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Minding Its Business
by Gal Luft
August 8, 2003
Published by the Near East Report

Saudi Arabia, which has demonstrated its willingness to use its vast oil reserves as a foreign policy tool, has not acted to aid U.S. efforts to rebuild Iraq.

Contrary to frequent assertions that Saudi Arabia is a loyal U.S. ally, Riyadh has pursued policies and taken actions that have caused grievous harm to vital American interests.

Apart from being a hotbed of Islamic radicalism and a source of terrorist funding, Saudi Arabia is known as the home of a quarter of the world’s oil reserves and supplier of about one-sixth of U.S. oil imports.

Saudi Arabia’s ability to produce a spare capacity of oil is the linchpin of its foreign policy
What gives the oil kingdom political strength is its role as the world oil market’s swing producer. It is the only oil producer with significant spare capacity—an extra 2.5 million barrels per day (mbd) that can be pumped into the market when other suppliers falter.

Spare capacity has become the linchpin of Saudi diplomacy. Foreign Affairs magazine defined it as “the energy equivalent of nuclear weapons, a powerful deterrent against those who try to challenge Saudi leadership.” The Saudis have demonstrated time and again their readiness to use their spare capacity to create a glut and have prices collapse in order to destroy exports from countries challenging their dominance.

Saudi oil policy has been designed to preserve stability in the oil market at a relatively high price while enjoying the benefits of being a top supplier to the United States. To maintain its influence over Washington, Riyadh provides a hidden subsidy of roughly $1 per barrel of Saudi crude sold in the United States. In return, Washington provides for the defense of the kingdom.

The House of Saud has used its oil power to influence U.S. Middle East policy toward Israel. This was done thirty years ago during the Yom Kippur War when the Saudis, enraged by President Nixon’s decision to ship arms to Israel, decided to cut oil supply to the United States, bringing about the worst economic slump since the Great Depression. Last year, The New York Times reported that senior members of the Saudi royal family discussed reusing the oil weapon in response to Israel’s Operation Defensive Shield in the West Bank.

Furthermore, U.S. presence in the kingdom has become a lightning rod for Islamic fundamentalism and anti-Americanism, leading groups like al-Qaeda to attack U.S. interests worldwide. Consequently, since the Sept. 11 attacks, there has been a growing American public demand to displace Saudi Arabia as the main source of U.S. oil in the Gulf. The victory over Saddam Hussein enables the United States to do so by developing Iraq’s vast oil fields. With a stable political situation and a large investment, Iraq might be able to pump up its production from 3.2 mbd prior to the 1991 Gulf war to 6 mbd by 2010.

Saudi Arabia’s dominance of the energy markets would be threatened by an oil-producing Iraq

The House of Saud is deeply concerned about internal political destabilization from a democracy-seeking Iraq and even more about increased Iraqi oil production. Undoubtedly, Saudi Arabia is likely to be the main casualty if Iraq joined the small club of giant producers—especially if Iraq is able to create spare production capacity to cut into Saudi Arabia’s near-monopoly. Saudi production quota stands at about 8 mbd of OPEC’s 25.4 mbd total. A gradual increase in Iraq’s quota would have to come at the expense of Saudi Arabia. This is something Riyadh fears.

Heavily in debt, burdened by high unemployment, lavish stipends to more than 10,000 princes and hush-money to its religious establishment, while solely dependent on oil income for its economic well-being, the House of Saud cannot sustain a drop in revenues. Saudi per capita GDP has dropped from $18,000 in 1980 to about $7,500 today. Decline in oil sales due to Iraqi production could further decrease it to about $3,000 by 2010.

The kingdom has not acted against Islamic radicals, whose attacks have hampered the rebuilding of Iraq
One way Saudi Arabia can prevent the emergence of Iraq’s oil industry is by creating an inhospitable investment climate in Iraq, deterring international oil companies from rebuilding the country’s oil infrastructure. In the past few months, hundreds of Saudi radicals have crossed the border into Iraq in preparation for a jihad against the United States.

These Islamist militants are concentrated in the Sunni area near Falujjah and together with remnants of Saddam’s regime they have launched attacks on oil pipelines and refineries, preventing Iraqi oil from coming back online and denying Iraq the much-needed funds for its reconstruction. The latest attack on Aug. 16 on a pipeline from Kirkuk to the Turkish Mediterranean terminal of Ceyhan costs Iraq’s tottering economy $7 million per day.

Without oil revenues, Iraqis will soon be disillusioned with the United States’ ability to rebuild and reform their country and the American public might become frustrated by the huge cost inflicted on the U.S. economy.

Though the Saudi government often claims to be a close ally to the United States, its actions indicate this outcome is precisely what it is hoping for. It has not lifted a finger to seal the border to block the surge of jihadists to Iraq, and certainly has done nothing to help rebuild Iraq’s vital oil industry. Indeed, the kingdom believes it is in its best interest to have the radicals fight the United States outside the country rather than destabilize the regime from within.

The Saudi complicity in the actions of its citizens in Iraq undermines the U.S. strategic objective of promoting peace and democracy in the Middle East. Behavior that increases the military burden coalition forces in Iraq are facing while undermining the United States’ economic recovery is the last thing expected from a perceived ally.

Dr. Luft is executive director of the Institute for the Analysis of Global Security (IAGS).

Copyright 2003 Near East Report