Tumult in Saudi Arabia and Its Implications

Tumult in Saudi Arabia and Its Implications
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In December 1972, the influential Democratic Senator Henry “Scoop” Jackson of Washington – having just returned from the first visit by a U.S. Senator to Saudi Arabia in five years – had a private meeting with President Richard Nixon in the Oval Office and raised alarms that still resonant in today’s tumultuous world of oil.

He warned of overdependence on oil from Iran and Saudi Arabia – the two countries with the world’s greatest reserves and both, more than generally recognized before the Arab oil embargo – vulnerable to political instability. “God knows what happens when the Shah goes,” Jackson fretted. The Senator also worried about the long-term prospects for Saudi Arabia, whose neighbors had greater military might. Nixon, the only one in the room who knew he was being taped, did not challenge the grim assessment of geo-political risk.

Jackson turned out to be prescient on Iran. Fissures between the Shah and his critics became increasingly evident (though not to U.S. intelligence agencies). In February of 1979, revolution led to the flight of the Persian “King of Kings,” already racked by the leukemia (another unknown for U.S. intelligence) that would soon kill him. During the turmoil, about 4 million barrels of oil per day were lost to the world market. After a crunch of gasoline lines, the world eventually adjusted to supplies from Iran that have not yet returned to levels when the Shah ruled.

Saudi Arabia, however, was a different matter. The challenges to stability were immense there as well, but somehow the royal family managed to handle its position as an ally of both friends and (often violent) foes, of Israel and a beneficiary of modern science (like U.S. military technology and advanced medical care for its ailing leaders). The royal family supported cultural and Wahhabi ultra-orthodoxy, even when the latter planted the seeds of extremist terrorism.

Over the years, the House of Saud somehow managed to negotiate these contradictions and remain relatively unscathed, while many of its neighbors experienced civil wars and the toppling of governments. In his memoirs, former Secretary of State Henry Kissinger marveled at the skill of Saudi diplomats, whose deft footprints around the world were so “unobtrusive” that “one gust of wind could erase [their] traces.”

Unlike Iran, the Saudis produces much more oil than when Jackson met with Nixon. In the past dozen years, levels have fluctuated from roughly 9 million to 10 million barrels per day – the most stable supply for the world’s growing demand.

As has been heavily reported in recent days, Saudi Arabia has been dealing more harshly with internal critics, intervening more directly in neighboring conflicts, drawing sharper lines in its long-time conflict with Iran, and even tampering with the rules for succession to the throne. None of these actions would be considered, in Kissinger’s prose, “unobtrusive.” 

Higher tensions in and around Saudi Arabia will have a paradoxical impact on the world oil market. In the short-term, the bitter rivalry between the Saudis and Iran will make it impossible to OPEC to function as an effective cartel, thereby adding to the pressures that keep prices low. Over the longer term, signs of instability in Saudi Arabia might drive prices higher. An actual loss of most Saudi exports – the chances of which would still be considered quite slim – would deal a crippling blow to the world economy.

Rising tensions in Saudi Arabia come at a time when several trends are making us less dependent on its oil. U.S. production has been booming (though slowed somewhat by falling prices), while much of the world is requiring greater vehicle efficiencies and China’s appetite for fossil fuels is facing greater constraints.

But the United States needs to avoid the complacency about oil supplies that has led to trouble in the past. Recent industry statements that we don’t have to worry about events in Saudi Arabia very much because of U.S. production potential encourage a false sense of optimism. American petroleum technology certainly helps and might deal effectively with some of the smaller problems that have plagued us in the past. But even with the shorter time frames of fracked wells, it is hard to see how the United States could produce enough additional oil in a timely way to cope with the magnitude of severe loss of crude oil from Saudi Arabia.

Congress in 2015 gave several clear nods to energy complacency. Not once, but twice it voted to sell off major chunks of the Strategic Petroleum Reserve. In addition, Congress chose to fund new transportation infrastructure with general revenue gimmicks rather than index the federal gasoline tax to inflation.

On the campaign trail, one major presidential candidate wants to abolish the Department of Energy, which helps develop technologies like batteries for vehicles that would reduce dependence on oil. The number-two candidate in the other party wants to ban new offshore oil leases in U.S. waters. Both proposals would make us more vulnerable to disruptions in dangerous places around the globe.

Yes, Saudi oil production is well protected, and the royal family has survived previous crises. But individuals, businesses, and governments protect themselves against all sorts of risks that are unlikely but must be considered because of their potential calamity. Given the current turmoil in the Middle East, that would appear to be the wise course of action for dependence on Middle Eastern oil.

 

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