The High Price of Oil: A Saudi Deal? 2333 GMT, 000912

At a time when high oil prices are sending ripples of concern throughout the West, Saudi Arabia suggests it may increase its oil production beyond the recent agreement of the Organization of Petroleum Exporting Countries (OPEC).

Riyadh has also submitted a request to the United States for a major arms purchase. Evidence suggests Riyadh may be linking its arms request to its willingness to boost oil production.

OPEC agreed Sept. 10 to increase oil production by 800,000 barrels each day. The very next day, Saudi Oil Minister Ali Nuaimi reportedly said Riyadh could pump more oil, if necessary, to lower prices. We can trigger the mechanism at any time, Nuaimi said, referring to an OPEC price-band mechanism, which triggers an increase of 500,000 barrels daily if prices stay above $28 for more than 20 days.

Nuaimis words indicate the Saudis may not wait until Nov. 12, when OPEC is to review the effect of the Sept. 10 decision. Despite OPECs decision to boost production, oil prices currently near $34 will stay high throughout the winter.

Global demand in the first half of the year has grown by at least 800,000 barrels; at best, an increase of that much will bring a very brief dip in prices, according to the U.S. Energy Information Administration. Saudi Arabia, Washingtons closest ally in the cartel, lobbied for an increase of 1 million barrels  the smallest amount that could effectively bring down soaring oil prices.

High level-diplomatic traffic suggests a link between Saudi Arabias arms request and its support for an oil production increase. Riyadh needs Washingtons approval to go ahead with the arms purchases, and Washington needs Riyadhs support for lower oil prices  a key issue during a U.S. presidential election year.

Before the OPEC meeting, President Clinton met Saudi Crown Prince Abdullah in New York, on Sept. 7. Following their meeting, Clinton confidently told reporters that he had secured Abdullahs support in bringing down high oil prices. The next day, Saudi Arabia requested U.S. arms purchases worth $2.7 billion, according to the Pentagon.

The Saudi request includes a $1.6 billion deal for contractor technical services, spare parts, support equipment, and simulators for F-15 aircraft in the Royal Saudi Air Force. Additional requests include 1,827 TOW 2A missiles, advanced tactical communication systems, and 132 various light armored vehicles to modernize the Saudi Arabian National Guard (SANG).

The arms deal appears ready to go forward without a hitch. After announcing the request, the Pentagon emphasized Saudi Arabias status as a highly valued ally. Additionally, Riyadh made no proposals for complicated offset agreements  under which contractors must reinvest some of their profits in the purchasing country. As well, American companies Boeing and Raytheon will benefit if the deal goes through. Boeing owns half of Al-Salam Aircraft Co.  the prime contractor. Raytheon Corp. will also be a principal contractor.

The deal marks an important shift in U.S. alliances to the Saudi royal family. Saudi Defense Minister Prince Sultan has historically been the key U.S. ally in Riyadh while Crown Prince Abdullah has been cooler toward Washington. Sultan controls the regular military while Abdullah controls the national guard; Abdullah also recently took control of the kingdoms oil policies. The United States now appears to be dealing more with Crown Prince Abdullah, who in turn will benefit from the military equipment earmarked for the guard.

Saudi Arabia may increase oil production in the weeks leading up to the November OPEC meeting. But prices are likely to stay high. Indeed, oil futures barely dipped $1 after the oil cartel announced it would boost production, effective Oct 1. Additionally, the Saudi Arabian arms request is likely to progress without delay

http://www.stratfor.com/MEAF/commentary/0009122333.htm

-- Martin Thompson (mthom1927@aol.com), September 15, 2000