The End of the House of Saud--PART I

                                                              Saudi Oil Politics

As I wrote in "The Demise of the House Of Saud?" three days ago friends asked me to comment on the Geo  Politics of Oil; particularly the impact of both fracking and renewable sources on OPEC .I started to pull a few numbers together--I can't help myself, I am an economist-- and then remembered a piece I wrote almost 40 years ago .Before the PC, the Internet and digital filing.                                                                                           

Not sure how, but I found and managed to copy this op-ed from 1977.It would be silly to say nothing has changed in nearly 40 years;but If you have the patience zoom in & read for yourself. If not just skip it.                                                       

I wrote this op-ed 39 years ago.I was a graduate student specializing in energy policy.It was written just three years after the“first oil shock”created by the Arab oil boycott of October 1973-March 1974.

A contemporary reader may be surprised to learn that for over 25 years after WW II the nominal oil price stayed around $2 /bbl [no zeros missing]

About $10 in today’s money and had actually gradually declined in real terms.

In January 1973 the price per barrel of “Saudi Light”was $2.59.This was to change very dramatically.

                                                   

• The Yom Kippur war erupted in October.
• Early Egyptian battlefield success was reversed.
• To be followed by the Arab oil embargo. 
• On October 19,the“Gulf [Arab] 6”raised their price to $5.12/bbl.
• In [non Arab] Iran the Shah was still in power.
• In December an OPEC meeting raised price to $11.65/bbl, about $60 in today’s dollars.
• Shah: "Of course [the price of oil] is going to rise... Certainly! And how!  You [Western nations] increased the price of the wheat you sell us by 300 percent, same for sugar and cement... You buy our crude oil and sell it back to us, refined as petrochemicals, at a hundred times the price you've paid us... It's only fair that, from now on, you should pay more for oil. Let's say ten times more."

The aftermath of the 1973 OIL SHOCK confirmed the changed the locus of production power. The producers had fully grasped the utility of their Oil Weapon.

• By the time I wrote the op-ed, April 1977,price was around $13;$65 in current dollars.
• The Shah was still in power and still trying to push prices higher.
• The Saudis,in an accommodation with the USA,and to show they could control swing production,were expanding output to keep prices down—albeit at 5x what it was in mid 1973.
• I argued that Saudi actions had more to do with the Saudi Diplomatic objectives than simply some notion of optimizing revenues or market share.

SAUDI OBJECTIVES  THEN                                       

• To consolidate relationships with their military protector-USA
• To remind their Sunni allies in the Gulf and Libya that they had a strong interest in following the Saudi lead   and
• To keep the Shah’s non Arab Shia regime in its place.

It was later to become apparent that they would use their growing wealth to subsidise Sunni Egypt-the dominant Arab military power; and Saudi’s Sunni client state Pakistan.

               

AND  NOW?

                               plus ça change, plus c'est la même chose ?

The events of 1973/4 precipitated and consolidated an epochal shift in the relationship between the Oil Majors and Host Governments.

• Not only did prices ratchet up almost six fold,
• But tax and royalty   terms were   substantially toughened and
• Over the course of the 1970s there was a swathe of effective nationalizations
• The oil companies were invited back as “contractors at risk”; and there was no shortage of takers.

               The boycott itself cut off some 5 mm bbl/day for five months or only 9% of supplies to the industrial west.Enough to shock Japan, Europe and the USA .It shifted the centre of policy making on oil prices,production levels,and swing supply from the USA to the Middle East. 

I will not bother the reader with all the data, tables, graphs and formulae that the rest of this blog draws upon but a few visuals and facts may be useful for context.

                                                                  IRAN          IRAQ     KUWAIT+UAE     SAUDI           

1973: production bbl/day                       6.4mm        2.6mm      3.9mm           10 mm

Now:                                                  2.8mm        4.0 mm     5.3mm            10 mm

Hold on to that relationship as you think about shifting power between the Gulf producers.


                                                    

So What Has Changed Since my 1977 Op-Ed?

• Starting in 1978 there were riots, protests and severe interruptions to oil production in Iran.
•   
• the world’s second largest exporter.
• 
  
• Khomeini displaced the dying Shah in April 1979.
• 
  
• Iranian oil was off the market   
• 
  
• The consumer countries panicked.
• 
  
• Prices almost tripled from $13 to $39.

This SECOND OIL SHOCK of 1978-79 was at least as traumatic as the first.                                               https://www.e-education.psu.edu/egee120/node/292

•   Saudi stepped up production from 8.5 to 10.5 mm bbl/day.
•   The resultant world supply loss was limited to about 4%.
•   The world had panicked    and 
•   The results were even more far reaching than six years earlier                          

 Iran became the  Islamic Revolutionary Republic and went on to become the major supporter of terrorism; the most disruptive force in the Middle East and therefore the world. Robespierre Redux. 

            

             

 Iran created turmoil and became an international pariah at “war” with the Great Satan.

The overthrow of the Shah had changed everything.

The impotence of the post Viet Nam west lay bare.

 http://www.nytimes.com/2002/04/09/opinion/the-third-oil-crisis.html

The upheaval exacerbated and extended the problems unleashed six years earlier: inflation, slow growth, economic upheaval and political instability. Dollar Prime Interest Rate had zoomed from around 5% in 1972 to 21% by December 1980.They did not return to single digits until mid 1986.It was April 2008 before they steadied around 5% They are now 3.5%.

The Saudi Perspective—A Silver Lining

The Saudis had shown again its critical importance to the security of western oil supplies and hence the kingdom's importance to stability of the world economy.

For the next 25 years the Saudis would be in the cat bird seat
            

• Iranian oil was off the market.
• Its Shia nemesis was in revolutionary disarray.                                                                                                                                                
• Oil scarce Pakistan became a wholly owned supplicant state—complete with a Sunni Bomb
• Saudi led and financed the Sunni world     and
• It was the irreplaceable OIL ally of the USA.
• Egypt was the most important Arab military power-it was Sunni
• After Sadat of Egypt made peace with Israel in 1974/75 it could even develop effective clandestine cooperation with Mossad—the common enemy of Iran.
• The price of oil had risen 15 fold since early 1973; the Saudi Treasury was growing geometrically,as was the personal wealth of the Royal Family.
• By 1979 Saddam Hussain had consolidated power and a Shia majority Iraq was under the heel of a Sunni Despot.
• Even the"secular"[Ottoman]Turk,devoid of its own oil reserves,had to pay respect to Saudi Sunni sensitivities. 

Not all was perfect 

 

• In December 1979 the Soviet Union invaded Sunni Afghanistan and stayed for a decade —see below
•  In 1980 Sunni Iraq invaded Shia Iran and that war continued till 1988
• Saddam  was supported by the USA and the Gulf Sunni States
• Saudi ally,Sadat was assassinated in 1981 

                                 

 NEVER THE LESS

• With both Iran and Iraq effectively out of the oil trade,Saudi kept the oil -and its revenues-flowing
• It proceeded to build up an enormous reserve of foreign exchange –in addition to its already dominant oil reserves

• It believed nothing moved in the Arab world without a Saudi nod.
• Saudi had become the dominant,stable Sunni Regime
  
  

The end of the Iraq/Iran War and the Soviet occupation of Afghanistan 1988/89

Saddam had pursued the Sunni War against the hated Shia Persians .The Gulf Kingdoms had been happy to  continue the war to the last Iraqi -much like Saddam himself. Saudi and the Gulf Kingdoms had done well out of the war gaining revenues from sales that otherwise would have gone,at lower prices,to Iran & Iraq.A potentially troublesome Saddam had been totally absorbed in pursuing the war.

After the war:

• Iraq had borrowed $60 billion;$14 billion from Kuwait
• Saddam asked Kuwait to write off the debt
• They refused
• Iraq asked Kuwait to cut back its output to stabilize price and make room for an increase in Iraqi exports
• Kuwait refused 
• Iraq invaded Kuwait in August 1990.The Kuwaiti royals fled,the House of Saud trembled---look at the map-and George H W Bush mobilised.
• This time the West would act to protect the oil and it could even claim the moral high ground, Arab support and UN resolutions to boot.
• By Feb 19991 a US led coalition had defeated Saddam and driven his army from Kuwait.
• He remained in power Iraq –festering and continuing to persecute and kill the Kurds and the Marsh Arabs -without hindrance.

Back to those pesky Soviets and the Taliban in Afghanistan

• In December 1979 Soviet Union invaded Afghanistan in support of its allies there.
• A resistance formed, in part around extreme Sunni tribesmen   --the Taliban-who shared much theology with the repressive Saudi Wahabi strand of Islam.

• They were heavily funded and supported by the Saudis—and the USA.”An enemy of my enemy”the Soviets.
• Many Saudi Religious Fundamentalists signed up for Jihad against the Infidel Soviets. Not least one Osama bin Laden,the scion of an ultra wealthy Saudi business family.
•  The Soviets were driven out by 1989
•    

• The Soviet Union was dissolved in December 1991—makes Viet Nam look like a victory.
• Civil war followed between the Taliban and various other Afghani tribes and factions.
• The Taliban was supported and funded by the Saudis and the Pakistani Security Services.
• The Taliban created the Islamic Emirate of Afghanistan in 1996
• Only Pakistan, Saudi Arabia, and the United Arab Emirates (UAE)recognised the Taliban Regime -funny that

         The period 1991-2000 may come to be seen as the high water mark of Saudi power .

• The Soviet defeat in Afghanistan followed by the collapse of the Soviet Union in 1991 saw the elimination of Russian influence in the Middle East.
• A major geo political enemy had been side lined.
•  Saddam's invasion and his subsequent eviction from Kuwait in February had cemented the alliance with the USA.
• The Bush administration had proved a reliable ally and there was no reason to believe other US administrations would be different. 
• Iran was on its knees economically and out of the oil market.
• Without the Shah,Saudi completely dominated OPEC . 
• Its financial reserves were soaring.
• Others fought its wars,the industrial world paid its bills and stuffed its treasury .
• It was actively exporting Wahabiism to the near and mid east.
•  Shia Islam was in retreat with Shia minorities under heel in the Gulf and even in defanged Iraq.

As I wrote last time :Saudi funding and support of the Taliban, the Pakistani Security Services and  Wahhabi activists may have sown the devil’s seeds.The victory of the Taliban in 1996,and their incubation of Al Qaeda, may one day be pointed to as the spark that ultimately led to the fall of the House of Saud.

 NEXT:
 NINE/ELEVEN INFLICTED BY SAUDI WAHHABISTS

  

                                    

Price –short, medium ,long