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Saturday, October 29, 2005

The significance of Saudi Arabia

The vast empty desert of Arabia has played a surprisingly pivotal role in history. The unforgiving aridity and heat, the almost total lack of productive land and its geographic isolation might have suggested that the desert would remain a little travelled backwater, supporting only scattered tribes of nomads.

But from this desert have come two crucial developments that have shaped history irrevocably. The first of these is Islam. The revelation of the Qu’ran to the Prophet Muhammad in the Arabian trading town of Mecca was the beginning of what became one of the world’s principal religions. Within a century of the Prophet’s death an Islamic Arab empire had spread across the Middle East and North Africa. This empire would continue to grow, and to schism, for the next 800 years.

By the time European nations were setting out to explore the globe in the fifteenth century, the Islamic world had been a dominant military and political force for centuries. But this pre-eminence was not to last.

Superior command of the sea, constantly improving military technology and tactics, and, finally, the industrial revolution propelled the Christian west ahead of the Islamic world in the seventeenth and eighteenth centuries. The innovations of Arab scholars had been absorbed by western mathematicians, scientists and philosophers and by the end of the nineteenth century much of the Middle East was languishing in relative poverty. Transport by sea had made the land routes across Eurasia increasingly irrelevant and life in Arabia was much as it had been for countless generations –intensely tribal and largely nomadic.

But the twentieth century brought another great change to the importance and fortunes of the peoples of the Arabian Desert. The Saud dynasty, began in 1744, had been slowly consolidating power on the peninsula for nearly two hundred years. This ascendancy owed much to the conservative strain of Islam known as Wahhabism, after Muhammad Abd Al-Wahhab, a reformer who had joined forces with Muhammad bin Saud in forming the dynasty. After a long struggle, the Saud family finally triumphed and, in 1932, the Kingdom of Saudi Arabia was founded. Diplomatic relations between the United States and the kingdom were established in 1933 and in that same year Standard Oil was given a concession to explore for oil.

The Arab American Oil Company (Aramco), as the partnership between the Saudis and Standard was called, struck oil in the eastern provinces of Saudi Arabia in 1938. This find was the first of many. Oil became the second great transforming development to occur in the Arabian Desert. Its impact on life in Arabia (and beyond) was felt just as rapidly as the irruption of Islam.

The Saudi oil reserves were of such enormous magnitude (they are the largest in the world by some considerable margin) that their strategic value was immediately obvious. President Franklin Roosevelt declared the defence of Saudi Arabia of vital importance in 1943, and in 1951 the US began military co-operation with the kingdom.

But the relationship between the increasingly oil hungry US and the Saudi ruling family has not always been an easy one. In 1960 the Organization of Petroleum Exporting Countries was formed. OPEC member states agreed to co-operate on production and pricing of crude oil. The cartel didn’t take any immediate action, but an embargo on oil exports in protest at support for Israel during the Yom Kippur war of 1973 gave the first indication of the growing power OPEC and its member states, particularly Saudi Arabia, wielded. This embargo led to the first of the oil shocks of the seventies, with prices nearly tripling.

Throughout the seventies and early eighties Saudi Arabia experienced an economic boom on an unprecedented scale. The circulation of petrodollars as a result of high oil prices helped pay for extensive construction throughout the Kingdom, including the construction of Mosques and Islamic schools known as Madrassas. In addition to infrastructure the monarchy was able to lavish generous social support programs on the citizenry, including bringing many western professionals to work in the Kingdom.

Then, in the mid eighties, the price of oil fell. OPEC member states were constrained by production quotas set by the cartel, which were in turn based on the size of oil reserves. In the face of declining revenue the Arab OPEC countries, one by one, began reporting much larger reserves than previously claimed. These upward revisions - sometimes in the realm of 100% - allowed countries the freedom to increase production largely at will.

What has become apparent, though never made explicit by the national oil companies, is that since the time of these revisions countries like Saudi Arabia, Iraq, UAE and Kuwait have been reporting the total amount of oil ever found, not the amount remaining. The figures reported have continued to slowly rise, or at least remain static despite the fact that little new discovery has been reported and production has largely risen.

Between the collapse of oil prices in the mid eighties and the end of the century, Saudi income from oil exports declined precipitously. The country also experienced high birth rates and consequent population growth which strained the ability of the ruling family to provide the social support they had enacted at the height of the petrodollar boom. Gross domestic product per capita declined from US$ 25,000 to US$8,000 in a little under two decades.

This difficult period was contemporaneous with the growth of a dangerous strain of militant Islam. Figures like Osama Bin Laden, a wealthy Saudi who had fought in Afghanistan, inspired a growing number of young men to question the governing arrangement of the Kingdom and the support of the United States for much reviled Israel. This was particularly so after the Sauds allowed American troops to be based in the Kingdom during and after the first Gulf War. As well as more marginalised figures many establishment religious figures were critical of the monarchy over perceived backsliding and apostasy. The monarchy has introduced limited reform in response, but has continued to experience sporadic terrorism and criticism from both conservative and liberal Saudis.

Much of the strength of the new militancy flowed from the deep sense of injustice felt by many Muslims at the eclipse of Islamic power by the west, particularly the perceived subjugation of Palestinians by Israel. The conservative brand of Islam that had helped propel the Sauds to power contributed to the radicalizing of a growing number of disaffected men who saw it as their duty to resist ‘crusaders’ and ‘zionists’. This message was being preached not only in militant training camps, but also in Mosques and Madrassas across the Islamic world.

As the reach of terrorist organisations grew in the late nineties and into the early twenty first century, the importance of oil was once again becoming a matter of serious strategic consideration in the West. The United States, and many other nations, are increasingly reliant on imports of oil to power their economies. US oil production had been declining since the early seventies and with the election of George W. Bush and Dick Cheney, both ex-oil men, it was apparent that security of energy supplies was going to become an even more crucial pillar of US foreign policy.

Amidst growing tension on both sides, serious questions were finally being asked about the validity of quoted Saudi Arabian oil reserves. In light of declining oil production in countries like the UK, Norway and Indonesia, the size and quality of the reserves in the Arabian Desert are now of vital interest.

So a debate has been going on both in industry publications and increasingly in the mainstream media over the expectation that Saudi Arabia will be able to significantly increase their production of oil to satisfy demand that is now growing more strongly than it has for several decades. Geologists like Colin Campbell and Jean Laherrere have been joined by people like Matthew Simmons, an investment banker and energy adviser to Dick Cheney, in openly suggesting that Saudi production is likely to decline rather than increase in the near term.

Saudi Aramco officials have been vociferous in denying the charge that they are headed for production declines, citing increased recovery rates from improved technology. They have also again reported large increases in their reserves. But westerners who have worked in the Kingdom are now questioning the quoted figures. Edward O. Price Jr., a former head of exploration for Saudi Aramco, is reported in the New York Times as being very sceptical of any projected increase in Saudi production. Price says that he was told by Saudi Aramco that they based their projections on estimates from US Geological Service, which are extrapolations of the effect new technology had on Texas oil production to the Saudi Arabian context.

Unfortunately, industry figure point out, the technology used in Texas is already in use in Saudi Arabia and it seems unlikely that any similarly effective innovations will be forthcoming. In fact, countries like the UK and Oman that have been using methods like horizontal drilling and water injection have experienced very sharp downturns in production after reaching their maximum production. The doubts about future Saudi production have been reflected in assessments prepared for the US Department of Energy and by the National Intelligence Council.

In addition to the risk of long term decline of oil production in Saudi Arabia, militants and terrorists have actively been targeting the oil industry, particularly foreigners working in the kingdom. In September 2005 a gun battle with terrorists in Ad Damman resulted in Saudi armed forces recovering forged passes to important oil installations and plans for attacks. The group involved in this incident are undoubtedly not alone in considering oil installations prime targets. The concentrated nature of the oil infrastructure in places like Ras Tanura mean that carefully planned attacks could cripple the export of oil and petroleum products.

The world has a great stake in the future of Saudi oil production. The global economy is still reliant on oil for everything from transport to chemical manufacture. A disruption of Saudi supply would have a crippling effect on trade and commerce. So it is with great care that the world’s governments must approach the dual problems of Saudi oil depletion and terrorism. It is imperative that the risks of both are widely understood. To this end, governments should be applying pressure to allow thorough analysis of the reserves of countries that guard such data as state secrets. But, in the case of Saudi Arabia a great deal of sensitivity is required in dealing with a country that has undeniable religious significance for so many people worldwide. The outright exercise of power in the birthplace of Islam is the surest way to engender more ill feeling and to recruit more potential terrorists.

Oil importing countries, and the United States in particular, find themselves in an unenviable position. In such a politically and religiously charged country as Saudi Arabia the combination of terrorism born of the perceived injustice of western hegemony and enormous oil reserves are an explosive combination. The world must handle these powerful forces with care.

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