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The Prize

Daniel Fisher, Forbes Magazine, 11.12.01

The war against Osama bin Laden is also a contest for the world's largest producer of oil--and a way of life that underlies the American economy.

Hijackings and Anthrax could be just a warm-up to a very different kind of terrorism. The next thing we may have to worry about is a civil war in Saudi Arabia that turns oil into a weapon against the U.S. economy.

Forget all the rhetoric about ousting infidels and saving starving Iraqis and oppressed Palestinians. Osama bin Laden's primary goal is to overthrow the ruling Al Saud family of Saudi Arabia. This subpopulation of 30,000 (in a country of 22.7 million) includes some 5,000 princes who control virtually all aspects of government and the military. Success would turn the kingdom's 260 billion barrels of crude--25% of the world's proven reserves--over to hostile hands. A fundamentalist government in Saudi Arabia would be "ten times more powerful [than] Iraq or Iran," says Nawaf Obaid, a Saudi-raised oil expert and Ph.D. candidate at MIT who has written extensively about internal struggles in Saudi Arabia. "They could make the Iranian mullahs look like babies."

Most observers, Obaid included, consider such a revolution unlikely. But bin Laden, Saudi Arabia's own homegrown terrorist, could wreak havoc with oil supplies in other ways--starting with simply surviving the attacks. The longer bombs fall on Afghanistan, the stronger the sympathy for the militants. The Al Saud family is vulnerable to intense internal pressure, especially from the ulema, or senior Muslim clerics. These are the self-appointed guardians of Saudi Arabia's dominant Wahhabi faith, a puritanical strain of Islam from which the royal family derives its legitimacy. The ulema could force the rulers to choose between loyalty to Wahhabism and adherence to a West-leaning policy favoring stable oil prices.

It has happened before. Threatened by Iraq, the house of Saud tilted westward during the Gulf war and kept exports flowing. But in 1973, Obaid suggests, the ulema pushed King Faisal to impose an oil embargo on the U.S. to punish it for supporting Israel in the October war of that year--helping to shove America into a 15-month recession.

The U.S. is even more dependent on Saudi oil than it was when we were driving gas-guzzlers in 1972. Even as the average car's fuel efficiency has risen 58% since then, U.S. oil consumption has risen 19% to 19.5 million barrels a day. Domestic oil production over the same period has fallen 39% to 5.8 million barrels. The rest of the crude is imported, with 1.5 million barrels coming from Saudi Arabia, a close second to Canada.

America imports almost as much oil from Mexico and Venezuela. But the Saudis hold the whip hand in the oil market, thanks to their ability to increase production by as much as 2.5 million barrels a day--or cause a worldwide shortage by turning off the spigots. A terrorist bomb like the one that destroyed Khobar Towers in Dhahran, killing 19 U.S. servicemen in 1996, could achieve the same thing as an embargo by taking out Saudi Arabia's Ras Tanura export terminal, which can pump up to 5 million barrels a day into supertankers. "It doesn't matter if we find 1.5 million barrels from somewhere else, if 5 million barrels a day are removed from the world market, prices will spike," says David Pursell, a director at Simmons & Co. in Houston.

Any price increase has devastating effects on the U.S. economy. Each dollar increase in the per-barrel price of oil trims airline margins by half a percentage point and cuts profits by $450 million, says Goldman Sachs analyst Glenn Engel. Consuming 45 billion gallons of fuel a year, truckers are vulnerable, too: Trucking-company failures tripled from the previous year to 1,320 in last year's third quarter, as fuel prices rose 50%.

The pain has a widening circle. Since oil is easily substituted for natural gas in many industrial and electrical turbines, prices of the two commodities tend to be correlated (coal less so). Stephen Brown, a senior economist at the Federal Reserve Bank of Dallas, estimates that a 30% increase in the price of oil, sustained for two years, would trim U.S. gross domestic product by nearly 0.8%, or $800 billion a year, and decrease employment by 0.3%.

And that's just an increase to $28 a barrel. Push the price of oil past $40 and refiners and petrochemicals manufacturers wither as economic activity plunges and costs rise faster than the prices they can charge.

The Strategic Petroleum Reserve could stave off calamity only so long. With 570 million barrels of crude, it covers 50 days of imports. Even if Vice President Dick Cheney's energy plan were adopted tomorrow, it would take two to three years to meaningfully increase North American production.

Nothing new about this scenario. The U.S. and the Al Saud family have been in an awkward embrace since the 1930s, when Harry St. John Philby, father of the infamous Communist spy Kim Philby, converted to Islam in order to serve as a top-level intermediary between then-King Ibn Saud and Standard Oil of California (now ChevronTexaco). Even as World War IIwas raging, Franklin D. Roosevelt took a detour on his way home from the Yalta conference to meet with Ibn Saud, promising the cash-strapped ruler $20 million in aid and a private DC-3 in exchange for honoring the U.S. oil concession.

The Al Saud family has been fighting to protect the flow of oil and dollars ever since--against conservative religious elements that have little sympathy for the U.S., partly because of its support of Israel. Out of that discontent--aimed as well at Saudi rulers, who are vilified as ineffectual and corrupt--have emerged extremists like bin Laden, with the enthusiastic backing of some wealthy Saudis.

You might ask why the royal family tolerates violent dissidents who seek its destruction and why it doesn't do more to cut off the finances of terrorist groups. (Ten of the 19 hijackers are thought to have been from Saudi Arabia.) But that's like asking why the store owner pays protection money to the mob when that money is used to hire thugs to extract yet more protection money. The millions of dollars that flow to groups like bin Laden's al Qaeda are, in effect, a payoff to avoid civil war. The royal family has learned to cut its enemies just enough slack to keep itself in power. It learned that painful lesson after fundamentalists seized the holy site of Mecca in 1979 and forced then-King Khalid to rout them in a bloody two-week battle. "That's when the determination set in that never again would [the royal family] have someone to their right on religious issues," says Richard Murphy, senior fellow for the Middle East at the Council on Foreign Relations and U.S. ambassador to Saudi Arabia from 1981 to 1983.

Key to a peaceful kingdom are stable oil prices. "Where they get in trouble is when oil is down around $10 a barrel," says David Butter, editor of Middle East Economic Digest. That's because the Saudi government--nominally run by King Fahd, who suffered a debilitating stroke in 1995, but actually controlled by his half-brother Prince Abdullah--still gets 70% of its revenue from oil. A decline to $10 a barrel from the recent $22 would slice revenues from $66 billion to $30 billion, well shy of the estimated $57 billion 2001 budget. That hits the country's staggering 15% unemployment rate--20% for people 30 and younger, the breeding ground for new militants--and does little to help provide for a population that is growing at 3% a year.

Like it or not, the U.S. may be betting big on the survival of the house of Saud for decades to come. That helps explain why the Bush Administration has chosen not to be confrontational about the Saudis' lack of help on intelligence, as well as closing down Islamic "charities" since the Sept. 11 attacks. Ed L. Morse, an executive adviser at Hess Energy Trading Co., has studied the fuel dilemma as chairman of the Joint Task Force on Strategic Energy Policy formed by the Council on Foreign Relations and the James A. Baker III Institute at Rice University. His conclusion is radical: Shift from oil to alternatives like fuel cells burning hydrogen. "The cost of government subsidization of technology to change dependence on the internal combustion engine," he argues, "would be less than the military costs of defending Saudi Arabia."

-- mark (, November 01, 2001

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