Confronting new realities in Saudi Arabia

Kate Gordon and Brian Katulis in a CAP cross-post.

The popular uprisings in the Middle East are yet another wakeup call on two fronts””the fragility of our world’s energy security and the inherent structural weakness in Middle East governments that lack popular legitimacy. While all eyes are on Libya and the growing threat of civil war, the coming eye of the storm may be Saudi Arabia, a critical player in the geopolitics of energy currently on the State Department travel warning list as a “dangerous and unstable” country.

To safeguard U.S. national security interests, the Obama administration needs to develop a forward-looking strategy that helps Saudi Arabia usher in a pragmatic political transition while offering continued support to ensure internal stability. These steps should include measures to move the authoritarian kingdom toward greater democracy, combined with efforts to help both our nation and Saudi Arabia diversify away from heavy over-reliance on oil and toward greater use of renewable and more efficient energy use. Easier said than done, of course, but it is not only possible but essential given the new realities of the Middle East.

Saudi Arabia is the world’s largest oil producer and exporter, with about one-fifth of the world’s proven oil reserves. Oil is key to Saudi Arabia’s internal economy, accounting for about 75 percent of its budget and 45 percent of its gross domestic product, the total output of its economy’s goods and services. The country’s dependence on oil for its economic growth has caused the kind of “resource-curse” problems that plague economies lacking diversification throughout the world: high unemployment, endemic corruption, low education rates, and the threat of acute budget and economic crises every time oil prices drop. But the world’s dependence on Saudi Arabia for oil has the potential to cause even greater problems.

Saudi Arabia has had enormous influence over world oil markets for decades. This first became clear during the Arab Oil Embargo of 1973-1974, when the Organization of Petroleum Exporting Countries, in reaction to American support for Israel during the Yom Kippur War, cut oil production by five million barrels a day. Non-OPEC countries were only able to make up one billion barrels a day in new production, and the resulting shortfall of four billion barrels a day immediately caused oil prices to rise over 400 percent in just six months. Since then, there has been no doubt that OPEC, and its major player Saudi Arabia, hold enormous influence over world oil prices. Non-OPEC countries cannot hope to make up the difference if OPEC either decides to turn off the spigot or experiences production disruptions due to political unrest or other disasters, as in recent days in Libya.

The violence in Libya also underscores Saudi Arabia’s unique position as the only OPEC country able to increase production enough to make up for other countries’ shortfalls””a situation that makes America even more dependent on this very volatile country. Saudi Arabia claims to have a “buffer” of about 2 million extra barrels of oil a day that it can choose to put into the world market at any given time (the U.S. government believes the spare capacity to be much higher). This means that every time there is a dip in global oil supplies, the world””and especially the oil-addicted United States””looks to Saudi Arabia to bail it out.

This happened most recently in 2008, when the Saudis increased production to 9.7 million barrels to counter worldwide price spikes caused by a potent combination of increased demand for oil from China and India, the steady weakening of the U.S. dollar, instability in the oil-producing regions of Iraq and Venezuela, and good old-fashioned speculation. It happened again last week, to make up for shortfalls from Libya.

So the Saudis have proven they can come to the rescue when they care to. But is it wise for the United States and the global energy markets to be so heavily dependent on a country whose government seems shaky and lacks popular support? And more immediately, is it wise for the United States to attempt to back the status quo in a country and region of the world where the status quo seems less sustainable each day?

The signs of Saudi Arabian unrest are worrying. Last week, King Abdullah bin Abdul Aziz Al Saud announced a $36-37 billion social welfare package upon his return from three months overseas for medical treatment. This emergency move was aimed at addressing rising food and commodities prices, unemployment, and an affordable housing shortage, but the effort was clearly an attempt to safeguard political stability as much of the rest of the Middle East experiences political turmoil driven in large part by economic pain.

Whether this stop-gap measure buys the Saudi regime some breathing room with its people remains to be seen. Shortly after the king announced the benefits package, a prominent group of leaders from the private sector and academia called for major political reforms including the establishment of a constitutional monarchy. As in other countries in the Arab world, Saudi Internet activists used Facebook to call for large protests, including a “Day of Rage” later in March, echoing the language used in other popular uprisings in the Arab world.

A leadership transition in Saudi Arabia is also on the horizon, with King Abdullah’s uncertain health combined with questions about who might succeed him. When Abdullah left the country for medical treatment, he formally gave his half brother Crown Prince Sultan authority, but Sultan is in his 80s and reportedly suffers from serious illnesses. The line of succession passes through the sons of Saudi Arabia’s founder King Abdul Aziz ibn Saud before moving to the next generation. But Saudi Arabia’s opaque political system and the fact that at least 5,000 members of the royal family hold princely rank could lead an extremely complicated transition strategy.

At the same time, the growing calls for political reform increase the chances for some sort of political change. When King Fahd bin Abdul Aziz Al Saud died in 2005, the government responded to earlier calls for political reform by taking small steps, such as allowing limited elections for municipal councils in which only men could vote for only a portion of the seats. But the councils ended up having only limited advisory duties.

Like many things in the Middle East these days, it is difficult to predict how much political opposition to the status quo might grow in Saudi Arabia. But it would be wise for the United States to anticipate possible changes on the horizon in that country, which is important to the United States not only because of its oil production, but also on multiple national security fronts, among them terrorism, Iran, Afghanistan, Pakistan, and the Arab-Israeli conflict. With some likely changes on the horizon in Saudi Arabia, the United States should continue to cooperate with Saudi authorities on the security front while offering quiet support and encouragement to Saudi Arabia in dealing with its difficult economic, political, social, and demographic challenges.

But what does this mean in practice? First, U.S. military and intelligence agencies should continue their robust cooperation with the Saudi military and security forces. The security cooperation between the United States and Saudi Arabia has grown over the past decade because of the enduring threats posed by terrorist groups and the looming threat of an Iran on the rise. Just last year the Obama administration announced a $60 billion arms package with Saudi Arabia, the largest in history. But this bilateral security cooperation should be delivered in a way that enhances the rule of law, encourages human rights practices, and quietly supports steps towards better governance, transparency, and oversight, as co-author Brian Katulis has argued before.

Concurrently, U.S. nongovernmental organizations working on democracy, governance, and human rights should continue reaching out to Saudi leaders calling for democratic reform. U.S. diplomats should continue playing a discreet, behind-the-scenes role in assessing the political landscape, sending quiet messages supporting pragmatic reforms, and offering assistance as Saudi Arabia crafts a roadmap for political reforms. The balancing act is complex. America needs to safeguard its regional security interests and continue counterterrorism cooperation while ensuring that such cooperation is not used to underwrite repression of legitimate political dissent. This is a difficult but not impossible mission””one that requires a coordinated interagency approach from the White House.

Secondly, our nation must also begin to take serious steps toward decreasing our dependence on this volatile country to feed our oil addiction. But we cannot wean ourselves from the Saudi tap by embracing a “drill, baby, drill” agenda. Oil is priced and sold in a world market, even more so today than in the early 1970s. As Ken Green from the American Enterprise Institute points out, even if the United States were able to increase our domestic production to cover 100 percent of our own oil needs, we still would not be able to affect the world oil price.

In other words, even if we opened up every possible area in the United States to drilling and exploration, consumers would see the same price spikes at the pump if, say, China’s increasing demand for oil caused a global shortage. But in fact the United States is unlikely to ever reach near 100 percent domestic production given that we possess only 2 percent of the world’s oil reserves but use almost 25 percent of the world’s oil.

Instead, the answer is far simpler””and involves far less contamination of our oceans, lands, and communities. In the short term, America can lessen the risks to world oil markets posed by instability in countries like Saudi Arabia by releasing, say, 30 million barrels of our own excess oil, held in the Strategic Petroleum Reserve. The reserve, developed in response to the Arab oil embargo, exists to help insulate the United States from price shocks or supply disruptions. It is currently just about at capacity, holding nearly 727 million barrels of oil, and could easily be tapped to calm global fears about oil shortages without depending on the Saudis to ride to the rescue. Releasing 30 million barrels at today’s prices would generate $2.9 billion in revenues that could be used to finance oil savings programs in a variety of areas.

Which brings us to the other key point: America must wean itself off oil. The Obama administration has already taken several important steps toward this goal, through policies aimed at fuel efficiency, clean fuel technology research and development, and getting more electric vehicles on the road. But as our Center for American Progress colleague Dan Weiss points out, there are even more steps we can take. We can:

• Make our current vehicles more efficient, by adopting stronger fuel-efficiency standards, especially for medium- and heavy-duty trucks
• Move toward new fuel sources….
• Invest much more heavily in public transit so that Americans actually have transportation options, rather than having to rely on personal vehicles for even very short intracity trips.

In fact, we could use some of the proceeds from Strategic Petroleum Reserve sales to help finance these efforts. And in the longer term, we could embrace smarter urban design so that Americans are not forced to move farther and farther into the suburbs just to find an affordable place to live.

At the same time, the United States can help Saudi Arabia to diversify its own economy away from oil and toward a broader range of energy and fuel technologies. The Saudis have already begun a campaign to lessen their dependence on oil as their major economic driver, recognizing that, like many resource-rich countries (and even specific regions of our nation), their country is hampered by oil so plentiful and profitable that there are few good reasons to develop other industries to help balance out the economy. Another good reason for diversification is that while the country is rich in oil now, it may not always be that way.

One way the kingdom has taken steps to address this imbalance is through major new investments in solar technology, which make sense in a country with “more sun than oil.” The Saudis are about to complete construction of the country’s largest solar plant, with an eye both to creating new jobs and related industries (such as solar-powered desalination), and to preserving more Saudi oil for export rather than for domestic consumption.

The country is also exploring new projects in algae-based fuels and nuclear power, but solar power is clearly the primary target for investment. The United States should explore a strategic partnership with Saudi Arabia to help advance solar technology development in both countries, including through sharing best practices in financing, siting, and grid integration. We should also advocate larger global climate financing solutions, including more investment by multilateral development banks (such as the World Bank and the International Monetary Fund) to help leverage capital worldwide in support of a range of renewable and efficiency solutions. These initiatives could support diplomatic relationships with Saudi Arabia while advancing the global imperative to reduce carbon emissions in general, and Saudi dependence on oil in particular.

Already the Saudi government has signed a $380 million deal with South Korea’s Hyundai conglomerate to jointly build a polysilicon plant””the material that converts solar light into usable energy””on the Persian Gulf coast. Saudi Aramco, the state oil company, is looking to complete a 3.5-megawatt solar plant in Riyadh by this September, and a 2-megawatt plant is already operating on rooftops of the King Abdullah University of Science and Technology. A joint U.S.-Saudi solar energy project could help move Saudi Arabia away from its own economic dependence on oil, and redirect the U.S.-Saudi energy relationship in a more beneficial direction.

Just after the Arab oil embargo, the U.S. government joined other nations, especially in Europe, in taking steps toward greater energy independence. We passed the first fuel-economy standards, invested in renewable energy research and began to take energy conservation seriously. But unlike in Europe, where many countries sustained their efforts to become more energy independent, our political leaders’ appetite for reform went down along with oil prices. It is time to pick up where we left off, and finally wean America off our dependence on the unstable situation in Saudi Arabia and the even more volatile commodity of oil.

Implementing these changes on both energy and U.S. national security in the Middle East will require a fundamental shift away from how America has done business over several decades. It won’t be easy, but as the fast-moving events in the Middle East demonstrate, the status quo is unsustainable.

– Kate Gordon and is the Vice President of Energy Policy at the Center for American Progress. Brian Katulis is a Senior Fellow on the National Security team at the Center. Thanks to Lee Hamill, Peter Juul, and Dan Weiss.