Nobody knows better how to use the oil weapon. But the Saudis are much more likely to screw their fellow oil suppliers these days (including and especially the Russians) than they are to screw the consumer–especially the United States. Indeed, the Americans and Saudis often appear to be colluding at the expense of other energy suppliers or sources. And in fact they are. Since the gulf war ended in 1991, Riyadh and Washington have become co-leaders of an informal global league of oil producers and consumers, all conspiring to keep prices as stable as possible at levels that don’t inflict too much pain on either side. This is a critical anchor for the global economy. But it will come as a surprise to most Americans, for whom the Saudis still evoke the enemy oil cartel of the 1970s and, of course, more deadly recent events.
There is no more truly “global” market than oil, a fluid commodity easily shipped between producers and consumers spread all over the planet. Every little jump in supply or demand can send ripples around the world. The Saudis are the No. 1 producers, with a quarter of the world’s proven reserves. The Americans are the No. 1 consumers, burning up about a third of the oil on the market every day. So there’s a certain commonality of interest that’s been recognized since President Franklin Roosevelt and Abdelaziz ibn Saud, the patriarch who gave the nation his name, got together on the Great Bitter Lake in 1945 and established a strategic rapport. “I learned more from talking with ibn Saud for five minutes than I could have learned in the exchange of two or three dozen letters,” Roosevelt told Congress. Unwritten agreements between American presidents and Arabian potentates have been a key to the relationship ever since. “We know our interests–both of us,” says a Saudi official. “We have special differences, and special points of agreement.”
Over the past 10 years the informal alliance developed a coziness never seen before. Yet its future looked grim after September 11. American politicians of all stripes started to call for “freedom from foreign oil,” which was widely read to mean freedom from Arab and particularly Saudi oil. Americans were incensed that Osama bin Laden and most of the 9-11 hijackers were born and raised in Saudi Arabia. And the Saudis watched in horror as Washington continued to support Israeli Prime Minister Ariel Sharon in his war with the Palestinians. “It’s not easy for us to deal with a market that’s constantly hostile to the Arab world,” says one influential Saudi.
Yet Washington and Riyadh are about as codependent as a couple can get. Call the ties addiction, alliance, mutual interest or whatever, the Saudis and Americans are stuck with one another. The Saudis are the single biggest source of foreign oil for the U.S. market, but that’s only part of the picture. Lots of countries pump oil–more than 60 in all, producing upwards of 76 million barrels a day. But just about all of them run flat out, using or exporting every drop they can suck out of the ground. Not the Saudis. They can boost output from their current 7.2 million barrels a day to as much as 10.5 million in a very short time to prevent prices from spiking at times of crisis. “Basically, this is what secures world markets,” says Walid Khadduri, editor of The Middle East Economic Survey.
So let’s not take too literally all the talk from the president and the press about “weaning America from Arab oil.” That would make U.S. supplies less secure, not more, as this administration well knows. Consider what the Saudis did the day after September 11. With no fanfare, but to great effect, they decided to ignore the quotas they’d agreed to with fellow producers. For the next two weeks they shipped an extra 500,000 barrels of oil a day to the United States. The effect: in the middle of a huge Middle East crisis that might otherwise have sent prices soaring, the cost of oil in fact declined from about $28 a barrel before the terror attack to $20 or less a few weeks later. Who but the Saudis would make that happen? In fact, no one else could.
It’s not just that they have so much oil. It’s that it is so easy and cheap for them to get out of the ground. The “lifting cost,” as they say in the business, is about $2 or less for a barrel of Saudi crude. From wells in the United States it costs twice as much, and in Russia up to three. To be sure, new reserves are coming onstream all the time, from Angola to Alaska, and new technologies will continue to lower the cost of extracting hard-to-get oil from beneath the sea, the permafrost and the so-called oil sands of Canada and Venezuela. But those sources will always be more expensive than Saudi oil, and in this profit margin lies another key to the Saudis’ once and future clout.
Of course, relations haven’t always been so cordial. During the Arab-Israeli war of 1973, King Faisal of Saudi Arabia decided to cut oil supplies to boycott the United States for supporting Israel. The Organization of Petroleum Exporting Countries backed his play, and all oil producers reaped enormous profits. As costs gushed off the charts, the world economy shuddered. Americans gave up big cars for smaller, more fuel-efficient machines. But by 1979, when the rise of the Ayatollah Khomeini in Iran precipitated a second price shock, the Saudis had a new interest in calming the crisis. They had invested most of the windfall profits from the 1970s in the West, especially in the United States. So what was bad for the American economy was now bad for them, too. (And even at the height of the 1973 boycott, the Saudis secretly continued to fuel the American fleet in the Mediterranean.)
By the late 1980s, the power of OPEC was weakening. This was partly due to the creation of organizations like the International Energy Agency, which pulled the United States and other consumers into a kind of buyers’ cooperative. In addition, the shocks of the ’70s had made non-OPEC and non-petroleum energy sources more attractive: deep-water drilling in the North Sea, nuclear power, even windmills got a second look, and a third. Meanwhile, the breakup of the Soviet Union raised the sudden promise that huge Caspian Sea reserves would soon open to the West, further weakening OPEC.
The ties that bind the United States to Saudi Arabia and its neighbor Kuwait, the Middle East’s second biggest exporter, were sealed in the late 1980s and early 1990s (as usual, on the basis of a handshake, not a treaty). In 1987 and 1988, Washington allowed Kuwaiti tankers to fly the American flag, then sent a fleet to protect them and Saudi shipping in the Persian Gulf from Iran. In 1990, when Saddam Hussein invaded Kuwait and threatened Saudi Arabia, the United States pulled together a massive alliance and went to war. In the aftermath, U.S. troops were stationed in both countries, and there they remain to this day. Last month U.S. Vice President Dick Cheney was in Jidda, discussing the latest regional upheavals with Crown Prince Abdullah.
With that relationship at its core, a strategic understanding has been developing between the rich energy consumers led by the United States, and OPEC, led by Saudi Arabia. There are frequent consultations, and Riyadh has even been pushing for a more formal relationship with the consumer organization. “The United States is concerned about security of supply,” says Klaus Rehaag, a leading analyst at the International Energy Agency, “and OPEC is concerned about security of demand.”
Prices still bounce, and sometimes pretty wildly. In the age of “just in time” inventories, the late arrival of oil supplies can cause quite a shock. So can a sudden fall in demand. The Asian recession of 1997 sent oil prices plummeting below $10 a barrel. The Saudis and the rest of OPEC dialed back their production, and prices briefly jumped to $35 by early 2000. But the “sweet spot,” as Saudi traders call it, is about $18 to $20, and that’s where they try to keep the price. In any case, if the price is adjusted for inflation, Americans pay about the same at the gas pump today as before the first oil shock of 1973, and volatility is lower, too.
The Saudis make a special effort to keep their American friends happy (and dependent) by giving the United States a discount of about $1 a barrel over other consumers. With their high margins, they figure they make up in good will what they sacrifice in income. It’s a reasonable price to pay for American protection from Saddam and other predators. And while the United States worries about keeping nuclear, biological and chemical weapons out of his hands, the Saudis make sure he’s deprived of the oil weapon, too. In late 2000 he tried shutting off his production to spike the market. Riyadh just turned up the taps and filled the gap.
Are the Saudis invincible? They sometimes sound as if they think so. “You want alternatives? That’s just so much sweet talk,” one former official at the Saudi Petroleum Ministry told NEWSWEEK. “Suppose you target the cost of alternative energy at so many dollars per Btu–and then we lower the cost of oil below that. All your investment goes down the drain.”
It is conceivable that Russia could supplant Saudi Arabia as the world’s leading oil exporter. As a recent special report from the IEA makes clear, however, Moscow will have to clean up a lot of corruption to attract hundreds of billions of dollars in new investment needed to modernize its industry. If it does that, and if it succeeds in building new pipelines and ports to get its oil out, if its own political situation remains stable, if the growth of its domestic economy doesn’t cause it to use a lot more of its own production–only then will Russia get the edge. That’s about as likely as the prospect that Americans will rediscover conservation and start driving smaller cars. Until that time, there will be no such thing as “freedom from foreign oil.”
