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The Saudis: Between Iraq and ...

“Blood is thicker than water, but oil is thicker than either.” That thinking has kept the United States and Saudi Arabia close for decades. But their bond is now wearing thin. By Michael Moran.
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“Blood is thicker than water, but oil is thicker than either.” That old oil industry adage aptly sums up the bonds that have held together the Saudi-American relationship for nearly three decades. But even with oil as a powerful handmaiden, the marriage contained little warmth: America, the proselytizer of liberty, champion of free markets and chief backer of Israel, had little in common with the dictatorial House of Saud, proponent of fundamentalist Islam, the liberation of Palestine and chief manipulator of OPEC, the world’s oil cartel.

“It was an arranged marriage,” says a powerful Saudi financier who would not allow his name to be used for this article. “Now, I fear it has gone cold, and depending on what is said during the divorce, there could be worse to come.”

Over the next year, if indeed the United States leads an international military campaign against Saddam Hussein, the very basis of the U.S.-Saudi relationship may be transformed.

The comfortable arrangement Washington and the Saudis have profited from over the past several decades seemed impervious to critics’ barbs, whether they were human rights activists aghast at Saudi torture and repression or Israeli officials objecting to sales of sophisticated U.S. weapons to a potential foe.

But problems now threaten to breakup this arrangement. Among them:

Questions in Washington about the longevity and liability involved in embracing the Saudi monarchy. The attacks of Sept. 11 awakened American policymakers to the long-term consequences of supporting a deeply unpopular regime in a world where terrorists might be able to deliver weapons of mass destruction.

Alternative sources of oil from countries outside of the OPEC cartel that involve less bothersome political and moral tradeoffs: Chief among these, oil from a reinvigorated Russian industry, from struggling West Africa, Colombia, Mexico and from within the United States as well.

The prospect of an American military occupation of Iraq, or even an American-backed Iraqi government in Baghdad. This scenario raises the possibility that Iraq, a nation with the world’s second-largest known oil reserves — one that will be eager to produce at maximum capacity to fund post-war rebuilding — will march to a tune written not in Riyadh but in Washington, possibly positioning a future Iraqi government to supplant Saudi Arabia as the world’s energy superpower.

For the family that has ruled Saudi Arabia like a family business for the better part of the last century, the policy of playing one hand (America) off against the other (radical Islam) has paved the way for a diplomatic, economic and political disaster.

The Saudi royals have long fretted about the domestic unpopularity of their alliance with America, largely due to American backing for Israel.

Nonetheless, the royals gambled that American backing in the oil markets, plus the security provided by American military power, would allow the oil-based alliance to continue. Just to hedge their bet, however, the Saudis funneled money to radical Islamic causes around the world, in effect buying off the domestic zealots who might otherwise turn against the monarchy.

That gamble may now fail, though the Saudis continue to hold out hope they can survive changes in their relationship with the United States.

“The [Saudis] know the relationship is not going back to where it has been,” a State Department official says. “They are not right now willing to give up on it, though. Remember, viewed from Riyadh, the most important goal around is controlling OPEC, and the most important lever they have to do that is a continued good relationship with the big consumers in the West.”

Meanwhile, Saudi Arabia suspects that the U.S. and Russia are plotting a carve up of Iraq’s enormous oil assets, along with France and other European powers in the aftermath of a conflict. According to most estimates, Iraq’s current production capacity of about 2.7 million barrels a day could be increased dramatically within five years if investment flowed liberally.

One group, the Center for Global Energy Studies in London, believes that Iraq may turn out to have oil reserves even larger than Saudi Arabia’s.

“If Iraqi oil is fully developed and Iraq reaches 7 (million) to 8 million barrels of oil a day in four or five years, then Iraq will replace Saudi Arabia as the guarantor of world oil supplies,” says Dr. F.J. Chalabi, a former deputy oil minister in Iraq who now runs the center. “In effect, the oil weapon is neutralized.”

The current landscape leaves the royal family with no easy route forward. Some analysts suggest that, should it become clear that American and allied oil firms are carving up Iraq as a kind of Western strategic oil reserve, the Saudis will be tempted once again to unsheathe the oil weapon while it still has some teeth. Through OPEC, the Saudis could disrupt the flow of oil from the Persian Gulf region to the big economies of Japan and Western Europe. as they did in 1973 and again, somewhat less dramatically, in 1979.

Others believe the Saudis will be more conciliatory. Indeed, analysts say that there is one way for the Saudis to salvage their influence even if Iraq’s oil fields do wind up beneath an American occupation force: ceding Iraq’s marketshare back to the post-Saddam regime in Baghdad.

In the days before the first Gulf War, when Iraq was an OPEC member in good standing, its fields produced some 3 million barrels of oil per day.

When U.N. sanctions against Iraq took effect in 1991, Saudi Arabia gladly picked up the slack — in effect, taking Baghdad’s market share. A goodwill gesture like this by the Saudis toward an Iraq that needs to rebuild may help U.S.-Saudi relations, and it would not hurt the monarchy in the eyes of the Arab world, either.

“The Saudis may see it in their interest to reduce production in favor of Iraq,” says Chalabi, a close relative of Ahmed Chalabi, the leader of the anti-Saddam opposition group, the Iraqi National Congress. “In 1990, when the Gulf War began, Saudi Arabia’s excess capacity replaced lost Iraqi production, stabilizing prices but also taking market share from Iraq. Giving it back would not impact them severely, and it may be a good move.”

Chalabi and other experts note that such a move could have the added benefit of helping stabilize prices by luring Iraq once again into OPEC’s quota system.

“A lot will be dependent on whether the new regime in Iraq is interested in following OPEC rules or not,” says Samer Shehata, an expert with the Center for Contemporary Arab Studies in Washington. “A U.S.-led oil industry in Iraq will pose a major challenge to Saudi’s position as market leader.”

The United States, along with Russia, France and China, all nations whose oil firms will stake a claim on post-war oil commerce in Iraq, are likely to seek to prevent Iraq’s oil from falling again under OPEC’s sway.

“At the end of the day, all the talk of a ‘carve up’ is overheated,” the State Department official says. “Suffice it to say, the U.S. would be satisfied to see Iraq emerge as a democracy, and democracies are not something you generally find in OPEC.” intern Lalita Aloor contributed to this report.