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Sunday, May 01, 2005

OPI WEEKLY: SAUDI SECURITY AND A NEW POLICY IN THE SOUTH: THE GEOMETRY OF OIL IN THE YEARS TO COME

U.S. President George Bush unveiled a new strategy this week for dealing with Venezuelan President Hugo Chavez. At risk are the 1.7 million barrels of crude oil that Venezuela ships to the U.S. each day. President Bush also held talks this week with Crown Prince Abdullah of Saudi Arabia. While there was no explicit link between the two events, they are crucially related none the less. Saudi security will be even more important than ever to the U.S. if the new Venezuela policy goes badly.

THE SAUDI VISIT

Saudi Arabia’s de facto ruler, Crown Prince Abdullah, visited U.S. President George Bush at his ranch in Crawford, Texas last week amid speculation that Bush would try to win a Saudi commitment to increase its production of oil in order to bring down record oil prices. There is increasing evidence that the high crude prices are starting to hurt U.S. economic growth.

The press was surprised, and many Americans perturbed, when the President emerged from the meetings holding hands (literally) with the Crown Prince, while extracting no new concessions on current production. Saudi Arabia has said for months that it would bring new crude supplies on line in the medium to long term, ramping up to 12 million barrels per day by 2009 and 15 million barrels per day by 2025. Saudi Arabia currently contributes between 9.5 and 10 million barrels per day to the crude oil market.

Such medium and long term increases, while helpful in the future, will do nothing to dampen oil prices now. Either the President failed in his goal for the meeting, or else there was something more to the meeting than met the eye.

The latter indeed is most likely the case. With the war against al Qaeda winding down successfully, the President has turned his attention to other strategic goals. Containment of the nuclear programs in North Korea and Iran are certainly high on that list. However, the Administration has also signaled its intention to deal more aggressively with Hugo Chavez, the increasingly popular leftist leader of Venezuela –especially as Chavez’s influence seem to be spreading. A populist revolt in Ecuador ousted the nominally pro-American leader there last week, and the Sandinista movement in Nicaragua may be gearing up for the same.

VENEZUELA ON THE FRONT BURNER

Last Sunday Venezuela announced that the 35 year old military cooperation, which had in any case dwindled in its extent, would come to an end. The remaining U.S. military personnel were asked to leave. It didn’t take the Bush Administration long to react. According to a story carefully leaked by the Administration two days later to the New York Times, the Bush Administration has concluded that further attempts to cooperate with the Venezuelan leader are doomed to failure. Instead it would adopt a tougher approach, including funneling more money to foundations and business and political groups opposed to Chavez and his left-leaning compatriots.

Chavez, however, possesses one critical weapon to wield against the United States should he so choose. That weapon, of course, is oil. Venezuela supplies 15% of the United States’ 11.8 million barrel per day of crude imports. Through its fully owned U.S. subsidiary, CITGO, it also wholly owns 756,000 barrels per day of refining capacity in the United States, and that does not include the Caribbean refineries that process Venezuelan crude almost entirely for U.S. consumption. The CITGO refineries alone produce 663 thousand barrels per day of gasoline. If Venezuela were to cease those supplies, the impact on the price of U.S. gasoline, and on the U.S. economy, would be significant.

If the ‘worst case scenario’ outcome of the new Venezuela policy took place and Chavez were to both stay in power and decide that he will starve the U.S. of crude, the change couldn’t happen overnight. For Chavez to do so would also be to starve the Venezuelan economy and government of the lion’s share of its national income. Ceasing U.S. supplies can be a medium-term goal for Chavez at best.

However, there already have been rumors that CITGO is seeking to sell all its U.S. based refineries –it announced earlier this month that two of the six are currently for sale—although CITGO officials deny the rumors are true. Venezuela has also recently strengthened its energy cooperation with China, a country which will increasingly demand foreign oil to feed its enormous and growing economy. A country as large and oil thirsty as China could provide adequate supply to replace sales to the U.S. down the road. However, China’s demand won’t ramp up until the medium-term at best—say by about 2009.

The timing thus works well: about the time that Venezuelan supplies to the U.S. might dry up, Saudi Arabia is set to bring about the same amount of increase onto the market. So did Bush and Abdullah talk about Venezuela in their Crawford meeting? Hardly. Saudi Arabia plans to supply those added barrels of oil regardless of what happens with Bush and Chavez. Furthermore, the extra Saudi barrels would easily be soaked up by the market in any case as both U.S. and North Sea crude supplies begin to run dry.

SAUDI SECURITY

But the timing of the ‘worst-case scenario’ outcome of Venezuelan policy does mean that those extra Saudi Barrels are especially important to the U.S. if it loses one of its primary supplies in Venezuela. Might Bush have sought a promise from Abdullah to reserve a certain amount of future supplies to the U.S.? Maybe. But it is more likely that much of this is understood while remaining unspoken.

What Bush had to tell Abdullah probably had more to do with assurances that the U.S. was dealing with Saudi Arabia’s primary security threats and that indeed the Saudi kingdom would indeed be around in the medium term to supply that oil. Even if Iraq and Russia are able to ramp up production –neither being a safe assumption given the political and economic environments in the two states—Saudi Arabia will continue to have the most capacity and the largest pool of oil to draw from. It sits on top of 26% of the world’s total reserves and has some of the lowest production costs in the world as well.

Saudi Arabia’s two greatest threats are al Qaeda and Iran. The U.S. is fundamental to the containment of both threats. Bringing down the House of Saud has always been one of al Qaeda’s primary goals since its inception. And for a time last year it seemed that al Qaeda was making good progress toward that goal. Gun battles between insurgents in the Kingdom were taking place almost on a daily basis and horrific attacks on Western business personnel threatened to cause an exodus of expatriate workers from the country.

Saudi and U.S. efforts to root al Qaeda out of Saudi Arabia, as well as the significant progress the U.S. has made in battling the al Qaeda network worldwide, has stabilized the Saudi situation. As the two attacks yesterday in Egypt make clear, Egypt has now become the primary target of the weakened terrorist group, much to the relief, no doubt, of the Saudi government.

Bush likely assured Prince Abdullah of this progress in their Crawford meeting, as well as his commitment to continuing the battle until al Qaeda ceases to be a threat anywhere in the region. The American President also, no doubt, assured the Crown Prince of his intention to keep Iranian influence in Iraq –not to mention its nuclear ambitions—in check. In essence, President Bush assured the Saudi leader that his country would be around in 2009 to deliver the much needed oil.

CONCLUSION

Although there are no longer U.S. troops on Saudi soil, and in some ways U.S.-Saudi relations are as strained as they ever have been, the two countries are more dependent upon each other than ever before. For Saudi Arabia, threats from Iran and al Qaeda will continue to make a U.S. security guarantee a necessity, even without troops on Saudi soil. For the U.S., oil from the Middle East generally, and from Saudi Arabia in particular, will be increasingly important. If Bush’s Venezuela policy goes badly and Venezuela stops supplying oil to the U.S., that dependence becomes even more acute.

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