Saudis can't save us: Beseeching oil sheiks to open their spigots and bring back cheap oil for Americans doesn't work any more

HOUSTON CHRONICLE
7/12/08

Saudis can't save us: Beseeching oil sheiks to open their spigots and bring back cheap oil for Americans doesn't work any more

Amy Myers Jaffe

There is only one thing I used to need to know to predict the price of oil: What was Saudi Arabia thinking?


For decades, the Saudi oil minister could declare a target price and the market would gravitate toward it. We can recall some of those targets nostalgically — $18, $25, even the more recent $55 price floor. They seem romantically quaint now.


Sheikh Zaki Ahmed Yamani shocked the oil world in 1984 when he declared the kingdom, which had struggled in 1983 to defend $40 oil, was initiating an oil price war and had set its sights on a $15 oil price. Armed with lots of spare crude oil productive capacity and the realization that the 1979 oil crisis was bad for long-term business, Saudi Arabia tripled its oil output, hoping competitors would cry uncle. Between the 1973 oil embargo to the upside and the 1984 price war to the downside, the kingdom showed it had the clout and the political will to change oil price trends virtually overnight.


In sum, for almost four decades, when Saudi Arabia spoke, oil speculators listened. That is why U.S. presidents, starting with Franklin Roosevelt and including most recently George W. Bush, have courted the king of Saudi Arabia on matters related to oil.


The problem is that the reality of Saudi oil power has faded and no one, not even our so-called "oil" president or the Saudis themselves, seems to have acknowledged this new fact of life.


For the past three decades, Americans have been able to count on Saudi Arabia to bail us out of almost any energy conundrum. Saudi Arabia raised its production in 1984, lowering oil prices and helping pull the global economy out of a major slowdown. Saudi Arabia raised its production in 1990 after Iraq invaded Kuwait to prevent a prolonged oil supply shock that would have damaged the global economy again. Indeed, Saudi Arabia raised production, with less publicity, after Sept. 11, 2001, and in the early days of the U.S. campaign in Iraq in 2003, again to prevent markets from overheating.


So it is not surprising that for more than 30 plus years, American administration after administration believed that no American energy policy was needed beyond a direct line to Riyadh.


The problem is, Saudi Arabia no longer has a white horse and we, like Cinderella, are thus waiting for a prince who will never come.


In recent years, Saudi Arabia has been slow to respond with the kind of massive investments that would have been required to maintain the kind of excess oil production capacity needed to calm markets as demand soared over the past 10 years. Almost no investment was made in the late 1980s. In the aftermath of the Persian Gulf war, the kingdom added some capacity, raising its production abilities by about 1 million barrels per day. For much of the 1990s, however, little money was spent on expanding new capacity at the kingdom's oil fields. In June 2005, the kingdom announced a commitment of $50 billion in new spending to bring its production potential from just over 9 million barrels a day to 12.5 million by 2009 and $14 billion in new oil field expansion projects (3 million barrels per day) is slated to be completed next year.


But forecasts over the same period had been projecting that as much as 17 million barrels per day (some projections were higher at 24 million) from Saudi Arabia might be needed given expected output declines in the United States and United Kingdom, and problems in the oil sectors of other major producers such as Venezuela, Iraq, Iran and Nigeria.

There is no question that Saudi Arabia had other problems besides investing in its fields. The country was experiencing poverty in its midst for the first time in decades, and unemployment or underemployment of a burgeoning youth bulge has become a major challenge. Moreover, rapid population growth threatened social stability, and the government faced a growing challenge from internal terror cells. In sum, the government in Riyadh had other problems besides worrying about keeping our supplies of oil affordable to average Americans. The kingdom's oil sector only employs 2 percent of the population, so other spending requirements were pressing.


The decision to limit spending on expanding its massive oil reserves into available production has left Riyadh unable to convince speculators, or anyone else for that matter, that it can effectively lower the price of oil. On June 22, Saudi Arabia announced that it was displeased with rising prices and said it planned to raise production from one of its newly expanded fields by more than 500,000 barrels per day. The global oil market barely flinched.


Ever since Saudi Arabia abdicated its market regulator role, whether accidently or on purpose, U.S. leaders have been flailing because, quite frankly, they have never really had to address energy issues in a serious way before. In the past, the Saudi safety net was always there, so calls for real policies seemed unnecessarily costly when shuttle diplomacy might just fix things with one cup of coffee in a palace behind closed doors.


We need to wake up to this new reality. There is no friendly oil sheikh who can fix the current energy mess by a sudden decree as has been done in the past.

It would take billions of additional dollars of Saudi spending, and many years of trying, for the kingdom to get back its oil mojo — short of a major global recession that so cut demand that its current oil capability would seem ample again.


Thus, a comprehensive overhaul of U.S. energy strategy needs to take place. The answer lies not in the fields of the Middle East. A glance at the mess we call the Iraq war should lay that bare without discussion.


There should be no debate between drilling or conservation. We need to do both.


We need a major national initiative in energy research and development.


We need to overhaul our transportation system and our automotive technology.


We will not be able to afford to move everything by road, and we should consider how to arrange our lives to drive less.


If every American reduced on-road travel by 25 miles a week by 2020, that would shave 20 percent from our oil imports.


We will need expanded public transportation, expanded bulk rail systems, more telecommuting. We will need smarter buildings, denser population growth, improvements in energy efficiency in industry and households, and more localized agriculture and services.


Most of all, we will need national leadership. That, unfortunately, seems to be in as short of supply as oil.


When we vote this November, we should demand more than sound bites. We should be looking for a concrete, detailed, long-range plan.


Jaffe is the Wallace S. Wilson Fellow for Energy Studies at Rice University's James A. Baker III Institute for Public Policy.