U.S.-Saudi Arabia - Flynt Leverett - Conference

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ITEM OF INTEREST
May 15, 2009

U.S.-Saudi Relations in a World Without Equilibrium
Conference Transcripts -- Session 2
Flynt Leverett

Editor's Note:

Last week a major forum addressing the state of and prospects for the relationship between the United States and the Kingdom of Saudi Arabia was convened in Washington by the New America Foundation (NAF) and the Committee for International Trade (CIT) of the Saudi Chambers of Commerce and Industry. Distinguished speakers spent the day providing perspectives and insights on what the relationship should look like, how economics was shaping the national security picture vis a vis the relationship, the challenges for America in the region and how the perspective on these challenges look from the Saudi Arabian point of view.

Today we are pleased to provide the transcripts from the second session, "Economics as a National Security Imperative: Challenges for Saudi Arabia and the U.S." Among the featured speakers was Flynt Leverett, Director of Geopolitics of Energy Initiative for the New America Foundation and Former Senior Director for the Middle East of the National Security Council.

Separate emails will provide each panelist's remarks and the question and answer period transcript. Transcripts for the remaining panel and luncheon remarks will be provided over the next few days. You can find all of the conference materials and related links at a new SUSRIS Special Section. [ "U.S.-Saudi Relations in a World Without Equilibrium" - Conference Special Section ]

Video MP3

U.S.-Saudi Relations in a World Without Equilibrium
Conference Transcripts -- Session 2
Flynt Leverett
Director, Geopolitics of Energy Initiative, New America Foundation
Former Senior Director for the Middle East, National Security Council

[Flynt Leverett] Thank you very much. Since I come to this gathering with a background in U.S. policymaking, I want to spend a few minutes talking with you about what it would mean for U.S. foreign policy if we really took serious the title of this panel, economics as a national security imperative, and more particularly what it would mean for the way in which the United States handles its partnership with the Kingdom of Saudi Arabia.

In the context of the current economic crisis, I think the United States is beginning to think about economics as a foreign policy/national security issue. The fact that Senator Kerry would ask someone like Heidi to join his staff at the Foreign Relations Committee is certainly a sign of progress in that regard. But on the whole, I would argue that the United States has yet to come to grips with the strategic consequences for its own international position of two very profound economic developments. One of those developments or sets of developments I�ll label as structural shifts in international energy markets, and the second category of profound developments I�ll label strategic transenglobal finance. Not surprisingly, the U.S./Saudi relationship lies at the heart or the center of both of these developments. When I talk about structural shifts in particularly oil and gas markets, at the risk of oversimplification, I�ll boil it down to a couple of things. One is over the last decade, you�ve had emerging markets, rising powers. What we used to call developing countries established themselves as really the main centers for incremental growth and demand for hydrocarbon-based energy looking forward. We�re all going through an economic downturn which has had its effects on energy demand. This is a structural shift. And as economic growth begins to pick up we will see a return of this phenomenon of demand growth particularly in what we used to call the developing world. That is not going to go away. And then the other structural shift that comes into play is a whole set of what are essentially above ground and largely political constraints on the growth of supply for oil and natural gas. This is in some cases the result of decisions by national governments of producer countries � Saudi Arabia is a very clear exception to that. But it�s also frankly the result of U.S. policy. From an energy security standpoint, what do you make of a U.S. policy toward Iraq, that both before Saddam was overthrown and since, has basically insured that Iraq has been and is likely to remain in a state of profound underperformance as an oil producer. You know, anyone who argues that the Iraq War was a war for oil, man if that�s the case, it was an even more unconfidently planned and executed than even I think it was. And not content with that contribution to global energy security, the United States across democratic and republican administrations has compounded that with a policy towards Iran which says in essence that the world�s second largest proven reserves of conventional crude oil and the world�s second largest proven reserves of natural gas should stay in the ground until we in Washington decide for reasons that will have nothing to do with the global energy balance that it�s okay monetize those reserves. Okay, that�s what I mean by above ground constraints. And you put the two developments on the demand side and on the supply side together and what you saw from late in �99 until the middle of 2008 was a very steady trend towards higher and higher prices for hydrocarbon-based energy that produced, I think, the biggest transfer of wealth from one group of countries to another in human history, and mark my words, within the next few years, as economic recovery kicks in, demand starts to grow once again, we will be back on the path towards higher prices and that transfer of wealth will only continue.

The second development that I�ve talked about is strategic trends in global finance. And here you have a situation where you have a financial system that is characterized by really unprecedented economic imbalances, and you have a monetary system characterized by a long standing reliance on the dollar as the preferred reserve and transactional currency in the world, but given everything else that is going on in the world, it seems like dollar hegemony is an increasingly shaky proposition. Now those developments have huge implications for America�s international position. They should have huge implications for American foreign policy and in particular they should have huge implications for the way that America deals with the Kingdom of Saudi Arabia. At the G20 Summit in London there was a lot of talk about a so-called G2 - this emerging partnership relationship between the United States and China. I think the G2 model was originally coined by Fred Burkston, but on the margins of the G20 Summit I heard a lot of talk about the G2.

I don�t want to minimize certainly the importance of China and the importance of the U.S. relationship with China. I would argue, though, that in terms of dealing with the economic challenges to America�s strategic position in energy and in finance, our relationship with Saudi Arabia is at least as importance to our international standing looking forward as our relationship with China. And there�s certainly, I don�t want to say that we shouldn�t be thinking about a G2, but I would think it�s even better if we could think about a G3 and recognize the central role that Saudi Arabia is going to play on energy and on finance in coming years.

What would it mean for American foreign policy if we really took Saudi Arabia seriously as a partner in these areas? Well I�ll try and offer a few comments about that with regard to both energy and finance. On the energy scene, as I said we have a lot of above ground constraints on the growth of supply. One of the few bright spots in that picture is the Kingdom of Saudi Arabia. Saudi Aramco several years ago committed itself to expanding its installed productive capacity for crude oil to twelve and a half barrels a day. They are on track to reach that target by next year. I don�t doubt, I don�t know anybody in the oil industry who doubts that Aramco will meet that goal. They are meeting it at a price tag of something that will probably come in at between 60, 70 billion dollars. Now that may not seem like a lot to you, but given all of the pent up infrastructure demand in Saudi Arabia, all of the needs for capital in the Kingdom to promote the kinds of economic modernization, innovation that our Saudi speakers have spoken about. There are other things that Saudi Arabia could have done with that capital, other than expand Aramco�s productive capacity, but in no small part because the United States exhorted them to do this, Saudi Aramco and the Kingdom made this commitment, and as I said, they are on the verge of fulfilling that commitment. But what is their reward for that? What is their reward for that from the new Obama Administration? Well, part of their reward for that was to be greeted with a posting on the White House website which talked about the Obama Administration�s firm commitment to ending America�s addiction to foreign oil and as a first step to that, during President Obama�s first term, to eliminating oil imports from Venezuela and the Middle East. Okay � I don�t really know where to begin in kind of unpacking the economic ridiculousness of that proposition, so I won�t even really get into that. As a political proposition, I think that is just absurd. It�s worse than absurd, it is really dangerous over the long run for American interest. If we think that Saudi Arabia will simply continue whenever we want to install more productive capacity and will whenever we want produce more oil just because we want it, I think to treat that proposition as an assumption and not as something which has to be cultivated, nurtured, discussed in the context of a genuine strategic partnership, I think that�s a really dangerous way for the United States to approach this relationship, but we really have yet to wake up to the new realities of America�s international position and what that means for the way that we conduct our business with Saudi Arabia.

On finance, as I said, I think that dollar hegemony the way that the United States has thought of it, promoted it, defended it for decades, is simply not sustainable over the long run. And we�re to have a fundamental choice to make. We can either be in denial about that reality, we can try to hold on for as long as we can to the traditional version of dollar hegemony, and then wait to see how bad it is when dollar hegemony finally implodes, or we can actually be proactive about talking to our major creditor partners, which includes China but also certainly includes Saudi Arabia. We can begin to discuss with them in an authoritative way how the composition of international reserve assets needs to and should shift over the long term to create a more sustainable monetary basis for economic growth and prosperity in decades to come. That would be real leadership. That would be leadership on the scale of what Senator Hagel evoked earlier this morning when he spoke about those Marshall, Truman, � who were present at the creation in the aftermath of World War II.

If there is going to be a new creation, a new and viable international economic order for the twenty-first century, I�m enough of a chauvinist to think that American leadership is going to be required to do that, but it is going to have to be American leadership that is exercised in close partnership with countries that have indispensable resources, assets, and wisdom to bring to bare on these problems. And there is no country in the world that fits that bill more than the Kingdom of Saudi Arabia. And it is time that the United States began to have a realistic discussion first of all in its own councils about America�s international position, and then as I said begin to have a more realistic discussion with our most important partners for how to deal with this situation and move to a more sustainable future. Thanks very much.

[Visit the SUSRIS Special Section "U.S.-Saudi Relations in a World Without Equilibrium" for the transcripts from this and other panels and additional resources.]

Session Two Video

Courtesy New America Foundation

Video MP3

Speaker Biography:

Flynt Leverett
Director, Geopolitics of Energy Initiative, New America Foundation
Former Senior Director for the Middle East, National Security Council

Flynt Leverett is a leading authority on U.S. foreign policy, the Middle East and Persian Gulf, and global energy issues. From 1992 to 2003, he had a distinguished career in the U.S. government, serving as senior director for Middle East Affairs in the National Security Council, Middle East expert on the Secretary of State�s Policy Planning Staff, and Senior Analyst at the Central Intelligence Agency. He is a consultant to the World Economic Forum�s �Gulf Cooperation Council and the World 2025� scenarios project and to the Club of Madrid on global energy issues. He is a peer reviewer for the International Energy Agency�s World Energy Outlook. Among Dr. Leverett�s many publications are Dealing with Tehran: Assessing U.S. Diplomatic Options toward Iran (2006) and Inheriting Syria: Bashar�s Trial by Fire (2005). He holds a Ph.D. in politics from Princeton University and is a life member of the Council on Foreign Relations and the International Institute of Strategic Studies. As senior fellow and director of the Geopolitics of Energy Initiative of the American Strategy Program at the New America Foundation, Dr. Leverett studies the implications of structural shifts in global energy markets for international politics and the international economy.

Source: New America Foundation / Committee for International Trade

AGENDA

Panel II: Economics as a National Security Imperative: Challenges for Saudi Arabia and the U.S.

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