Posted by: bmeverett | January 30, 2011

The Fall of the House of Saud


The oil market was in an uproar last week as a result of the unrest in Tunisia and Egypt. Oil prices rose about $4 a barrel in a few hours, even though neither Tunisia nor Egypt is a significant oil exporter. It’s pretty clear that the market is really worried about a spillover of popular discontent to the big oil producers of the Middle East.

Five Middle Eastern countries contain about 700 billion barrels of proved oil reserves, 55% of the world total. Saudi Arabia is by far the largest with 265 billion barrels followed by Iran with 145 billion barrels and Iraq, Kuwait and the United Arab Emirates with roughly 100 billion barrels each. Moreover, these countries own the inexpensive end of the supply curve. We saw in 1979 what can happen when one of these countries erupts in flames. The fall of the Shah in Iran was quickly followed by a doubling of oil prices with severe economic impacts on the US and other countries.

So how likely is the spread of revolt to the “Big 5”? Iran seems for the moment to be firmly in the grip of Islamic fundamentalists. The US might help to loosen that grip, but President Obama seems to prefer cutting a deal with the clerics to overthrowing them, despite the strong current of secular pro-western feeling among urban Iranians. Iraq seems to have a fighting chance of establishing a government where popular feelings are fought out in the ballot box, rather than in the streets. So far, we have a record of one win, one loss in the region. The other three countries are likely to be problems. All three are modernizing countries rules tribal monarchs, all of whom are betting their power and in fact their lives on their ability to spread oil money around skillfully.

The UAE and Kuwait have had some success in this effort. Kuwait even has a parliament which has limited powers but at least provides an opportunity for public discourse and some role in government for average Kuwaiti’s. Kuwait earned about $45 billion in oil export revenues in 2009. Its population is around 2.8 million, but roughly half are foreign workers. The government therefore has about $32,000 per Kuwaiti to spread around in terms of make-work jobs, housing, education, health care and other amenities. The UAE earned a little more – $53 billion. The Emirates have about 5 million people, but only 40% are citizens. The government therefore has about $26,500 for each of its citizens. Even that number is a bit misleading since Abu Dhabi, the biggest of the seven Emirates, has only 40% of the population but 95% of the oil. Dubai and Sharjah have a little oil. The four other Emirates have no oil at all and rely on the largesse of their richer brothers. Nonetheless, the Emirates are a rather tolerant society, more focused on business than politics.

These two societies have serious problems. Their populations rely on government hand-outs, albeit very generous ones. As a result, their work ethic is rather attenuated, and they rely on foreign immigrants to do most of the work and all the hard labor. They have no military capability to speak of, as we quickly discovered when Iraq invaded Kuwait in 1990. How long the Emirs can govern isn’t clear.

The problems of Kuwait and the UAE pale, however, compared to those of Saudi Arabia. Saudi Arabia is the largest oil producer in the world, with 2009 oil revenues of $184 billion. Lots of money, but lots of people as well. The current Saudi population is about 26 million, including about 6 million foreign workers. Oil revenues are therefore about $9,200 per Saudi citizen. That’s good money by the standards of China or India, but it’s not enough to support a living standard comparable to the US or Europe. Furthermore, the amount of available cash is substantially diminished by the unknown but clearly large share taken by the royal family for its own use and by the large Saudi military establishment. Adjusted for inflation, the Saudis earned only about 20% more oil revenue in 2009 than they did in 1974 while their population has tripled.

Saudi citizens are therefore much harder to buy off than their Kuwait and Emirati neighbors. Furthermore, the Saudi government is an ugly creature. The original power base of the Saud family was the fundamentalist Wahhabis, and the Saudi political system now rests on a bizarre bargain. The royal family has first call on oil revenues and is entitled to live a lavish and, many would say, debauched lifestyle with Swiss villas, mistresses, gambling jaunts, private jets and all the trappings of wealth. In return, the Wahhabi clerics get to terrorize the Saudi population with a particularly harsh form of Sharia law which tolerates no civil liberties, no functioning political institutions, no rights at all for women and no religious liberty. Christians, like Philippine guest workers for example, are forbidden from practicing their religion under pain of death. In addition, the royal family funds Wahhabi fundamentalism abroad, including an active program in the US. The House of Saud clearly fears al-Qaeda, but only insofar as terrorists target them. Targeting the US and Europe appears to be perfectly OK to the Saudi monarchy.

Egyptian riots may have come as a surprise, but a conflagration in Saudi Arabia seems increasingly likely as internal conditions continue to deteriorate and the population becomes more and more restive. The implications of such an upheaval for the oil market and western economics are terrible to contemplate. But can the US actually do anything constructive? I think the answer is yes.

The House of Saud has recognized since it took power in 1931 that it would never be able to defend itself against stronger foreign powers. Iran, Saudi Arabia’s traditional rival, has a population of about 75 million – three times the Saudi population. Initially, the Saudis looked to Britain as its protector, a role Britain had happily taken on throughout the region. During World War II, however, it became clear that post-war Britain would no longer have the global military reach needed to protect the Saudis, and the baton was handed off to the US. There is a famous picture of FDR meeting with King Abdul Aziz on board the cruiser USS Quincy in February, 1945 – a visual symbol of the handover.

Since taking on this responsibility, however, the US has underplayed its hand – very much to our detriment. The Saudi royal family simply has nowhere else to go for protection. During the cold war, they were terrified of the godless Soviets. The only card they had to play was oil. For many years, the Saudis were awash in cash and could threaten to cut off oil supplies if they were displeased by US foreign policy. In fact, they did precisely this during the Yom Kippur War in 1973 in an attempt to pressure the US to abandon its support for Israel. During the 1970s and early 1980s, the Saudis varied their oil production to sustain high oil prices, despite constant pleading by the US for moderation. By the mid 1980s, however, the Saudis found that their OPEC friends had deserted them, leaving the Saudis alone to reduce production when prices were weak. In response, the Saudis stabilized their production at 8-10 million barrels per day where its stays to this day. Given their massive need for cash, the Saudis no longer have the flexibility to cut production by very much. Neither do they show any inclination to increase it, despite the thirty-year effort by the US government to persuade them to do so.

Yet the US policy toward Saudi Arabia continues to be one of appeasement. For nearly 40 years, fear of Saudi displeasure and its possible consequences for the oil market have encouraged successive US administrations to ignore the destructive and dangerous behavior of the Saudi royal family. We should instead treat them as the client state that they are. The issue is not how the US can please the Saudis so they will continue to produce oil. They will do that no matter what we do. The question is how the Saudis can please us so we will continue to tolerate their existence.

The US may not be able to prevent a violent collapse of the House of Saud, but we ought to give it a try. Our conversations should switch from “Please restrain oil prices” to “Here’s what we expect you do.” I would suggest the following.

First, the spread of Wahhabism around the world and particularly here in the US stops NOW. The North American Islamist Trust (NAIR), a Saudi-financed organization with the clear purpose of radicalizing American Muslims in the US is to be shut down immediately. The Washington Mosque, which the Saudis essentially expropriated in 1981, is to be returned to its Board of Directors composed of all the Muslim countries. The US will publicly prosecute terrorists hiding behind Saudi institutions in the US. The virulent anti-Semitic nonsense the Saudis spout has to stop.

Second, the royal family is to undertake a process of political reform inside Saudi Arabia with the eventual goal of establishing a constitutional monarchy. Moderate political parties are to be permitted and not suppressed. A free press is to be gradually instituted, and reporters are not to be jailed. Criticism of the royal family is no longer to be treated as treason. Civil liberties, including full rights for women and Shiites are to be instituted. True elected institutions are to be phased in over time. The net result must be some legitimate outlet for popular political frustrations.

Third, the royal family must stop confiscating so much of the national treasury for its own use. A dividing line between the assets of the royal family and the assets of the Treasury has to be established. The princes can spend their own money, but not the country’s. If that’s not enough, they need to get jobs.

The Saudi royal family may not, of course, do any of these things. They can be insulted and outraged at this blatant interference in their internal affairs. They can huff and puff and withdraw their ambassador in Washington. They can threaten and bluster. Unless they do what we ask, however, the US should begin withdrawing its support for the regime. US support is probably their only chance at long-term survival, and they know it. Without our support, the royal family could easily end up hanging from lamp posts in Riyadh. At the very least, the US could avoid identification with these corrupt medieval bigots in the eyes of the Saudi population.

My guess is that the Saudis would take the deal.

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Responses

  1. This is terrific. I hope it gets a wider circulation. Do you think that a phased-in democracy in SA would be likely to lead to a more modern and reasonable regime, or would it mean transition to a hostile fundamentalist regime like in Iran? If the culture is as soaked in Wahhabism as it appears, what could prevent the latter scenario?

    • I’m not sure we will end up with a stable democracy in Saudi Arabia rather than a fundamentalist state. I am pretty sure, however, that continuing to support the status quo makes the latter outcome much more likely.

  2. Dear Dr. Everett,
    Great post! As always enjoy your articles! I heard that SA has substantial assets outside of SA as their economy wouldn’t absorb so much capital inflows, though I don’t have facts to back it up. I checked the foreign reserves and they are around 400$ billion. Do know how big their foreign assets are?


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