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Saudi-US relations reset along familiar lines: Fuel for Thought

With US imports of Saudi crude falling to levels last seen three decades ago, you could be forgiven for concluding that relations between Washington and Riyadh have broken down.

That clearly isn't the case, however, judging from the red carpet rolled out for President Donald Trump upon his arrival in the Kingdom this spring.

Oil and security remains the pillars of the Saudi-US relationship that neither side appears likely to abandon anytime soon.

When Trump visited Saudi Arabia in May—his first official trip abroad as president—an arms deal was announced worth $350 billion over 10 years.

And in late May, Saudi energy minister Khalid al-Falih stressed the US remains a "key market," even while mentioning there would be a "marked decline" in US imports of Saudi crude.

A desire by the Saudis to cut exports was arguably rooted in criticism over the effectiveness of OPEC-led supply cuts to reduce global stockpiles.

With that in mind, Saudi Arabia seemed to take aim at the country with the most visible and transparent set of inventory data.

Falih has been as good as his word. Saudi imports have averaged 842,000 b/d since the week ended June 16, compared with 1.185 million b/d in the year-to-date period prior to that.

Top suppliers of crude oil to the US

The last time US imports from Saudi Arabia's averaged less than 900,000 b/d on an annual basis was 1987. Back then, Saudi Arabia had a slight advantage over Canada and Mexico as the top supplier of crude to US refiners.

Its lead would grow sharply over the next few years, as Saudi Arabia pursued an objective of intertwining its commercial interests with the world's biggest military.

One tool that Saudi Arabia implemented to achieve its goal was selling crude at a discounted price to US refiners, according to Jennifer Peck, an economist at Swarthmore College who has analyzed Aramco pricing behavior.

One of her findings was that the discounted crude was essentially a gift targeted to specific US refiners who then reciprocated by making political contributions aligned with Saudi interests.

Saudi crude oil discount to US refiners

Growing competition from Canada, Mexico and Venezuela toward the late 1990s forced Aramco to deepen discounts. By 2001, the discount to US refiners reached a high of $6.30/b relative to Asia.

But the costs of the discount program, along with strained ties with Washington around that time, pressured the Saudi government to abandon the policy, which lasted from 1991 to 2003 and tallied $8.5 billion, Peck said.

"Faced with a string of political disappointments in the early 2000s, the Saudi government also began to question the benefits of a close alliance with the United States," she said.

After the policy was suspended in 2003 the average discount of Saudi crude sold to US refiners fell sharply hovering around zero.

Another likely consideration was trying to sell more crude in the booming Asian market around the time. That aim was complicated by what Asian refiners saw as an unfair premium they had to pay for Saudi crude.

Aramco's president, Abdallah Jumah, told reporters in 2005 about his plans to increase Saudi exports to India and China, while also remaining a leading supplier to the US.

That prognostication has largely held up. From 2004-08, US imports of Saudi crude averaged 1.46 million b/d, which was consistent with the five years prior, and trailed first-place Canada by about 320,000 b/d.

US imports of Saudi crude dropped off sharply starting in 2009 in line with a decline in total crude imports. Saudi Arabia has still managed to hold onto second place, albeit by a distant margin with flows from Canada soaring.

Even if Saudi Arabia never regains its status as the top supplier of crude to the US, the election of President Trump and his tough talk on Iran show that bilateral relations can still be revived.

With so much at stake, that's hardly any wonder. Another prize being dangled in front of suitors is the location for listing shares of Aramco in a much-hyped initial public offering possibly next year.

Crown Prince Mohammed bin Salman, who is seen as having final say, reportedly prefers New York over London for political reasons.

All of this suggests a certain equilibrium that exists between Washington and Riyadh. The centrifugal forces of oil and security prevent the two sides from ever growing too far apart.

As Aramco's chief, Abdallah Jumah, told the New York Times back in 2005: "The US needs us, and we need the US."