SO NOW WE KNOW: The Saudi Arabian regime is no friend of ours. Sure, they sell us oil and tell us that they keep the OPEC cartel from pushing prices through the roof. But their refusal to go along with OPEC price hawks is self-serving. They have huge wealth stashed away in investments here and in other Western countries, which means that they don't want oil prices to go so high as to trigger a serious recession that would depreciate the value of those investments.
So the Saudis grumble when oil prices hit a "low" of $20 but keep selling the oil that costs them somewhere between $2 and $5 per barrel to find and produce. And they worry that even that level of exploitation of the world's consumers--a profit of $15 per barrel isn't exactly chopped liver--is not enough to support the lifestyles of thousands of indolent princes, while at the same time continuing to bribe the country's work-averse young masses with the free telephones, water, almost-free gasoline, and other goodies that keep them from overthrowing the monarchy. Saudi Arabia's budget, which counts on oil exports for 70 percent of its revenues, will be in deficit this year, in good part because of princely payments to the royal family and handouts to the restless and unemployable Ph.D.s in Islamic studies being churned out by the nation's religious schools.
As Prince Bandar, the kingdom's ambassador to the United States, pointed out in an unguarded moment--of which he has very few--when a democracy's leaders lose touch with the people, they lose their jobs; when a monarchy's leaders lose touch with their subjects, they lose their heads. Which is why the royal family (numbering by some estimates as few as 7,000, by others as many as 30,000) got so nervous when Sheikh Hamoud al-Shuaibi, a Saudi cleric, seemed to include the royals in his recent declaration of a holy war against "whoever supports the infidel"--a category that might well include a regime that allows American soldiers to be stationed in Saudi Arabia, even if they are there to protect the country from being overrun by Iraq.
And which is why, as a number of devastating articles in the weeks since September 11 have made clear, the rulers of this land that sits atop 25 percent of the world's proven reserves of oil have been playing a double game. Even as the Saudi regime has accepted American protection and nurtured its longstanding relationship with Washington, it has also been playing footsie with the organization that murdered thousands of Americans in the World Trade Center and the Pentagon.
This means that when we finish with our work in Afghanistan, if we take seriously George W. Bush's pledge to root out those who harbor terrorists or support them in any way, we will eventually have to decide what to do about Saudi Arabia. We will have to take seriously Crown Prince Abdullah's August letter to President Bush, in which the Saudi ruler wrote that "a time comes when peoples and nations part. . . . It is time for the U.S. and Saudi Arabia to look at their separate interests." Great idea.
BUT WHAT ABOUT that oil? If push comes to shove can we do without it? Not a chance. America consumes almost 19 million barrels of oil every day, and produces fewer than 8 million. The balance comes from overseas suppliers, with Canada and Saudi Arabia each providing some 15 percent of our imports, Venezuela 14 percent, Mexico 11 percent, Nigeria about 8 percent, and Iraq about 6 percent.
We are, it should be noted, dependent not only on those countries from which we buy oil directly. Oil is a fungible product, and a shutdown of production in any country, even one from which we buy little oil, will affect the price we pay our own suppliers.
To say that not all of the nations on which we rely are exactly friendly to the United States is an understatement. The Saudis can be counted on so long as the regime in place is one that needs the money from oil sales. But it is not clear that the valves would remain open were bin Laden's crowd, or its equivalent, to take over. To those folks, cash would be less attractive than injuring the United States: They seem, for instance, to prefer caves to palaces. We know that Iraq, second to Saudi Arabia with almost 11 percent of the world's known oil reserves, wishes us ill, and periodically manipulates production to raise prices. Venezuela, which ranks with the Saudis in importance as a source of our imported oil, is run by a president whose hero is Fidel Castro, who is dedicated to bringing down "Western imperialism," and whose support of bin Laden is so overt that Washington has been compelled to recall our ambassador "for consultations."
When we look further down the ranking of countries blessed with significant reserves, we find that Iraq is followed by the United Arab Emirates and by perhaps the world's most famous ingrate, Kuwait, each with a bit more than 9 percent of the world's known reserves. We have less than 3 percent of the world's known reserves, about the same portion as neighboring Mexico. Canada, although rich in natural gas, has relatively small known reserves of oil that are economically recoverable at anything like current prices. Russia, the new "hot" area for oil exploration, has substantial reserves and, with large-scale investment, can significantly expand its production. But lacking sufficient pipeline capacity, Russia can't increase exports significantly before several billions are spent and at least five years pass. Besides, it is not unreasonable to question the wisdom of developing a new energy policy that markedly increases our reliance on a country that has yet to establish itself as a reliable geopolitical partner.
Even these figures understate our dependence on the Saudis. Enough oil is known to exist in the United States to maintain current production levels for about 10 years, and in Canada for about 8 years; the Saudis can tap their reserves for over 80 years without slowing output. There is worse: It is well known that the Saudis haven't really attempted to explore for new reserves because they already know precisely where some 260 billion barrels are located. "You don't plant potatoes when you have a cellar full of spuds," a grizzled denizen of America's oil patch once told me. Not only are the Saudis sitting on the world's largest known reserves, they are also the only country with existing excess capacity, and therefore the only country in a position to increase production quickly should some other supplier withdraw from the market or be knocked out of action.
In short, Saudi Arabia is and will remain the kingpin of the oil world, able to pump enough oil to satisfy America's thirst if it chooses. But should this regime come to believe that its survival requires unsheathing the oil weapon, or should a regime less wedded to cash flow come to power, supplies might be cut off. In the latter case, analysts would suddenly find themselves following the words of a bin Laden oil minister more closely than those of Alan Greenspan when they prepare their forecasts of the course of the American economy.
IN THE LONG RUN, then, if things continue as they have, we will increasingly be dependent on a shaky, despotic regime that uses the proceeds of its oil sales to support the gangs that aim to destroy us, and to educate its young to hate us, after skimming off enough to support its princes' penchant for yachts, women, and Johnny Walker Black Label. In a worse case, we will see our supplies controlled by a regime driven more by hatred than by greed.
This is not a new problem. Post World War II history is replete with efforts by administrations, Democratic and Republican, to free America from dependence on Saudi Arabia and its cartel colleagues. As I have noted in an essay for the Hudson Institute, when the Arabs first unsheathed the oil weapon in October 1973 in response to America's support of Israel during the Yom Kippur War, President Nixon responded: "Let us set as our national goal . . . that by the end of this decade we will have developed the potential to meet our own energy needs without depending on any foreign sources."
Not to be outdone by his predecessor, President Ford pursued the illusory goal of self-sufficiency by attacking both the supply side--encouraging greater use of coal and providing greater incentives for domestic exploration--and the demand side (auto fuel efficiency standards), while at the same time creating a Strategic Petroleum Reserve as a buffer against another shortage.
Jimmy Carter proved that failure to craft a successful "energy policy" is bipartisan. He created the Department of Energy to wage what he unfortunately termed "the moral equivalent of war" (which quickly became known by its acronym, MEOW, and didn't strike terror into the hearts of OPEC). The usual mix of supply-side subsidies and demand-side constraints followed, notwithstanding the failure of such efforts in the past, as President Carter appeared, sweater-clad, to urge Americans to shiver a bit more in the winter and sweat a bit more in the summer--and to do without hot water in federal facilities such as the restrooms of airports.
By the end of the 1980s, we were more dependent on imported oil than ever before. So George Bush the elder decided to meet the threat to our oil supplies created by Saddam Hussein's march into Kuwait en route to Saudi Arabia in a more direct fashion. He sent half a million troops and several aircraft carriers to the Gulf to defend a corrupt, despotic regime in which we would have no interest were it not sitting atop a large pool of oil (100 million barrels already found, much more awaiting exploration), and athwart the road to Saudi Arabia.
And there things have stood, with only trivial changes in U.S. policy in the decade since. The new Bush administration's attempt to develop an energy policy turns out to be, like many before it, a stew concocted to please pressure groups from the nuclear, oil, and coal industries, with side dishes to delight supporters of energy from renewable if not terribly reliable sources such as the wind and the sun. It is perhaps best described by the line attributed to that great philosopher Yogi Berra: "I came to a fork in the road, and I took it."
The best that can be said for this latest grand scheme for America's energy future is that it was developed before the terror attack on America made business as usual in oil markets more risky even than before. Now we know that it would be imprudent in the extreme to assume that the Saudi royal family will remain in Riyadh, rather than pulling up stakes and moving to the South of France and to London's Dorchester Hotel on a permanent, year-round basis. This introduces a further degree of uncertainty into an energy supply situation in which we are already in perpetual danger of a sudden cut-off of crucial oil. The unfortunate fact is that God saw fit to put the oil in places run by a lot of people who just don't like us.
In the post-September 11 world, we can forget about all of the subsidies the administration's plan would provide to increase electricity production. The market reaction to the short-term California shortage last summer--enough new capacity to produce a glut of electricity and a price collapse--shows that this is an area the government had best leave to the market. Besides, few generating plants any longer rely on oil as a fuel. The supply of natural gas can also be left to market forces: It is extraordinarily responsive to price changes, as the spurt in drilling when prices rose clearly demonstrates.
Oil is where the rubber hits the road in terms of national security. As far ahead as we can see, it is oil, refined into gasoline, that will keep the wheels of the economy turning. Nuclear can substitute for coal, and natural gas for both and for oil in stationary uses--like power generators--but it's safe to assume that engines that run on something other than gasoline will not be significant for a good long while. And this irreplaceable gasoline accounts for about 45 percent of all our oil consumption.
Those who think that we can reduce our dependence on the Saudi royals should think again. Sure, it is a good idea to increase the pace at which we develop our own reserves. But consider the possible contribution of the much-contested Arctic National Wildlife Refuge (ANWR). The best guess is that there are some 10.3 billion barrels of reserves to be had there and in abutting state and native lands, of which the pessimists guess about 4 billion are recoverable at today's prices, a figure that optimists would double. Applying a variety of rule-of-thumb estimates about how much can be produced and shipped in any year from a field that size, Howard Gruenspecht, resident scholar at Resources for the Future, estimates that at prices of around $20 per barrel we would get maybe one million barrels per day from ANWR. And that won't be until somewhere between 2010 and 2020, even if Congress acts promptly to open the area to drilling. By then, our consumption of oil, now running at about 19 million barrels daily, will have increased by a good bit more than what we will be getting from ANWR.
That doesn't mean that we shouldn't do all that we can, consistent with a market-based environmental policy, to increase domestic production. And we should of course diversify our supply sources, especially if we can persuade neighboring Mexico to allow us to invest in its oil industry, which is now a state-run morass so short of capital that it has allowed its known reserves to fall in half in the past decade.
But in the end, there is almost nothing that we can do on the supply side that will enable us not to care about the future of Saudi Arabia. Nor is there much relief in prospect on the demand side. Gruenspecht, who has more data about the oil demand and supply situation at his fingertips than any other expert, has run through some interesting calculations about the savings to be had by mandating tighter fuel efficiency standards, one of the centerpieces of any conservation program.
There are some 200 million cars and light trucks (the latter include SUVs, minivans, and pick-ups) on America's roads, with an average life of roughly 15 years. Vehicles seven years old or newer account for about half of all the vehicle miles traveled in any year. This means that eight years down the road, any tightening of standards now will still be affecting only half of the miles being driven. Only new vehicles, of which there are some 16 million produced in any year, would be subject to tighter efficiency standards, and not immediately, since those new standards would have to be phased in to give manufacturers time to adjust. Do some quick arithmetic and it turns out that a 25 percent increase in efficiency standards phased in over five years, now set at 27.5 miles for cars and 20.7 miles for light trucks, would, in a little over a decade, reduce consumption by a bit more than one million barrels per day. The full effect, which would not be felt until two decades from now, would be twice as large.
Throw into the policy mix Gruenspecht's pet program--auto insurance rates that reflect miles driven rather than being set without reference to how often you expose yourself and your vehicle to insured risk--and a 50 cent per gallon tax on gasoline, and you will reduce consumption immediately, but not by enough to change the hard fact of our dependence on Saudi oil. "It is hard to imagine that the world would be in good shape without Saudi Arabia," concludes Gruenspecht.
This leaves us with very few options. We can continue to ignore the Saudis' support of terrorists, and remain guarantors of the regime's survival, not abandoning it as we did the shah in Iran when the mullahs took over. We can, of course, throw in a bit of exhortation about democratic reforms, to which the response will undoubtedly be that such a path was what led the shah to his hasty exit. Asked some years ago what our energy policy is, I replied "aircraft carriers." That is as good a description as any of our present predicament. And it is about all we have to rely on at the moment.
It also leaves us with one overriding strategic imperative: We must make clear that in the event of an upheaval in Saudi Arabia, we will take control of, protect, and run the kingdom's oil fields, which American oil companies originally developed after paying substantial sums for the right to do so. This may be a difficult policy to defend in the post-imperialist era, but that doesn't make planning for this contingency any less necessary. Our State Department is creative; surely, if called upon, it would be able to figure out an arrangement for operating the oilfields that would safeguard our supply and win the blessing of a revenue-hungry regime with a stake in the continued flow of oil. And surely such a regime, if it did not exist, could be invented.
Before dismissing this as fantasy, consider that it is not very different from what we did in Kuwait, when we seized the oil fields from Saddam Hussein and put them in the hands of a friendly regime, one that remains dependent on us for its survival. In the end, we need the oil, they need the money, and, most of all, whoever is in power in these countries needs America to protect it from the Saddams and bin Ladens who are breathing down their necks.
We can do all the good things: increase domestic production, diversify sources of supply, finally learn how to set up an adequate Strategic Petroleum Reserve that does not discourage private companies from carrying inventories, and decrease our reliance on oil by conserving and pushing technologies that use fuels other than oil. Programs once deemed too costly to pursue might well make sense in this new era of heightened threats to our oil supplies.
But do all of these things, and we still end up with our future tied to Saudi oil. Unless, of course, we are willing, really willing, to pay the price of independence by raising and re-raising the price of oil, taxing imports and taxing them some more, until they are so expensive that we just don't import much oil, and are therefore free to set our foreign policy independent of coalitions that undermine our war on terrorism and seek to force us to abandon Israel to the tender mercies of Arafat and his Arab allies. Something around $5 per gallon should do the trick.
Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of regulatory studies at the Hudson Institute, and a columnist for the Sunday Times (London).
November 19, 2001 - Volume 7, Number 10