America and Saudi Arabia are locked in a bitter battle over oil. The stakes are massive

New York(CNN Business) The relationship between the United States and Saudi Arabia is one of the most important on the planet. And lately, it's also been one of the most awkward.

Angry officials in Washington vowed "consequences" after Saudi-led OPEC sharply cut oil production earlier this month, driving up pump prices just weeks before the midterm elections.

US lawmakers are threatening steps that were unthinkable not long ago, including banning weapons sales to Saudi Arabia and unleashing the Justice Department to file a lawsuit against the country and other OPEC members for collusion.

Riyadh has been caught off guard by the thirst for revenge from US politicians. And Saudi officials are hinting at payback -- including dumping US debt -- that could have huge ripple effects in financial markets and the real economy.

Neither side is even trying to hide the tension. After a top Saudi official suggested the kingdom has decided to be the more mature party, a top White House official responded by saying, "It's not like some high school romance here."

What happens next is critical.

If this decades-old relationship devolves into a full-blown break-up, there could be enormous consequences for the world economy, not to mention international security.

"This is a new low. We have seen a degradation in the US-Saudi relationship for years but this is the worst it's been," said Clayton Allen, director at the Eurasia Group.

So much for that secret deal

The spat is linked to one of the biggest sore spots among voters during the Biden era: Inflation and high gas prices.

After trying and failing to persuade OPEC to ramp up oil production, President Joe Biden reversed his 2020 campaign promise to make Saudi Arabia a "pariah" over its human rights record. Biden visited Saudi Arabia over the summer and even fist-bumped Crown Prince Mohammed bin Salman.

US officials thought they reached a secret deal with Saudi Arabia to finally boost supply of oil through the end of the year, The New York Times reported this week.

They were wrong.

OPEC and its allies, known as OPEC+, responded by increasing oil production by a measly 100,000 barrels per day -- the smallest increase in its history. The move was widely viewed as a "slap in the face" of the Biden administration.

What came next was worse.

In early October, OPEC+ announced plans to slash oil production by 2 million barrels per day -- a move that briefly drove up oil and gasoline prices at a time of high inflation and infuriated US politicians.

"Neither side seems to understand each other," Allen said. "Riyadh underestimated the severity of the US backlash. And the US assumed we had an unspoken agreement."

Fatih Birol, executive director of the International Energy Agency, described the move as "unprecedented" and "unfortunate" in an interview with CNN International on Thursday.

"When the global economy was on the brink of a global recession, they decided to push the prices up," Birol said.

Saudi official accuses US of manipulating markets

The tensions haven't eased, and officials from both sides have sharpened their criticism of each other in recent days. In one telling episode, a top Saudi minister went from defending Biden's energy strategy to slamming it.

During the OPEC+ press conference in early October, Saudi Energy Minister Prince Abdulaziz bin Salman seemed to praise Biden's decision to release unprecedented amount of emergency oil reserves from the Strategic Petroleum Reserve.

"I wouldn't call it a distortion. Actually, it was done in the right time," Prince Abdulaziz told reporters. "If it didn't happen, I'm sure that things might be different than what it is today."

Flash forward three weeks, and that same Saudi minister sang a very different tune.

"People are depleting their emergency stocks, had depleted it, used it as a mechanism to manipulate markets while its profound purpose was to mitigate a shortage of supply," Prince Abdulaziz said during a conference in Saudi Arabia this week. "However, it is my profound duty to make it clear to the world that losing emergency stock may become painful in the months to come."

The criticism is noteworthy, especially given that OPEC openly manipulates markets in many ways by withholding supply to support prices.

OPEC is unpopular

The risk is that the tension devolves into a tit-for-tat cycle of retaliation that undermines global economic stability, or whatever economic stability there is at the moment.

Lawmakers from both sides of the aisle have stepped up their calls to enact NOPEC (No Oil Producing and Exporting Cartels) legislation that would empower the Justice Department to go after OPEC nations on antitrust grounds. Although NOPEC isn't new, it seems more possible now than at any point in recent memory. Eurasia Group pegs a 30% chance of NOPEC enactment and a 45% chance of a watered-down version of the bill.

"You can't overstate how upset a huge number of lawmakers are," said Allen.

Lawmakers aren't only upset, they realize OPEC is not exactly endearing itself to voters.

"This is popular. American sentiment is anti-Saudi. This now has domestic political utility for American politicians. That's where we are now," said Karen Young, senior research scholar at Columbia University's Center on Global Energy Policy. "NOPEC would be harder to veto than in the past."

Could Saudi Arabia dump US debt?

Saudi Arabia could respond to penalties from Washington with drastic steps of their own, ratcheting up the conflict further.

Saudi officials have privately warned that the kingdom could sell US Treasury bonds if Congress passes NOPEC, The Wall Street Journal reported this week, citing people familiar with the matter.

At a minimum, dumping US debt would create uncertainty in markets at an already-perilous moment. A fire sale would drive up Treasury rates, destabilizing markets and raising borrowing costs for families and businesses.

And of course, Saudi Arabia's own holdings would be damaged in such a fire sale.

Saudi Arabia is sitting on roughly $119 billion of US debt, according to Treasury Department data, making it the world's 16th largest holder of Treasuries.

Another risk is that Saudi Arabia, the de facto leader of OPEC+, could remove further supply from world oil markets -- or at least refuse to respond to future price spikes as the West continues to crack down on Russia.

Further curbs on OPEC supply would lift gasoline prices and worsen inflation, raising already-high recession risks.

All of this explains why a full-blown breakdown in relations between the United States and Saudi Arabia may be the last thing the fragile economy needs right now.