The disappearance and possible murder of Saudi journalist Jamal Khashoggi complicates President Trump's efforts to maintain an alliance with Saudi Arabia to keep production high as oil sanctions kick in next month on Iran.
Trump said Thursday that he has been in contact with top Saudi officials to discuss the missing journalist, who disappeared in Turkey after visiting the Saudi consulate there.
From all reports, thus far, foul play and a possible assassination plot by the Saudi government appear likely. Khashoggi, a Washington Post columnist and Saudi news veteran, was regularly critical of Saudi Arabia’s King Salman.
But the timing couldn’t be worse for the administration and Republicans, facing a tough midterm fight the day after oil sanctions on Iran kick in Nov. 4.
“The Khashoggi affair throws a monkey wrench into these plans,” said Jim Krane, energy geopolitics fellow at Rice University's Baker Institute.
“Trump has been pressing Saudi Arabia to ramp up oil production to cover the lost Iranian supply — and keep gasoline prices reasonable — so as not to antagonize the U.S. motorist driving to the polls,” Crane added.
“The timing is terrible from a Republican perspective,” he said.
Even Trump donors like Dan Eberhart are getting a little jittery. Eberhart, CEO of the oil services firm Canary, sees the prospect of the U.S. taking action against the Saudis as complicating Trump’s arrangement with the Mideast oil giant.
“There is a grand bargain where Saudi keeps production inching higher as the Trump administration puts increasing pressure on Iran,” Eberhart said. “The presumed killed journalist is a giant complication. Trump doesn’t want to disrupt the arms sales either.”
Top senators on the Foreign Relations Committee have asked Trump to impose sanctions against anyone found responsible for Khashoggi’s fate. Trump has dismissed calls for sanctions on Saudi Arabia so far, but pressure could force his hand, Eberhart said.
“The administration seems reluctant to impose sanctions so far, but the pressure from the media for action will be unrelenting,” he said.
Amy Myers Jaffe, energy geopolitics expert at Council on Foreign Relations, said there is precedent for the U.S. to apply sanctions against key oil-producing countries even if doing so goes against its energy interests.
"The U.S. Congress has in the past passed various kinds and levels of sanctions on energy exporters in certain unique situations even when when it was counter to energy concerns,” Myers Jaffe said. “Saudi Arabia needs to be cognizant of that."
But Krane said the Saudis have leverage over Trump with its role in making his Iranian oil sanctions policy.
“I'm sure Trump worries that pressing the Saudis right now could backfire,” Krane said. “If the Saudis don't play ball, Republican candidates in the midterms could find themselves struggling to explain the president's role in gasoline prices.”
The U.S. oil industry is a little more optimistic that the Khashoggi situation won’t interfere with the global crude oil supply.
Dean Foreman, chief economist for the American Petroleum Institute, the largest oil industry trade group, chalked it up as just another in a plethora of geopolitical concerns affecting the market.
“It’s just one more thing on the geopolitical side as these factors compound,” Foreman said. “One of the issues in the oil markets has been the extent of stability, or cooperation, and the willingness of OPEC to step up and meet the world’s challenges.”
Foreman pointed out that things have changed with the U.S. now supplying all new demand for oil globally.
“What the administration has done is go back and ask OPEC to keep its house in order as these sanctions are being imposed on Iran,” he said, explaining that U.S. oil production should not be underplayed in compensating for lost Iranian supply.
“The U.S. has continued to not only supply the world’s growth ... but to compensate for the loss of production, on net, in OPEC,” he said.
He explained that nobody really knows how much of Iran’s 3.4 million barrels per day of oil is actually going to come off the market. In fact, API is releasing an analysis next week that shows Iran has been discounting its oil, and that big buyers such as China will continue to buy Iranian crude even after sanctions start in November.
Foreman said that market reports this week have verified that China had stopped buying U.S. oil in favor of discounted Iranian crude oil.
“I’ve also gotten a note from corresponding with folks in India that while the top one or two refiners are complying, if you will, with the administration’s request with the re-imposition of sanctions, most of the others are not,” Foreman said.
They are also getting quite a deal from Iran, which has discounted each barrel of oil by $2-$3.
Energy Secretary Rick Perry, in a recent interview with the Washington Examiner, said there could also be more oil coming onto the market from other countries as sanctions kick in.
“The economic issue is, if you see that much crude taken off the market then you’re going to see prices go up. Well, not necessarily,” said Perry.
“The reason I say 'not necessarily' is because of increased American production, the Saudi-Kuwaiti conflict on a border issue has about 250,000 to 350,000 barrels per day, if that gets worked out,” he explained.
Perry has recommended to the Saudi leadership that they find a solution to the conflict with Kuwait to begin production there. But that’s only one example of where more oil can come from outside the U.S., according to Perry.
“Northern Iraq, the Kurdistan region, has about 250,000 to 300,000 in stranded barrels a day there,” he explained. “The new prime minister of Iraq, their former oil minister ... is very familiar with this area, and at this juncture is a pro-U.S. individual.”
“My point … is there is some very real opportunities on the supply side that we don’t necessarily have to see crude prices going up, gasoline prices going up because of the increase in international supply,” Perry said.
“Our goal is to try to impress on everyone the importance of stability in supply,” which “is good for the world economic condition,” he said.
The situation is different from 15 years ago when the administration of former President George W. Bush was heavily invested in making sure Saudi Arabia would double oil tankers to the U.S. as it invaded Iraq.
“We are not negotiating supply," he said. "We’re basically recognizing that there is a demand for these products, and the United States has multiple tools at our disposal now that we did not have 15 years ago. And we’re going to use them all.”