Saudi-US relationship to light beacons of new opportunities
The US-Saudi commercial relationship is of long-standing and considerable strategic importance for both sides. In the postwar decades, Saudi Arabia played a critical role as a leading oil supplier in the non-Communist world, something that became critical for the US as American energy independence began to slip in the 1970s.
The Saudi-US economic relationship has been undergoing significant changes in recent years. For instance, the bilateral merchandise exchange for years revolved heavily around US imports of Saudi oil and Saudi purchases of US machinery and equipment, including a range of vehicles and aircraft.
Even as recently as 2015-2018, oil accounted for over 90 percent of Saudi exports to the US. However, the rapid rise of fracking in the US challenged these traditional patterns. As a result, US crude output peaked at 13.1 million barrels per day in February 2020 after hovering around 5 mbpd for years.
Even as this relapsed below 10 mbd during the pandemic, it gradually rebounded to 11.2 mbd in 2021. The inevitable consequence was a sustained decline in Saudi oil exports to the US, which fell from an all-time high of just over 1.7 mbd in 2003 to 356,000 bpd in 2021 — a 79.4 percent cumulative drop.
The consequences of the heavy oil dependency and the recurrent volatility of the oil price have been pronounced variations in trade volumes. For example, Saudi merchandise exports to the US peaked at $55.7 billion in 2012 but fell to just under $9 billion in 2020 before rebounding to $13.7bn in 2021.
While Saudi imports have shown more continuity, they have mirrored the export dynamic and trended fairly consistently from a peak of just under $20 billion in 2015 to just over $11 billion in 2020 and 2021.
Structurally, the Saudi-US commercial relationship seems ripe for a new chapter. While the ongoing global energy transition and shifting political winds complicate longer-term projections for oil, a substantial revival in Saudi oil exports to the US appears unlikely, even as ambitions of a complete decoupling are unrealistic in a global market.
In 2020, the OPEC+ agreement on market rebalancing to rescue the embattled shale sector in the US drew praise from the latter.
More recently, the disruptions delivered by the sanctions on Russia have left the Kingdom and its Gulf peers in a pole position in their ability to bring relief to tight markets. By contrast, many other OPEC producers have struggled to meet their output allocations.
Conversely, the traditional Saudi import bundle involves goods that also feature heavily in the Saudi government’s development and diversification plans.
The Kingdom is keen to stretch out value chains in local industries and create more employment and value opportunities in areas such as vehicle and defense manufacturing.
While this cannot realistically result in anything like complete import substitution, it will challenge the past growth dynamics.
Robust growth in the weight and value of Saudi non-oil exports is also reshaping the relationship. Already pre-pandemic in 2019, the share of oil dropped to 85.8 percent of the total Saudi merchandise sales to the US. However, as bilateral commerce returned to growth in 2021, Saudi non-oil exports rebounded annually by a remarkable 72 percent to an all-time high of SR9.1 billion, which now made up nearly 18 percent of the total value of Saudi goods exports to the US.
The most crucial non-oil export was fertilizers which accounted for 29 percent of the non-oil total, followed by a further 19 percent in organic chemicals. Aluminum was the third category at 14.3 percent. This spread reflects the growth and diversification of the Saudi manufacturing base in recent years.
Strong growth in US service exports appears to be another emerging trend. The US exported $9.4 billion worth of services to the Kingdom in 2019, which marked an 11.4 percent increase from the preceding year and a 51.7 percent gain in 2009. Services made up almost 30 percent of the aggregate value of US exports to the Kingdom. Travel, professional and management services were of particular importance. This dynamic links to the changing structure of the Saudi economy with a steady shift toward increased value addition and a more innovative, knowledge-based economy. The importance of services looks likely to grow, even if more US and other companies will be encouraged to localize some operations in the Kingdom.
It also looks likely that the nature of the US-Saudi relationship will continue to shift from traditional goods trade toward more investment. The US market offers investment opportunities for some large Saudi corporates looking to internationalize and build new partnerships. Also, semi-sovereign vehicles such as the Public Investment Fund pursue international strategic and value opportunities.
More US companies and investors are likely to seek opportunities in the Kingdom in reflection of the growing weight, diversity, and strategic standing of the Kingdom.
The openness and growth of the Saudi capital markets will doubtlessly draw in more foreign, including US capital. Driven by multiple potentially transformative trends, a new opportunity now beckons for the long-standing US-Saudi economic relationship.
• Jarmo Kotilaine is an economist and strategist focusing on the Gulf region. He writes on issues ranging from economic development to changes within the corporate sector.