Saudi Arabia announced this weekend that attacks on two of its state-owned oil facilities — launched either by Iranian-backed Houthi forces in Yemen or by Iran itself, depending on whom you ask — had disrupted the country’s oil production.
President Donald Trump’s response was unusual, even for him. Normally, Trump takes a crass, transactional view on foreign policy, rejecting the pro-forma assumptions about maintaining good diplomatic relationships with allies. Instead, he made a glaring exception to those rules on behalf of Saudi interests.
First, the president argued that “we don’t need Middle Eastern Oil & Gas.” Then he made an apparent vow to not only come to Saudi Arabia’s assistance anyway but also to completely defer to the Saudi royal family as to “under what terms we would proceed.”
Saudi Arabia does not have a formal treaty of alliance with the United States — meaning there is no piece of paper obligating the US to do anything whatsoever in response to an attack against Saudi Arabia. And while the US has been intimately involved in the Saudi oil industry going back to the 1930s, nobody has ever claimed there is a deep connection grounded in values between our two countries.
But the Saudi royal family does seem to have a special relationship with Trump, who has repeatedly bucked bipartisan congressional majorities to back the Kingdom on topics ranging from its disastrous war in Yemen to the murder of Jamal Khashoggi.
It’s a fishy situation that naturally raises questions about Trump’s personal financial relationships with Persian Gulf monarchies — questions he and his allies in Congress have been successfully stonewalling for years.
And his official explanation of the need for a cozy relationship with the Saudis — that they are a valuable customer for American arms merchants — makes very little sense, though it does cohere with his larger nonsensical views about international trade as a whole.
America makes a lot of oil now
After sinking for almost 40 straight years starting in 1970, American production of crude oil and natural gas has skyrocketed for the past 10 years, thanks largely to technological improvements in fracking and horizontal drilling.
As a result of this, the United States is now the world’s largest producer of petroleum and natural gas.
This surge in American oil production means that changes in global energy prices impact the American economy in very different ways today than they did in the 1990s or 2000s.
This is particularly true because while the United States now produces a lot of oil, American oil is still relatively difficult to extract compared to Persian Gulf oil. This means that American oil production is fairly sensitive to global oil prices. In other words, when prices rise not only do US oil producers earn higher profits they also intensify the investment in extracting oil.
So for many players in the American economy, higher oil prices are now a good thing. Fracking communities experience localized economic booms, Alaska gets much higher government revenue, and a broader supply chain of American manufacturers of drilling-related equipment get more orders.
When oil prices dropped precipitously in the winter of 2014-’15, many drivers celebrated cheap gas. But it also contributed to a localized mini-recession as business investment and manufacturing output fell.
Expensive oil used to be a hammer blow to the American economy, and that isn’t quite true anymore. But it’s still the case that for most people the main economic impact of oil prices is on the price they pay at the pump, and that expensive gas is economically damaging.
Gas prices still matter economically
At the end of the day, most Americans do not work in the oil industry or live in a community that has a large oil extraction industry. By contrast, most Americans do rely on their cars for their daily commutes and generally don’t have very good short-term options for switching to more fuel-efficient vehicles or alternative modes of transportation.
Consequently, the main traditional economic impact of high oil prices — rising gasoline prices, rising consumer fuel costs, and falling consumer spending on everything else — are still in place. Even before the fracking boom it was the case that some Americans benefitted from high oil prices even while most suffered. Today the minority of Americans who benefit from expensive gas is larger than it was 10 or 20 years ago, but it’s still a minority.
What’s more, the economic impact of changes in oil and gas employment is different today with the labor market relatively stronger than it was just a few years ago. Back during the generally soft labor market of the Obama years, it was probably right to think of the shale boom as essentially creating employment where there would have otherwise been unemployment. Shale communities enjoyed consistently low unemployment rates and sucked-in idle labor from the rest of the country.
But oil prices also matter because they complicate the work of the Federal Reserve.
For all the recession hype the country witnessed in August, there was genuinely little reason to believe a growth downturn could be in the works. Inflation was low so there was no reason for the Fed to hesitate to provide interest rate cuts to support the economy and thus supported the economy could continue to grow.
High oil prices lead to inflation whether the oil is imported or not. Some of that takes the form directly of high gasoline prices, which the Fed normally ignores. But expensive oil also makes planes and trucks more expensive to operate, which tends to increase the price of everything that moves around which the Fed does not ignore. What’s more precisely because higher oil prices will pull more workers into the oil and gas extraction industries, they’ll raise labor costs across the board for other kinds of construction and shipping work further fueling inflation.
That in and of itself isn’t necessarily a huge problem. But it does mean that the Fed could find itself performing a balancing act between weak global economic conditions and rising domestic prices. And when the Fed tries to balance, it sometimes falls off the bar.
Every recession of the past generation has come amidst high global commodity prices precisely because that’s the kind of situation in which monetary policy mistakes can happen; so it’s still an economic risk, albeit a lesser one.
Trump has murky financial ties to the Gulf
Trump is not, in general, a big believer in the idea that America should play a beneficent global role and help out allies. He has complained vociferously about the financial cost of America’s treaty commitments to NATO and South Korea.
Which is why it’s so strange that he’s so dogmatic about upholding some supposed obligation to Saudi Arabia — again, a country with which we don’t have any formal treaty of alliance and whose regime is much less sympathetic than the democracies of Europe and Northeast Asia.
What’s particularly striking is that back in 2014, Trump took the view that “Saudi Arabia should fight their own wars” or else “pay us an absolute fortune” for coming to their assistance.
Now that Trump is president, he has changed his tune. And while Saudi Arabia does not pay “us” — in the sense of the American people — any kind of fortune, they do seem to pay Donald Trump a fair amount of money.
The manager of Trump’s hotel in New York credited a timely stay by members of the Saudi Crown Prince’s entourage (though not the prince himself) with lifting revenue there by 13 percent in one quarter last year. Lobbying
But the truth is that nobody really has any idea how much money Trump gets from the Saudis or other Persian Gulf regimes. He owns a golf club in Dubai but its membership roster isn’t public information any more than the membership list at any of Trump’s other clubs is public knowledge.
The fact about the crown prince’s entourage’s visit to Trump’s hotel in New York happens to have leaked to the Washington Post, but we don’t know what kind of hotel stays haven’t leaked.
In fact, we know next to nothing at all about Trump’s financial relationships with anyone, other than that Trump refuses to do any kind of meaningful
Trump’s official line on the relationship, however, is that of course it has nothing to do with his personal finances. But while a more conventional politician would cite some kind of strategic or geopolitical rationale, Trump really is focused on Saudi money — money that flows to American defense contractors.
Trump loves Saudi arms sales
Since Republicans have controlled the Senate throughout Trump’s entire presidency, he’s only issued five vetoes and four of them were of congressional efforts to curtail US assistance to Saudi Arabia.
Some of this legislation aimed to curtail sales of American military equipment to Saudi Arabia — a traditional way for the United States to discipline a country whose behavior the US government feels has gone off the rails.
Trump has always criticized such moves by citing the allegedly enormous economic value of the weapons sales themselves, occasionally claiming to believe that “millions of jobs” are at stake — even though there are only about 1.5 million people working in the entire aerospace and defense sector.
Trump continued with this line of thinking at a Monday press availability alongside Crown Prince Salman of Bahrain, claiming that the Saudis “spent $400 billion in our country over the last number of years,” giving them credit for “a million and a half jobs,” and then observing that “Saudi Arabia pays cash.”
Later Trump appeared to suggest that the United States might go to war against Iran on Saudi Arabia’s behalf as a kind of mercenary force, saying that “the Saudis are going to have a lot of involvement in this if we decide to do something. They’ll be very much involved. And that includes payment. And they understand that fully.”
This seems like almost a parody of a leftist reading of American foreign policy — every geopolitical decision is shaped by the narrow economic concerns of the arms industry.
It also inverts the normal thinking about the relationship between arms sales and alliance politics, in which access to American weaponry is considered an advantage you receive for being a country the United States regards as reliable. After all, the Iranians would surely be glad to get their hands on some advanced American defense technology too if we were inclined to sell it to them.
But Trump’s focus on arms exports as a goal of foreign policy, rather than a tool that serves foreign policy, is consistent with his strange thinking about trade policy. He judges all such relationships in terms of the bilateral balance of trade. A world in which the US exports weapons to the Gulf without importing much oil is a world where the US is winning. And if Trump’s private businesses can “win” too, then that’s so much the better.