The End of the Affair

The recent Saudi-China oil agreement sent shock waves through an America already reconsidering its relationship to the Kingdom.  

The United States is not exactly feeling at ease with its Saudi allies at the moment. After the February 2006 attacks on the Abqaiq Oil Facility, oil prices hit creeped towards the record prices of last year. Americans are hardly likely to be reassured by Saudi minister of Petroleum Ali Al-Naimi's statement that while $63 was not a stable price, $45 could be. Add this to a cottage industry of books on the relationship between the House of Saud and terrorism, and we can see the relationship between the two countries is very much up for discussion. 

In such a climate of uncertainty, mention of China can only set pulses racing. It is growing voraciously, and is currently Saudi Arabia's fourth biggest client in Asia, consuming 450,000bpd (barrels per day). Thus, the spectacle of King Abdullah in Beijing signing five different co-operation agreements shortly after Bush's state of the Union speech announced he will break the American addiction to (middle eastern) oil, raises some questions about the Saudi-American relationship. 

The beginning of a beautiful friendship... 

1993 could turn out to be a crucial year in Saudi Arabian history. It was the year China became a net importer of crude oil. Since then, the Chinese demand for oil has exploded. Some 40% of oil demand growth over the past four years is from China, and it is now the third largest crude oil importer in the world, after the United States and Japan.  

The visit of Jiang Zemin to Riyadh in 1999 initiated a 'strategic oil partnership.' This saw China opening its downstream sector to Saudi Aramco, the Saudi national oil company, while Saudi Arabia agreed to open some of its domestic oil and gas market to China. It is an arrangement that has allowed China to modernise its notoriously inefficient refineries while developing a relationship with the country with the biggest oil reserves on the planet. China now imports 60% of its oil from the Persian gulf, and projections indicate this number could rise to 90% in the next two decades. These deals are frequently on an exclusive basis, with the Chinese paying over the market price to ensure exclusive agreements.  

It is less clear that the exchange offers such immediate short term benefits to Saudi Arabia. Winter and Leverett, in an article for the Washington Quarterly, raise doubts about whether opening up gas resources to Chinese investment was coherent with the national policy of excluding foreign firms from the energy market. They quote a senior Saudi Aramco executive, who comments on the deal: "Well, getting foreign companies in was always about technology transfer. And we've achieved it, from Aramco to Sinopec!" 

Yet the Saudi strategy does not seem too dissimilar to its strategy with America. Contrary to a recently reprinted Foreign Affairs article, Saudi Arabia does not give a dollar discount on the barrel to the US consumer in return for political influence. Rather, this 1$ is the difference in transport costs between selling in America and Europe: if Saudi Arabia tried to raise the price they would find their market share eaten up by competitors. Saudi Arabia seeks to maintain a dominant position in the US market because of its dynamic growth of demand. Likewise, the relationship to China cements links to a rapidly growing market.  

There are also more pressing reasons that Saudi Arabia is open to overtures from China. Winter and Leverett argue that expanding their ties with China  is part of a Saudi hedging strategy to compensate for the changing relationship with the United States. China is a much more amenable partner than the United States, and as we have seen in its dealings with Sudan, it is none too concerned with bringing democracy to its business partners. America, on the other hand, has seen increasing criticism of the relationship between the House of Saud and terrorists, and increasing numbers of calls for reform. 

Business is Business is Business 

Saudi Arabia has been transformed in the American imagination in recent years. From being one of the staunchest opponents of communism during the cold war it has become a state indelibly associated with 911 in American eyes. Bush tried to address these concerns in his State of the Union address, claiming America will: "replace more than 75 percent of our oil imports from the Middle East by 2025" by moving "beyond a petroleum-based economy, and [making] our dependence on Middle Eastern oil a thing of the past." 

Several concerns underlied his speech. As oil prices remain high, there is increasing doubt about the ability of the Saudis to increase oil production at a rate that can keep pace with the increasing demand. Matthew Simmons claims that most of the large Saudi fields are already in decline, though his claims run contrary to most analysts, including the recently published report by the CERA (Cambridge energy research associates) who argue there will not be a peak before 2020 at the earliest.  

Perhaps more than any doubts about oil however, Bush's speech was motivated by the increasing perception that Saudi Arabia is unstable, and cannot be relied upon for America's energy needs.  

It would be a mistake to read to much into the speech. While America might be successful in reducing American reliance on importing Saudi oil, this would not reduce their reliance on Saudi oil. As Clawson and Henderson note in their Washington Institute report on reducing vulnerability to middle east oil shocks, even without importing a drop of Saudi oil, America is dependent on the market. Problems with Saudi oil would reflect in oil prices world-wide.  

What makes Saudi Arabia even more important is the question of surplus capacity. It is the only country in the world which can adjust the world market to sudden shortfalls in supply, as it did during the first Gulf War. Furthermore, while the long term price of oil is dependent on the market, the cost of short term price spikes, is not insignificant. Finally, in the present climate it remains highly doubtful that America would let a hostile government come into power in the centre of the Muslim world. For all the talk of ending America's dependency on the middle east, it is clear that they remain committed to a role there for the foreseeable future. 

The Choice 

What this role should be remains the heated question.  

The United States policy towards Saudi Arabia has always been split between realism and idealism. During the cold war, the two met happily in an anti-communism that saw American support for the monarchy. In Saudi Arabia, the fight against communism was an Islamic struggle that saw fighters go to Afghanistan. It is precisely this legacy, and the continuing closeness of the relationship between the House of Saud and radical elements that remains the question disputed in America today. 

The splits in how to handle Saudi Arabia are endemic of the disagreements about American foreign policy in general. Several commentators occupy an idealist position, and continue to argue for increasing the pressure on the House of Saud to make tangible reforms. While there has been some not insignificant reforms, Orkhrulik has pointed out that the irony of Islah (reform) is that it has tended to increase the power of the royal family. It has also tended to sidestep central questions of the reform of the House of Saud, the judiciary and the role of religion.  The idealist position has taken rather a knock in recent months however, with the recent election of Hamas in Palestine and the continuing disorder in Iraq reminding idealists of the possible unintended consequences of 'importing democracy.' From an American perspective, too hasty reform in Saudi Arabia would not be in their interests. As Bronson notes anti-Americanism is widespread and the sahwa movement is still very active. It is also important not to make any simplistic correlation between social and political beliefs. A social conservative does a not a political conservative make. 

However, such a policy would surely not be worse than its collary, a crass isolationism combined with the support for authoritarianism that Fukuyama argues would be the worst reaction to the failed idealism of Bush in Iraq. In Saudi Arabia such a policy would see increasing criticism and distance from the House of Saud, combined with a lack of positive pressure for change. While the House of Saud is not the fragile edifice some commentators seem to suggest, there are sufficient areas of concern that such a policy would fail to address the deep structural problems Arabian society is facing. 

The third option seeks to combine idealism and realism in a pragmatic idealism, as advocated by Bowman in Parameters. This would see pressure placed for the pace of reform, while appreciating the difficulties of moving too swiftly.  

Current American policy can be seen to encompass all three strains of thought. While Rice is talking about transformational democracy and the NSP document is being rewritten, in line with a more moderate neo-conservatism,  the adventure in Iraq continues. There is also a continuing strand of isolationism, as witnesses by the hysteria surrounding the attempt to buy  In the ongoing Dubai Ports  Such a reaction can also be seen, as Leverett and Bader note, in the decision to block the Chinese bid for UNOCAL, which just increased Chinese perception is cannot rely on the market for its oil needs and forced it towards more of the exclusive operations it makes with Saudi Arabia.  

None of this points to the end of the affair, but perhaps it is time to renegotiate the rules.