Why the Saudis aren't lifting a finger to ease oil prices

Their break from past oil policy is significant.

By Steve Yetiv and Lowell Feld

from the February 6, 2008 edition

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Norfolk and Arlington, VA. - Here's one of the most important puzzles of global oil security: Since the late 1970s, Saudi Arabia has pumped the market with oil, fearing that high prices could hurt global growth, reduce demand for Saudi oil, and anger its protector, Uncle Sam. Now, oil has almost doubled in one year to more than $90 a barrel, and the Saudis have barely lifted a finger despite the fear that high oil prices could increase the likelihood of an American, and therefore a global, recession. Why? The answer may define oil in the 21st century – or at least underscore the reasons for the US to seek greater oil independence.

The Saudis may have been thinking in the past year that the American and global economy could tolerate $90 oil. Until now, the global economy has been growing, and the US economy has avoided recession in spite of months of very high oil prices. However, on his recent trip to the Middle East, President Bush pushed the subject. The Saudis noted that the weakening US economy is a valid concern, but they remain reluctant to increase oil supply.

Oil producers say that high prices are partly due to speculation in oil markets as well as to the dollar's decline, and not because oil is lacking. That may be true, but the high price, whatever the cause, remains a big problem. Saudi Arabia's reluctance to address sustained high oil prices, even in the face of a potential recession, represents an important break with past Saudi oil policy.

Another explanation for no action could be that the Saudis may not want to look an oil horse in the mouth. Saudi Arabia's young population has nearly tripled since 1980, while oil export revenues in real terms have fallen by around one-quarter (despite recent increases). Each Saudi gets 72 percent less in trickle-down money today than in 1980. The nation needs oil export revenues to maintain high levels of subsidies (for food, fuel, you name it) to sustain the population and to build massive infrastructure. Those funds help soothe a population that suffers from 13 percent unemployment. It also helps buy off Wahhabi radicals and antiregime elements who work against the royal family.

The Saudis are also more apt to be scared of Iran now, because Saddam Hussein – the counterweight to Iran – is gone. Iran likes high oil prices, so the Saudis might not want to offend the mullahs across the pond by pushing for greater oil production. Meanwhile, Washington is tangled up in Iraq, and the US dollar has dropped significantly. Some officials in Europe, China, and the Arab world have even considered a move away from the dollar as the currency for oil trade. American troubles may be pushing the Saudis to hedge their security bet by not antagonizing Iran.

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