What We’re Watching – The US–Saudi defence pact

Welcome to The Geopolity’s What We’re Watching (3W), Our daily look at the interconnected worlds of Geopolitics, Economics and Energy. Curated from the world’s leading sources of information, our analysis and commentary is designed to help you make sense of the events driving the major developments in the world.

Following the signing of the mutual defense pact between Saudi Arabia and Pakistan in September, there were some who argued this indicated the Saudis were moving out of the US orbit, in response to Gaza and the Israeli attack on Qatar.

Presently, however, there are preparations underway for Saudi Crown Prince Mohammed bin Salman (MBS) and US President Trump to announce a defense pact, styled on the US – Qatar agreement, when the two meet at the White House next week.

Furthermore, we look at:

• The US military’s preparation for a new military base “near Gaza”, to house a 10,000 “stabilization force; where 3W explains why this indicates the force’s real task will be to secure the interests and objectives of the US – Israel Alliance, not the interests of the people of Gaza
• The new US sanctions on individuals and entities involved in supply Iran with rocket fuel from China
• The decision by American car manufacturer General Motors to fully de-China its entire supply chain, marking a new key moment in the trend towards decoupling of the US and Chinese economies
• The significant increase in crude oil stored at sea, which could be a first indication that the sanctions are actually removing barrels from global supply
• Europe’s inability to establish a rare earths recycling industry that can reduce its dependency on China for these critical minerals

Geopolitics

As to Gaza, the US military is looking at building a temporary base capable of housing 10,000 people near the Gaza Strip, writes Bloomberg. The base would house the “stabilization force” of troops from other countries that is to provide security services to the international board of governors that is to run Gaza in the next phases of the Trump Peace Plan. The base is to be built inside Israel, Bloomberg adds. This, together with the information that the center for command and control of the “stabilization force” is to be based in Israel, makes very clear that the role of the force will be to secure the interests and objectives of the US – Israel Alliance, in the 3W view. Not the interests of the people of Gaza.

As to Iran, the US on Wednesday announced sanctions on 32 individuals and entities in Iran, the UAE, Turkey, China, Hong Kong, India, Germany and Ukraine over supporting Iran’s ballistic missile and drone manufacturing industry, writes Bloomberg. The target is an international network known as the “MVM partnership,” which the US says provides the ingredients for ballistic missile propellant from China to Iran. The 3W view is, firstly, that this confirms there is collaboration between entities and Iran and China on rocket fuels. Secondly, we note that if this collaboration is out of Chinese companies following monetary incentives, then the sanctions can work. But if Chinese companies are working with Iran due to a Chinese government instruction, the sanctions will not have a real impact, as China and Iran will work around them.

Meanwhile, US and Saudi officials have been holding intense negotiations to finalize a broad set of agreements, including a defense pact, writes Axios. Saudi Defense Minister Prince Khalid bin Salman (KBS) visited Washington on Monday and Tuesday. Saudi national security adviser Musaad Al-Aiban also visited the US recently to discuss the possible agreement. Crown Prince Mohammed bin Salman (MBS) is scheduled to visit to White House to meet President Trump next week to further discuss the subject. The pact will likely fall short of a legally binding defense treaty, as this would require US Senate confirmation. More likely it will be the same as the pledge Qatar received in September via executive order, meaning any future administration could revoke it. In return, the Saudis also want to move forward with the purchase of a massive weapons package, including dozens of F-35 fighter jets. 3W notes that following the signing of the mutual defense pact between Saudi Arabia and Pakistan there were some who argued this indicated the Saudis were moving out of the US orbit (in response to Gaza and the Israeli attack on Qatar). This news clearly disproves that assertion, we believe.

Macroeconomics

General Motors has directed several thousand of its suppliers to scrub their supply chains of parts from China, writes Reuters. GM executives have been telling suppliers they should find alternatives to China for their raw materials and parts, with the goal of eventually moving their supply chains out of the country entirely. The automaker has set a 2027 deadline for some suppliers to dissolve their China sourcing ties. The automaker already had been among the most active car companies in weaning itself from a reliance on China for battery materials and computer chips. It has partnered with a U.S.-based rare-earths company and invested in a lithium mine in Nevada for future electric-vehicle battery materials, for example. But the latest effort is broader and includes more basic components and materials. In the view of 3W, the move by GM marks another key moment in the in the trend towards decoupling of the US and Chinese economies.

Energy

There has been a surge in oil stored on tankers in international waters, writes Bloomberg. Part of the explanation is that Saudi Arabia increased oil production over the summer, and so is sending more crude by tanker to markets around the world. But roughly 40% of the increase is barrels from Russia, Iran, Venezuela, or unclear origin, Bloomberg says, which seems to indicate that the western world’s tightening of sanctions on these countries is having at least some effect, as these barrels now struggle to find a home. It could be a first indication, therefore, that the sanctions are actually removing barrels from the global supply of crude oil. But it could also be that the sanctions are in the process of forcing larger discounts on the sellers of Russian, Iranian and Venezuelan crude oil.

The latter will at least in part happen, if history and LNG are a guide. China is stepping up its efforts to import =sanctioned Russian LNG, namely, because it is building a “shadow fleet” of vessels that can transport the super-cooled fuel from Russia to China, writes Bloomberg.

Chevron plans to focus on returns to shareholders over the next five years, not growth, writes The Financial Times. “We’re focused on growing free cash flow, not volume. That’s the difference,” Eimear Bonner, Chevron chief financial officer, said in an interview. Bonner said the company remained focused on lowering costs and was targeting $3bn to $4bn in structural savings by the end of 2026.

Other

Yesterday 3W looked at the US efforts to establish a supply chain for rare earth minerals that does not depend on China. Today, we look at Germany, which is taking steps toward recycling critical minerals and rare earths to wean off a dependence on China. But, Germany is finding Chinese competition hard to beat even in this area, writes Nikkei Asia. One reason is that Chinese companies are competing on the European market for the scrap materials from which the rare earths can be extracted. Another is that the costs of recycling for rare earths are higher than the price for new rare earths from China.