What Ukraine Needs to Liberate Crimea
A Credible Military Threat Might Be Enough
Shibley Telhami and Fiona Hill
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.
Finally, Saudi Arabia has a trump card that Russia does not: spare production capacity. Morse and Richard rightly acknowledge that the kingdom's extra reserves, to be used only as a last resort during a crisis in the oil market, make "policymakers elsewhere beholden to Riyadh for energy security" and form "the centerpiece of the U.S.-Saudi relationship." Russia, on the other hand, produces and exports at maximum capacity and is likely to continue to do so—a fact that has begun to generate some anxiety domestically. To make matters worse, a recent Russian government energy report indicates that if current oil-extraction levels continue and new technologies do not bring additional reserves into production, Russia can expect to have depleted its current reserves by 2040. This is a sobering conclusion for an economy that remains heavily dependent on energy revenues and subsidies.
ON GUARD IN THE GULF
U.S. strategic priorities supply a second reason why Saudi Arabia will remain important to the United States. For half a century, the United States has made Persian Gulf oil a primary security interest, and this emphasis is unlikely to dissipate in this decade. The conventional view of U.S. policy in the Persian Gulf is that American strategy and military posture are based primarily on ensuring an uninterrupted flow of oil at reasonable prices. But, as U.S. government documents declassified over the last several years show, the strategy has also focused on preventing hostile forces from seizing and establishing control of Persian Gulf petroleum. From 1949 to the present, American planners have worried that a hostile state may gain too much wealth and power by controlling the dominant share of the world's oil supply—and thus become more threatening to the United States. U.S. policy toward the region has thus sought the "denial" of oil to enemies while assuring its flow to the West.
Indeed, in 1949, the fear of a Soviet seizure of oil resources in the Persian Gulf led U.S. policymakers to plan the destruction of regional oil facilities. In coordination with the British government and U.S. and British oil companies, but without the knowledge of local Arab governments, President Harry Truman approved a detailed plan—described in a National Security Council directive known as NSC 26/2 and later supplemented by a series of additional NSC orders—to store explosives near Persian Gulf oil fields. As a last resort in the event of an imminent Soviet invasion, oil installations and refineries would be blown up and the reserves plugged to keep the oil out of Moscow's hands.
The fear that the Soviet Union could control all that oil was so great that the Truman administration even considered deploying radiological weapons to destroy the oil fields before the Soviets could access them. That option was rejected in 1950, and the CIA study that led to this decision reveals the dual logic of U.S. interests: denying the use of Persian Gulf oil to the enemy while at the same time preserving the region's oil for future use by the West. The CIA's conclusion, as detailed in NSC 26/3, dated June 29, 1950, noted,
Denial of the wells by radiological means can be accomplished to prevent an enemy from utilizing the oil fields, but it could not prevent him from forcing "expendable" Arabs to enter contaminated areas to open well heads and deplete the reservoirs. Therefore, aside from other effects on the Arab population, it is not considered that radiological means are practicable as a conservation measure.
If the Red Army ever did invade the Persian Gulf, the report continued, the United States needed to ensure the "preservation of the resources for our own use after our reoccupation."
In the 1950s, this calculation led to a strategy of using more conventional means to prevent the Soviets from seizing Persian Gulf oil. Explosives were moved to the region and stored near oil fields. Although the State Department apparently expressed reservations that the plan seemed to signal that the United States was not prepared to defend local governments, the fear of Soviet control overrode these concerns. In 1957, in response to increased instability in the wake of the Suez crisis, the Eisenhower administration reinforced and expanded the logic of this strategy. With many friends of the West threatened by the rise of pan-Arabism, championed by Egyptian President Gamal Abdel Nasser, the United States grew concerned that unfriendly governments would emerge in the region. This fear led Eisenhower to expand the denial policy to include not only threatening external powers, but also hostile regional regimes.
Today, Iraq and, to some extent, Iran have replaced the Soviet Union as the hostile powers in U.S. thinking (though in this case they already control some of the regional oil reserves). It is clear that one of the principal American reasons for going to war against Iraq after its invasion of Kuwait in 1990 was the belief that an ambitious and ruthless Saddam Hussein would be empowered and emboldened if left in control of so much of the world's oil wealth. Certainly, the even greater concern that he might ultimately be in a position to seize control of Saudi Arabia's oil fields was also a strong driving force in American policy, regardless of the U.S. political commitment to the Saudi regime. Given the continued assumption in Washington that Iraq under Saddam and an Iran that the State Department calls "the most active state sponsor of terrorism" threaten American interests, it is unlikely that Washington will allow either regime to expand its oil wealth and, thereby, its power.
In the coming years, the United States is likely to face additional complications in the Persian Gulf as the world becomes increasingly dependent on Middle Eastern oil, and as new countries vie to protect their own interests in the region's supply. China is a case in point. Oil now accounts for almost 30 percent of Chinese energy consumption. The country imports 60 percent of its oil from the Persian Gulf, and projections indicate that in the next two decades, this figure could rise to 90 percent. Economic interests and concerns over energy security could thus easily lead to increased Chinese political involvement in the region. China has already begun to invest in energy exploration in Iran and has made efforts to negotiate rights to develop an oil field in Iraq. (Beijing's interest in Caspian energy reserves has also translated into political involvement in Central Asia—most notably through the creation of the Shanghai Cooperation Organization with Russia and four of the Central Asian states, including Kazakhstan.) Yet China is just one reminder that in the next decade, the United States will not necessarily find it so easy to influence and restrain the activities of all the interested parties in the Persian Gulf.
Given America's ongoing security interest in the Persian Gulf, it is highly likely that the U.S. military will retain a large presence in the region. Washington must therefore continue to place high priority on sustaining favorable relations with Riyadh, since Saudi approval and cooperation will remain essential to any continued American military presence. It is certainly possible that the United States will reduce the number of troops it keeps in Saudi Arabia, or will at least have them assume a lower profile, but it is hard to imagine that, with the exception of Kuwait, any of the smaller members of the Gulf Cooperation Council (which comprises Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) could afford to host large American bases without Saudi acquiescence. In addition, U.S. options would be significantly handicapped if Saudi Arabia were to deny overflight rights to U.S. military aircraft, or prohibit ground troops from launching operations from Saudi soil in the case of a war with Iraq.
And finally, the key role that Saudi Arabia plays psychologically and symbolically in the lives of Muslims worldwide cannot be underestimated. It is one thing to have radical nonstate groups that advocate and employ violence against the United States; it would be a very different matter to have a radical government employ the pulpit of Mecca, where millions come every year on pilgrimage, to set a hostile tone in the name of Islam. This prospect alone—which seems quite realistic in Rouleau's portrait of "the most rigorous theocracy in the Islamic world," where Islamic radicals "have called into question the very legitimacy of the al Saud dynasty"—should be enough to convince Americans that a close U.S.-Saudi relationship is in their best interest.
AN ALLY YOU CAN'T REFUSE
In the end, it is clear that the United States has an important interest in continuing strategic cooperation with Saudi Arabia. Yet critics of U.S.-Saudi relations, although mistaken in suggesting that the United States no longer needs Saudi Arabia, do highlight some real areas of concern. Both sides must now work hard to regain the trust of each other's publics and policymakers. The Saudis will need to reform their political, educational, and economic system, not only for their own sake, but also to improve the relationship between Saudi Arabia and the rest of the world. If reform is rejected, then new pressures from the young, restless majority—many of whom are unemployed and some of whom are increasingly radicalized—will pose serious challenges internally and externally.
Yet those Americans calling for reform in Saudi Arabia must bear in mind that political change cannot be imposed from the outside, and especially not by the United States. The process will be slow. In fact, a gradual approach is the only guarantee of political change: no reform process is likely to produce a positive, stable outcome without the cooperation of the monarchy, and only sustained, gradual reforms will be palatable and not immediately threatening to the current government.
The changes should begin with the educational and economic systems. In terms of education, Rouleau's emphasis on the urgent need for broad reforms in Saudi Arabia has now been bolstered by a recent United Nations report on human development in the Arab world. This sobering study, which gave the region the lowest "freedom score" in the world (based on research conducted in the late 1990s), highlighted the Arab states' minuscule expenditures on scientific research and technological development. By neglecting to invest in these areas, Riyadh is wasting the economic potential of its population and ignoring an opportunity to provide jobs and livelihoods to frustrated young Saudis who might otherwise turn toward extremism. In addition, the Saudis will have to scrutinize their international aid programs to Islamic schools and groups outside the country that may ultimately threaten the regime's interests.
Economic reforms must inevitably extend to the Saudi oil sector, where Morse and Richard have a point in contrasting Riyadh's rigid state control with Russia's more liberalized environment. Although Saudi Crown Prince Abdullah has shown initiative in allowing some international investment in the Saudi oil industry, he is playing catch-up with Russia. Russian oil companies operate more freely as private, or semiprivate, entities and are now attempting to transform themselves into international players by acquiring their own international reserve bases and downstream operations, including in the Middle East and the United States.
Finally, the United States must reconsider its own policy priorities in the Middle East, beyond the U.S.-Saudi relationship, if it hopes to help promote a stable environment in Saudi Arabia that will protect U.S. strategic interests. Opinion surveys in the kingdom underscore that public perceptions are increasingly formed by the media outside Saudi Arabia rather than by the official government-controlled press. And attitudes toward the United States are shaped less by what America stands for than by concrete American policies. Indeed, in an early 2002 survey, 86 percent of Saudi elites and 59 percent of the general public indicated that their frustrations with the United States were based on its policies, not on American values.
First and foremost among Saudi concerns is U.S. policy toward the Arab-Israeli conflict. In a survey conducted in spring 2001, 63 percent of Saudis characterized the Palestinian situation as "the single most important issue to them personally," and another 20 percent ranked it among the top three. It is this inescapable domestic reality that drove Prince Abdullah toward a new attempt to seek a comprehensive Arab-Israeli peace.
From the American point of view, the events of the past year have undermined the proposition that the Arab-Israeli conflict can be completely separated from U.S. strategy in the Persian Gulf. The United States must design a public diplomacy strategy that reaches out to the region's public and addresses the unfortunate misperceptions that have taken root there. And ultimately, regardless of how U.S. policymakers choose to deal with Iraq, the most effective way to reduce the tension between the United States and Saudi Arabia is to push forward with Arab-Israeli peacemaking. The United States must do these things because, as long as the world remains dependent on oil, it simply cannot make do without Saudi Arabia.
SHIBLEY TELHAMI is Anwar Sadat Professor for Peace and Development at the University of Maryland and Senior Fellow at the Saban Center at the Brookings Institution. FIONA HILL is a Fellow at the Brookings Institution and Adviser to the President of the Eurasia Foundation.
Abdullatif A. Al-Othman
Edward Morse and James Richard make a number of statements that are misleading and reach some conclusions that do not comport with the facts.
In pointing out that overall OPEC production capacity is actually lower today than in 1980, the authors oversimplify a somewhat complicated course of events. After world oil demand peaked in 1979, it did not really recover until 1989. During the intervening decade, demand for OPEC crudes was subdued. OPEC producers thus did not need to increase or even maintain their existing production capacity, which had previously been built up to meet what was expected to be a much higher level of demand in the early 1980s. Saudi Arabia allowed its capacity to decline from more than nine million bpd in 1980 to roughly seven million bpd by the mid-1980s. Many other events, then and now—the Iran-Iraq War, the devastation of the Kuwaiti oil fields during the Persian Gulf War, the continuing oil embargo on Iraq, and U.S. legislation restricting foreign investment in Iran—have also restrained the growth of production capacity of OPEC members.
The authors assert that Middle East producers have not been able to expand their resources beyond the levels that international companies achieved before they were nationalized in the 1970s. They ignore the fact that Saudi Arabia has increased its production capacity from seven million to more than ten million bpd since 1980. The giant but previously inaccessible Shaybah field was developed by Saudi Aramco and brought on stream in 1998. Saudi Aramco successfully financed and managed this massive project, including all the planning, design, construction, drilling, geological and reservoir analysis, and development and production. Additionally, the Hawtah field in central Saudi Arabia and several other nearby fields were discovered and recently developed by Saudi Aramco. Finally, Saudi Aramco has added about five trillion standard cubic feet of natural gas to its reserve base every year, and it plans to double its gas production over the next two years.
Morse and Richard also state that Saudi Arabia has been unable to increase its production capacity for 20 years. With about three million bpd of spare production capacity already installed (which the authors acknowledge), the logical question is not why additional spare capacity has not been developed, but why Saudi Arabia would have wanted or needed to increase it further.
In describing their perceptions of how Saudi Arabia has employed its spare capacity in recent history, Morse and Richard cite two examples that are apparently meant to suggest that Saudi Arabia was attempting solely to regain price control within OPEC, rather than to benefit consumers in the industrialized world. The examples come from 1985, when Saudi Arabia sought a fairer sharing of production restraint through quotas, and the late 1990s, when the kingdom wanted to counter significant overproduction by another OPEC member. On each of these occasions, the primary beneficiaries were the consumers, not Saudi Arabia. Moreover, the authors infer that Saudi Arabia uses its spare capacity only to teach others in OPEC a lesson in conformity. Their article completely overlooks the much more important responsive and responsible actions taken by Saudi Arabia during the Gulf War to stabilize prices and meet the world's consumption needs by making up for lost production from Kuwait and Iraq.
The authors also incorrectly suggest that Saudi Arabia supplies cheap oil to the United States as a quid pro quo for a favorable U.S. policy toward Saudi Arabia. Saudi Arabia has a clear strategy to maintain its market share in all major markets, including but not exclusively the important U.S. market. Under this strategy, Saudi Arabia makes available ample supplies of crude oil to the United States and other markets, which includes catering to customers' preferences for the crude oils most appropriate for their refinery feedstock needs.
Furthermore, Saudi Arabia sells crude oil only on the basis of prevailing market prices in all world markets. Neither the Saudi government nor Saudi Aramco sets the price of Saudi crude oil. Saudi Aramco sells Saudi crude oil at prices based on the prices of selected "benchmark" crudes, which fluctuate constantly, reflecting changing local and global market conditions.
With its prolific reserves, Saudi Arabia can easily increase oil output to meet demand for decades to come. Oil-consuming countries such as the United States should take comfort in the immensity of Saudi Arabia's existing and potential spare production capacity and in the kingdom's demonstrated willingness to use it for the mutual benefit of consuming nations in times of need. Saudi Arabia's responsible approach to development and management of these resources will preserve and enhance its traditional role as the key, and the most reliable, energy supplier to the West and the rest of the world.
ABDULLATIF A. AL-OTHMAN is Executive Director of Saudi Aramco Affairs.
Cyrus H. Tahmassebi
Edward Morse and James Richard state that Saudi Arabia, in its quest to maintain a dominant position in the U.S. oil markets, offers a $1 per barrel discount to American oil companies. Assuming a daily import of 1.7 million barrels of Saudi oil into the United States, they argue that this discount amounts to an annual subsidy of $620 million to American consumers. Although the arithmetic may be correct, the characterization of this amount as a subsidy to American people is wrong and misleading. In fact, Saudi Arabia offers neither a discount nor a subsidy to American consumers. The so-called $1 per barrel discount is nothing more than the difference in transportation costs that the Saudis have to absorb if they want to sell their oil in distant U.S. markets rather than in Europe or Asia. U.S. oil companies run highly sophisticated refineries with great flexibility. They constantly evaluate the economies of running different types of crude oils and switch from one type to another based on this evaluation and product prices in their markets. Therefore, if Saudi Arabia tried to recoup additional transportation costs by raising its prices or aimed to receive the same revenue on a given type of crude oil from its different export markets, it would find its market share eaten up by competitors who happened to be closer to these markets. In the United States, its main competitors would be Canada, Mexico, Venezuela, and oil producers in North Africa.
As Morse and Richard explain, Saudi Arabia is eager to retain a dominant position in the United States because of the latter's market size, growth potential, and stability. The U.S. markets also provide diversity, and Riyadh has a political interest in remaining America's biggest oil supplier. Nevertheless, even if the United States imported no Saudi oil, it is difficult to imagine a scenario in which an interruption of Saudi supply would not have an impact on U.S. markets. Given oil's fungibility and the integrated nature of world oil markets, a severe interruption in Saudi Arabia is likely to have virtually the same price impact whether or not America imports Saudi oil. The United States will therefore continue to defend Saudi Arabia and the flow of its oil to world markets, even if it one day imports much less Saudi oil. It might be much more difficult, however, to explain the U.S. intervention to the American public if little or no Saudi oil were imported.
In discussing the potential growth of oil production in the former Soviet republics and its adverse impact on Saudi Arabia, the authors seem to have gone overboard. If the annual increments in production in the post-Soviet states remain in the half-million-barrel range (which may turn out to be optimistic) and world oil demand grows at the rates the authors allude to, demand for Saudi oil will continue to rise; it is just that the rate of increase in demand for Saudi oil will be less robust. And these are not new trends that the authors point to: the Saudis have been concerned about the potential growth in Russian and Caspian basin production ever since the collapse of communism. Furthermore, the authors overlook the potential threat to Saudi oil dominance from Iraq, which has the resources to produce at least six million barrels a day. If this potential is realized after Saddam is gone, it will have a much greater commercial and political impact on Saudi Arabia and the other Persian Gulf oil producers than will the gradual incremental increases in Russian and Caspian production.
In addition, Morse and Richard accept two widespread misconceptions about Saudi "spare production capacity." First, they, like most other analysts, have taken the position that the Saudis have traditionally adhered to a plan that calls for maintaining a certain amount of spare capacity solely for the purpose of keeping oil prices stable if there is a disruption in supply. Second, the Saudis have absorbed the huge cost of this plan because of their deep concern about the long-term adverse impact of price volatility on world demand for oil.
A close scrutiny of the Saudi oil policy, however, reveals quite a different perspective. Saudi spare capacity has emerged often not because of a well-conceived advance plan, but as a result of their miscalculations about future demand for oil. For example, in the late 1970s and early 1980s, Saudi production and capacity reached as high as ten million bpd. But due to a worldwide recession, a partial production restoration in Iran and Iraq, and the kingdom's decision to defend the prevailing oil price, demand for Saudi oil tumbled to three million bpd in 1985. Thus, the kingdom faced a huge "unplanned spare production capacity" for years to come. The mere existence of this unused capacity did serve Saudi Arabia quite well during the Iraqi invasion of Kuwait. The Saudis were able not only to fill the gap created by the resulting supply disruption but also to use their spare capacity as a bargaining chip to perpetuate their relatively much bigger production quota. Thus any attempt to portray the Saudi spare capacity as an act of altruism is profoundly misleading.
CYRUS H. TAHMASSEBI is President of Energy-Trends, Inc.
In "The Battle for Energy Dominance" we argued that the revival of the Russian oil industry had geopolitical implications that could be ignored neither by Saudi Arabia and other oil exporters nor by OECD governments. The article was not intended to forecast what would happen over the next 20 years in the international energy arena.
Still, we have stepped on sensitive ground. Oil is an inherently political commodity, particularly when it comes to determining who can obtain the lion's share of the rents from its production. We pointed out that the OPEC countries' (among them Saudi Arabia's) production capacity is no higher now than it was 20 years ago. We did not impugn Saudi engineering expertise or underestimate the country's reserve base. Rather, we sought to illuminate a paradox: the country with the world's largest and cheapest oil has boxed itself in by targeting a price band that guarantees prices are high enough to finance competitors and simultaneously puts physical limits on the amount of oil it can sell. High prices and market share are mutually incompatible.
Two developments that have been highlighted by September 11 will inevitably affect the geopolitics of energy over the next decade. First, the oil-importing countries need to confront an uncomfortable problem. It is well and good to rely on Riyadh as a replacement when other oil sources are disrupted. But what are the options if a disruption cuts off Saudi oil itself?
Second, Russian oil companies have been undergoing a transformation and, in the process, are reinvesting aggressively with one simple rule of thumb—obtain the highest rate of return on invested capital whenever and wherever possible. Since the leaders of OPEC and Russia got very publicly reacquainted last fall, oil and petroleum product exports from the successor states of the Soviet Union are up 690,000 bpd, an increase of 13.7 percent that accounts for virtually all of the petroleum added to world markets during this period.
It is Russia's export infrastructure of pipelines and ports—a potential area of foreign investment—rather than its resource base or production capacity that serves as the real impediment to increasing exports. This year, in an effort to overcome the limitations, two major Russian oil companies, Yukos and Lukoil, began deliveries to the U.S. market. These companies believe that after proving the economic viability of such shipments they can propel Russia's share of the U.S. market from being virtually negligible to some five percent of total consumption.
Russia's moment has therefore arrived. Since April, Royal Dutch Shell, TotalFinaElf, and BP have made commitments that could bring billions of dollars in new investments over the next five years. They have done so in a burgeoning market economy that is becoming increasingly dynamic. Moscow and the private sector are now reinvesting in the transformation of the entire Russian economy, which, as a result, will make energy a smaller and less vital component of the country's GDP in the coming decades.
Of course the situations of Saudi Arabia and of Russia could change quickly, but change would be the result of political circumstances rather than the countries' resource bases alone. Saudi Arabia could, for example, renounce its price-target strategy and opt, as it did in 1985, for a market-share strategy instead, doubling its production within a few years and reducing the price of a barrel of oil to under $10. It could also undergo revolutionary change that could result in far lower output in the years ahead. Either way, the political fallout would be extensive. With the price of a barrel of oil actually having decreased in value in real terms over the past several decades, opting for a market-share strategy would be consistent with long-term Saudi policy of maximizing the value of its wasting energy assets for the benefit of its citizens.
Similarly, for decades the ravenous appetite of the Soviet Union's inefficient industrial complex consumed the country's hydrocarbon production with little or no value added. Even at a peak production of 12 million bpd, the former empire only exported 2 million of them. Our essay argued that this has changed forever. In fact, if President Vladimir Putin is able to restructure Moscow's energy monopolies, RAO UES and Gazprom, and end the massive energy subsidies in the domestic Russian market, more of the energy currently flowing into inefficient domestic enterprises will be available for export.
Together with additional investments by international oil companies in Russia and in other successor states to the Soviet Union, oil and gas production from those states could well take the lion's share of new market growth for a decade or longer. This is especially likely to be the case if oil demand continues to languish as it has for the past seven years. Russia, meanwhile, has become a democracy and a full-fledged member of the G-8 community of countries with their uniquely defined common cultural, economic, and political interests. If Russia and the other former Soviet states expand their energy supplies, as their potential indicates they can, what would be the repercussions for Saudi Arabia and other oil exporters, whether in OPEC or outside the producer cartel?
Saudi Arabia has one unique attribute: it is the only oil producer that maintains, as a matter of policy, spare production capacity regardless of what it takes. The world benefits from Saudi Arabia's investment; so does the kingdom. But there are consequences to the world's dependence on Saudi oil that can perhaps no longer be ignored.
There is little doubt that the global oil market operates and fluctuates within often confounding political realities. On a daily basis, the market is merely able to take into account the price of short- to medium-term economic and political events that affect supply and demand. The impact of the long-term political reality is why this debate continues to unfold within these pages.