Saudi Arabia - Saudi Arabia Begins Looking East

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Doubtful of the US,
Saudi Arabia Begins Looking East
Jean-Francois Seznec

Editor's Note

In May Ambassador Chas Freeman addressed the World Affairs Council of Northern California at Asilomar on the topic, "The Arabs Take a Chinese Wife: Sino-Arab Relations in the Decade to Come," which we were pleased to be able to share with you in these pages. Among the pointed observations about growing Saudi Arabian interest in relationships with the countries of East and South Asia was:

"The Arabs see the Chinese as pretty much like Americans - that is, Americans as we used to be before we decided to experiment with diplomacy-free foreign policy, hit-and-run democratization, compassionate colonialism and other "neocon" conceits of the age. And they see a chance to rebalance their international relationships to offset their longstanding overdependence on the United States. They know that they can't divorce us, even if they wished to do so. They are as addicted to our money as we are to their oil. We are locked in a Catholic marriage. But they are Muslims and they don't have to divorce us to take a second wife. Hence their romances with China and India. And these romances are taking place when international polls routinely show that, outside of Germany and our own country, China is now far more admired and trusted than the United States."

Today we are pleased to present for your consideration another discussion of the burgeoning ties between Saudi Arabia and Asian nations. Dr. Jean-Francois Seznec, previously a subject of a SUSRIS interview (link below), is an adjunct professor at Columbia University and Georgetown University. His essay "Doubtful of the US, Saudi Arabia Begins Looking East" previously appeared in Bitterlemons.org and the Beirut Daily Star.

Doubtful of the US, Saudi Arabia begins looking east
By Jean-Francois Seznec

This year Saudi Arabia will produce 50 million tons of petrochemicals, making it the seventh largest producer in the world. There are tens of industrial projects in the kingdom valued at hundreds of billions of dollars that are likely to bring production of petrochemicals to 120 million tons by 2015. This growth should translate into sales of $60 billion per year, slowly but surely switching the Saudi economy away from crude oil production alone and making it the leading world producer of petrochemicals.

This massive industrial growth is not due only to the kingdom's access to cheap energy. It is also caused by the policy decisions of a few Saudi leaders and a change in the international environment after September 11, 2001. The present switch to industrial growth is having a major impact on both local society and foreign policy.

(Photo by Ken Childress/Saudi Aramco/PADIA)
(Photo by Ken Childress/Saudi Aramco/PADIA)

The first Saudi efforts to industrialize were made by King Faisal in the early 1970s and continued unabated by his successors, kings Khaled, Fahd and Abdullah. Faisal ordered the creation of the Saudi Industrial Development Fund to provide cheap loans to new entrepreneurs and the Public Investment Fund to fund the development of, and eventually sell to the public, very large local industries like SABIC and Saudi Airlines. The civil service, mainly the ministries of finance, commerce and oil, was put in charge of the effort.

The government established priorities, which forced Saudi Aramco to sell all natural gas and related products to the local market at cost rather than export it, as is done in Qatar, the United Arab Emirates or Algeria. Today, Saudi Aramco sells its methane and its ethane to Saudi industries at $0.75/million BTU (compared to $5.50/million BTU on the New York Mercantile Exchange). Other gas liquids for petrochemicals are sold at about 50 percent below prices in Asia. Presently, the Saudi government is pressing to build four new refineries at a total cost of over $30 billion. These oil refineries will emphasize the production of naphtha, a major feedstock for petrochemicals, for local industrial development rather than just gasoline or diesel for the export market.

In the past five years, the kingdom has seen a sudden acceleration of the industrialization process. Today, there is a feeding frenzy by private investors to invest in new industrial projects. Until now, large-scale plants in petrochemicals, electricity or desalination were developed and owned by government agencies. However, the government saw that job creation by these companies, while substantially higher than pure oil production, was insufficient to meet the need for 400,000 new jobs per year. King Abdullah and his technocrat ministers realized that the state sector would have to work with the private sector and create incentives to invest at home.

Abdullah's government pushed hard to join the World Trade Organization, which would guarantee access to the Far East for Saudi products. Saudi Arabia, like the rest of the Gulf, has a natural advantage in low-cost energy. This translates into the very low prices for feedstock mentioned above and can allow Saudi products to sell in any market competitively compared to those of the major petrochemical producers. In December 2005, the kingdom was formally accepted into the WTO at very favorable terms.

As soon as Saudi investors saw that WTO negotiations were a priority, it became clear to them that the kingdom would open its markets and its society to the 21st century. Further, with WTO accession there would be an assurance of long-term markets for Saudi goods. Hence the private sector felt comfortable about investing at home.

However, the push for investments in the kingdom was also due to a change in the traditional practice of investing abroad. After September 11, the merchants, the richest but also the less rich, feared they could no longer hold their assets in US dollars in American institutions due to the threat of capricious seizure by the US Treasury. At the same time, they realized that US involvement in an unprovoked war and ambiguous foreign policies was leading to a loss of American credibility in the world and the transfer of US wealth to Chinese coffers. Hence it made sense to Saudis to invest at home and try to conquer the Far Eastern markets.

Thus industrial growth in Saudi Arabia has increasingly important consequences internally and externally. Internally, the new industries require high levels of expertise. This has triggered an education boom in privately owned Saudi schools and universities for men as well as for women. The stranglehold of Salafists on education is now constantly questioned and fought by the merchants, the civil service and many princes.

The population is growing quickly but the economy is still dependent on 7 million foreign workers who remit home over $10 billion per year. Many Saudis, both liberal and conservative, are beginning to push hard to increase the employment of local women to replace a large number of the expatriates. A major consequence of the increased importance of technical education and of women in the workforce is that the Salafists are becoming marginalized. This, indeed, may have been one of Abdullah's main underlying goals in promoting the current economic boom.

External consequences are also shaking the present world order in the Gulf. Indeed, newly developed industries are no longer dependent on the West. Local investors can buy Western technology and sell to markets in the East. The fear of the US military hegemon is palpable in the Gulf, even among America's "allies." Thus the Saudi government seeks to increase its relations with the country that their business sense tells them is the next economic hegemon: China. The Saudis have been sweet-talking the US with promises of cooperation, but the real tangible activity, both diplomatically and economically, is increasingly with China. The Saudis are more eager to be friends with the lender states, Japan and China, than to actually support a US government that is kept financially afloat by, and thus dependent on, the far eastern powers.

The Saudis have turned toward trading with the East rather than supporting the Bush administration's militaristic policies, which they see as self-destructive. The new paradigm the Saudis are working with considers that world domination will come not from a military hegemon but from an economic one in the Far East, with which Saudi Arabia is rapidly carving out a major position of influence for itself.

Jean-Francois Seznec [Photo: Ryan & Associates] Jean-Franï¿½ois Seznec

Dr. Seznec has been an Adjunct Professor at Georgetown University for four years. He also teaches at Columbia University. His research centers on the influence of the Arab-Persian Gulf political and social variables on the financial and oil markets in the region. He is Senior Advisor to PFC Energy in Washington, DC. He holds a MIA from Columbia University [1963], a MA and his Ph.D. from Yale University [1994]. He has published and lectured extensively and is interviewed regularly on national TV, radio and newspapers, as well as by the foreign media.

Dr. Seznec has 25 years experience in international banking and finance of which ten years were spent in the Middle East, including six years in Bahrain as a banker. Dr. Seznec is a founding member and Managing Partner of the Lafayette Group LLC, a US based private investment company. He uses his knowledge of business in the Middle East and the United States to further his analysis of the Arab-Persian Gulf.

Source: Georgetown University

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