Doc's Talk: SAUDI ARABIA'S ECONOMIC NEEDS AND THE PRICE OF OIL

Wednesday, March 09, 2011

SAUDI ARABIA'S ECONOMIC NEEDS AND THE PRICE OF OIL

Joseph Mann *

Since the late 1990s, Saudi Arabia has faced increasing economic challenges. In order to address these problems and to improve the conditions of its citizens, the Saudi regime has gradually increased oil price targets. This article analyzes the factors that have influenced Saudi Arabia's considerations in setting a preferred oil price target. It also examines the option of diversification of the Arab economy and the creation of new industries as a means of reducing oil prices.
INTRODUCTION

Between 2003 and 2008, the West Texas Intermediate (WTI) crude oil spot price increased by 300 percent. However, the economic crisis that befell the world and reached its peak in December 2008 sent prices back to below the 2004 average. In reference to the crisis, the Saudi Arabian monarchy stated that the drop in the price of a barrel of oil to below $50 to $55 was damaging to its economy and that a continuing drop in prices would be detrimental to the growth the country had been undergoing since 2001. About five months after the crisis had reached its peak, evidence surfaced of a strong correlation between the price of oil and the Saudi government’s economic aspirations; the price of oil surpassed the $50 mark in May 2009 and reached over $60 in the second half of 2009.

The purpose of this article is to show the correlation between Saudi Arabia’s economic needs and the price of oil. The article begins with an analysis of Saudi Arabia’s status both in the world oil market and within the Organization of the Petroleum Exporting Countries (OPEC). It continues with an examination of the factors that influence Saudi Arabia’s oil policy, including the change in the country’s outlook since power was transferred to King Abdallah in 2005. In addition, the article explains the reasons behind the rise in the oil target price since 2001. Last, it focuses on Saudi efforts to diversify the economy in attempt to reduce dependence on oil and the effects this has had on its budget.

FACTORS INFLUENCING SAUDI OIL POLICY

Saudi Arabia is an absolute monarchy. Most of the kingdom's key posts are held by members of the Saud family whose legitimacy is based on the fact that they founded the country and on their commitment to Islam--more specifically to the Wahhabi movement. The Wahhabi movement originated in the Arabian Peninsula and conquered and unified the various provinces there, leading to the establishment of the modern day Kingdom of Saudi Arabia in 1932. Based on various estimates, there are approximately 30,000 Saudi princes total, though only a few hundred belong to the most prominent branch of the family. Since the late 1930s, the Saud family has gained an important international role due both to the religious duty of pilgrimage (Hajj) carried out under its patronage and to its control over the most influential oil industry in the world.[1]

Saudi Arabia’s status in the world oil market evolved from the state’s abundance of oil reserves as well as its high production capability, estimated at 10.5 to 11 million barrels a day in 2008. According to Oil & Gas Journal, Saudi reserves are estimated at 266.7 billion barrels, approximately one-fifth of world oil reserves. Members of the royal household claim that they have set aside an additional 100 billion barrels to ensure the kingdom’s economic well-being in the decades to come. The country also has more reserves that have not been designated for production, for the time being, due to high costs and a lack of technology.[2]

The royal family wields great influence over Saudi oil policy. The country is involved in the Supreme Council for Petroleum and Mineral Affairs, over which the Saudi king and several princes--including Crown Prince Sultan bin Abd al-Aziz and Foreign Minister Saud al-Faisal--preside. The presence of these three prominent figures on the council is far from coincidental; it is proof of the royal household’s highly vested interest in the energy market as well as the influence that market has on Saudi domestic and foreign policies. Furthermore, the involvement of these three individuals in the council’s affairs is a show of power within the royal household, where there have been tensions over the issue of succession and disagreement over policies and decisionmaking. Crown Prince Sultan, for example, is the full brother of the deceased King Fahd and a member of the Sudairy Clan.[3] The clan has been an important source of power in the kingdom since 1975, when King Khalid, who was not interested in politics, gave effective control of the country to his half-brother, Crown Prince Fahd.

The Sudairy Clan is conservative and opposed to reform, which it fears could result in a loss of power for the elites and prove harmful to the country’s Wahhabi tradition. King Abdallah, on the other hand, is considered to have reformist tendencies and seeks to unite the kingdom under the general umbrella of Islam and not to abide only by Wahhabi rules. Unlike the members of the Sudairy Clan, he has no natural allies, because he has no full brothers. Therefore, Abdallah has had to form a coalition with different princes in order to obtain consent within the royal family for his policies. Foreign Minister Saud al-Faisal--son of the respected King Faisal who was assassinated in 1975 by his nephew–served as deputy oil minister in the 1970s and is thus considered knowledgeable on the subject of energy. He is popular in the West and is greatly respected by many members of the royal household. He is also seen as a supporter of foreign involvement in developing the energy market and has worked toward promoting such involvement in the gas sector. Saud al-Faisal is therefore a balancing element both amid the princes who support the Sudairi Seven and among those who are close to King Abdallah.[4]

Since the 1990s, an increasing number of government positions have been filled by people outside the royal family, who now make up two-thirds of the Supreme Council for Petroleum and Mineral Affairs that determines Saudi Arabia’s oil policies. In October 2007, King Abdallah issued a royal decree renaming a number of ministries and appointing six government ministers to the council. Among those who have served on the council are: Minister of State Dr. Muttlab al-Nafissa; Minister of Commerce and Industry Ghazi al-Gosaibi; Minister of Finance Dr. Ibrahim bin Abd al-Aziz bin Abdallah al-Assaf; Minister of Petroleum Ali al-Naimi; the late Minister of Economy and Planning Khalid al-Gosaibi; the president of the King Abd al-Aziz City for Science and Technology, Dr. Muhammad al-Suwaiyel; and Saudi Aramco President and CEO Abdallah Jum’ah. Although they work for the king, most council members have a wealth of international experience in and knowledge of oil-related economics. To give but a few examples, Minister of Petroleum al-Naimi studied in the United States and earned master's degree in geology at Stanford University, and Secretary General Muttlab al-Nafissa holds a Ph.D. in Physics from Harvard University.[5]

Even prior to the creation of the Supreme Council for Petroleum and Mineral Affairs, there was a perceptible change in Saudi policy toward the oil market. Due to King Fahd’s deteriorating health, most government authority was transferred to Crown Prince Abdallah in 1998. From the beginning, King Abdallah took a hard-line approach toward oil pricing and even more so after assuming full power in 2005. He believes that Saudi Arabia should make strategic use of oil profits and reject the OECD states’ demands to lower oil prices, as long as it is not in Saudi Arabia’s interest to do so. King Abdallah’s policy proved to be beneficial to Saudi Arabia when, according to various sources, he instigated an OPEC production cut during the East Asian economic crisis of1998. He sought the cooperation of non-OPEC states in this matter--first and foremost Russia and Norway--as a means to secure an increase in oil prices. Furthermore, despite pressure from OECD states for Saudi Arabia to increase its oil production in order to bring down prices, King Abdallah announced on several occasions that he did not intend to do so as it could harm Saudi Arabia’s economic security in the future.[6]

There has been a feeling in the royal household that King Abdallah’s oil policies have become tougher since King Fahd’s death in 2005. Indeed, while his brother was alive, Abdallah felt committed to Fahd’s policy of preserving low oil prices as a means of maintaining good relations with the West. Following Fahd’s death, however, Abdallah became...

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*Dr. Joseph Mann is a lecturer in the department of Middle Eastern Studies at Bar-Ilan University. Over the past few years, he has focused on the commodities market and on the renewable energy industry in EU countries. He now deals mainly with issues related to the oil and gas industries in the Middle East.
MERIA Journal Staff

Publisher and Editor: Prof. Barry Rubin
Assistant Editor: Yeru Aharoni
MERIA is a project of the Global Research in International Affairs
(GLORIA) Center, Interdisciplinary University.
Site: http://www.gloria-center.org/ - Email: info@gloria-center.org

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The IDF’s Minorities in Numbers and Pictures

In honor of IDF Diversity Week, we present diversity through numbers and pictures. Each year, more and more Muslims, Christians, Druze, Bedouin and immigrants from around the world take on the responsibility of defending Israel.

MUSLIMS:

Muslim Arab Israelis are not required to draft in the IDF, but there are many who volunteer. In 2013, there were over 200 Muslims serving in the IDF and over 300 in the reserves.

Bedouins:

Bedouins are nomadic Muslims who were in Israel when modern borders were set in place and are now considered Israeli citizens. They are not required to draft but a growing number choose to enlist. In 2012, there were over 1,400 Bedouin Muslim soldiers doing regular IDF service and almost 1,500 in the reserves.

Read more:http://www.idfblog.com/2014/02/27/truth-idf-numbers-pictures/#more-34027

Are you aware that in 2013, Middle class taxes go up-significantly?

In January of next year, the federal income tax rate for middle-class taxpayers is scheduled to rise from 25 percent to 28 percent, and the payroll tax is scheduled to rise from 13.3 percent to 15.3 percent… This drives the marginal tax rate based on the aforementioned three taxes to 48.12 percent. Add in state and local property, corporate, excise, and other state and local taxes, and the percentage of each additional dollar that is taxed hovers around 50 percent… When half of each additional dollar earned is taxed away, taxpayers experience a disincentive to start businesses or expand existing ones. This leads to fewer jobs being created.

Why is HAMAS Inside Tampa Schools?

Clare Lopez

Kelly Miliziano, who teaches history classes at Steinbrenner High School in the Tampa, Florida area apparently thinks it’s perfectly OK to invite a senior official of a HAMAS-affiliated organization into her classroom to discuss Islam with her students. According to local media reports, not only has this been going on for years, but in spite of the civil and criminal proceedings that could result from such reckless negligence, the Hillsborough County school superintendent, Mary Ellen Elia, and the chairman of the school board, Candy Olson, also expressed approval for students under their responsibility to be exposed repeatedly to guest speaker, Hassan Shibly, who is the Executive Director for the Council on American-Islamic Relations (CAIR) in the Tampa area.
More...

Did You Know... Ignoring the Call to Islam will Bring Jihad

‘Conquest through Da’wa [proselytizing] that is what we hope for. We will conquer Europe, we will conquer America! Not through sword but through Da’wa.’
-- Yousef al-Qaradawi , Muslim Brotherhood spiritual leader The Arabic word ‘Da’wa’ means the “call to Islam.” But do not think that Da’wa is the same thing as an invitation to an optional holiday event. The classical Islamic doctrine of jihad mandates that enemies must be given the opportunity to convert to Islam or pay the jizya tax before it is permissible to attack them.
Clare M. Lopez

Who is being discriminated-facts tell the truth

Religious bias

Hate crimes motivated by religious bias accounted for 1,409 offenses reported by law enforcement. A breakdown of the bias motivation of religious-bias offenses showed:

65.4 percent were anti-Jewish.
13.2 percent were anti-Islamic.
9.5 percent were anti-other religion, i.e., those not specified.
4.3 percent were anti-Catholic.
3.8 percent were anti-multiple religions, group.
3.3 percent were anti-Protestant.
0.5 percent were anti-Atheism/Agnosticism/etc.

http://www.fbi.gov/about-us/cjis/ucr/hate-crime/2010/narratives/hate-crime-2010-incidents-and-offenses.

On March 31, 1977, the Dutch newspaper Trouw published an interview

with PLO executive committee member Zahir Muhsein. Here's what he said:

"The Palestinian people does not exist. The creation of a Palestinian state is only a means for continuing our struggle against the state of Israel for our Arab unity. In reality today there is no difference between Jordanians, Palestinians, Syrians and Lebanese. Only for political and tactical reasons do we speak today about the existence of a Palestinian people, since Arab national interests demand that we posit the existence of a distinct "Palestinian people" to oppose Zionism.

For tactical reasons, Jordan, which is a sovereign state with defined borders, cannot raise claims to Haifa and Jaffa, while as a Palestinian, I can undoubtedly demand Haifa, Jaffa, Beer-Sheva and Jerusalem. However, the moment we reclaim our right to all of Palestine, we will not wait even a minute to unite Palestine and Jordan."

In March 1977, Zahir Muhsein, a PLO executive, said:

"The Palestinian people does not exist. The creation of a Palestinian state is only a means for continuing our struggle against the state of Israel for our Arab unity. In reality today there is no difference between Jordanians, Palestinians, Syrians and Lebanese. Only for political and tactical reasons do we speak today about the existence of a Palestinian people, since Arab national interests demand that we posit the existence of a distinct Palestinian people to oppose Zionism."

"For tactical reasons, Jordan, which is a sovereign state with defined borders, cannot raise claims to Haifa and Jaffa, while as a Palestinian, I can undoubtedly demand Haifa, Jaffa, Beer-Sheva and Jerusalem. However, the moment we reclaim our right to all of Palestine, we will not wait even a minute to unite Palestine and Jordan."

The Arab Apartheid

Ben-Dror Yemini
In 1948, the Arab countries refused to accept the UN partition proposal and they launched a war of annihilation against the State of Israel which had barely been established. All precedents in this matter showed that the party that starts the war - and with a declaration of annihilation, yet - pays a price for it. Between 550,000 and 710,000 Arabs fled because of the war and a larger number of 850,000 Jews were expelled or fled from Arab countries (the "Jewish nakba").
Population exchanges and expulsions were the norm at that time, occurring in dozens of other conflict points and affecting about 52 million people. In all the population exchange precedents that occurred during or at the end of an armed conflict, there was no return of refugees to the previous region, which had turned into a new national state.
Only the Arab states acted completely differently from the rest of the world. Instead of assimilating the refugees, they crushed them despite the fact that they were their coreligionists and members of the Arab nation - instituting a regime of apartheid. So the "nakba" was not caused by the actual dispossession, which had also been experienced by tens of millions of others. The "nakba" is the story of the apartheid, oppression, abuse and denial of rights suffered by the Arab refugees at the hands of the Arab countries. (Maariv)

International Law and Military Operations in Practice - Col. Richard Kemp

"Islamist fighting groups study the international laws of armed conflict carefully and they understand it well. They know that a British or Israeli commander and his men are bound by international law and the rules of engagement that flow from it. They then do their utmost to exploit what they view as one of their enemy's main weaknesses. Their very modus operandi is built on the correct assumption that Western armies will normally abide by the rules, while these insurgents employ a deliberate policy of operating consistently outside international law. "

Lost Historical Moments

What Rabin’s last Knesset speech really said:repudiation of a Palestinian state

Rabin ruled out a fully sovereign Palestinian state :

“We view the permanent solution in the framework of State of Israel which will include most of the area of the Land of Israel as it was under the rule of the British Mandate, and alongside it a Palestinian entity which will be a home to most of the Palestinian residents living in the Gaza Strip and the West Bank. We would like this to be an entity which is less than a state, and which will independently run the lives of the Palestinians under its authority.”

Rabin ruled out a total withdrawal from Judea and Samaria and thus a return to the pre-June 1967 borders :

“The borders of the State of Israel, during the permanent solution, will be beyond the lines which existed before the Six Day War. We will not return to the 4 June 1967 lines.”

Rabin ruled out withdrawing form the Jordan Valley:

“The security border of the State of Israel will be located in the Jordan Valley, in the broadest meaning of that term.”

Rabin ruled out uprooting settlement blocs, like the Gush Katif bloc in Gaza (which was subsequently uprooted by former Prime Minister Ariel Sharon):

“The establishment of blocs of settlements in Judea and Samaria, like the one in Gush Katif.

AND

Rabin ruled out removing any settlement before coming to a full peace agreement with the Palestinians:

“I want to remind you: we committed ourselves, that is, we came to an agreement, and committed ourselves before the Knesset, not to uproot a single settlement in the framework of the interim agreement, and not to hinder building for natural growth.”

Rabin insisted on Israel retaining full security control of the borders with Egypt and Jordan, contrary to Israel’s relinquishment of the Philadelphia Corridor on the border with Egypt:

“The responsibility for external security along the borders with Egypt and Jordan, as well as control over the airspace above all of the territories and Gaza Strip maritime zone, remains in our hands.”

Correcting Oslo Myths-Part 2

3) Kuttab laments that the post-1993 Oslo process resulted in a Palestinian Authority "whose ministers and legislators are not guaranteed passage between Gaza and the West Bank ...."

Before free passage or other perquisites, PA leaders were obligated, among other things, to eliminate the terrorist infrastructure in the West Bank and Gaza Strip, end anti-Israeli, antisemitic incitement in schools, mosques, and communications media, and resolve all outstanding issues through peaceful negotiations. They met none of these commitments, sometimes bolstering terrorism and greatly increasing incitement.

4) Kuttab complains that under Oslo the PA got "lightly armed police ---- but no real sovereignty over the land or contiguity between our communities in Gaza and the West Bank."

Oslo agreements repeatedly were revised, regardless of Palestinian non-compliance, until the authorized number of police grew from 8,000 to 40,000. Though they were to be the only armed forces in the territories, Israeli estimates early in the second intifada put the number of gunmen - police, "security services," terrorists, and armed gangs - at 85,000. Their armament reportedly included not only heavy machine guns and rocket-propelled grenades, but also anti-tank and anti-aircraft missiles.

Sovereignty was to be negotiated in the envisioned 1998 "final status" talks - after a five-year period of confidence-building. Palestinian leadership chronically undermined the process. Palestinian terrorism made the 1993 - 1998 Oslo period more deadly for Israelis than the 15 years preceding it.

The United States doesn't have contiguity between the lower 48 states and Alaska and Hawaii; territorial contiguity between the West Bank and Gaza Strip - that is, through the 20 miles of Israeli territory between them - was never promised and would destroy Israeli contiguity.

5) "Palestinians have been made to endure hundreds of checkpoints in the West Bank, an eight-foot wall deep in our territories, and tight Israeli control over borders."

The security barrier is not "deep in Palestinian territories," but rather encompasses less than 8 percent of Judea and Samaria, and is mostly a fence, rarely a wall; the land in question is not "our [Palestinian] territories" but disputed territory to which, according to the authors of U.N. Security Council Resolution 242, Jews as well as Arabs have claims; and there are no international borders, only the 1949 armistice lines with Jordan. Under 242, borders remain to be negotiated. As for checkpoints - like the security barrier and "tight Israeli control" - Palestinian Arabs precipitated these measures themselves. No terrorism and there would be no fence or tight Israeli control and few checkpoints - like before the first intifada.

Correcting Some Oslo Myths

1) In Oslo "Israeli, Palestinian and other world leaders promised that ... Palestinian sovereignty would be solidified."

No, they didn't. The 1993 Declaration of Principles and subsequent Oslo agreements outlined a process by which final status negotiations about the West Bank and Gaza Strip would be reached. The process required an end to anti-Israel terrorism and incitement and a commitment to peaceful negotiations. The PA, Fatah, Hamas, Islamic Jihad, the Popular Front for the Liberation of Palestine, and other terrorist groups, sabotaged the process from the start.

2) "The reality is that, in defiance of U.N. Security Council Resolution 242, which states that it is inadmissible to occupy land by force, Palestinian territories are still under foreign military occupation."
Wrong again. Resolution 242 (1967) does note "the inadmissibility of the acquisition of territory by war." It also affirms the right of every state in the area "to live in peace with secure and recognized boundaries free from threats or acts of force." There were no "Palestinian territories." Jordan occupied the West Bank, Egypt controlled Gaza. Israel did not have "secure and recognized boundaries," so retention of some of those territories was possible under 242. Israel is not a "foreign" military occupier in the West Bank but, pending final negotiations, the lawful military administrator as a result of a successful war of self-defense.

Doc's Talk