From the Los Angeles Times

New forces fraying U.S.-Saudi oil ties

Surging prices, along with a weak dollar and an oil-thirsty Asia, have blunted America's leverage with the key oil producer and helped sour the two nations' relationship.

By Paul Richter
Los Angeles Times Staff Writer

June 8, 2008

WASHINGTON — For decades, Saudi Arabia worked with its dominant customer, the United States, to keep world oil markets stable and advance common political goals.

But the surging price of oil, which soared more than $10 a barrel Friday to a record-high $138.54, has made it plain that those days are over. New forces, including a weak dollar and an oil-thirsty Asia, have blunted the United States' leverage and helped sour the two countries' relationship.

As gasoline prices have risen, the White House has unsuccessfully exhorted the Saudis to step up production, and Congress has threatened retaliation. But the situation now is a far cry from the days when the U.S. economy dominated the direction of the petroleum market.

"That gave us leverage," said Greg Priddy, an oil analyst at the Eurasia Group, a New York-based risk assessment firm. "There's certainly a perception that the power equation has changed."

The weakening of the economic relationship comes when the vital U.S.-Saudi security relationship also has been fraying.

In the 1980s, the U.S.-Saudi bond that kept oil prices low was credited with helping weaken the Soviet Union during the waning days of the Cold War. And it helped keep markets stable after Iraq's 1990 invasion of Kuwait.

But the Saudi government has been dismayed by the consequences of the war in Iraq and by what it sees as a weak Bush administration commitment to the Palestinians.

The relationship is shaping up as a political issue for the fall campaign, certainly among congressional candidates and perhaps among presidential candidates.

With a 20-million-barrel-per-day habit, the U.S. remains the world's largest oil customer, even though its daily consumption over the years has dropped from one-third of total daily production to one-fourth.

But the U.S. can no longer guarantee on its own that producers will have the markets they need for their oil. Nor can the Saudis, alone, ramp up production in sufficient amounts to stabilize prices.

China and other Asian nations now use about 17 million barrels a day. That's up more than 20% since 2003, and booming growth is expected to continue.

With the shift in buying power, the Saudis are cultivating important Chinese customers, analysts say. Saudi Arabia recently contributed $50 million for Chinese earthquake relief, and King Abdullah has visited China.

"The relationship is clearly developing rapidly," said Paul J. Saunders, who served in the State Department under President Bush and is executive director of the Nixon Center think tank.

Saunders believes that China may be buying more Saudi oil than the United States in less than a decade. That sets up "a real possibility that China will have more leverage in dealing with Saudi Arabia than we do," he said.

The Saudis helped the United States for years as "doves" within the Organization of the Petroleum Exporting Countries on the issue of oil prices. They were willing to moderately increase production, fearing that high prices could cause the United States and others to seek alternate supplies or cut consumption, as happened in the 1980s in reaction to the oil price shocks of the 1970s.

But attitudes have been shifting. Many believe the Saudis have grown more interested in conserving their supplies for later generations, and confident that if U.S. consumption drops, the economies of China, India and others will take up the slack.

By the end of 2007, it was also apparent that the Saudis no longer believed they could substantially affect prices by increasing production. Now, Saudi oil experts believe that the price run-up is due to such factors as investor speculation, the weak dollar and limited output from such key producers as Iraq, Iran and Venezuela.

"They see themselves as having lost control of the market," Priddy said.

The weakening of the economic ties between the United States and Saudi Arabia comes when the Saudi government has increasingly sought to distance itself politically from Washington.

Even as the United States has tried to forge a coalition of Persian Gulf states to counter Iran, Saudi officials have grown skeptical about a security alliance with Washington.

Instead, leaders of the overwhelmingly Sunni Arab kingdom worry that the U.S.-led invasion of Iraq has weakened their security and fret about the Shiite Muslim domination of Iraq. Stephen Hadley, the national security advisor, recently acknowledged to reporters that the war has been a "stress" on the relationship.

Meanwhile, the Saudis, making use of the added economic clout fueled by soaring oil prices, are trying to forge a new leadership role in the Muslim world. They have participated, if often invisibly, in efforts to resolve the Israeli-Palestinian conflict and to stabilize Lebanon.

Ordinary Saudis like the idea of their nation's added wealth, as well as the idea that U.S. leaders are coming as supplicants.

Saudis and their Persian Gulf neighbors "feel pretty satisfied," Hady Amr, director of the Brookings Institution's Doha Center, said in an interview from Qatar. "They're relishing their prominence on the world stage."

In mid-May, President Bush went to Saudi Arabia for the second time this year to seek increased oil production, but officials in Riyadh, the Saudi capital, said no large increases were planned. Sen. Hillary Rodham Clinton (D-N.Y.) criticized Bush in her presidential campaign appearances, saying she found it embarrassing that a sitting president was "begging" the Saudis.

U.S. lawmakers, meanwhile, have proposed various measures to force the Saudis to boost production. One, sponsored by Senate Democrats, threatens withdrawal of a proposed $1.4 billion in pending arms sales.

"We have to shove it in the face of the Saudis and the others in the international criminal cartel," Rep. Donald Manzullo (R-Ill.) said May 22 at a hearing of the House Foreign Affairs Committee. He decried Saudi Arabia and other members of OPEC as "bandits."

The Saudis, for their part, have told U.S. officials that they understand that this is an election year, and seem to largely discount the rhetoric. But there also have been hints of indignation that Americans are pressing them.

Even without the passage of punitive legislation this year, diplomatic efforts could suffer if the Saudis react badly to the American outcry, Saunders said. One that could be affected is Bush's insistence on a Mideast peace pact by the time he leaves office in January.

"You couldn't have any real expectation of [a peace deal] if the Saudis are seriously alienated from the U.S.," Saunders said.