Money Sage (archive)

This analysis has a very limited focus: the Saudi role in oil prices, and the prospects for future Saudi action on this critically important issue. We are not here attempting to predict either the future course of oil prices or the level oil prices may seek as the unfolding global "slowdown" plays out. As for the fundamental issue of future supply/demand ratios, we would simply reiterate what we have said in prior posts. We continue to expect that the favorable balance (for the producers) will continue. Whatever cyclical tempering or reduction in demand, the secular trend is clear and will be impossible to reverse absent some spectacular alternative energy breakthrough or a truly massive energy conservation/alterntive energy development policy. (Said policy would require vast sums of money, in contradistinction to the vast quantities of hot air currently being expended on the project).

The Saudi focus is crucial because, as we have indicated previously, the Saudis, in the current and prospective intermediate future oil supply/demand equation, are the SOLE source of significant, immediately accessible, additional supply. In a market which is likely to remain very tight in even the best of circumstances, given the economic revolution in China and India, and the endless prospective upward spiral in demand for oil, Saudi Arabia will continue to possess the balance of power. The Kingdom's role in the realm of oil is akin to Britain's decisive power as the balancer in the unending struggle for power on the European Continent in the 17th, 18th, and 19th centuries.

To begin at the beginning, let us consider the locus of decision-making power within the Kingdom on the oil issue. As in all matters of importance, ALL POLICY-MAKING POWER is in the hands of the royal family. Within the family, the locus of power rests with the senior princes, particularly the living sons of the king who founded the Saudi state, Abd'al Aziz.
The old king had 40 sons, of whom a number are now dead. The present king, Abdallah, is, like all Saudi kings, essentially the "primus inter pares"(first among equals). He is not, by any stretch of the imagination, an absolute monarch. Indeed, there exists a certain type of unwritten "constitutional system," if you will, within the royal family. Serious consultations between the king and his half-brothers and other senior princes are expected and required. The king has very limited ability on any important issue to go significantly beyond the consensus of "the family."

Within the family there are, naturally, differences of temperament, personality, character, attitude, and perception of reality. There are also conflicts between sons of different wives of the late Abd'al Aziz. In additional, we may speculate upon possibly developing generational differences within the family.

How, then, does the family view the world? How do they view the West, and especially the U.S.? What risks do they perceive to the family's interests, and to the security of the Kingdom? How are they inclined to view alternative "solutions" to these problems? Where does oil fit into the equation?

These are not easy questions to answer. Moreover, they require a great deal of guesswork and inference.

We can probably infer the following. In any ruling group occupying the position currently enjoyed by the al-Saud, there is inevitably concern about potential internal threats to the survival of the regime. In the case of Saudi Arabia, the principal threats, we would speculate, come, in the first place, from that portion of a westernized middle and business class which is dissatisfied with the amount of wealth, income, and other perks it enjoys. A disgruntled class with money which is not fully assimilated into a ruling elite always serves as a potential threat to a governing group. There is also the issue of frustrated Saudis lower down on the economic ladder, and the problem of a large number of foreign workers in the Kingdom. Another potentially deadly source of trouble are certain Islamic Fundamentalists. Here it it important to note that the Saudi monarchy has, from its inception, been legitimated by the support of an Islamic fundamentalist sect, the Wahhabis. The Wahhabis enjoy substantial power in the Kingdom, and their edicts over social behavior and religious practice are unchallenged. However, there are more than a few fundamentalists, we would gather, who are hostile toward the regime. They regard the regime as corrupt, un-Islamic in its penchant for luxury and consumption, and, above all else, as having committed the egregious sin of having invited INFIDEL AMERICANS--that would be us--onto the holy soil of Arabia.

This then is the situation insofar as key figures in the Saudi royal family probably perceive them.

Then, there is the problem of external threats. The primary, imminent geopolitical threat to the Kingdom prior to the destruction of the Saddam Hussein regime was, of course, Iraq. Happily for the Saudis, the U.S. solved that problem for them. Unfortunately, the removal of the Saddam buffer against Shi'ite Iran intensified the Iranian threat to the rule of the Al-Saud. It is not merely the acute religious difference and theological conflict between Sunni Saudi Arabia and Shi'ite Iran. There are also the inevitable, geopolitically generated fears and antagonisms. Even when the pro-American Shah Reza Pahlavi ruled Iran, there was much bad feeling between Saudi Arabia and Iran, much suspicion of the Shah's intentions and fear of his military capabilities, and much mutual hostility. The religious element was largely subdued, given the Shah's indifference. With the accession of the fundamentalist Shi'ite regime, which the Sunni fundamentalists hate like poison (and whose antagonism is more than reciprocated by the Iranian clerical regime) the Saudi princes, we would infer, are filled with fear and loathing. Nor is it a totally insignificant sidelight that the bulk of the indigenous population of Saudi Arabia's key oil producing region -- the Eastern Province -- is Shi'ite.

The oil policy of the Kingdom must inevitably be formulated with careful consideration of its impact upon relations with its U.S. protector, with its regional enemy, and with its need to keep a hefty income stream flowing in order to buy off popular discontent. Additionally, since Saudi Arabia has the world's largest proven oil reserves, it will be in the oil business for a long time. Consequently, the desire to maximize current income may have to be tempered, from time to time, by the imperative of not damaging significantly western economies. This has occurred in the past, and has been attended by a drastic decline in oil prices, and hence in the flow of income into the Kingdom.

Historically, Saudi oil policy has been governed by an overriding desire to extract the maximum short-term gain possible from current Saudi oil production. The Saudis have not shown foresight in anticipating that overpricing would lead to western recessions, and a consequent sharp drop in oil demand and prices. The desire to avoid antagonizing Iran and other fellow oil producers has played a subsidiary, but not insignificant, role in a basically hawkish Saudi oil policy, posturing and window dressing to the contrary notwithstanding. Today, with a far larger population to satisfy than in the past, and with a more acute fear of Iran, the Saudis feel little disposition to take the action they are the only producer capable of taking in order to reduce prices substantially: sharply increase production. The Saudis, like the generality of humanity, are prone to wishful thinking. They are happy to believe that the world's ability to pay $90 plus/bbl. enables them to continue to rake in unprecedented sums, while keeping their American protector sufficiently prosperous to maintain its defensive shield over the Kingdom. They are pleased, in other words, to have their cake and eat it too.