Keti Shea

Geo Paper

3/4/05

The Role of Oil in the Evolution of Saudi-U.S. Relations

Abstract: The commercial discovery of oil in Saudi Arabia began a new era in the history of Saudi Arabia and its relations to the United States. Oil wealth was the determining factor in the development of Saudi infrastructure and allowed Saudi Arabia to establish itself as an international player. The agreement between American oil interests and Saudi officials was based on mutual interest: arms for oil. The security and maintenance of the Saudi kingdom including its key oil fields and refineries would be ensured by American military assistance. In return, Saudi officials would ensure an uninterrupted flow of oil to world markets and especially to U.S. markets. The events of the Gulf War and recent terrorist attacks have led to a call for decreased dependence on Saudi oil. Disagreements concerning American foreign policy have heightened the tensions between the nations. Hence, we see that the relationship of “mutual interests” has perpetuated a system of dependency for both parties involved. Yet an important distinction exists between political policy and economic interests and while the United States has pursued policies in the Middle East which seem to undermine the Saudi regime, U.S. economic interests remain firmly entrenched in the Saudi oil industry.

The continuation of U.S.-Saudi relation will depend on the extent to which the Saudi regime develops its natural gas and petrochemical industries. A strong natural gas industry will secure foreign investment and, if used domestically, will free up more oil for export. Unless the U.S. curbs domestic oil consumption and is able to reconcile its economic interests with its political policies, the U.S. will remain reliant on Saudi oil in the near future.

Introduction: Saudi Arabia is not the only country to in possession of oil and other energy resources but it is certainly one of the most prominent and established players in the world oil market. As the largest net oil exporter, oil export revenues constitute 40% of Saudi Arabia’s GDP and 90-95% of its total export earnings^{^[1]}. It possesses 1/4 of the world proven oil reserves and has low production costs due to its relative ease of extraction. In addition, 2/3 of Saudi oil is of the lighter grade, either light or extra light. Although it is also sour (has a high sulfur content), Saudi officials are currently working in conjunction with foreign oil interests to develop their “sweet” oil in the Shaybah field^{^[2]}. The country also has large natural gas reserves as well as an expanding petrochemical industry but it was the commercial discovery of oil which initially attracted foreign interest and investment to the region.

Discussion: Unlike other areas of the Middle East, the Saudi kingdom never came under direct colonial rule. The region fell under Britain’s sphere of influence after the fall of the Ottoman empire but this relationship existed more on paper than it did in fact^{^[3]}. Britain preoccupied itself with the maintenance of Iraq and did not intervene in Saudi affairs. Instead it was the United States which formed a pervasive and lasting tie to Saudi Arabia. This alliance was formalized by the 1933 oil concession after which the Saudi government invited foreign oil companies in to help develop its nascent oil industry. The concession was an agreement between the Saudi government and California Arabian Oil Company (Casoc), an affiliate of Standard Oil of California (Socal and now Chevron)^{^[4]}. Texaco acquired a 50% share and was joined in 1948 by Exxon and Mobil. The concession was renegotiated later at a 30% share for Chevron, 30% each for Exxon and Texaco and a 10% share for Mobil (later to become Exxon-Mobil)^{^[5]}. With virtually no infrastructure and modern technology, the Saudis at this time lacked the finances and technological expertise necessary for the extraction and refining of their vast reserves. In fact, it was only in 1980 that the Saudi government bought all the company’s assets under its new name ARAMCO^{^[6]}. American oil companies asserted themselves early on, even bringing in so many American workers to the country that a separate “American” camp was established to house the influx of U.S. oil workers. Ths American camp was said “to resemble Bakersfield on the edge of the Mojave Desert in California, as it was in the 1950's– a little world of split-level houses with outskirts of dreary tin-roofed shacks...”^{^[7]}.

The oil concession set a precedent in the region with the establishment of a relationship between the United States and Saudi Arabia based on mutual interests. The Saudis sought protection from their neighbors and recognition of their nation’s newly-acquired status as an international player^{^[8]}. An alliance with a superpower and the associated prestige helped legitimize the Saudi kingdom as the international community began to see it as a strategic nation. In return for a promise of security, the Saudis in turn ensured the continued flow of reasonably priced oil to U.S. markets^{^[9]}. The two countries established a quid pro quo on the basis of “oil for arms” which has persisted to the present. Oil wealth gave the Saudi regime leverage power but an alliance with a superpower gave them a boost in prestige and legitimacy.

The cement of this agreement was and still is their mutual interest in ensuring a continuous flow of oil to the oil market even in times of crisis. Saudi Arabia’s “excess capacity” makes it stand out from other oil-producing countries since Saudi production has an excess capacity ranging from 1.4-1.9 million bpd^{^[10]} as of 2003^{^[11]}. This means that if there is a sudden reduction in other oil-producing countries, Saudi oil can supplement for any disruptions and stabilize the market.

U.S. investment in Saudi oil production extends to an investment in the governance of the kingdom itself. It is in the best interests of the United States to maintain the ruling elite to ensure the flow of Saudi imports. Recent history has shown that a radical change in domestic politics of oil-producing countries corresponds with a reduced output^{^[12]}. It is in the best economic (although not political) interests of the United States to maintain the ruling class in Saudi Arabia^{^[13]}. This helps stabilize and legitimize the Saudi government itself, a fact which acts as a further incentive for the Saudis to retain their close ties with the United States.

Even before the threat of Iraq loomed large, the U.S. proved its willingness to send arms and other military assistance to protect strategic oil fields and refineries. The rise of Arab socialism under Nasser during the 1950's led to fears on the part of American oil companies who felt a security risk to the investments^{^[14]}. A strong, socialist Egypt might complicate or disrupt Saudi oil production. In accordance with their foreign policy agreement, the US government provided $180 million in 1957 in military assistance as well as naval equipment, ground aircraft and trained technicians^{^[15]}.

The Soviet invasion of Afghanistan heightened fears in Washington about a communist invasion of the Gulf region. This would threaten Saudi oil fields and jeopardize American oil and investment interests. Saudi Arabia did not possess adequate resources to combat a possible invasion and so the United States established the “Rapid Deployment Force” to prepare in case of an attack^{^[16]}. The Carter administration released the Carter Doctrine stating that “American military forces will be used to gain control of the Persian Gulf region, and any assault on the Gulf will be regarded as an assault on the vital interests of the United States”^{^[17]}. The wording of the document indicates the intense degree of U.S. involvement in the region and their investment in the oil resources. Not only are American arms and equipment ready for Saudi use, the United States is willing to declare war and deploy its own troops to defend its “vital interests”. In other words, an attack on Saudi oil constitutes an attack on the United States.

The Gulf War made good on the Carter Doctrine. The Iraqi invasion of Kuwait in 1990 threatened Saudis both militarily and psychologically^{^[18]}. Despite their vast oil wealth, the kingdom did not possess the military strength or requisite technology to combat an Iraqi force. Not surprisingly, they once again turned to the United Sates for assistance, which it readily supplied in the form of arms shipments and American troops^{^[19]}.

The Gulf War marked a turning point in the evolution of US-Saudi by revealing the extent of U.S.-Saudi dependency. Saudi Arabia depended on foreign military aid to ensure its own security and vital resources, leading to resentment and opposition on the part of Saudi citizens who say the kingdom should fight its own wars. Resentment centered around the morality of letting so-called “infidels” invade the county to fight its wars and exploit its resources^{^[20]}. One result therefore of the Gulf War was rising anti-American sentiment as Saudi citizens expressed their humiliation at having to rely so heavily on American military aid. This opinion was shared by trained professionals, scholars and laymen alike. Dr. Safar al-Hawali is a famous scholar who asserted the argument that the real enemy was the West and not Iraq^{^[21]}. Al-Hawali criticized the Saudi elite for perpetuating an alliance based on dependence and urged the Saudi regime to wean itself off American military aid.

An important point to add here is that despite its vast oil wealth, Saudi Arabia still suffers from severe economic problems such as unemployment and debt. Saudi kings incurred a large debt as soon as the oil revenues started flowing in in the 1930's, using much of this money to build royal palaces and support their lives of luxury^{^[22]}. Although corruption is not as blatant at present, the state as owner and distributor of the nation’s oil wealth remains. Public services and goods are administered through the state run according to a system of patronage. The large influx of oil revenues created a political system based on patron-client relations in which alliances are cemented through gifts. Instead of taxation, the ruling elite interacts with civic society and governs through handouts: “The most important reason for the apparent stability has been high oil revenues that have enabled the royal family to settle disputes and calm opposition by handing out money”^{^[23]}. Oil revenues ensure the continuation of the Saudi government but because it is concentrated in the hands of a privileged group, there is a tendency for resources to be mismanaged^{^[24]}. This abuse of Saudi Arabia’s resources helps account for the nation’s lack of military technology and infrastructure despite its vast oil resources.

The idea of dependency applies the United Sates as well as many U.S. politicians have pointed out the growing dependence on foreign oil. In the period of January- October of 2004, Saudi Arabia exported 1.5 million bpd of crude oil to the United States^{^[25]}. Despite these fears of growing dependence on Saudi oil, US demand has continued to rise. For example, the United States imported 6.79 million bpd in 1991. By 2000, the number had reached 10.2 million bpd^{^[26]}. Needless to say, growing demand forces the United States to remain reliant at present on Saudi oil imports. Just as Saudi citizens reacted to their own government’s reliance on American military assistance, so too have Americans voiced complaints about U.S. dependence on Saudi oil. The neo-conservative approach is an example which argues for shift away from Middle Eastern oil^{^[27]}. In this view, the United States should “drive down the price of oil, break the ability of OPEC to set prices, and deprive unfriendly states–including Saudi Arabia–of revenue^{^[28]}.” The quid pro quo established in the 1930's is under strain as both countries come to recognize the dependent nature of their relationship over oil.

The policy of “oil for arms” is becoming less and less viable in Saudi Arabia as political climates in the Middle East become increasingly volatile. The rise of Wahhabism, anti-American sentiment and terrorist attacks have caused Washington to question the viability of maintaining ties with the Saudi oil market. One trend which has arisen in reaction to these fears is the concerted effort to find alternative sources to support America’s ever-growing appetite for oil.

One suggested alternative is Russia. As the largest non-OPEC exporter in the world, Russia exported 8.6 million bpd in mid-2003^{^[29]}. Beginning in 2001, Presidents Bush and Putin met in a series of discussions termed the “U.S.-Russian Energy Dialogue”^{^[30]}. Their goal was to discuss the possibility of the United States and Russia forming a partnership . This new “axis of oil” would mean that Russian oil would be used to supplement and possibly even replace Saudi oil imports^{^[31]}. The problem arising with this is Russian unwillingness to privatize their oil industry as well as general lack of accountability, transparency and regulation^{^[32]}. Russian oil is less attractive in comparison to Saudi products because the cost of production is much higher owing to the fact that Russian reserves are located in geographically remote regions in fields which are “geologically challenging.”^{^[33]} Russia also has no excess capacity, a feature which is essential to ensure the stabilization of oil markets in the face of fluctuating world outputs.

Another suggested alternative is oil imports from Iraq which possesses 11% of world’s proven oil reserves. Some scholars project that Iraq will attract foreign investment to its oil industry if it is able to recover from recent events. This means that the newly-formed Iraqi government will have to stabilize both its economy and political climate so as to attract enough investment. Although Iraqi oil is cheap with field located near the Mediterranean Sea and the Persian Gulf, security remains the greatest deterrent to investors^{^[34]}. The prerequisites for a stable Iraqi oil industry include a “reorganization of the current Iraqi oil industry, enactment of a new business law, creation of a regulatory regime, settlement of contentious issues of regional revenue-sharing, rescheduling of Iraq’s foreign debt and some level of democratic legitimacy.”^{^[35]} While Iraq may become an influential player in the global oil market in the future, the currently unstable conditions mean this will not happen any time soon.

There is another viable alternative available to the U.S. but one which it does not exploit. Canada possesses an estimated 175 billion barrels of tar sand (or oil sand) resources with production numbers already reaching 800,000 bpd and a projected estimate for 2015 set at 1.5 million bpd^{^[36]}. However U.S. politicians have not pursued or even promoted this resource. Tar sands are deposits of bitumen and are heavier than crude oils^{^[37]}. They have a density over 960 kilograms per cubic meter in comparison with the density of light crude oils which is 793 kilograms per cubic meter^{^[38]}. Therefore tar sands cannot be pumped from the ground but must be extracted through mining. In addition to emitting carbon dioxide, this has raised concerns about environmental degradation to the extraction site.

These example demonstrate the significant obstacles facing the U.S. if it acts to shift its import base from Saudi Arabia to another source. Yet maintaining ties with Saudi officials is also increasingly challenging due to the debate concerning Israel-Palestine. The United States has vested interests in Israel and shares strong ties to its government while the Saudi stance on the matter can be summed up as follows: “no recognition of the state of Israel, no negotiations with Israel, and no peace with Israel.”^{^[39]} Their disagreement in policies towards the Middle East has deepened the rift in Saudi-U.S. relations. Yet political policies of the U.S. often diverge from its economic interests and while U.S. foreign policy in Middle East may suggest tense relations, economic interests persist in tying the United States to the region.

Even if an alternative source was found to replace Saudi oil, there is no guarantee that this new oil-exporter would continue the Saudi practice of moderating oil prices. Moderation of oil prices is essential to American interests as it allows the U.S. to import oil at the same price even when there are rising volumes of oil. In the words of one scholar, “...a Saudi government pumping out less oil and driving prices up, but not buying weapons, would be highly undesirable. The United States not only has an interest in the survival of the Saudi monarchy, but even more in the continuation of present oil and arms procurement policies.”^{^[40]} In other words, the relationship between the U.S. and Saudi Arabia may be under pressure politically but vested economic interests persist in tying the nations together.

An additional factor which augments Saudi Arabia’s leverage power is its nascent natural gas market. Natural gas has not received as much attention internationally or domestically until recently. Oil and Gas Journal estimates Saudi’s proven natural reserves at 235 tcf^{^[41]}, 60% of which is associated gas^{^[42]}. ARAMCO’s vice president, Khalid al-Falih stated that “only 15% of Saudi Arabia has been adequately explored for gas” and company officials have furthermore projected that the industry will grow at an average annual rate of 3.7% for the next 20 years^{^[43]}. This natural gas and related natural gas liquids will prove to be a valuable resource for Saudi Arabia in the near future. In addition to creating new jobs for Saudi workers, natural gas production has strengthened their oil export industry. This is because the Saudi government has adopted the policy of using natural gas domestically in order to free up more oil for export^{^[44]}.

Conclusion:

However much U.S. officials may push for independence from foreign oil, Saudi Arabia remains a strategic oil supplier and a undeniable force in the global oil market. The Saudi government (and other members of OPEC) have taken note of U.S. calls for less dependence on foreign oil. In reaction to this, Saudi Arabia is expanding its natural gas industry which it is now using as a leverage tool. For example, Saudi officials signed an agreement in 2003 with European, Russian, and Chinese companies licensing them to explore for non-associated gas in the nation’s Empty Quarter^{^[45]}. No American company was a part of this agreement, an assertion perhaps on the part of the Saudis that they are an influential power. If the U.S. will not do business with them, they will take their business elsewhere.

Saudi-U.S. relations have clearly evolved since the 1933 concession just as the world political climate itself has changed. The discussion above suggests that the “oil for arms” policy will persist despite current strains or tensions. The extent to which the two nations will be able to break from the long-established quid pro quo will depend on U.S. ability to find viable alternative sources to replace Saudi oil imports in conjunction with efforts to curb domestic oil demands. The Saudi oil regime in turn will have to form new partnerships with superpower nations in order to attract investment and develop their natural gas industry.

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