Dec. 2001 Vol. 222 No. 12  International Politics

A.F. Alhajji,  Contributing Editor

Middle Eastern decisions will carry political prices

Can Saudi Arabia and its Gulf allies afford the political price of cutting oil production after Sept. 11, 2001, to keep oil prices within OPEC’s price band ($22 to $28/bbl)? Can they afford a further smearing of their reputation by the U.S. media because of an output cut? On the other hand, can they afford lower oil revenues, negative economic growth, and higher unemployment? Can they afford public anger over covert cooperation with the U.S. against terrorism, while the West Bank / Gaza situation deteriorates by the minute?

The answer is no, they cannot afford any of that, and they will have to walk the fine line between hell and misery. Therefore, the message that is sent to the U.S. is very clear: Do not push it and let me walk that line! This message came with guarantees of plentiful oil supplies, stronger ties and a joint effort to fight terrorism.

The politics of oil production cuts. Immediately after the terrorist attacks on New York City and Washington, the Arabian Gulf states announced that they would supply any oil quantities needed, and they promised to keep prices below $30/bbl. Ironically, oil prices declined and then continued their downward trend. Three weeks passed by with the OPEC basket price lingering below the price band’s lower end, yet no action was taken by the group. By contrast, OPEC during 2000 had agreed to cut production by 500,000 bopd if its basket price declined below $22/bbl for 10 consecutive days.

OPEC did not cut production at that point, because the Gulf allies of the U.S. judged that they could not afford the political price for such action right after the worst terrorist attack on American soil. Who wants to cut output and raise prices, after more than 6,000 people were allegedly killed by Middle Eastern terrorists from oil-producing nations? Who wants to cut production in a period when every action that could potentially affect the U.S., such as higher gasoline and heating oil prices, can be perceived as helping terrorists? Thus, the Gulf states postponed output cuts, even though it meant losing millions of short-term dollars. This is a wise decision for governments looking for long-term stability.

Although the Gulf allies did not call for a production cut, Venezuela and Iraq did that job for them, anyway. It seems that oil dealers understood OPEC’s limitations, and they did not react to various announcements by Venezuelan President Hugo Chavez, the Iraqis, or even OPEC Secretary-General Ali Rodriguez. However, when Saudi Oil Minster Ali Naimi called on Nov. 8 for a production cut, oil prices increased by more than 5%. The Saudis may have felt that such low prices may affect the delicate balance that they are trying to maintain. They know that there will be a domestic political price, if they do not cut output. Luckily, they may find some support from the White House, as long as prices stay in the low $20s. The Saudis and their Gulf allies must find a balance that satisfies both internal and external factors.

Realizing that a production cut may not satisfy internal factors, Gulf states look for help from non-OPEC producers. This approach may sound like it is based on economics, but it has a political agenda – support from Russia, Norway and Mexico, to legitimize the cut in the eyes of Americans.

Media attacks on Saudi Arabia. A month after the terrorist attacks on America, the U.S. media launched a concerted campaign aimed at Saudi Arabia. This verbal onslaught may have prevented any production cut sponsored by Saudi Arabia, and OPEC cannot cut without the kingdom’s participation. The Saudis may have felt during the first two months after the attacks, that a production cut would give the media real ammunition, since most accusations are not true.

This media attack led some analysts and unsophisticated news anchors to conclude that the Saudis might cut oil production as a form of retaliation against U.S. policies in the Middle East. Other observers argued that oil supplies might be disrupted because of political instability or terrorist attacks on oil facilities. Still, others went too far and called on the U.S. military to occupy the oil fields.

The White House and the State Department proved them all wrong. President George W. Bush and Secretary of State Colin Powell, on many occasions, praised the Saudis’ cooperation. Middle East experts argued that the Saudi government is one of the most stable regimes in the region and insisted that U.S.-Saudi relations are as strong as ever. They also stated that most Saudi advisors and officials are U.S.- educated, and it is highly unlikely that Saudi Arabia will impose an oil embargo on anyone. A recent letter to The New York Times stated, "No matter the shallowness of Saudi Arabian democracy, no matter the venality of its leaders or the terrorist acts perpetrated by its citizens, America’s friendship will remain as deep as the oil fields buried under Saudi land."

Immediately after the September 11 attack, Saudi Foreign Minster Saud Al-Faisal led a team of intelligence officials on a visit to Washington, to discuss cooperation in the fight against terrorism. Saudi Arabia – as detailed by the White House and State Department – has arrested Bin Laden sympathizers, prohibited incitement in mosques and media, and frozen the assets of organizations and individuals listed by the State Department. According to press reports, the Saudis are allowing the FBI to interview Bin Laden supporters and the families of presumed hijackers. Despite these facts, U.S. television networks have continued to attack Saudi Arabia, and frighten viewers about the possibility of a Saudi oil embargo.

Saudis question the timing of this unfriendly media blitz, claiming that it has nothing to do with Sept. 11. They believe that they were attacked because of their firm stand on issues related to establishing a Palestinian state that features Jerusalem as its capital. They also believe that the media onslaught began after an exchange of letters between President Bush and Crown Prince Abdullah became public. The letters relate to possible declaration of a Palestinian state in the forthcoming UN General Assembly meeting.

Dr. A. F. Alhajji joined Ohio Northern University in August 2001 as an assistant professor of economics in the College of Business Administration at Ada, Ohio, specializing in international and energy economics. Previously, he was an award-winning, visiting professor of economics at Colorado School of Mines. He is a regular contributor to this column.