Saudi Arabia's Accession to the WTO: Is a "Revolution" Brewing?
Middle East Policy Council Capitol Hill Conference Series on US Middle East Policy
U.S. Capitol
Washington, D.C.
January 13, 2006

Jean-Francois Seznec
Adjunct Professor, Columbia University's Middle East Institute

AMB. FREEMAN: One issue mentioned I think is very important, and it leads directly to Jean-Francois Seznec, who I hope is going to discuss a little bit of the impact of this on Saudi Arabia's relations with other countries beyond the United States. One of the reasons that Saudi Arabia has not been able to develop its comparative advantage in petrochemicals has been the closed nature of the EU market. There were some very anomalous results recently - in my business capacity, in a neighboring country I've been approached to deal with a lubrication oil project, and I discovered to my surprise that although this country is itself a major oil exporter, it actually imports base oil from Europe in order to make lube oil.

So the Europeans, by various tricks based on their history, have managed to exclude the producers in the region - in the Arabian region - from some of the downstream processing that otherwise would have been done. WTO accession promises to change this, and it will make Saudi Arabia, in particular, in my view, a major manufacturer in the petrochemical area in a way that it has not been. And, Jean-Francois, you may disagree with me if you wish.

JEAN-FRANCOIS SEZNEC: I don't - it's too bad. [Laughter] I just wanted to emphasize, what my predecessors here have mentioned, that I think the social issues and the economic issues under these WTO negotiations are absolutely vital. I think there was a policy by certain groups in Saudi Arabia, namely some of the civil service - finance, oil, commerce and industry - to totally modernize the country and the social aspect of the country. I think they all know that in order to survive, Saudi Arabia must get into the 21st century and must really sideline the Salafis. And I think the whole game of these WTO is really just that, is the sidelining of the Salafis.

So given that, they have pushed after 2001 - they have decided to really push hard on joining WTO. Why? Because from now on, with WTO, they can maximize where they have a natural advantage. And I hope I won't be too technical because it can be pretty boring to be so technical, but the fact is Saudi Arabia has the cheapest feedstock in the world. To make petrochemicals you need various feedstocks, either natural gas, natural gas liquids, or oil or naphtha out of oil. The cost to Saudi Arabia is below $2 a barrel, whether it's in gas barrel equivalents or in oil. That allows them to start taking over the markets. I should add that Saudi Arabia is already the 7th-largest producer of petrochemicals in the world today, and that is increasing by leaps and bounds. They're producing about 46 million tons a year. Some of it - 10 percent of that is from this private sector and not only from SABIC.

One of the key issues under WTO is that there was a risk that the Saudi growth in industry was going to be shut out of the main market - China - because China is a member of WTO. The main investor in China in petrochemicals is Germany. And we'll get talking about the EU, but I must stress the importance of those petrochemicals because every - you know, the Chinese sell $20 billion of goods to the United States every month. Every cent of that dollar - of those dollars has a component of petrochemicals. It may not be much but it has something - either the packaging or something - and that comes from China, and China could not grow as it is and create the jobs it's creating without the petrochemicals. These petrochemicals could not happen without the growth in the Saudi petrochemical industry.

So we're not talking enormous amounts of money at this point, maybe $20 billion of sales - which is substantial really - but it is strategically very important from a commercial standpoint. So the Saudis needed to make sure that they still had access to these markets, and could grow these markets, because the civil service in Saudi Arabia has decided a long time ago - that goes back to 1976 - that they were going to be a major player in industry in the world. My personal analysis - and it's not proven by any means, but it's my feeling that the minister of oil, the minister of finance, and their predecessors, had decided to become as important in industry - petrochemicals - as they are in oil in the world today. By 2015 Saudi Arabia will be the largest producer of petrochemicals in the world.

Now, this is very interesting because who is the largest producer of petrochemicals in the world today? It's Germany. And Germany has been working against Saudi Arabia in that sense. Even though Germany is the third-largest seller of product into Saudi Arabia, Germany does not cooperate with the Saudis on petrochemicals or any energy-based industry. There are no German joint ventures in the region. The only one there was has just been sold to an Indian company. So it is quite interesting.

During the negotiations between the EU and Saudi Arabia, there was a major issue of double pricing. Let me just go quickly through this. One of the key ingredients of petrochemicals is butane and propane, which is called natural gas liquids, which come out of the natural gas extracted in Saudi Arabia out of the oil. This is sold at about $400 a ton in the world. The Saudis sell that at 30-percent discount to SABIC, and the Europeans said, this is unfair and if you want to join WTO you've got to stop this double pricing. The Saudis actually agreed, but if you read between the lines they agreed wholeheartedly to stop the double pricing in the agreement with the EU. But they also know that within five years - within four years from now they will not export any natural gas liquids because they're growing their industry so fast right now that it will all be used locally, and therefore they could agree to having no double pricing because there would be no double pricing; it would all be sold at a discount in Saudi Arabia.

The other issue is the price of natural gas. Natural gas is sold by Aramco - Saudi Aramco - to the users, whether it's electricity companies or water desalination companies or SABIC or the private sector at 75 cents per million BTUs. Today the market in New York is about $8.60 a million BTU. That's to show you the difference in price. At 75 cents per million BTUs, that's the equivalent about - if my tables are right; I'm not too great a calculator of these things - it would amount to about $4.35 per barrel of oil equivalent.

So the Saudi producers of petrochemicals can buy - including a profit for Saudi Aramco of probably $2.50 - can buy their products, their raw material, at $4.35. The Germans, who are competing with the Saudis, are buying at $62 a barrel equivalent today. So there is an enormous difference between the two.

Now, the Saudis are increasing their sales to the Far East tremendously every year, and of course they can get any market they want because the growth is such now that the Chinese are buying everything they can. They don't have to have any price war on the prices or anything of this nature. However, if the Germans felt that the Saudis were going to gain the markets they could start putting WTO blocks against Saudi Arabia in China, because that is where their biggest investments are.

Now, they decided not to - finally, by joining WTO, that allows the Saudis to compete. The Saudis today can take any market wherever they want at any price they want if the markets start declining.

Eventually the EU agreed to this double pricing, and eventually - and I suspect because of American pressure - also finally in the final agreement, which was signed on November 11th, agreed to even drop this double-pricing issue. What is mentioned today is that the Saudis - Saudi Aramco in particular, can sell to its own buyers its products at cost, all inclusive - labor cost, capital cost, depreciation, et cetera, et cetera, plus a fair profit, and that probably amounts to about $2.50-a-barrel equivalent, and the price which is given by Saudi Aramco is now $4.35. So eventually the Saudis can continue to grow. By 2015 the Saudis will be producing over 100 million tons of petrochemicals.

Just a final word is it's not only petrochemicals but all manner of other products. Cement is very energy intensive and Saudi Arabia today is a big exporter of cement and will increase that tremendously. Steel - they already produce 5 million tons a year. They're going to go into aluminum. They're going to bring a lot of goods from inside Saudi Arabia with the new railroads they're building, and that will develop an enormous exports industry.

So the EU, if you like - to just conclude on this, I think the EU is going to be a big loser in this issue because the French are investing in Saudi Arabia but the Germans, who are the largest, are not. And even though they are the largest trade partners to the - the EU is the largest trade partner to Saudi Arabia today, the big gainer is the American companies because they're already there, they already have $5 billion or $6 billion of joint ventures in Saudi Arabia, and they can continue to take this market over. They will produce in Saudi Arabia for the Chinese market.

There is a strategic issue here, though, because it means that the Chinese relations with the Saudis are going to increase tremendously compared to the Americans, but some of those commercial relations will be coming from American companies as well. And I'm running out of time.

Presentations provided in separate SUSRIS IOIs:

• William Clatanoff - Former Deputy U.S. Trade Representative for Labor

• C. Christopher Parlin - Partner, Loeffler Tuggey Pauerstein Rosenthal, LLP

• Robert Jordan - Former U.S. Ambassador to Saudi Arabia

• Charles Kestenbaum - Former Regional Director, U.S. Dept. Of Commerce

• Jean-Francois Seznec - Adjunct Professor, Columbia University's Middle East Institute

• Moderator/Discussant - Chas. W. Freeman, Jr. - President, Middle East Policy Council

• Questions and Answers

Middle East Policy Council

The MEPC, since its formation in 1981, has provided political analysis of issues involving the greater Middle East. Through its programs, publications and Web site, the Council strives to ensure that a full range of U.S. interests and views are considered by policy makers. We challenge the conventional wisdom, ask the difficult questions, encourage a wide spectrum of views, provide forums to stimulate thinking. The Council strives to fulfill these objectives through three major activities:

• Middle East Policy - a quarterly journal of political, economic and social analysis.

• A Capitol Hill Conference Series - forums for members of Congress, their staffs, federal government officials, foreign policy experts and the media.

• Workshops for high school teachers - daylong training sessions to build a fact-based foundation for educating America's youth about the Arab world and Islam.

KNOWLEDGE, INSIGHT AND PERSPECTIVE - THESE ARE THE PATHS TO UNDERSTANDING. THEY ALSO ARE GOALS OF THE MIDDLE EAST POLICY COUNCIL.

More: <click here>

On SUSRIS

• Crossroads in US-Saudi Relations - Jean-Francois Seznec Interview - SUSRIS Interview Series - Oct. 8, 2004

WTO Accession:

• Accession of Saudi Arabia to the WTO - SUSRIS

• World Trade Organization Accession - SUSRIS IOI - Nov. 10, 2005

• The Implications of WTO Membership: A View from the Kingdom - SUSRIS IOI - Oct. 30, 2005

• World Trade Organization Accession: Saudi Arabia Gets "Green Light" - SUSRIS IOI - Oct. 28, 2005

• WTO Accession: One Step Closer - SUSRIS IOI - Oct. 12, 2005

Capitol Hill Series:

• 35th in the Capitol Hill Conference Series on U.S. Middle East Policy Conference Panel, January 23, 2004 Saudi Arabia: Enemy or Friend?

• David Aufhauser, Former General Counsel, Department of the Treasury

• Frank Anderson, Former Chief, Near East and South Asia Division, CIA

• David 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