Middle East Strategy at Harvard

From Gal Luft

President Bush’s appeal to the Saudis to increase oil production is more pitiful than understandable. At $100 a barrel, the United States bleeds over a billion dollars per day in order to finance its petroleum import needs. The result: ballooning trade deficits, growing unemployment, a weakened dollar and crumbling financial institutions like Citigroup and Merrill Lynch now forced to beg Persian Gulf monarchies for cash infusions. At current oil prices, the U.S. economy is melting faster than the ice caps.

But despite the president’s sweet-talk, his ridiculous appearance in a traditional Arab robe, his hand-holding with the Saudi monarchs, and even his gift of 900 precision-guided bombs, the Saudis were quick to respond with a slap in the face. Within one hour, the kingdom’s oil minister announced that oil prices would remain tied to market forces and the Saudis would not open the spigot.

This is hardly a surprise to me. The Saudis—despite their claims that oil high prices are the doing of Wall Street speculators and American SUV-driving soccer moms—are the first to blame for the current oil crisis. Their reluctance to invest in new production, their lack of transparency on reserve data and their anti-market practices, which prevent international oil companies from operating in their midst in any meaningful way, are the real reason for the quadrupling of prices in the past six years.

The Saudis are also the prime reason for the failure of the Iraqi oil industry to take off. Exactly four years ago I warned that the United States was turning a blind eye to the Saudi failure to seal its border with Iraq. This led to a migration of thousands of Saudi jihadists into Iraq, a fact that contributed to the terror campaign against Iraq’s oil industry. If not for the attacks, Iraq today could have been producing at least five million barrels per day. Instead it does less than three. Of course no one has ever held the Saudis accountable for the loss of two million barrels per day—an amount of oil that, were it in the market today, would have dropped prices by at least $30 a barrel. We’d rather beg than blame.

The truth is that the Saudis feel quite cozy at $100 oil. The world economy hasn’t come down (yet), the American public is docile, and oil-exporting countries—the recipients of a transfer on a scale the world has never known—are having a jolly time. Furthermore, the Saudis feel they have already met their obligation to the American economy by standing steadfast against other OPEC members like Iran and Venezuela, which are pushing for an OPEC decision to dump the dollar as the currency used for oil trades. Such a step could send the dollar down like a rocket.

So much of this is our own doing. Two years ago President Bush committed a major blunder, allowing Saudi Arabia’s admission to the World Trade Organization. By dint of Saudi Arabia’s leadership of the OPEC cartel, no other country is more responsible for violating free trade. Yet, its admission was not contingent on any behavioral change. Thus the Saudis enjoy the benefits of free trade while continuing to manipulate the price of the world’s most important traded commodity.

Furthermore, the United States has its own mechanisms to bring down oil prices. It owns 770 million barrels in strategic reserves. OECD countries have between them 4 billion barrels in stock. Yet, not a drop of oil has been released. Now that the Iowa caucuses are over, the United States could remove the 54-cent tariff on imported ethanol and bring billions of gallons of alternative fuel into the country almost overnight. This alone could drive down gasoline prices by at least 50 cents per gallon. And there are more strategic solutions which could remove the yoke of our oil dependence, like providing fuel choice and electrifying our transportation system. (We no longer produce electricity from oil.)

The spectacle of American presidents kowtowing to the Saudis is as old as U.S. involvement in the Middle East. Six decades ago FDR had to steal a cigarette in a stairwell of the USS Quincy in order not to smoke in King Abdulaziz’s presence. (Winston Churchill, on the other hand, had a smoke and a drink!) With growing dependence on the Saudis, our sovereignty and freedom of action have been steadily eroded. Barring some serious action, no matter who the next president is, he or she will have to ride a lot of camels and wear a lot of robes to keep the oil barrels rolling.