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Fear of Mideast oil crisis causes alarm
Some argue US should ?walk out? on Saudi suppliers, look elsewhere

Russian fuel looks set to challenge a market long dominated by the Gulf giant,
bringing significant changes to the world economy

Ed Blanche
Special to The Daily Star

Middle Eastern oil producers may have rebuffed Iraqi and Iranian efforts to
impose a new embargo in support of the intifada, but the United States and the
world?s richest countries are still bracing for energy problems because the
mounting turmoil in the region is inexorably pushing up oil prices. According
to US officials, this is sufficiently troublesome to be a critical factor in
the planning by the Bush administration for a knockout blow against Saddam
Hussein.
Oil prices have risen by one-third - about $10 a barrel - so far this year and
with the Middle East on a knife-edge they are likely to continue climbing. A
hike of $10 a barrel is, as one commentator put it, ?like a $70 billion tax
increase? in the US. This alone is causing concern in the industrialized world
at a time when the global economy is clawing its way back to recovery from the
events of Sept. 11.
But there are wider geopolitical concerns that are increasingly influencing,
if not dominating, US policymaking and which can be expected to intensify over
the next few years. There seems to be a growing sentiment in the US, greatly
exacerbated by the events of Sept. 11, that it must lessen its dependence on
Saudi Arabia and the Gulf producers, by developing alternative sources of
energy that will end, or at least significantly reduce, Riyadh?s influence on
oil supply and prices.
The political and economic consequences of such a dramatic policy shift are
immense, particularly in this region.
According to some industry analysts, it is far from certain that Washington
will continue to favor low prices at the expense of security of supply.
Indeed, US business executive Stanley A. Weiss expressed what not so long ago
would have been heresy in a commentary published by The Los Angeles Times last
month: ?Americans worried about rising oil prices need not fear a Saudi Arabia
scorned. It is time for the United States to walk out on Saudi oil.?
In the shorter term, the current strains in US-Arab relations are likely to
deteriorate if the Bush administration continues the way it is going in the
Middle East. In that regard, it would be imprudent, to say the least, to rule
out the possibility that the Arabs and Iran, frustrated by US support for
Israel, might not wield the oil weapon at some point, even though that would
be immensely costly for them.
If the Bush administration does unleash an attack on Iraq to topple Saddam
Hussein and dismantle, once and for all, his weapons of mass destruction, an
Arab backlash could result in a major upheaval in the oil market. Indeed, The
New York Times recently quoted senior US officials as saying that any such
offensive would probably be delayed until early next year because, among other
factors, time was needed to prepare for ?a global oil price shock.?
Although industrialized states are far better able to withstand an Arab oil
boycott now than they were in 1973-74, when a ban on oil supplies quadrupled
oil prices and wreaked havoc with Western economies, oil prices still remain
hostage to political developments in the Middle East.
The Gulf producers have repeatedly declared that they are committed to stable
oil supplies and would not use the oil weapon. But there have been credible
reports that the Saudis at one point in April did consider doing just that.
Indeed, the Saudis have sometimes used their spare production capacity of some
3 million barrels per day (bpd) to control prices, a key element in Riyadh?s
long-held strategy of ensuring that oil remains a central factor in the world
economy for as long as possible.
The Saudis, still heavily dependent on oil revenues, want to keep prices high
whenever possible; but not so high that demand is curbed or that other sources
of supply are encouraged, not so low that the kingdom?s revenues are
threatened.
?It is a blunt instrument that makes policymakers elsewhere beholden to Riyadh
for energy security,? energy specialists Edward L. Morse and James Richard
wrote in a penetrating article, in the March-April edition of Foreign Affairs,
on the emerging battle between Saudi Arabia and Russia for dominance of the
energy sector.
?Saudi spare capacity is the energy equivalent of nuclear weapons, a powerful
deterrent against those who try to challenge Saudi leadership and Saudi goals.
But unlike the nuclear deterrent, the Saudi weapon is actively used when
required. The kingdom has periodically (and brutally) demonstrated that it can
use its spare capacity to destroy exports from countries challenging its
market share.?
It did so in 1985, when prices were particularly low. It successfully waged a
price war to force other, mainly non-OPEC, producers to curb output so that
the kingdom could produce the minimum level it had targeted. Oil prices were
more than halved within a month or two and Saudi Arabia regained the market
share it had lost over the previous four years, mainly to non-OPEC producers.
In 1997, OPEC partner Venezuela challenged Riyadh by sharply increasing
production and elbowing Saudi Arabia aside as the leading supplier to the US.
When diplomacy failed, Saudi Arabia boosted its production by 1 million bpd
and triggered a price collapse in 1998.
?By engineering a price drop, it had to withstand a painful drop in income -
but it achieved its main goals,? More and Richard wrote. ?Saudi Arabia
reasserted its OPEC leadership, reestablished itself as the prime supplier of
oil to the United States and induced non-OPEC producers Mexico and Norway to
support OPEC?s revenue-maximizing goals.?
More recently, with prices spiraling following Sept. 11, the Saudis sought to
blackmail Russia into cutting back on its burgeoning post-Cold War production,
buoyed by growing Western investment (from which the Saudis had cut themselves
off through nationalization 25 years ago) by threatening a new price war.
But that backfired because the Russians, less dependent on oil prices than the
Saudis and convinced they were better placed to ride out a price collapse than
OPEC members, called Riyadh?s bluff.
The battle between these two energy titans is going to intensify and could
bring significant changes for the world economy over the next decade or so.
With the dramatic shift in the Bush administration?s policy toward Russia
post-Sept. 11, and its drive to develop alternative energy sources, coupled
with the strains in Washington?s relations with Saudi Arabia, this could have
a particular impact in the Middle East as a whole.
The severe strains imposed on the strategic partnership between the US and
Saudi Arabia by Sept. 11 cannot be stressed enough. They will simply never be
the same again. This relationship has been built on a simple equation: the
Americans protect Saudi Arabia in return for it guaranteeing supplies of cheap
oil. But the very protection the US has provided, particularly since the
1990-91 Gulf crisis with US forces more or less permanently based on the most
sacred soil in Islam, has now become a source of friction, a monumental
political embarrassment to the House of Saud and the source of internal
discontent with the monarchy. It is under fire from religious conservatives
and liberal-leaning reformists. There are no guarantees that this dissent can
be suppressed ad infinitum.
The American military presence in the Gulf costs the US taxpayer around $50
billion a year. When offset against the supply of relatively cheap oil from
Saudi Arabia, where production costs are the lowest in the world, it is
questionable whether such a commitment is sustainable. It is increasingly
fostering anti-US sentiment in the Gulf, and elsewhere in the Arab world, that
threatens the very governments the Americans are seeking to maintain in power.
The Bush administration appears to be determined to get rid of Saddam,
believing that the long-term benefits of doing so outweigh the short-term
upheaval that would cause. For one thing, removing the Iraqi threat to Saudi
Arabia would allow Washington to withdraw its military forces in the Gulf,
thus eliminating the cause of widening dissent in the kingdom and thereby
undermining the cause of Osama bin Laden.
It must be tempting for the policymakers in Washington to argue that with oil
reserves expanding in other regions, such as Central Asia, Russia, and West
Africa, diversification of supply and disengagement in the Gulf to less
volatile climes would seem a pragmatic thing to do.
Russia?s growing power as a major oil exporter is reshaping a market long
dominated by OPEC, and Saudi Arabia in particular. The improvement in
relations between the US and Russia since Sept. 11 is encouraging foreign
investment in Russia?s resurgent oil industry now that it has been put on a
more businesslike footing since the collapse of the Soviet Union.
Saudi Arabia?s oil industry has been stagnant since nationalization 25 years
ago and, belatedly, Abdullah is now seeking to revive big-ticket Western
investment. How successful he will be remains to be seen, but already final
negotiations on major deals signed in 2001 with US and European firms are
getting bogged down.
Concerns about turmoil in the Middle East have also spurred interest in
developing West Africa?s oil fields.
Although the region is politically unstable, the location of new offshore
fields means that oil can be shipped directly across the Atlantic without
having to pass through potentially dangerous maritime chokepoints like the
Straits of Hormuz, the only way in and out of the Persian Gulf, or through
pipelines traversing unstable regions. High oil prices make such projects more
feasible to oil companies.
In March, the US announced that it was prepared to use its military to help
Azerbaijan defend its maritime borders in the oil-rich Caspian Sea, the
subject of a seemingly intractable dispute with neighboring Iran. That marked
the first time the US had pledged to use its military in the dispute,
underlining the extent to which the Bush administration is prepared to go to
secure access to the Caspian El Dorado.
Congress had prevented the Pentagon from providing direct military assistance
to Azerbaijan, a measure that stemmed from its war with Armenia over
Nagorno-Kharabakh in the 1990s. But Bush suspended that in January.
This shift in US policy was indicated in October 1999, during the Clinton
administration, when the Defense Department switched command authority over US
forces in Central Asia from the Pacific Command to the Central Command, which
has responsibility for the Middle East and the Gulf region.
This underlined Washington?s new emphasis on protecting oil supplies, even in
areas that had been peripheral to global strategy during the Cold War. As
Morse and Richard wrote: ?The threat of a ?northern? oil boom, that Middle
Eastern producers feared in the
early 1990s, is now real.?

Washington, Moscow close to energy deal

WASHINGTON: The United States and Russia are considering an ?energy security?
deal that US President George W. Bush and his Russian counterpart, Vladimir
Putin, could seal as early as this week at their summit in Russia, Newsweek
magazine says.
According to the weekly, which appeared on Monday, the possible deal would
include a Russian offer to make up any shortfalls in oil supplies to the West
resulting from crises in other parts of the world.
In return, Moscow would get a US commitment to help develop not only Russia?s
own energy resources, but to work together to integrate Central Asia into the
world?s markets, the report said, citing an unnamed senior US diplomat.
?Working with Russia now is in our larger strategic interest,? the diplomat is
quoted as saying. ?We can collaborate and promote stability in Central Asia,
preventing more radical ideologies from taking root there. It?s a win-win for
both of us.?
Neither the White House nor the State Department would comment on the Newsweek
report. - AFP


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