Bush
Can't Count On The Saudis
By Marshall Auerback
TomDispatch
01 May, 2004
Worried
about $40 per barrel oil? You needn't be, if Bob Woodward is anyone
to go by. According to Woodward, Saudi Arabia's ambassador to the United
States, Prince Bandar bin Sultan, promised President Bush the Saudis
would cut oil prices before November to ensure the U.S. economy is strong
on Election Day. In an interview with CBS's 60 Minutes about his new
book Plan of Attack on the Bush administration's preparations for the
Iraq war, Woodward, a senior editor at the Washington Post, said Prince
Bandar pledged that the Saudis would try to fine-tune oil prices to
prime the U.S. economy for the election -- a move they understood would
favor Bush's reelection.
It sounds wonderful,
but if such a pledge was ever given, Saudi actions in the past year
suggest that it has been revoked, largely in response to the growing
geopolitical morass that is developing in the Middle East. In the aftermath
of Gulf War II, it was felt that mobilization against Iraq would give
the United States a renewed opportunity to expand its power and influence
in the region -- this time potentially to use its new Persian Gulf bases
to establish even more bases in the ancient territories between the
Tigris and Euphrates rivers in Iraq, while remaking a hitherto backward
region into a bastion of Anglo-American liberal-democracy. More importantly,
many of the neo-cons who now dominate Administration thinking felt that
the oil fields seized as a by-product of this invasion would give the
United States a de facto seat in OPEC, and control over a huge cash-generating
asset required to fund its massive domestic and overseas debt build-up.
At the same time, it was also hoped that President Bush would use his
expanded leverage to press for a comprehensive settlement of the Palestinian-Israeli
conflict.
All of these blithe
assumptions look questionable today, to say the least -- none more so
than the assumptions about oil.
After the end of
the Iraq invasion, the oil price fell sharply to $26 (WTI), although
little of this can be ascribed to the Saudis, who have been producing
at roughly the same capacity of between 8.5 and 9.4mmbd of crude oil,
natural gas, and gas liquids for the past ten years, according to figures
collated by independent oil analysts, Groppe, Long & Littell (GLL).
These price forecasts, made by a number of prominent Wall Street banks
such as Citicorp, were based on two assumptions: precautionary inventories
built prior to the Middle East hostilities would be liquidated and,
under the U.S. occupation, Iraqi oil would flow soon and copiously.
In turn, that Iraqi oil would at least pay for the occupation and reconstruction
of Iraq -- so believed neoconservative planners in Washington and in
the new Coalition Provisional Authority set up by the Bush administration
in Baghdad.
Since the U.S. occupation
of Iraq began, the pipelines north of Haditha have been the targets
of repeated sabotage. The result, according to GLL, is a shortage of
natural gas and the inability to use all of the capacity of Iraq's refineries.
Consequently, the country is still producing well below its current
estimated capacity of 2.5mmbd of crude oil production. Equally problematic
from the Americans' perspective is the increasingly unaccommodating
policy stance of the Saudis, who had hitherto been relied upon to offset
looming oil shortages. As it now stands, the Israel-Palestine conflict
has no direct impact on Middle Eastern oil supplies. However, it has
led to a movement of solidarity among Middle Eastern states against
the Bush administration's perceived one-sided support of Israel and
in addition has led the Saudis, fearing their "special relationship"
with America to be under threat, to play the oil card in a manner highly
inimical to American economic interests.
It is not as if
the Bush Administration wasn't warned: Before his visit to Bush's ranch
near Crawford, Texas, Crown Prince Abdullah (through his interpreter)
told the press that allowing the Israeli-Palestinian conflict "to
spiral out of control will have grave consequences for the United States
and its interests." On June 10th last year, the Saudi oil minister,
sent letters to the companies negotiating contracts for participation
in the natural gas industry of the Kingdom. Subsequent to those letters,
the following has occurred:
*July, 2003
The Saudi government announces gas agreements with Shell (Anglo-Dutch)
and Total (French)
*August State
visit to Moscow by Crown Prince 'Abd' Allah-al-Saud
*September
OPEC ministers adopt Saudi Arabia's proposals to reduce production quotas,
despite of expectations in advance of the meeting that the status quo
would be maintained.
*January, 2004
Saudi Arabia announces gas agreements with Lukoil (Russian), Sinopec
(Chinese), Agip (Italian), and Repsol (Spanish)
*February
OPEC Ministers adopt another Saudi proposal to reduce production quotas.
Note the complete
exclusion of U.S. energy companies in all prominent new Saudi energy
ventures; this is hardly consistent with an ostensible pledge to flood
the market with oil around October to guarantee the election of a President
viewed to be fundamentally hostile to Islamic interests by the vast
majority of OPEC nations. It is equally salient that the officially
stated OPEC price range of $22-$28 per barrel has largely been ignored
by virtually all OPEC members (judging from the extent to which they
are producing above agreed quota numbers) not only because higher
prices can be sustained in spite of this widespread "cheating"
on quotas, but also because of growing opposition among its members
to American policies in the Middle East.
The new, largely
unarticulated high oil price strategy should be viewed in the context
of Saudi promises to invest billions in the development of the Russian
energy industry, and suggestions of an emerging Russo-Saudi oil alliance.
Last December, the Russian government announced that its policy for
production is to stay under 9.0mmbd for the next five years. Five years
is also the term of the oil and gas co-operation agreement signed with
Saudi Arabia on September 2, 2003, at the end of the state visit by
Crown Prince Abdullah.
The significance
of this alliance for the oil market lies in the fact that, in 1998,
the value of Russian oil exports was a mere $16bn. In 2003, their value
was over $63bn -- second only to the $80bn worth of exports by Saudi
Arabia. This increasing cohesion of Russian and Saudi energy policies
is occurring against a backdrop in which the oil supply/demand balance
is tighter than usual and long-term depletion rates are much higher
than is generally recognized. Although Saudi Aramco (the state oil company)
has historically done what is required to offset declines in existing
oil fields and maintain an estimated capacity of approximately 10mmbd
through new projects, the higher production required to generate a sharp
fall in oil prices cannot be achieved without more personnel and investment,
according to both GLL and Houston-based oil analyst Matt Simmons of
Simmons & Co, who has recently undertaken an extensive study of
the Saudi oil fields.
In fact, given that
most OPEC members are already producing close to full capacity (and
well in excess of official quota figures), without significant new discoveries
in Russia, the effects of more rapid depletion dynamics will manifest
themselves much earlier than currently envisaged by the market. From
a peak of 11.06mmbd in 1988, Russia's actual crude oil production in
2003 had fallen to a little less than 8.0mmbd, according to GLL. Much
of the new technology introduced to develop Russia's energy fields will
only accelerate rates of depletion in existing fields, leaving remote
areas of Siberia as the key variable in determining whether the Putin
administration can achieve its publicly stated goal of 9.0mmbd production,
let alone get anywhere near the peaks sustained during the late 1980s.
Given that the Saudis
and the Russians are two of the world's largest oil suppliers, the effects
of their de facto alliance cannot be overestimated. In early 2003, Saudi
Arabia facilitated the invasion of Iraq by temporarily increasing oil
production, but all actions subsequent to a June 10th Saudi decision
to end negotiations with U.S. companies on the development of the Saudi
natural gas fields have been consistent with a broader Saudi reassessment
of its respective relations with both the U.S. and Russia.
In 2002, the OPEC
oil ministers met 4 times. In 2003, they met 7 times. Thus far in 2004,
they have already met twice. The significance of the increased frequency
of these meetings over the past 18 months (at least in contrast to the
comparative paucity of meetings from the early 1990s through 2002) is
that it has allowed OPEC member states to better minimize the risks
of overproduction relative to quota allowances. The monitoring of overproduction
can be more accurately calibrated with more frequent meetings, note
Groppe, Long, & Littell. In fact, GLL argues that OPEC has in effect
moved closer to the old model of the Texas Railroad Commission, which
still sets monthly allowances for production in Texas. As GLL notes:
"The genius of the monthly meetings of the Railroad Commission
is that the commissioners did not have to depend on their ability to
forecast accurately. Any mistakes made and some were could
be corrected at the next meeting."
The goal here appears
clear: limit overproduction and keep oil prices high, not flood the
market with cheap oil. And with the Saudis clearly not playing ball
on oil, one can only surmise that their hitherto almost reflexive move
to recycle petrodollar surpluses back into the dollar has likely dissipated
as well, removing an important marginal bid in the bond market, at a
time when inflationary pressures are intensifying and 10-year bond yields
have headed north of 5%. The broader economic and geopolitical implications
are enormous: the House of Saud, which has cultivated a special relationship
with successive U.S. administrations since the days of FDR, seems to
have effectively decided that politically and economically distancing
itself from at least the present American government provides a much
better means of ensuring its long-term survival.
All of this implies
an increasingly precarious backdrop for U.S. financial assets and the
dollar, the rallies in which do not fully reflect today's deteriorating
geopolitical and economic variables. Consumers have reached debt saturation
with short-term rates at 1%. What happens as rates rise and the oil
price explodes? A further price spike in energy could well exacerbate
a growing inflationary psychology now predominant in the credit markets,
which in turn could undermine the Fed's recent efforts to "talk
down" yields on long-term interest rates.
An oil shock potentially
endangering U.S. national security and economic interests is the last
thing a debt-saturated America, embarking on expensive overseas ventures,
needs right now. Yet that appears to be where we are headed today, the
consequences of which are not yet fully reflected in the markets.
Marshall Auerback
is an international portfolio strategist for David W. Tice & Associates,
a US money management firm with approximately $1 billion in assets.
His weekly "International Perspective" can be seen at PrudentBear.com
Copyright C2004
Marshall Auerback
[This article first
appeared on Tomdispatch.com,
a weblog of the Nation Institute, which offers a steady flow of alternate
sources, news, and opinion from Tom Engelhardt, long time editor in
publishing and author of The End of Victory Culture and The Last Days
of Publishing.]