The U.S. and Saudi Arabia reinforced their decades long economic and security relations during President Donald Trump's two-day visit to the Kingdom during the weekend as two countries signed deals in defense, finance and energy that are set to diversify the Saudi economy.
"Real needs [in Saudi economy] are infrastructure and finance, as these will be the backbone of future diversification," Cyril Widdershoven, a partner of consultancy firm VEROCY in the Netherlands, told Anadolu Agency.
"Investments should be focused on future developments, which should necessarily include high-tech and financial tech," he added.
Economic diversification is the main objective of Deputy Crown Prince Mohammed bin Salman's "Vision 2030" initiative that plans to end Riyadh’s over-dependence on oil revenues by 2020.
General Electric reached a $15 billion Saturday with the Saudi government to improve the country's power grid, while the Kingdom also signed agreements worth $22 billion with American energy firms to improve its oil and natural gas industry.
The deals also include a $12 billion investment from Motiva Enterprises, a subsidiary of Saudi oil giant Aramco, into a U.S. oil refinery.
"Look at Aramco's spending spree in U.S. downstream. Very attractive for Saudis to invest there," Widdershoven said.
After assets of Motiva were separated in early May, Aramco gained total control of the biggest oil refinery in the U.S. -- Port Arthur in the state of Texas that has a 600,000 barrels of refining capacity.
Saudi Arabia is estimated to have signed 16 separate deals with 11 American energy firms worth approximately a total of $50 billion, according to reports.
- Security and stability
The biggest agreement between the two countries over the weekend was the $350 billion arms deal over the next 10 years with $110 billion of it to take effect immediately.
For decades, the Saudi-U.S. relationship has been based on "oil-for-defense" for the Kingdom's security, and stability in the Middle East.
"The U.S. should be looking at Saudi Arabia as a possible military asset in the region, to control Iran and its proxies. As long as Washington will not be able to kick Russia out from the region, and it is not willing to lift sanctions on Iran, Saudi Arabia will be needed," Widdershoven said.
"As long as Riyadh is supporting a pro-Western/U.S. position, Washington can be assisted in its drive to confront religious extremism in the region," he added.
The White House also emphasized the importance of regional security and the agreements between Washington and Riyadh with a statement on Saturday.
"This package of defense equipment and services supports the long-term security of Saudi Arabia and the Gulf region in the face of malign Iranian influence and Iranian related threats. Additionally, it bolsters the Kingdom's ability to provide for its own security and continue contributing to counterterrorism operations across the region, reducing the burden on U.S. military forces," it said.
The agreement on defense falls under five categories -- border security and counterterrorism, maritime and coastal security, air force modernization, air and missile defense, and cyber-security and communications upgrades -- according to the statement.
- Saudis as stabilizer in oil market
Although the "oil-for-defense" formula benefitted the U.S. to import crude from Saudi Arabia for decades, the U.S. has emerged as a major oil producer since 2008 shale revolution and nearly halved its crude imports since then.
This, however, does not mean that the U.S. no longer needs Saudi Arabia -- the world's biggest crude oil exporter.
"The new relationship will be still partly based on crude oil for defense, not anymore on the product volumes, but largely on the position of Saudi Arabia as stabilizer of oil markets," Widdershoven said.
Just last Monday, Saudi Arabia and Russia agreed to extend their oil production cuts agreement until March, which pushed crude prices up 5.5 percent last week.
American oil producers need higher crude prices to increase their investment and domestic output. The Kingdom also needs higher and stable prices in order to keep state revenues high, and social services spending going.
"Saudi Arabia would genuinely like to see a higher price for oil, for revenue and expenditure purposes, and it would also like to see that higher price protect its market share," Dr. Florence Eid-Oakden, chief economist at the London-based Arabia Monitor analysis firm, told Anadolu Agency.
She said it is difficult to see crude prices to average $60 per barrel in the second half of the year, but added that it is possible to see this level in 2018 if some factors become supportive.
"Saudi-Russian agreement will help, but not solve the oil glut problem. There are many other factors, such as U.S. supply, the rapid return of shale oil supply at lower marginal cost, and OPEC member compliance that will come into play on the supply side. On the demand side, the factors we know well is the Chinese [economic] growth," she said.
- Aramco's IPO
Dr. Eid-Oakden also stressed that higher crude prices would benefit Aramco's initial public offering (IPO) that is anticipated to happen next year.
"An increase in the price of oil would maximize the chance that the Aramco IPO will go through as planned. Prices as they are today do not favor this IPO," she explained.
Widdershoven noted that Saudi Arabia's oil production cost is around $8 per barrel on average; so, higher the difference between that level and prices in global oil market would translate into more more profits for Aramco.
"Higher oil prices also will decrease overall budget deficit of Kingdom, so less pressure on using Aramco, even after IPO, as a cash cow," he said, adding that a price range between $55-$65 a barrel would increase the valuation of Aramco above $1.5 trillion.
Saudi Arabia aims to earn $100 billion by offering 5 percent of Aramco to the public, which would put the market capitalization of the company around $2 trillion.
By Ovunc Kutlu in New York
Anadolu Agency
energy@aa.com.tr