The Long Goodbye, Al-Saud Style

by Trent Telenko at August 13, 2003 12:40 AM

Sometimes things just catch your eye. In the past week I have seen the following in the Washington Post and the Weekly Standard: first Jim Hoagland's "Saving The Saudi Connection" column, then Stephen Schwartz's "The Dysfunctional House of Saud" and Max Singer's "Saudi Arabia's Overrated Oil Weapon." Then I see that the Bush Administration is filling the US Strategic Petroleum Reserve to the tune of nearly 11 million barrels of oil, which has the following effect:

"Energy consultant Phil Verleger, an economist, said with commercial inventories so low, any oil taken out of the market has an impact on price. Verleger estimated that the 11 million barrels "probably translates into a buck or a buck-and-a-half a barrel' price increase."

Given the above pattern, and the negative political implications for Bush re-election of higher oil prices, I'd say that the Bush Administration has a strategic psychological operations campaign active and aimed at the Al-Saud clan saying the following loudly and clearly: "Your Services Are No Longer Required."

When Hoagland writes passages like this:

U.S. commitments to protect the Saudi royal family and oil fields from revolution or other disaster stretch back to 1945. But the involvement of Saudi citizens in 9/11, the kingdom's relative decline as the swing factor in world oil markets and the Bush agenda for regional change mean that Washington is no longer willing to overlook Saudi behavior that was left alone in the past.

"The old assumption was that the cost of terrorism was sustainable," says one senior administration official. "The horror of 9/11 showed that it is not. You have to deal with the threat now, before it strikes you."

...and you see oil market predictions like this:

Technological developments over the last 10 years have reduced the cost of producing unconventional oil to below $15 a barrel, so that it is being produced profitably at the price at which oil has sold for almost all of the last 30 years. We'll see later why the much lower production cost of Gulf oil gives the Gulf countries less power than people think. Already a million barrels a day of unconventional oil is being produced, and it is just as good as the black goo pumped in the old-fashioned way.

...and this:

(3) The low production cost of Gulf oil lets the Gulf countries determine how much of world demand they will supply. Wrong. Where the world's future oil supply comes from depends on where oil companies decide to drill wells and make other investments. Since there is much more oil available in the ground than will be needed in the next few decades, oil investors have much choice about where to get oil. Right now there is practically no investment being made in increasing--or even maintaining--oil production capacity in the Gulf region; instead, almost all drilling is being done in other parts of the world.

There are two reasons the oil industry is not investing in the Gulf. Owners, not producers, control the benefit of low production costs, so low costs in the Gulf don't necessarily give companies an incentive to invest in producing Gulf oil. And oil producers have strong incentives to avoid sources that are as politically vulnerable as the Gulf seems to be.

The Gulf countries could theoretically produce their oil themselves--or give the companies strong incentives. But this requires capital and/or effective decision-making, and so far only some of the smaller Gulf states are expanding their capacity. We have reason to hope that there will be improved regimes in Iraq and eventually Iran, which could very well lead to major production increases--but if Iraq and Iran are both removed from the "axis of evil," we will have even less reason to be concerned about how much of world oil supply comes from the Persian Gulf.

When you see that, you know something is up.

I don't believe that oil analysis point about unconventional oil going down to $15 a barrel. I just don't see Alberta's oil sand deposits anywhere near that, for example. However, it is useful to say it in print if it blows wind under the Al-Saud clan's robes.

The second point about Middle Eastern political risk is absolutely spot on. The only way Western investors with fiduciary responsibility will risk money in Middle Eastern Oil is if they have either 1) obtain a high enough premium into the return on investment to account for the political instability or 2) obtain a reliable political security guarantee. In other words, the only place Western investors will put money into new Middle Eastern oil production after 9/11/2001 is where American ground troops control the oil production. American ground troops will be the only way they can realistically buy into the oil corporation's return on investment calculations in their business plans.

When I look at these headlines in that light:

I'd say that the message was received and understood.

There were people predicting this U.S. turn against the Saudis in print literally years ago. This is from Tom Holsinger's April 24, 2002 Strategypage.com column titled "One Invasion Won't Be Enough" which talked about what would happen to the Saudis after the fall of Iraq and a successful Iranian democratic revolution:

"These events would be immediately followed by an epidemic of bed wetting on the south side of the Persian Gulf. Once we've secured the oil production of Iraq (which necessarily means our control of Kuwait's) and obtained a friendly regime in Iran, the continued existence of the Saud regime will no longer be in America's interest. The Saud regime is the dominant source of funding for terrorism, especially terrorism against the United States. I expect loss of Saudi funding will cause Islamic terrorism outside Arab areas and Pakistan to tube, and that in Arab areas will be significantly reduced.

The Saudi regime has major problems at home such that we might not be able to keep them in power much longer even if we wanted to (its domestic problems are what drives its funding of terrorism), and it certainly can't stay in power if the U.S. government attempts to bring it down through overt (blockade) or covert means. But as with Iran, we might not have to do anything to terminate the Saud regime.

American-fostered regime changes in Iraq and Iran, alone, could easily cause shaky Saudi domestic politics to spiral out of control, bringing down the monarchy and replacing it with something more radical and anti-American, though there are also liberal and democratic factions. Revolution in Saudi Arabia or its invasion, with an invitation or without one, would likely see a lot of its oil infrastructure destroyed (it purportedly has long been wired for explosives and quick destruction). Then, after the world has done without Saudi oil for a while, the oil fields (which comprise only a small part of Arabian real estate) would be rebuilt and revived under U.S. government control.

At which point we'll also know which other oil-producing countries are still funding terrorism (the likely suspects are Libya, Kuwait and the United Arab Emirates). This is pretty scary stuff, but once we invade Iraq there is a major possibility of snowball effects, which include incentives to continue invading. Hopefully the Bush administration has a desired end state in mind. And things could start rolling this summer.

Tom also said the following about Europe's role with the Al-Saud Clan's riches in his "The World's Coming Encounter With Andrew Jackson " column from November 28, 2002:

"Foreign governments should definitely plan on the U.S. government doing exactly what it proposes, and most should hope that it succeeds given the Jacksonian alternative. Some could much profit from America remaking the world for its better security at home. Consider that $700-$800 billion in foreign assets held by the Saud regime might become available when that regime passes. Europe could offer sanctuary to the Fair Maid Of Money."

In this war you always have to watch what the Bush Administration actually does versus what it says. There has been a pattern of long preparation and then building political, economic and military activity until a final burst of military frenzy that changes everything. Then we fall back to the long slow slog again. This happened with Afghanistan and then with Iraq.

The information warfare campaign the Bush Administration is engaging in with the Saudis shows that they are now starting to strategically multi-task. Bush Administration has not finished with Iraq and has not started with either Iran or North Korea, yet they are now preparing the ground in Saudi Arabia. The implications of that development are profound.

A good intelligence indicator for the blogosphere to watch for will be France and the other members of the "Axis of Weasel" starting to line up for their Saudi pay day.

URL List:

Saving The Saudi Connection
Jim Hoagland
Washington Post, Thursday, August 7, 2003; Page A21

The Dysfunctional House of Saud
Stephen Schwartz
Weekly Standard, August 18, 2003 issue.
"Compromised by terror, the Saudi regime will have to change or die."

Saudi Arabia's Overrated Oil Weapon
Max Singer
Weekly Standard, August 18, 2003 issue
"There's no need for Washington to be deferential to Riyadh."

US Questions Saudi Man in 9-11 Probe
Guardian, UK - 21 hours ago

Saudi Arabia Frees Westerners Jailed for Bombings
Reuters, UK - Aug 8, 2003

Reports: Saudi Forces, Militants Clash
JIDDAH, Saudi Arabia (AP)

White House accused of stoking oil prices by filling reserve
By H. Josef Hebert
Associated Press, 8/6/2003

Analysts: Filling oil reserve hurts prices
Tuesday, August 05, 2003

One Invasion Won't Be Enough
Tom Holsinger
Strategypage.com, April 24, 2002

The World's Coming Encounter With Andrew Jackson
Tom Holsinger
Strategypage.com
November 28, 2002

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