Saudi American Relations

SUNDAY, FEBRUARY 1, 2004 ITEM OF INTEREST

Saudi Arabia: Enemy or Friend?
35th in the Capitol Hill Conference Series on U.S. Middle East Policy
Conference Panel - Nathaniel Kern
President, Foreign Reports, Inc.

[Fifth in a series]

Editor's Note:

The Saudi-U.S. Relations Information Service would like to thank the Middle East Policy Council for permission to share this series with our readers. These presentations were made at the 35th Capitol Hill Conference on U.S. Middle East Policy on January 23, 2004. The conference was hosted by the Middle East Policy Council. This item provides the panel presentation of Mr. Nathaniel Kern, President, Foreign Reports, Inc. Individual transcripts will be provided separately by email and posted on-line -- see links below.

We invite you to participate in a discussion of this issue with other SUSRIS readers and web site visitors. Visit the Discussion Forum to join the dialogue. Also check below for related items published in the Saudi-American Forum and the Saudi-US Relations Information Service.

Middle East Policy Council
35th in the Capitol Hill Conference Series on U.S. Middle East Policy
Saudi Arabia: Enemy or Friend?

Transcript -- Nathaniel Kern , President, Foreign Reports, Inc.

CHAS. W. FREEMAN: The discussion of SAMA's origins and haj certificates and the like leads us directly to the question of how what was once something as poor as Mauritania became the country it is now. And Nat, I invite you to come up.

NATHANIEL KERN: Actually I'm just going to talk about Saudi Arabia and oil because that's the thing that we're most interested in here. And in that context I'd like to offer some observations about whether the Kingdom's oil policies are friendly or hostile to the United States. It's fairly common for American politicians to deplore our dependence on Middle East oil, by which they can only mean Saudi oil. Saudi Arabia is our largest source of crude oil imports, and except for on-and-off supplies from Iraq, Saudi Arabia is our only significant source of crude from the Middle East. Our imports from Saudi Arabia comprise about 15 to 20 percent of our total imports. We get about 2 to 3 percent from Kuwait, almost nothing from Qatar and the UAE, and by law of course we ban imports from Iran and Libya.

Part of this popular aversion to dependence on Saudi oil no doubt harks back to memories of the 1973-74 Arab oil embargo, which was spearheaded by Saudi Arabia. Another part of this aversion may stem from the notion that our ties from Israel might be compromised by our ties with Saudi Arabia. Another more recent myth is that our purchases of Saudi oil somehow funds terrorism.

Photo by the Royal Embassy of Saudi Arabia, Washington, D.C. Over the past half century Saudi oil has played a major role in advancing U.S. interests. The U.S. didn't become a major oil importer until 1970, but from the early days of the Cold War it was U.S. policy that inexpensive oil from the Middle East be used to fuel the post-World War II economic recoveries in Japan and Western Europe in order to avert the kind of economic chaos which it was felt would open the way for communist influence.

Even during the heated political atmosphere of the 1973-74 Arab oil embargo, Saudi Arabia never stopped supplying the fuel our military forces needed worldwide, especially in Vietnam, even though the secretary of state at the time made veiled threats that the U.S. would invade and occupy Saudi oil fields.

When oil prices raged out of control during the second oil crisis, spurred by the Iranian revolution of 1978-79, Saudi Arabia consistently moderated oil prices by increasing production and by undercutting official selling prices advocated by others in OPEC. When Iraq invaded Kuwait in 1990, the first Bush administration imposed a blockade to prevent oil from Iraq or occupied Kuwait from being sold to world markets, and that cut off more than 5 million barrels from world oil supplies. Saudi Arabia moved expeditiously to ramp up production to help fill this gap, such that oil prices were lower when the U.S. military campaign to oust Iraq from Kuwait began than they were before Iraq seized Kuwait.

Last year oil markets met their perfect storm. A lengthy strike had paralyzed Venezuela's oil exports beginning in December 2002. Our invasion of Iraq in March terminated Iraqi production, while strikes and ethnic violence in Nigeria at the same time cut that country's production by more than one-third. Despite its misgivings about the wisdom of the U.S. invasion of Iraq, once Saudi Arabia was convinced that the Bush administration was determined to invade, it did everything in its power to minimize the economic costs to the world economy by producing enough oil to make up the shortfalls from that perfect storm in the markets. By a combination of high oil production and skillful market interventions, Saudi Arabia was able to bring down the price of oil by $11 from $37 a week before the invasion to $26 two days after the invasion.

Photo by the Royal Embassy of Saudi Arabia, Washington, D.C. Those are a few of the historical high points, but what of the future? Saudi Arabia holds one-quarter of the world's oil reserves, and alone among producers has a policy of maintaining the cushion of spare capacity, some 2 million barrels per day of spare capacity now for the explicit purpose of providing extra oil to the market when there is an interruption in global supplies. Without that cushion of spare capacity, the only way the oil market can adjust to a significant global supply disruption, like an Iraq or Venezuela last year, is to let prices arbitrate between supply and demand.

Price arbitration can be a fairly unpleasant way to lower demand to match a reduction in supply. Very few of us are willing to take the - to abandon our cars and take the bus just because gasoline prices are high. Unfortunately, the only way Americans really curtail their use of gasoline is when they are thrown out of work and are taking the bus to the unemployment office.

The Saudis do, of course, have a business purpose in maintaining that cushion of spare capacity. Overly volatile prices give their main export product a bad reputation among consumers, but it's a costly process for the Saudis to maintain that cushion, and at the end of their day their leadership justifies the cost because they believe they do have a responsibility that comes from a stewardship over one-quarter of the world's oil reserves, a responsibility for the security and stability of worldwide supplies, from which we in the U.S. benefit as consumers of one-quarter of the world's daily supplies.

As we look to the future and think of the role of Saudi Arabia in it, I'd ask you to ponder a couple of things that have occurred over the past 20 years, and some of the new realities we face. Twenty years ago we consumed 15 million barrels in the U.S.; today we consume 20. Twenty years ago we produced 8.9 million barrels domestically; today we produce 5.6. Our imports of crude have gone from 3.2 million barrels a day in 1984 to 10 million barrels today. The United Kingdom, which became an exporter of crude thanks to the discovery of prolific North Sea fields in the 1970s, last year became a net importer of crude. One of OPEC's leading members, Indonesia, which has been producing oil since 1983, last year also became a net importer of petroleum. China overtook Japan last year as the number-two oil consumer in the world, and its oil use has been growing at double-digit rates. It still has 200 million under-employed workers whom it wishes to bring into the global economy. That's a workforce larger than in all of North America or larger than the EU's.

The historical record shows that Saudi Arabia's actions and interests in the oil market have been aligned with those of the U.S. and last year the case was proved again. Saudi's stated intentions are to maintain that alignment of interest in the future. Our need to maintain the same alignment over the next 20 years is probably greater than it was 20 years ago. We've had occasion to, since 9/11, to address and air complaints to Saudi Arabia about a host of different things, and some of them have been measured and constructed, and some of them have been shrill and bordering on hate. Over time the Saudis have responded and are responding, sometimes too slowly for us, to these complaints, whether it's terror financing, education reform, you name it.

Saudi students in a classroom. (Photo by the Royal Embassy of Saudi Arabia, Washington, D.C.) But we also, I think, should look at how some of the measures we have enacted since 9/11 are losing us friends in that part of the world. One-half of the students nominated last year for Fulbright scholarships from Muslim countries were denied U.S. visas. I just came back from Saudi Arabia and Kuwait, and everywhere you go, as Chas. points out, middle and senior officials of those countries are U.S. educated and they have a very strong affinity for America. Their kids can't get visas to come to college here. Their parents can't get medical visas. They no longer want to come here for vacations because they're being told they're unwelcome. At best they're reluctant to make business visits here. This is going to create a problem for us sooner rather than later.

I think the conference has a valid purpose in examining whether Saudi Arabia's hostile or friendly to the United States, but we also have to bear in mind that friendship and hostility are two-way streets, and it may be worth asking whether our policies are friendly or hostile to Saudi Arabia. I fear that if our policies are perceived as hostile, the Saudis are going to be successful in finding new friends. Thank you.

CHAS. W. FREEMAN: Thank you, Nat. Very succinct and very sobering analysis, which I think underscores the point that I made at the outset. The interests haven't changed. The emotional climate in which they are addressed, however, has.

Click on a speaker's name to read a transcript of the paper that each presented at the 35th Capitol Hill Conference on U.S. Middle East Policy.

Speakers:

David Aufhauser
Former General Counsel, Department of the Treasury
Frank Anderson
Former Chief, Near East and South Asia Division, CIA
David E. Long
Retired U.S. Foreign Service Officer -- Saudi Arabia, Sudan, Morocco and Jordan
Nathaniel Kern
President, Foreign Reports, Inc.
Hussein Shobokshi
President, Shobokshi Development & Trading; Managing Director, Okaz Printing and Publishing

ABOUT THE SPEAKER

Nathaniel R. Kern is president of Foreign Reports Inc., a firm founded in 1956 to provide political reporting and analysis for the oil industry. Mr. Kern has been with the firm since 1972, becoming vice-president in 1975 and president in 1990. Besides directing and writing the firm's analyses and reports, he also has managerial responsibility for the firm's five other senior professionals. He has a wide variety of hands-on experience in the region. Mr. Kern has worked with major contractors from around the world in the supply of power-generation and water desalination equipment to the Saline Water Conversion Corporation of Saudi Arabia and participated actively in the preparation of economic planning for the Sultanate of Oman for the utilization of natural gas and the establishment of light industries. He received his B.A. in Near Eastern Studies from Princeton University in 1972 and attended the University of Riyadh from 1970 to 1971 as the first non-Arab student.

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