Saudia Arabia is not in a position to halt oil exports to the US because it is far too dependent on oil revenues to deliver its public services
When tensions first flared in the Middle East, energy analysts said Opec would never use the oil weapon.
When Iraqi President Saddam Hussein announced last month that he was halting oil exports for 30 days, Saudi Arabia said it would make up for any deficit in global output.
Were they all wrong? According to the New York Times, Saudi Crown Prince Abdullah gave an ultimatum to President George W Bush when the two met recently at Bush's Texas ranch. Either the US moderates its support for Israel's military policies, or the Saudis and other Arab nations will play the oil card and demand the US leave strategic military bases in the region, according to a person close to the Crown Prince quoted in a Times article.
Now that some members of the extended Saudi family have chosen to go public with their strong-arm tactics, what do they do for a graceful exit? If Bush says no dice, which is what one would expect, and the Saudis fail to act, then they lose face, not to mention stature, among the militant masses in their own country and in the Arab world.
Exercising the oil weapon is the equivalent of shooting themselves in the foot. Oil revenue makes up about 90% to 95% of total Saudi export earnings, 70% to 80% of state revenue, and about 40% of the country's gross domestic product, according to a January 2002 report from the Department of Energy's Energy Information Administration. Saudi Arabia has a high level of domestic debt, about 100% of GDP, according to the EIA. The population is growing faster than the economy, which has reduced real per capita income and generated higher unemployment. Can the Saudis really afford the loss of oil revenue with an increasingly radicalised population threatening their shaky regime?
The Times article, which ran on the front page, had some scary quotes.
'It is a mistake to think that our people will not do what is necessary to survive,'' the person close to the Crown Prince said. 'And if that means we move to the right of Bin Laden, so be it; to the left of Qaddafi, so be it; or fly to Baghdad and embrace Saddam like a brother, so be it. It's damned lonely in our part of the world, and we can no longer defend our relationship to our people.''
Oil prices fell overnight; clearly the Times story wasn't considered reliable information. As the sun made its way across the pond, however, oil traders decided they'd rather buy than sell.
Experts on the Middle East gave the story short shrift.
'Saudi Arabia is an oil-based economy,'' said Mordechai Abir, senior managing director for energy and geopolitical research at Burnham Securities. ``Unlike Russia and Norway, without oil revenue the Saudis are finished.''
The Saudis know that constant manipulation of oil prices is 'ruining the market, reducing their market share, encouraging production elsewhere and a move to develop alternate sources of energy,'' Abir said. 'They have declining revenue and a budget deficit expected to be $12bn in 2002,'' or 7% of GDP. The loss of revenue from oil exports ``has very serious ramifications for Saudi Arabia, which is why they have been careful not to use the oil weapon,'' Abir said.
Abir's view is that the tactics being used to put pressure on the US are 'not from official sources,'' or else they're from 'unknown members of the royal family,'' which is not exactly a cozy clan (no intimate around-the-table holiday dinners for this group). 'Crown Prince Abdullah and foreign minister Saud al-Faisal have gone out of their way to repeat and reiterate that the oil weapon will not be used,'' Abir said.
Let's hope so. The Saudis have successfully deflected attention from their complicity in the 11 September terrorist attacks (15 of the 19 hijackers were Saudis) by offering a peace plan for the Middle East. (Given the success of land for peace, don't expect the Israelis to get too excited about Prince Abdullah's land-for-a-promise deal.) Like all illegitimate regimes, the Saudis, when threatened at home, find it useful to create an external enemy to engage the masses.
Standing up to the US with the threat of the oil weapon may create a sense of power at home. In the end, the Saudi royal family must know that any loss of revenue is far riskier to its wellbeing in a society used to generous public services.
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