Commentary

Is Terrorism the Price of Saudi Oil?

This article was published in National Review, December 2, 2002.
The U.S.-Saudi relationship is again engulfed in controversy. Did a Saudi princess, and wife of the ambassador to the U.S., give money to two of the September 11 hijackers? Yet again, both governments are paying a high price for this unnatural international friendship.

The Bush administration’s reaction has been circumspect, and it seems implausible that a prominent Saudi royal would intentionally aid terrorists. But Riyadh has lost the benefit of the doubt for many Americans. Not only were 15 of the 19 September 11 hijackers Saudis, but it is widely acknowledged that Saudi money has flowed into al Qaeda’s coffers. As Carl Ford, assistant secretary of state for intelligence and research, recently told Congress, “The Saudi banking system is not totally transparent, and Riyadh has not maintained strict oversight” of nongovernment organizations overseas.

Washington may not be able to force Saudi Arabia to accept political or religious freedom. But it can insist that Riyadh cooperate to turn off the financial spigot for terrorists. And the U.S. must do so even if it means loosening the two governments’ friendly embrace. First, Washington need not fear for its bases. Whatever the resolution of the Iraq crisis, U.S. troops should be withdrawn from Saudi Arabia. If Saddam is disarmed, Riyadh can defend itself; if Saddam is overthrown, there will be no Iraqi threat against which to defend.

Nor need the U.S. step gently because of oil. Contrary to popular wisdom, the Saudis’ trump hand is surprisingly weak. True, with 262 billion barrels in proven reserves, Saudi Arabia has about one quarter of the world’s resources and 8.7 times America’s supplies. Riyadh is not only the world’s leading supplier, but as a low-cost producer can easily augment its daily exports, eight million barrels a day last year.

However, the reserves figure vastly overstates the importance of Middle Eastern oil to the U.S. (and Western) economy. Saudi Arabia accounted for about 10.5 percent of production last year (and so far under ten percent this year); Riyadh plus Kuwait and the various sheikdoms came to 26.6 percent; OPEC produced 39.2 percent of the world’s supplies. Were Saudi Arabia to fall, prices would rise substantially only if the conquerer, whether internal or external, held the oil off of the market, especially if the other Gulf states also collapsed. The result then would be severe economic pain in the short-term, though the Strategic Petroleum Reserve, which the president has vowed to fill, would help moderate prices.

Such a policy would, however, defeat the very purpose of conquest, even for a fundamentalist regime. After all, the Iranian revolution did not cause that nation to stop exporting oil; in fact, Iranian production increased steadily throughout the 1990s. If a new regime did halt sales, the primary beneficiaries would be other oil producers, who would likely increase exports in response to the higher prices. A targeted boycott against only the U.S. would be ineffective, since oil is a uniform product available around the world. In fact, the embargo of 1973-74 had little impact on production; the global recession of 1975 caused a far more noticeable drop.

A new regime might decide to pump less oil in order to raise prices. Such a strategy would require international cooperation, yet the oil producers have long found it difficult to coordinate prices hikes and limit cheating on agreed-upon quotas. Even if effective, restricting sales would have only a limited impact. A decade ago, when oil was selling for about $20 a barrel, energy economist David Henderson, a professor at the Naval Postgraduate School, figured that the worst case of an Iraqi seizure of the Saudi oil fields would be about a 50-percent price increase, costing the U.S. economy about one half of one percent of GDP. Prices are today running close to $30 a barrel, but that includes an uncertainty premium over the prospective war with Iraq. Thus, the real price hike today of a Saudi collapse probably would be similar to that of a decade ago. Moreover, it would fall on an economy more than one-quarter larger.

In any case, the economic impact would diminish over time. Countries like Kuwait, Iran, Nigeria, Russia, the United Arab Emirates, and others have the ability to pump significantly more oil. A resolution of Iraq’s status would bring substantial new supplies on line; Baghdad pumped 2.2 million barrels a day in 1990, before becoming subject to sanctions after the end of the Gulf War. As economist Susan Lee puts it, should Riyadh turn off the pumps, “the U.S. would find itself plenty of new best friends.”

Sharply higher prices would bring forth new energy supplies elsewhere. Total proven world oil reserves were 660 billion barrels in 1980, 1,009 billion in 1990, and 1,046 billion at the end of 2000. Yet in the last decade alone the world’s people consumed 250 billion barrels of oil. How could this be? A combination of new discoveries and technological advances increased the amount of economically recoverable oil. Reserves rose even as oil prices dropped: Between 1980 and 1990, proven oil reserves jumped by 62 percent while prices for Middle Eastern petroleum were falling 43 percent. Prices eventually hit a dramatic low in 1998, down another 41 percent, before rising over the next two years.

America is dotted with high-cost wells that could be unplugged. The nation’s outer-continental shelf alone is thought to contain more than 30 billion barrels of oil, greater than our current proven reserves; since so little of the OCS, barely six percent, has been leased, those resources have not been proved. Barely 15,000 acres of the 19.6 million acre Arctic National Wildlife Reserve could contain a similar amount of oil (as well as supplies of natural gas). Even the modest estimate of five billion barrels of recoverable reserves at current prices would be a significant addition to current supplies. However, we won’t know how much is there without drilling, which could be conducted in an environmentally sensitive manner. And while the desire to lower the cost of gasoline might be thought by some to be an inadequate reason to develop these supplies, the prospect of terrorism and war related to America’s access to Persian Gulf oil should change the benefit-cost ratio considerably.

Further, some 300 billion barrels of unrecovered oil, ten times our proven reserves and more than known Saudi resources, lie in beds of shale under the United States. They are not counted, however, because they are not currently worth developing. But as prices rise and new techniques are developed, they may become economically recoverable. Moreover, energy companies are looking for new oil deposits around the world, including the Caspian Basin, Russia, South China Sea, and West Africa. Estimates of as-yet-undiscovered potential recoverable oil range from one trillion to six trillion barrels. At current consumption rates the Energy Information Administration estimates that we have enough oil for another 230 years and “unconventional” sources, such as shale, that could last 580 years. And even these figures are based on existing prices and technologies. Higher prices would stimulate exploration, as well as production of alternative fuels and conservation, reducing oil consumption.

In short, an unfriendly Saudi Arabia might hurt America’s pocketbook; it would not threaten America’s survival. (In contrast, control of the Gulf by a hegemonic rival — notably the Soviet Union — would pose a significantly different, and greater, security threat, but that prospect disappeared with the end of the Cold War.) Thus, it is worth risking Saudi displeasure in order to try to starve al Qaeda of funds.

Anyway, Riyadh isn’t likely to turn hostile. It needs the money from selling oil as much as America needs the oil. Moreover, it will be as brutal as necessary to defend itself from internal foes and the withdrawal of U.S. forces would remove a prime source of potential instability.

Nor need Washington treat the Saudis as enemies. Rather, the U.S. simply should reorder its priorities, accepting a cooling of the relationship if that is the only way to halt terrorist funding.

America’s most important foreign-policy objective is defeating terrorism, and the most important contribution that Saudi Arabia can make is to cut off funding for al Qaeda or related networks. That’s worth achieving even at the cost of lost bear hugs in the White House, princely visits to the ranch, and Cabinet-level jaunts to Riyadh.

Doug Bandow is a senior fellow at the Cato Institute.