment could crumble, say oil experts.

    A rhetorical threat to withhold additional supplies “could certainly exert some upward pressure on prices,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.

    And the kingdom could go further, by “slow-walking” output increases to make up for reduced Iranian supplies when US sanctions take effect next month, Croft added.

    Filling the gap left by Iran

    Saudi Arabia pumps around 10.5 million barrels of oil a day, according to OPEC data. It has previously said it is willing, along with Russia, to fill the gap created by the return of sanctions on Iran.

    “We expect Iran’s crude production to decline by nearly 1 million barrels per day,” said Bjørnar Tonhaugen, head of oil market research at Rystad Energy. “Saudi Arabia is the only country that has spare production capacity … to compensate for such losses.”

    World oil markets have been transformed by a doubling in American output over the past decade. For the first time since 1973, the United States is the world’s largest producer of crude oil, according to preliminary estimates published last month.

    Saudi Arabia's oil exports to the US have fallen in recent years but it remains the second biggest foreign supplier.

    As a result, America is far less dependent on Saudi oil that it once was. In 2017, the United States imported 9% of its oil from the kingdom, according to the US Energy Information Administration. Imports from Saudi Arabia have almost halved over 25 years.

    But the world, and the US still needs Saudi oil. While US imports of Saudi oil have declined, the kingdom remains the No. 2 source of foreign oil in the United States, behind only Canada.

    Boom, then bust?

    Any move by the Saudis to cut supply would push up global prices, hitting drivers in their pockets and further forcing up inflation that already threatens to take the shine off America’s economy.

    Such an oil shock would come at a very sensitive time. President Donald Trump has lashed out at OPEC, suggesting he’s concerned about rising gasoline prices impacting next month’s midterm elections. And concerns about inflation have helped send US Treasury yields spiking, setting off a wave of turbulence on Wall Street.

    “Under a scenario where the Saudis scale back production, it is likely this will feed through to higher prices. How much upside, would depend on how much they cut production,” said Warren Patterson, commodities strategist at ING.

    Hitting $100 per barrel by the end of the year “is not impossible,” if Saudi production is scaled back, Robin Mills, CEO of Qamar Energy told CNN.

    It’s a risky strategy. Saudi Arabia could end up shooting itself in the foot.

    “Higher prices will likely lead to increased demand destruction in the short to medium term, while in the longer term it will only quicken the pace of structural changes we are seeing in energy markets, with regards to energy transition,” said Patterson.

    It may also encourage people to adopt cleaner technology.

    “It is in Saudi Arabia’s interest to keep prices moderate to avoid global economic damage and a slump in demand, a loss of market share to shale production, and the encouragement of non-oil technologies such as electric vehicles,” Mills said.

    ING’s Patterson echoed the view: “Higher oil prices for a sustained period of time could help support higher penetration rates of electric vehicles moving forward.”

    John Defterios, Matt Egan contributed to this report.