Managing Dependence: American-Saudi Oil Relations

Arab Studies Quarterly (ASQ), Wntr, 2001 by Gawdat Bahgat

INTRODUCTION

SOARING OIL PRICES SINCE early 1999 have underscored the United States' vulnerability to imported oil supplies. In response some policymakers in Washington have called for measures to reduce the nation's dependence on foreign countries and achieve a state of "energy independence". This study argues that in a highly inter-dependent global economy a collective energy security should be sought. Instead of energy independence, the United States should consolidate a strategy to manage its growing dependence on foreign oil suppliers, particularly from Saudi Arabia -- the world's largest oil producer and exporter. Two areas of cooperation between Washington and Riyadh are examined: stability of oil prices and the return of American oil companies to the Saudi upstream oil and gas sectors.

MANAGING DEPENDENCE: AMERICAN-SAUDI OIL RELATIONS

On 22 September 2000, President Clinton authorized the release of 30 million barrels of oil from the Strategic Petroleum Reserve (SPR) over 30 days in an attempt to bolster United States oil supplies and to alleviate possible shortages of heating oil during the upcoming winter. This drastic measure can be seen as a response and a reflection of the volatility of global oil market and Washington's vulnerability of the ups and downs of oil supplies and prices. With less than three percent of the world's proven reserve and a share of one quarter of global consumption, the United States is the world's largest oil importer. In 2000, Washington's import of oil was estimated at 10.9 million barrels a day (b/d), representing around 57% of total demand. [1] This heavy dependence on imported oil underscores the significance of foreign supplies in meeting American growing demand for oil. Thus, oil imports have been rising since the early 1980s. This rise reflects the widening gap between declining production and increas ing consumption. While production is projected to decline at an average rate of 0.8% a year between 1998 and 2020, consumption is anticipated to increase by 1.6% during the same time span. [2] Most of the increase in consumption will occur in the transportation sector where demand for petroleum is inelastic. Advances in oil exploration and production technologies are insufficient to offset declining resources. Consequently, the share of petroleum consumption met by net imports will rise to 64% in 2020. [3] This vulnerability to imported supplies can be demonstrated also by the shrinking replacement days from the SPR. In 1985, the reserve's holdings reached 493 million barrels, which would have provided enough crude oil to replace about 115 days' worth of net petroleum imports that year. In 1999, the reserve held 567 million barrels of crude oil. Due to increased rate of imports, however, that amount would replace only 59 days' worth of net imported petroleum. [4]

In addition to Washington's increasing dependence on foreign oil supplies, the United States is the leading player in an inter-dependent global economy. Accordingly, if the U.S. imported not one drop of oil, the interdependence of Western economies is such that a disruption of oil supplies to heavily import-dependent Europe and Japan would have a negative impact on U.S. export earnings, prices and overall production and employment levels. [5] In other words, the globalization of oil markets has made the question of who sells and buys a particular barrel of oil less and less relevant. American and global economic prosperity depends on the steady supplies of petroleum at reasonable prices. A large share of these supplies will come from the Persian Gulf, particularly Saudi Arabia.

With more than one-fourth of the global proven reserves, Saudi Arabia is the world's leading oil producer, exporter and holder of spare production capacity. The kingdom enjoys several advantages. These include abundant resources, location on well-developed export routes, the cheapest production costs in the world [6] and excess capacity, which can meet either a substantive increase in demand or an emergency caused by a major disruption of supplies. Indeed, the Center for Global Energy Studies (CGES) estimates the cost to Saudi Arabia of maintaining its idle capacity at $500 million each year. [7] Given these advantages, the relationship between the world's largest oil exporter (Saudi Arabia) and the world's largest oil importer (the United States) has been of special interest not only for the two sides but for global economic prosperity as well.

For the most part, Saudi-American relations have been built on a longstanding tradition of friendship. At the heart of this friendship is their mutual interest in developing the kingdom's immense oil resources. Unlike other countries in the Middle East, the Saudi oil was developed entirely by American companies. In 1933 Standard Oil of California obtained a concession from the founder of modern-day Saudi Arabia King Abd Al-Aziz Ibn Saud. Commercial production began in 1938, but large-scale production was delayed until the end of the Second World War. In 1944 the California Standard-Texaco operation in Saudi Arabia became known as the Arabian-American Oil Company (ARAMCO). [8] Prior to the Saudi takeover in the mid 1970s, ARAMCO was the largest single American investment in any foreign country. [9] For most of the last half century, Riyadh has advocated the use of oil as a "positive weapon" to build up the military and economic strength of Arab states. [10] However, shortly after the break-up of the Arab-Israeli war in October 1973, Saudi Arabia announced an embargo on oil shipments to the United States for its support to Israel. The embargo was officially lifted few months later. In spite of this short period of disagreement between the two sides, the overall relations between Riyadh and Washington can be characterized as a continuous cooperation. A significant sign of this strategic and economic cooperation between the two countries is the l arge share the kingdom holds in the American oil market as the following table shows.