Saudi Arabia: Over a Barrel

F. Gregory Gause III

From Foreign Affairs, May/June 2000

Article preview: first 500 of 5,283 words total.

Summary:  A key reason for today's skyrocketing oil prices is the behavior of one of America's closest allies: Saudi Arabia. The world's largest oil exporter was the driving force behind the deal that turned off the spigots. Riyadh is risking a crisis with Washington because the once-flush kingdom has gone broke sustaining a vast welfare state for an exploding population. America must push the Saudis toward privatization and fiscal reform. The House of Saud must get its house in order.

F. Gregory Gause III is Associate Professor of Political Science at the University of Vermont and author of Oil Monarchies.

THE PERILS OF HIGH OIL PRICES

Oil prices have not been front-page news in the United States since the bad old days of stagflation, American hostages in Iran, and gas lines. But the near-tripling of the price of a barrel of oil since January 1999 has finally begun to hit American consumers in their wallets. Those two great bellwethers of the public mood -- politicians and late-night comics -- have again made gasoline and heating-oil prices grist for their mills. After two decades of generally low oil prices, how has this happened?

There are many reasons for the spike: an unexpectedly quick recovery by the East Asian economies, which increased the world's overall demand for oil; all those gas-guzzling sport-utility vehicles on America's roads; and the slow recovery of Russia's oil industry from the decade of chaos after the Soviet collapse, which limited oil supplies. But one of the main reasons for skyrocketing oil prices is a series of decisions taken by one of the United States' closest allies, Saudi Arabia, the world's largest oil exporter. During the past 25 years, Saudi oil policy has generally helped to prevent price spikes and to hold prices down when big increases have occurred anyway. But as prices rose during 1999, Saudi oil production fell by more than a million barrels per day (mbd). Moreover, the Saudis were the driving force behind the event that sent prices climbing: the March 1999 agreement among the major oil nations, both inside and outside of the Organization of Petroleum Exporting Countries (OPEC), to reduce production.

All last year, the Clinton administration (quite reasonably) remained silent in the face of this shift in Saudi oil policy. In 1998, oil prices had fallen dramatically, at times running as low as $10 per barrel. Higher oil prices helped Russia, American friends in the Middle East, and America's own depressed oil industry. The booming U.S. economy, more insulated from the effects of oil-price increases than it had been in the 1970s, kept chugging along. But as prices continued to rise in early 2000, election-year politics combined with a cold winter and consumer discontent to push the oil issue back into the spotlight and compel Washington to react. President Clinton has suggested releasing oil from the Strategic Petroleum Reserve and sent Energy Secretary Bill Richardson to lobby major oil producers -- especially the Saudis -- to increase production. Although some in Congress have advocated sanctions against oil countries, the administration has kept the dialogue friendly.

Neither the United States nor Saudi Arabia wants oil prices to be "too low" or "too high." Just where "too low" and "too high" fall, however, is a matter of dispute. Washington has always said that market forces, rather than politically inspired production agreements, should govern the oil market. If the U.S. economy stalls, the new Saudi oil policy could create a crisis between Riyadh and Washington reminiscent of the 1970s.

Avoiding such a crunch is in the interests of both countries. They must start ...

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