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Currently in the final stage of my doctoral work on the political economy of national oil companies. Here you'll find some of my findings--as well as other musings on oil-related topics. All comments -- civil, civilized or barbarian -- are welcome

The Canada-Saudi Arabia dispute: worlds apart but connected by oil

The Canada-Saudi Arabia dispute: worlds apart but connected by oil

The not-so-mysterious murder mystery of a Saudi journalist brings more context to the bizarre and diplomatic quarrel between Canada and Saudi Arabia. These unfortunate episodes are proving to be a window into an erratic and reactionary Saudi foreign policy under its supposedly reformist Crown Prince; the oil giant may yet choose to disrupt global oil markets

October 2018

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The recent torture, death and likely dismemberment of Saudi journalist and critic Jamal Khashoggi at the Saudi consulate in Turkey by a professional team of hitmen may help shed light on the diplomatic spat between Canada and Saudi Arabia from August this year. In light of what is almost certainly the state-sanctioned murder of Khashoggi, who had turned into a vocal critic of the regime, the Crown Prince’s reaction to Canada’s criticism may not actually be that much of a surprise. While the dispute’s impact hasn’t been great, there is one thing that binds the two—oil, its price and the struggle to sell to American consumers. Given the Crown Prince’s unpredictability, we may yet see the Saudis move to disrupt global oil markets. But it’s an extreme measure with heavy costs, especially for Saudis already diminished leverage in the US oil market.

280 characters and a diplomatic crisis

When the Canadian Ministry of Global Affairs tweeted its defense of several female Saudi human-rights activists, the Kingdom of Saudi Arabia (KSA) responded by expelling Canada’s ambassador, suspending all flights between the two countries, liquidating all Canadian assets inside the Kingdom, among other things. It was no doubt an over-reaction from the Saudi regime, but it wasn’t altogether unexpected given the Kingdom’s ultra-sensitivity to human-rights criticism from foreign governments; Germany and Sweden had done so before—and the Saudi regime’s whiplash reaction wasn’t all that different.

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The West has been consistently sold the image of Saudi Arabia under its new Crown Prince Mohammed bin Salman (MBS) as a more open, less repressive society. After all, it was MBS who has sought more trade and investment, lifted the ban on women driving, allowed music to be played in some public spaces, and even opened the Kingdom’s first movie theatre (Black Panther was the first movie shown). (Thomas Friedman, who has become MBS’s most prominent spokesperson in the Western media, has been noticeably silent since Khashoggi’s death).

Different in all ways but one

There isn’t much that holds Canada and Saudi Arabia together. Both are high per-capita income countries but they do only a small amount of business with each other. At about CDN$4 billion, a year of Canada-Saudi trade is about the same value of one day of US-Canada trade; Canada trades more with countries like Belgium and Switzerland. Their views of the world aren’t similar either: KSA lives in a dangerous neighbourhood in which the regime spends extravagantly—and largely inefficaciously—on the latest and greatest weapons, intervenes in several of the region’s conflicts and politics (including temporarily kidnapping Lebanon’s prime minister), and lives in a permanent state of fear of its own minority Shi’a population (the ruling family is Sunni and adheres to a very strict interpretation of Islam known as Wahhabism). By contrast, Canada spends little on its military, expends most of its diplomatic energy on issues like international cooperation and human rights, and has the luxury of disputing lumber and dairy tariffs with the world’s superpower next door. Their political system and societies are very different, too. Canada is an immigrant-welcoming, multi-cultural, bilingual society and enjoys a stable, non-violent multi-party democracy. Saudi Arabia is an extremely conservative theocracy run by an expansive and frankly predatory ruling family that doles out social welfare from its vast oil revenues.

There is one thing that binds them: oil, its price, and the struggle to sell oil to the US market. As big oil producers, the two countries have a few common interests—a moderately high oil price most importantly—but many diverging interests. On the one end, Canada produces about 4 million barrels per day (b/d)—no paltry sum, good enough for 4th most among oil-producing countries. Canada also has perhaps the world’s second biggest reserves—‘perhaps’ because estimating reserves is mostly science but a little art, too. Canada’s oil sector is vibrant, populated by dozens of companies, but handicapped by political head-butting between certain provinces (Alberta, its biggest oil-producing one, and British Columbia, its potentially most important transit province to Asian markets). Canada is also a large net oil exporter; practically every barrel of Canadian oil is sold to the United States—and this is the most important fact from the Saudi perspective.

On the other end is Saudi Arabia, producer of about 11m b/d, about three times more than Canada’s production. And with a rather tiny domestic oil appetite, Saudi Arabia is the world’s largest oil exporter—by far actually. But Saudi’s great strength in oil is also its weakness: the Kingdom spends wildly—as one may expect from a bunch of princes. But this extravagant spending also requires that oil prices stay high but not too high so as to pay for the country’s continued modernization and sustain the ruling family’s vast clientelist network. Canada, which has one of the most diverse economies in the world (only 3% of its GDP comes from crude oil production), isn’t nearly as dependent on oil production for its generous welfare system, but definitely would benefit from mildly expensive oil. Those in Canada’s oil sands do not want to relive the low-price crunch of mid-2014-early 2016. Canada’s benchmark crude, West Canadian Select, isn’t quite so select; it holds the dubious distinction of being the world’s least valuable crude, which means higher costs for extraction, refining and the environment.

That leads us to another kind of inconvenient truth: Canada free-rides on OPEC’s quotas and production cuts. And no player is more important in orchestrating—and enforcing—these cuts than Saudi Arabia.

But despite Saudi Arabia’s undeniable influence in world oil markets, Canada has something that the Saudi want (back): access to the US market, the world’s largest oil-consuming market. Virtually every barrel of Canadian oil gets sold to the US, but at a big discount—part of the reason why that pipeline to the west coast is so vital. In less than twenty years, Canada has nearly quadrupled its market share in the US; about 40% of the US import market (about 3.5m b/d) is satisfied by Canadian oil. And unlike higher oil prices that would benefit Canada and Saudi Arabia despite their other differences, access to the US market is a zero-sum game: Canada’s increased oil sales have come at the Saudis’ expense. Another pipeline from Canada’s oil sands to the US, such as the controversial Keystone XL pipeline, could bring as much as another 1m b/d to American consumers—oil that, if coming from Canada, isn’t coming from Saudi Arabia.

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So, although KSA is the world’s largest crude exporter, it has rapidly lost market share in the United States in recent years. And with American oil production easily passing the mark of 10m b/d, imports of Saudi crude—a fixture of America’s oil market since the 1970s—may be done away with altogether.

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Where to go from here?

The diplomatic dispute between Canada and Saudi Arabia, when analyzed on its own, is unexpected and sudden. But given Crown Prince MBS’s knee-jerk and excessive reaction to criticism from other countries on human-rights issues, it shows how MBS sees Saudi foreign relations and its apparent opening: ‘I will decide the time and pace and type of change—not the international media pushing me’, journalist covering the Arabian peninsula Aya Batrawy told CBC’s The Current. That may mean opening to investment and trade, or allowing women to drive. Or it may mean cutting all official ties with another sovereign state. Or it may mean something far more severe, using Saudi Arabia’s most valuable weapon: oil. But the Saudis wielding the oil weapon has mixed results at best—successful in 1973 especially and 1998 less notably, ineffectual in 1967, and disastrous in 1985. Picking a fight with Canada may not mean much on its own, giving the low stakes of the relationship. But it may jeopardize its far more important—and far more comprehensive—relationship with the United States on whom the Saudi regime relies for much more than just oil purchases, but a relationship that underpins Saudi goals—and outright survival—in that dangerous neighbourhood.

Since the tweet-induced diplomatic spat, Canada has held strong. And given the gruesome fate of Mr Khashoggi that almost certainly came at the hands of the Saudi regime—and likely on MBS’s order—Canada should be in no rush to give in.

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