It was early 1983. Oil ministers from the Organization of Petroleum Exporting Countries were quietly converging on Riyadh airport. The Saudi capital still looked incredibly prosperous to a visiting journalist. There were new cars traveling new boulevards. There were new villas, palaces, and universities. At a hundred different worksites there were laborers from almost every nation on earth (although native laborers were rare in a country that shuns manual labor.)
One heard wild stories about futuristic cities, highways to nowhere, and thinly disguised giveaway programs. There were even, at great expense, desert farms -- created to make the kingdom self-sufficient in wheat.
It was fat city.
But on that particular night three years ago crisis hung in the air. The oil boom was on the verge of dying. Officially, oil was still priced at $34 a barrel, but buyers were few. Eventually the price would have to be lowered. Three years later, the price would collapse.
OPEC was caught in a glut. Saudi Arabia, a ``dove'' in the OPEC scheme of things, had foreseen the problem as early as 1979 when other OPEC ``hawks'' rushed to take advantage of panicked buyers purchasing oil during the Iranian revolution. The Saudis worried that higher oil prices would accelerate worldwide energy conservation and the hunt for new oil resources, and that a glut would eventually occur.
They were right. And, among OPEC nations, they were the principal losers because of the glut.
Although life remains comfortable in the kingdom, and the appearance of prosperity persists, Saudi bank accounts and investment portfolios have been running down. From a high of $150 billion in estimated foreign reserves three years ago, Saudi Arabia's holdings have slipped to about $90 billion, or maybe even less. At that rate, by the early 1990s, the Saudi national treasure would have all but vanished.
That, say economists, oil analysts, and Saudi experts, is the main reason the Saudis decided to embark on a highly risky new strategy last summer. It was an uncharacteristically bold move that puts tremendous stress on the OPEC cartel, sends financial waves throughout the world, and places the kingdom at loggerheads with potentially dangerous powers in Tehran, Tripoli, and Moscow.
The Saudis, say observers, simply became fed up with their role as ``swing producer'' in OPEC, always tightening their own tap to try to maintain an artificial scarcity of oil and keep prices firm so that Iran, Libya, Nigeria, Mexico, and a host of other oil countries could benefit.
``That succeeded as long as the biggest took the rap,'' says London-based petroleum economist Paul Frankel. ``But now Saudi Arabia is a rogue elephant.''
As such, the Saudis are producing about two million barrels of oil a day more than they were last fall (the rate varies from month to month). This has flooded an already well-oiled world and driven down prices. Many oil watchers say prices could be heading towards $10 a barrel, although they expect them to recover to present levels and eventually creep higher by 1990.
``As far as we can make out, the decision came right out of the royal family,'' says a veteran observer based in London.``It wasn't something that Sheikh Yamani necessarily wanted'' -- a reference to oil minister Ahmed Zaki Yamani.
``It wasn't the idea of the oil people,'' agrees Dr. Frankel. King Fahd and his relatives saw the huge Saudi budget deficit and dwindling foreign assets and decided it was better to be a wealthy, conservative monarchy in a dangerous neighborhood than a poor one. By pumping two million barrels a day more, even at $17 a barrel, the Saudis would generate twice as much income.
Economists and bankers say the extra money will go to budget balancing, mollification of interest groups within the kingdom, subvention of allies such as Iraq and North Yemen, and defense against foes such as Iran (hence the recent $7 billion Saudi oil barter deal with Britain for 72 Tornado fighter bombers and jet trainers). But the days of fabulous spending on development schemes are over.
``Our exports to Saudi Arabia are falling,'' says one West German economist.
``The oil countries have no more money,'' concurs a German machine-goods executive. ``Their investment dreams have not been realized.''
The Saudi strategy of nearly doubling their production, may help the kingdom with its finances, but if so at the expense of countries such as Mexico, Britain, Iran, and Egypt -- who will receive less oil revenue.
Egypt, for instance, the predominant Arab military power and an ally of Saudi Arabia, ends up in sad shape. Its oil sales are declining and it has been losing workers' remittances as a result of cutbacks in Persian Gulf development. Its Suez Canal revenues have dropped -- due to a decline in tanker traffic, and is currently suffering from a falloff in tourism because of worries about terrorism in the Mediterranean region. Although the Saudis and their close kin, the Kuwaitis, should pull through, most OPEC and non-OPEC oil producers will be increasingly desperate. If these countries could just hold out until 1990, they may see a big pickup in demand for their oil, says Robert Mabro of the Oxford Institute for Energy studies.
``The gamble on low oil prices cannot benefit OPEC countries until the 1990s,'' a special report from the institute says, ``and the risk is that the time needed to recoup the initial losses may turn out to be too long.''
Saudi Arabia, of necessity, takes the long view. It sits atop the two biggest pools of oil in the world. The oil is so easy to tap that its cost of production, by some estimates, is only 10 cents a barrel. It flows right out of the ground and out loading docks by gravity -- and will continue to do so, by most estimates, for 100 years. By contrast, North Sea oil begins to dwindle in the 1990s. Soviet and US reserves have peaked, too. In fact, only Mexico, a distant second to Saudi Arabia, has reserves to last well into the 21st century at current consumption levels.
Beginning last summer, the Saudis signaled they would no longer be the swing producer in OPEC. They signed a series of ``netback'' deals that insured their oil would have a market.
It is this new structure in oil dealings, which is being adopted by more and more oil nations, that has brought about the drop in oil prices. The view that the Saudis were playing ``chicken'' with North Sea oil powers Britain and Norway was wrong, analysts in London say -- although it was a fiction the Saudis did little to dispel since it deflected attention from them for a while.
``Anyone,'' says economist Mabro, ``who believes that some economic deus ex machina is going to stabilize prices is dreaming. It can only be done by political intervention.''
Can the Saudis stand the political heat?
To cutback production again would involve a serious loss of face, although King Fahd could announce that the kingdom was simply disrupting Western economic planning by causing wild gyrations in oil prices. One Saudi watcher calls this the ``yo-yo effect,'' and he and others admit it is only marginally plausible.
Externally, Iran is the most immediate threat. Despite the fact that Iran's military reach is not very long these days because of the debilitating 5 1/2-year war with Iraq, the presence of Iranian soldiers 50 miles from Kuwait City has to be of some concern in Riyadh.
Iran has long disputed the notion -- of Saudi Arabia and other OPEC members -- that Britain was causing the oil price weakness, naming Saudi Arabia directly as the culprit. And, a further indication of touchy relations, is the recent agreement between Saudi Arabia and Britain for the Saudis to purchase military equipment, at least in part, to fend off any danger Iran may pose.
Internally, there could always be a surprise -- as demonstrated by the 1979 takeover of the mosque in Mecca by Islamic extremists. But the royal family is huge and it has scrupulously installed checks and balances in the military, and bankrolled disparate tribes within the kingdom. Though it is vulnerable, it is not simply another Duvalier or Marcos regime. It is more like a huge extended family and is always handing out money.
For reasons such as these, oil analysts expect Saudi Arabia to hang tough with its policy of higher production and lower prices. The choice for King Fahd was: face pressure now from other oil countries or face pressure later as financial power erodes.
``I feel sure the decision was made by looking at the balance sheet,'' an oil watcher in London says.
Second of a three-part series. Next: Haves, have-nots, and bankers.