Does Saudi Arabia Still Matter? Differing Perspectives on the Kingdom and Its Oil

The U.S.-Saudi relationship has come under considerable scrutiny recently, with some analysts questioning its centrality in U.S. foreign policy. The discovery that many of the September 11 attackers were Saudis is partly responsible, as inquiries into the society and political system that produced these terrorists have yielded grim results. In these pages, for example, Eric Rouleau has noted that "a major crisis is now brewing in Saudi Arabia" and warned that public anger there at both the monarchy and the United States "poses intense risks for both countries; indeed, if not controlled it could tear apart [their] strategic alliance" ("Trouble in the Kingdom," July/August 2002). Changing conditions in the oil market and the ascendance of new suppliers such as Russia, meanwhile, are raising a different set of questions. Thus Edward L. Morse and James Richard have challenged the assumption that Persian Gulf oil remains vitally important to the United States ("The Battle for Energy Dominance," March/April 2002).

Certainly, events in the past year have shown the need for profound political and economic reform in Saudi Arabia, which would bolster the stability of the kingdom as well as the global economy. Yet the proposition that the Persian Gulf states and Saudi Arabia are losing their significance for the United States misses the mark on several issues.

WHERE'S THE OIL?

The Persian Gulf region remains central to the global oil market and will become even more vital in the future. U.S. oil imports from outside the Middle East will not change this fact. The United States and the other major oil importers -- western Europe and increasingly, as Morse and Richard note, South and East Asia -- are all part of a single, seamless oil market driven by supply and demand, and global demand for oil has risen steadily over the last several decades. Oil currently accounts for 40 percent of global energy consumption and is not anticipated to fall much below this share in the next 20 years.

The options available to these oil importers are clearly determined by price -- and therefore by those countries that hold the reserves. More than 60 percent of world oil deposits are clustered in and around the Persian Gulf. Saudi Arabia alone sits on fully 25 percent of global reserves, with Iraq following at 11 percent, and Kuwait, the United Arab Emirates, and Iran at 9 percent each. These states' share of the world crude market has dropped appreciably since the 1970s, as other countries have expanded their exports to meet rising world demand. Yet this downward trend is not likely to continue indefinitely. On the contrary, the Persian Gulf's market share is likely to grow again purely because of its reserve base. Outside oil production may continue to rise over the next decade, but all major production increases from 2010 to 2020 are projected to come, once again, from the Persian Gulf.

It is true that long-term trends in oil pricing are driven less by political and military strategies and more by market supply and demand. Yet short-term spikes, which can have significant economic consequences, sometimes result from political calculation, and sometimes from unanticipated events. Only Saudi Arabia has the ability to affect these spikes, by either holding or increasing oil supply, and the United States greatly depends on Saudi cooperation to keep the oil market smooth.

Russia certainly cannot play this role, contrary to Morse and Richard's claim that "energy resources can be used to buttress Moscow's goal of becoming a key partner of the United States." In the months following September 11, Moscow engaged in a high-profile standoff with the Organization of Petroleum Exporting Countries over the former's refusal to comply with OPEC demands for substantial production and export cuts to boost oil prices. This defiance threw the spotlight on Russia and the post-Soviet states around the Caspian Sea as alternative suppliers to the unstable states of the Persian Gulf. The euphoria, however, was misplaced. Russia does have considerable potential to break into some markets in Europe and Asia as a supplemental supplier, but it cannot ever displace the Middle East as the world's primary supplier of oil.

For one thing, the United States itself -- which Morse and Richard note "will remain the single most important force in the oil market," thanks to its ravenous appetite for petroleum -- currently purchases less than three percent of its oil from Russia and the Caspian states. Even in the European and Asian markets where Russia has a greater foothold, an increase in Russian oil production from the current seven million barrels per day (bpd) to projected levels of nine or ten million bpd, would still not make Russia the dominant supplier.

Moreover, Russia's proven oil reserves constitute just five percent of the world total -- considerably smaller than those of the key Persian Gulf countries. The Russians do anticipate finding major new reserves on Sakhalin Island off their eastern coast, in the "northern seas" of the Arctic Circle, and in certain fields in the Russian sector of the Caspian Sea. As for the other post-Soviet states, substantial new reserves certainly lie in the Caspian basin, already equivalent in size to those under the North Sea. And more finds are expected in Kazakhstan, where the new Kashagan offshore field is now estimated to contain around 22 billion barrels of oil -- more than twice the size of the Prudhoe Bay reserves in Alaska. But even after adding a field of this size to the existing reserves and projected Russian findings, Russia and the Caspian basin together will still never have enough oil to displace Saudi Arabia's 264.2 billion barrels of proven reserves.