Although I don't doubt Hutch's experience in his field, presenting this almost 3 billion per year US aid as purely gifts is quite dishonest.
First and foremost though, the US's private military industry and its involvement in the ME is significantly more developed than that of say African nations, in playing the balance game in maintaining Israel's QME in the region, compared to supplying mostly small arms to competing African tribes. Supplying advanced aircraft to SA and defense systems to Israel, then a few years later, visa versa. This was all done when the US replaced France as Israel's major supplier of arms and commodities, which France was from 1949 to about the late 1960's, of which the US developed the 'Commodity Import Program' or CIP (as the US did with Vietnam), thereby establishing monopolies in Israel, from cashews to hi-tech items.
Mind you, a fair deal, the amount of which is moot, of the US military hardware outside of the aircraft and other advanced systems, often involve the US exporting their outdated weapons systems and munitions supplies. Otherwise, these weapons would simply sit rotting away in warehouses. Who can forget those nice outdated cluster munitions Israel was force to purchase over the last several decades from the US.
Israel's QME and the supplying of weapons to both sides is in addition to the same approach the Russians have been employing for over 50 years. Supply weapons to both sides to destablize the region, then invest in said economies and assist in peace processes between opposing countries. Rinse, repeat. (Ie Iran/Iraq, Syria/Lebanon/Jordan/Egypt, UAE/SA/etc.)
Foreign military aid to Israel, where 24% go into Israel's private military industry, where the US has significant influence in whom Israel selects tenders with, also includes joint R&D projects. Since these are joint-projects, both sides receive payment for exporting such systems and the successors, ie Arrow and THEL. Israel also sells Israeli-developed systems to the US such as TROPHY for use in Iraq for coalition armored vehicles, ontop of supplying mortars and munitions in both Gulf wars and Afghanistan to US troops. The Israeli arms industry also has to export a greater deal in order to turn of a profit since it does receive assistence, much of it is not 'waived'.
U.S. Foreign Aid to Israel
As for Saudi Arabia purchases, sure, these are paid with oil profits (often exorbitant) which the Saudis pay for foreign and direct military purchases. What is left out is the Saudi demand for 35% of these purchases to be offset, thereby taking away American jobs and exporting them to places like Turkey. So double costs (or triple if you include the result of offsets) to the American government/economy in receiving oil profits which US and other foreign companies create in the first place, and providing offsets (which Israel doesn't do to the same effect as SA).
Read about that here:
Offsets: The Industrial, Employment and Security Costs of Arms Exports
Foreign military sales to Israel, which include spare parts and the aforementioned jp-8 fuel, are part of of the $30 billion+ per year in sales. Loan guarantees of about 2/3rds of the approximately $3 billion per year to military assistance, of which a further 24% is invested in Israel's private military industry, can be more seen for its ROI down the road. I would see the ROI to be significantly higher from Israel's military assistance and purchases (as in not 'gifts') to be better for the US's economy than compared to the high offsets demanded by the Saudis or any other recipients in the ME/NA/NE regions.
I would like to see the US-Israel equivalent of BARD and BIRD foundations in countries like Saudi Arabia, Egypt, and Yemen, on top of the bi-lateral trade agreements outside of foreign drilled and processed oil such as in SA.
EDIT: In regards to the f-35 purchases, the major holdup, as with the f-16i's, was the demand for Israel to make modifications to the electronic systems to, for example, be modified to be able to use Israeli-made munitions. The encryption bit wasn't not the primary issue here...