Saudi – American oil relationships

Yesterday, US President Obama met with King Abdullah of Saudi-Arabia. For those interested in energy history, this meeting was not without interest. It had a famous precedent with the meeting between president Roosevelt and the then King Ibn Saud at the end of the second World War. Aboard a US Navy Vessel, two completely different worlds met. The King was at that moment the sovereign in a feudal country of herdsmen. Roosevelt was steering his country through a terrible war that would definitely assert the US as a super power. The US acquired this position by embracing modernity more enthusiastically than any other country in the world. But somehow, the two of them found one another. Through the walls of cultural differences and translation, the two great statesmen managed to outline an alliance that lasts until today. The cement of that alliance was what it still is today: oil.

In the decades that would follow US oil companies developed the Saudi-Arabian oil industry. They discovered the world’s largest oil fields and made them produce barrels and barrels of oil. This oil bonanza catapulted the peninsular country forward in the lists of the world’s richest countries. It brought Ibn Saud and his family unfathomable wealth and geopolitical clout that far exceeded the size of the country and its population.

And then something intervened. After that same second world war, Jews from Europe settled in Palestine, a poor Arabian country. As their number grew, they became increasingly assertive. They started to fight a number of wars during which their military supremacy humiliated the Arabs. The powerful house of Saud sided with the Arabs with whom they shared descent and religion. The United States, pushed forward by a powerful pro-Jewish lobby at home, sided with Israel. All of a sudden the allies were pitted against one another. To put more pressure on the West, Arabian oil-producing countries, Saudi’s on top, decided to cut oil exports. A huge oil crisis ensued and US citizens blamed Arabs for the high prices that they paid for fueling their cars and heating their homes. Matters worsened when the Saudi’s decided to kick out the US oil companies that had helped them to surface their oil. They nationalized oil production activities in a company that ironically kept its name Aramco, which refers to the excellent Arab – American relationship. When Saudi citizens flew airplanes into New York office buildings on September 11, it became clear how much that relationship had become more and more problematic.

If you look at this history, you could imagine that President Obama and King Abdullah had a lot to discuss today. And what did they talk about? Oil prices. Mister Obama is worried about the recent spike of oil prices. As Saudi officials have asserted that they believe that the world economy is ready for oil costing 75 dollars per barrel, he is rightly worrying that Opec might be aiming for that price. He certainly doesn’t want the billions of dollars that he is pouring into the economy to flow into the pockets of oil producers. He doesn’t want oil price greed to kill the fragile economic recovery that is probably ahead of us. I am curious about the sort of economics that the Saudi economists apply to calculate the 75 dollar. How do they calculate at which price the economy is slowing down because of oil prices? When it was up at 150 dollar, it looks like these economists didn’t realize that it was killing purchasing power in Western economies. And wasn’t it declining purchasing power that made over-borrowed US citizens default on their mortgages, which sparked the credit crisis?

King Abdullah is worried about Mr. Obama’s plans to reduce the dependency of the US economy on oil consumption. If you consider the way in which US companies were kicked out of Saudi-Arabia three decades ago, it is rather surprising how long it took the US policymakers to come up with such a policy of reducing energy dependency. Again: isn’t it simple economics that demand is adjusted when prices rise?

President Obama is travelling through the Middle East with his hand extended towards the Arab world. Today he spoke at the university of Cairo, sowing the seeds of hope of a new relationship between the US and the Muslim world. Let’s hope that this can create a new political understanding that can be the basis of a constructive discussion on the world’s oil markets between the world’s largest oil producer and the world’s largest oil consumer. Let’s hope that what both men found in one another bore some resemblance of what their famous predecessors President Roosevelt and King Ibn Saud found on board of that US ship. Let them find enough friendship for Mr. Obama to be able to put some pressure on Saudi-Arabia and Opec’s decisions. But let them not be friends enough for Mr. Obama to forget about his policy of reducing energy dependency.

President Roosevelt meets King Ibn-Saud

President Roosevelt meets King Ibn-Saud

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