Donald Trump will make his first foreign visit this week, eschewing more typical early presidential destinations like Canada in favor of a photo-op heavy swing through Saudi Arabia, Israel, and the Vatican, before attending next week’s NATO summit in Brussels. Of these, perhaps the most interesting will be his time in Riyadh, where he will conduct bilateral meetings and attend two summit gatherings: one a Gulf Cooperation Council (GCC) meeting, and the other a U.S.-Arab Islamic summit.
Despite Trump’s negative comments about Saudi Arabia during the campaign, he has been more supportive since his inauguration, and likely looks forward to a warm reception in Riyadh. For their part, the Saudis have invested heavily in lobbying the new administration, with whom they believe they can work on issues from counterterrorism to Iran. For a president under fire at home, and whom even foreign allies treat with extreme caution, the open embrace of Saudi leaders is undoubtedly welcome.
During the visit, Trump is expected to make two announcements. The first is a massive arms sale worth as much as $300 billion over a decade. The package includes a number of advanced systems, most notably a THAAD missile defense system, and is intended to improve Saudi Arabia’s military capabilities. The second rumored announcement – the creation of an “Arab NATO” – is more unexpected. Though such an idea has been suggested before, regional realities have typically prevented it from advancing past the idea stage.
Indeed, though the U.S. has long sought to build up military cooperation and interoperability between regional states, policy differences and long-running disputes have torpedoed similar initiatives in the past. From military cooperation within the GCC to 2015’s Saudi-led announcement of an “Islamic coalition to fight terrorism“ these efforts have yielded few concrete results. Even at the height of the Cold War, the Baghdad Pact (CENTO) was rendered ineffectual by regional disputes.
In reality, the likelihood of failure may not worry either Trump or the Saudi leadership, both of whom have shown a propensity for policy characterized by big, flashy announcements that are rarely followed through with concrete steps.
Of greater concern are other areas of likely discussion at the summit, particularly the prospect of greater U.S.-Saudi cooperation against Iran. Though Trump has thus far proven unwilling to “rip up” the Iranian nuclear deal, he has initiated new sanctions on Iran, and repeatedly promised a more assertive U.S. policy to deal with Iran’s “destabilizing” regional behaviors. Unfortunately, this approach carries risks, including the prospect of undermining the nuclear deal or of creating a wider regional conflict.
And while the President and Saudi leaders may agree on many policy issues, the summit does present several areas of potential conflict. For one thing, the hosts have extended an invitation to Sudan’s President Omar al-Bashir, currently under indictment by the ICC for war crimes and genocide, a choice which has upset many in Washington, if not necessarily the President himself. Trump is likely to accidentally provide support to one side in the ongoing influence struggle between Mohammed bin Nayef, the Saudi Crown Prince, and Mohammed bin Salman, the King’s son and second-in-line to the throne.
Trump’s scheduled speech on Islam also promises a variety of opportunities for misunderstanding and misstatements; in addition to the President’s habit of deviating from prepared remarks, the speech itself is reportedly being written by advisor Stephen Miller. Miller is not only the author of the Trump administration’s controversial travel ban on various Muslim countries, but also waged a campaign during his college years to create awareness of the dangers of “Islamofascism.”
In short, though Trump’s trip to Saudi Arabia offers little in the way of policy disagreements – and presents a valuable opportunity for the new administration to distance itself from turmoil at home – it also offers plenty of potential pitfalls for the new President and his staff. And that’s before he even makes it to stop number two.
Since at least World War II, U.S. foreign policy has been shaped by the necessity of securing scarce oil supplies. And for more than 30 years, it has been shaped by a commitment to safeguard the flow of oil from the Persian Gulf. Many of the defining moments in U.S. foreign policy since then– including the Arab oil embargoes of the 1970s, the 1980s ‘tanker war’ and even the 1991 Persian Gulf War – have been shaped by this commitment, perhaps most clearly articulated by President Carter in 1980:
Let our position be absolutely clear: An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.
Yet recent years have seen profound changes in the global oil market. Growth in U.S. domestic production – a result of the shale gas revolution – has returned the United States to the top of global hydrocarbon producer rankings for the first time in decades. A more general shift in production from global south to north has made the United States substantially less reliant on Middle Eastern sources of oil, and more on close neighbors like Canada.
These changes, combined with dramatic shifts in the Middle Eastern balance of power raise a key question: should the United States continue to use its military to guarantee the flow of oil from the Persian Gulf?
On February 27th, Cato will host a book forum to discuss the recently published book Crude Strategy: Rethinking the U.S. Military Commitment to Defend Persian Gulf Oil. The book addresses many of these key questions, pulling together an interdisciplinary team of political scientists, economists, and historians to explore the links between Persian Gulf oil and U.S. national security.
The book’s essays explore key questions such as the potential economic cost of disruption in oil supply, whether disruptions can be blunted with nonmilitary tools, the potential for instability in Saudi Arabia, and the most effective U.S. military posture for the region. By clarifying the assumptions underlying the U.S. military presence in the Persian Gulf, the authors conclude that the case for revising America’s grand strategy towards the region is far stronger than is commonly assumed.
The discussion will feature the book’s editors, Charles Glaser, Professor of Political Science and Director, Institute for Security and Conflict Studies at the George Washington University and Rosemary Kelanic, Assistant Professor of Political Science, Williams College. Joining them will be Kenneth Vincent, Visiting Fellow, Institute for Security and Conflict Studies, George Washington University and John Glaser, Cato’s Associate Director of Foreign Policy Studies.
The event promises a fascinating discussion on the energy security roots of America’s foreign policy in the Middle East, and the future of the U.S. commitment to the region’s oil supplies. You can register for the event here.
In an op-ed for the Boston Herald last week urging the Trump administration to uphold the Iran nuclear deal, I noted that the precise posture that the Trump White House will have toward Iran is not yet known. Today, we got our first insight into just how confrontational that posture will be. And it doesn’t look good.
Trump National Security Advisor Michael Flynn said in a White House briefing that, “As of today, we are officially putting Iran on notice.” According to Flynn, Iran’s recent test of ballistic missiles, which he said is “in defiance of UN Security Council Resolution 2231,” along with an alleged attack on a Saudi naval vessel “conducted by Iran-supported Houthi militants” in Yemen, serve as evidence of “Iran’s destabilizing behavior across the entire Middle East” and make clear that the nuclear agreement signed by Iran and the P5+1 has “emboldened” Iran to act nefariously in the region, “plac[ing] American lives at risk.”
Flynn’s statement amounts to heated, combative rhetoric over rather trivial issues. Only one of the incidents cited by Flynn was an Iranian action. While it’s true that Iran supports the Houthi rebels in Yemen, it has never been clear exactly how much support they give and it is doubtful Iran has the kind of leverage over the militants that make them qualify as strategic proxies. At the end of the day, whatever instability is caused by Iranian support for the Houthis, it doesn’t hold a candle to the regional instability caused by Sunni jihadists, like al-Qaeda-linked groups and ISIS, that have been supported with funds coming out of Saudi Arabia and other Arab Gulf states. Rather than berate the Saudis with threatening bombast in a White House briefing, though, Washington continues to aid the Saudi military as it relentlessly bombs Yemen, killing thousands of civilians, putting millions at risk of starvation, and committing acts that a United Nations panel said could amount to crimes against humanity.
With regard to Iran’s ballistic missile test, the reality is far less alarming than Flynn’s words suggest. The nuclear deal itself doesn’t prohibit these missile tests. And as Dan Joyner, professor of international law at the University of Alabama School of Law, explains, “the assertion that Iran’s ballistic missile tests…violate UN Security Council resolutions is incorrect because, as of Implementation Day, all UNSCR’s adopted prior to that date regarding Iran are terminated except for Resolution 2231. And the language that Resolution 2231 employs in addressing Iran’s ballistic missile activity is legally nonbinding language…[T]here can thus be no violation of a legal obligation that doesn’t exist.”
As The Wall Street Journal reports, “UN Security Council Resolution 2231, which endorsed the deal, ‘called upon’ Iran to avoid any activity related to missiles designed to be capable of carrying nuclear warheads.” It’s hard to confirm one way or the other, but for what it’s worth Iranian Foreign Minister Javad Zarif told the Journal that none of Iran’s missiles are designed to carry a nuclear warhead and the tests involved “conventional warheads that are within the legitimate defense domain.” Given that Iran has verifiably rolled back its nuclear enrichment program over the past year, it makes sense that they would have little interest in designing missiles that can carry nuclear warheads, especially given the added international scrutiny it would needlessly attract.
Flynn’s statement indicates an eagerness to stir up tensions with Iran over relatively innocuous issues. This will undoubtedly be perceived in Tehran as threatening, thereby bolstering the more hawkish voices in Iran and undermining the future viability of the Iran nuclear deal, despite the fact that, as the International Crisis Group recently reiterated, “It has delivered so far on its narrow objective: effectively and verifiably blocking all potential pathways for Iran to race toward nuclear weapons.”
The Saudis have just completed peddling their new $15bn bond issue (with more to come). One thing that’s been swept under the rug is a smoking gun. A smoking gun because it’s an indication of just how much trouble the Kingdom is in.
The most telling sign of the depth of the Saudi welfare state’s troubles is the fact that they switched from the lunar-based, religious Hijri calendar to the western Gregorian calendar on October 1, 2016. The reason for this radical change is simple economics.
The Gregorian calendar has 10.9 more days than the Hijri calendar, meaning that the public sector can cut costs through the dilution of wages—same pay spread over more working days. In another move that touches on sensitive religious matters, the Kingdom has announced that it will increase visa charges for people completing their religious pilgrimage, the Hajj. Even in the Kingdom of Saudi Arabia, economics has trumped religion.
In yesterday’s Washington Post, a headline proclaimed: “Saudi Arabia is Facing Unprecedented Scrutiny from Congress.” The article focused on a recently defeated Senate bill which sought to express disapproval of a pending $1.15 billion arms sale to Saudi Arabia. Unfortunately, though the presence of a genuine debate on U.S. support for Saudi Arabia – and the ongoing war in Yemen – is a good sign, Congress has so far been unable to turn this debate into any meaningful action.
Yesterday’s resolution, proposed by Kentucky Senator Rand Paul and Connecticut Senator Chris Murphy, would have been primarily symbolic. Indeed, support for the bill wasn’t really about impacting Saudi Arabia’s military capacity. As co-sponsor Sen. Al Franken noted, “the very fact that we are voting on it today sends a very important message to the kingdom of Saudi Arabia that we are watching your actions closely and that the United States is not going to turn a blind eye to the indiscriminate killing of men, women and children.” This message was intended as much for the White House as for the Saudi government, with supporters arguing that the Obama administration should rethink its logistical support for the war in Yemen.
Unfortunately, opponents of the measure carried the day, and the resolution was defeated 71-26. These senators mostly argued that the importance of supporting regional allies outweighed any problems. Yet in doing so, they sought to avoid debate on the many problems in today’s U.S.-Saudi relationship. In addition to the war in Yemen – which is in many ways directly detrimental to U.S. national security interests, destabilizing that country and allowing for the growth of extremist groups there – Saudi Arabia’s actions across the Middle East, and funding of fundamentalism around the world are often at odds with U.S. interests, even as it works closely with the United States on counterterror issues. As a recent New York Times article noted, in the world of violent jihadist extremism, the Saudis are too often “both the arsonists and the firefighters.”
As the Financial Times reported on 12 July, Saudi Arabia’s oil-output reached record highs in June 2016. Increasing production 280,000 barrels/day to 10.6m b/d, Saudi Arabia has once again waved off OPEC’s request not to glut the market with oil.
As it turns out, economic principles explain why the Saudis began, in late 2014, to pump crude as fast as they could – or close to as fast as possible. In fact, there is a good reason why the Saudi princes are panicked and pumping.
Let’s take a look at the simple analytics of production. The economic production rate for oil is determined by the following equation: P – V = MC, where P is the current market price of a barrel of oil, V is the present value of a barrel of reserves, and MC is the marginal recovery cost of a barrel of oil.
To understand the economics that drive the Saudis to increase their production, we must understand the forces that tend to raise the Saudis’ discount rates. To determine the present value of a barrel of reserves (V in our production equation), we must forecast the price that would be received from liquidating a barrel of reserves at some future date and then discount this price to present value. In consequence, when the discount rate is raised, the value of reserves (V) falls, the gross value of current production (P – V) rises, and increased rates of current production are justified.
When it comes to the political instability in the Middle East, the popular view is that increased tensions in the region will reduce oil production. However, economic analysis suggests that political instability and tensions (read: less certain property rights) will work to increase oil production.
Let’s suppose that the real risk-adjusted rate of discount, without any prospect of property expropriation, is 20% for the Saudis. Now, consider what happens to the discount rate if there is a 50-50 chance that a belligerent will overthrow the House of Saud within the next 10 years. In this case, in any given year, there would be a 6.7% chance of an overthrow. This risk to the Saudis would cause them to compute a new real risk-adjusted rate of discount, with the prospect of having their oil reserves expropriated. In this example, the relevant discount rate would increase to 28.6% from 20% (see the accompanying table for alternative scenarios). This increase in the discount rate will cause the present value of reserves to decrease dramatically. For example, the present value of $1 in 10 years at 20% is $0.16, while it is worth only $0.08 at 28.6%. The reduction in the present value of reserves will make increased current production more attractive because the gross value of current production (P – V) will be higher.
So, the Saudi princes are panicked and pumping oil today – a take the money and run strategy – because they know the oil reserves might not be theirs tomorrow. As they say, the neighborhood is unstable. In consequence, property rights are problematic. This state of affairs results in the rapid exploitation of oil reserves.