What the White House really wants
Posted: Saturday, September 28, 2002
September 28 2002, www.smh.com.au
The unifying element in an often-contradictory US foreign policy is the dream of toppling OPEC and controlling the world oil market. And Iraq is the key, writes Paul McGeough from Riyadh.
The unifying element in an often-contradictory US foreign policy is the dream of toppling OPEC and controlling the world oil market. And Iraq is the key, writes Paul McGeough from Riyadh.
Contempt rises to the surface. Over glasses of sugared tea, two of this desert city's leading businessmen are stung by news from Washington that Saudis entering the United States are to be subjected to the indignity of being fingerprinted.
Abdulrahman Al-Zamil, his leg twitching nervously in the folds of his white robes, spits out his words: "America should ask the British about the history of Iraq." His colleague Khalid Al-Turki rejoins: "The justifications for a US attack on Iraq is not only to get rid of weapons of mass destruction. They also want to control the oilfields, so that no more will they have to rely on the Wahhabi-dominated crazies of Saudi Arabia." The exchange, as the fading autumn light made filigree of Riyadh's stark, modernistic skyline, was more than just a Saddam-inspired rant.
As George Bush prepares for war against Iraq, he has spoken only of disarming Saddam Hussein and of liberating his people. But if his battle plans are viewed in the context of some of Washington's ambiguous and contradictory adventures in the wake of September 11, one of the most coherent strands in today's US foreign policy is oil.
Consider. Washington's war talk is what is pushing oil prices to about $US30 ($55) a barrel - an increase of 45 per cent in a year, of which analysts say that anywhere between $US5-$10 is a "war premium".
But that didn't stop the US Energy Secretary, Spencer Abraham, from getting his dukes up with OPEC oil ministers at a conference in Osaka last Saturday: "We aren't going to beg for oil. Producers have their way of looking at things and the US has to do that as well." And that is what Washington has been doing.
Abraham had stopped over in Central Asia on his way to Japan. In Azerbaijan he officiated at the ground-breaking ceremony for a new US-sponsored pipeline from Baku, on the oil-rich Caspian Sea, to the Turkish Mediterranean port of Ceyhan. But the project is more notable for the fact that the $US2.9 billion pipeline is significantly longer, and so more costly, than it might have been because the US was determined that is should avoid two countries - Russia and Iran. Some critics say that an oil price of less than $US20 could make the project economically unviable.
After years of US silence on the dearth of democracy in the Middle East, the US National Security Adviser, Condoleezza Rice, has taken to claiming that the American values of freedom and democracy do not "stop at the edge of Islam" as she urges "the march of freedom in the Muslim world".
But in April Washington was coldly indifferent to the threat to democracy in Venezuela when a short-lived coup briefly bundled President Hugo Chavez from office. In the preceding months senior US officials had met those plotting against Chavez, prompting a Latin American commentator to liken the coup to a "Bay of Pigs without weapons". The Bush Administration stubbornly refused to welcome Chavez's restoration to office, mainly because of the company he keeps - Castro, Saddam and Gaddafi. Worse, Chavez was messing with the independence of the Venezuelan oil industry which, at 1.5 million barrels a day, was the third-biggest foreign supplier to the US.
In post-Taliban Afghanistan, Hamid Karzai, the man whose every movement is guarded by US soldiers, was a consultant to the US oil giant Unocal before he was handpicked by Washington as the country's interim president. Zalmay Khalilzad, Bush's special envoy to Kabul, was similarly employed by the same company, which for years wanted to run a strategic energy pipeline through Afghanistan. Now in office, Karzai is dusting off the old plans.
In the former Soviet republics of Central Asia, the US has thousands of advisers and troops protecting energy assets with combined reserves said to be as great as those of Saudi Arabia and which already are sucking in $US200 billion in US investment.
In strife-torn Colombia, America's seventh-biggest oil supplier, Bush has stumped up $US100 million to train and equip a local army of 2000 to protect California-based Occidental Petroleum's 772-kilometre Cano Limon pipeline from guerilla attacks.
And despite a hectic "war on terror" workload, the Secretary of State, Colin Powell, found time a couple of weeks ago to fly the US flag in the oil-rich African nations of Gabon and Angola. And Bush is to go to Nigeria early next year. It's all part of a quiet but concerted energy-driven return by the US to a continent it pretty well abandoned when the collapse of the Soviet Union ended its usefulness as a Cold War battlefield. Africa supplies about 14 per cent of US oil imports, a figure that experts say could almost double in the coming decade.
THE Bush Administration launched a new energy blueprint last year which came to be known as the Cheney Report, after the Vice-President, Dick Cheney, who led the energy policy team. It was quickly consumed in domestic ructions over the involvement in its drafting by executives from the now-disgraced Enron Corporation and over its call for drilling in the wildlife sanctuaries of Alaska. Those debates died on September 11.
But Michael Klare, a professor of peace and world security studies at Hampshire College in Amherst, Massachusetts, says the international implications of the plan had been missed in the coverage. In an interview with the Herald he reduced them to four key points:
"The US, which burns a quarter of all oil consumed, is utterly dependent on foreign supplies; it will have to import heavily from sources like the Caspian states, Russia and Africa on top of its traditional big suppliers - Saudi Arabia, Venezuela and Canada; market forces alone will not work - the US will have to overcome foreign resistance to the outward reach of American energy companies; and in time, the US will be increasingly dependent on oil from dangerous, unstable and unfriendly neighbourhoods."
The Cheney report canvasses global markets in some detail, but oddly it makes no reference to any prospect of sanction-bound Iraq's 22 per cent share of world reserves coming into play, unless the authors had Baghdad in mind when they wrote: "[By 2020 the US] will import nearly two of every three barrels of oil [it uses] - a condition of increased dependency on foreign powers that do not always have America's interests at heart."
Given the White House's failure to explain why it wants to attack Iraq now, after years of grumpily accepting the Iraqi status quo, and why now, in the middle of the so-called war on terrorism in which no one has seriously linked Saddam to the September 11 attacks, diplomats and analysts across the Middle East and the world are still attempting to assess how significant the oil factor is in Bush's war reckoning.
As the world's biggest economy, the US depends on Saudi Arabia not so much as a supplier of oil as it does for the Saudis' unique ability to control the price of oil - all international producers pump at or close to full capacity, with the exception of Saudi Arabia, which has a massive excess capacity.
If prices go up, it is the only oil producer that can flood the market to bring them down; if they drop, it can turn off the spigot to bring the price back into a steady band. And all that production clout has allowed Riyadh to control the often-fractious OPEC cartel in the self-serving knowledge that oil-driven market fluctuations are no good for the Saudis' $US800 billion foreign investment portfolio.
It all suited the West quite well. Until the September 11 attacks, the underpinning of the US-Saudi relationship was powerfully simple - Washington provided defence and Riyadh delivered oil at a manageable price. But since 15 young Saudis joined Osama bin Laden's death squads last year, great chunks of flesh have been ripped from the bones of the relationship by a piranha-like media and lobby campaign across the US. Hence the fingerprinting for the long-trusted citizens of a traditional ally.
The Saudi businessman Abdulrahman Al-Zamil could not contain his outrage: "Osama bin Laden did not select these young Saudis because he was stupid. It was deliberately calculated to wreck our relationship with the US." Mocking himself as a "Bedouin idiot" who still could see clearly that which was not obvious to the smartest in Washington, he said: "The US has given bin Laden his victory. Osama has won the war!"
Despite denials, there is a perception of tit-for-tat in a Saudi decision to allow negotiations to bog down on a huge new gas development that was expected to be a $US25 billion bonanza for US energy companies, and a trillion-dollar class action against Saudi Arabia by the US families of the September 11 victims. "That lawsuit is an albatross of the Lockerbie variety," said one diplomat, who predicted that the legal action would cause friction for years to come.
Traditionally at this time of year, tens of thousands of Saudis holiday in the US to escape the fierce summer heat in the Gulf - 150,000 own homes in America. But this year's US visa crackdown forced them to holiday in Europe, Malaysia, Egypt and Lebanon.
Students who would normally go to the US to study are being enrolled in European colleges and a boycott of US goods is being blamed for a fall of more than 30 per cent in imports from the US. Much of this is heat of the moment stuff, but the long-term worry for US observers is that the Saudi elite and management class, which is almost entirely educated in the US, is starting to look elsewhere in the world for business and pleasure.
Says Al-Zamil: "We have been hurt more than anyone else by this. We are the losers - we have lost US goodwill and our image. But the US has lost, too - all that tremendous business and interaction between our people is in decline. They have taken their air force to Qatar and what we built up over 30 years has gone on the wind."
The fear for some analysts in Riyadh is that, in the same way that September 11 was an asymmetrical contest - there was no connection between the might of the US military complex and a bunch of young men with box cutters and credit cards - there will be no connection between anti-Saudi public opinion in the US and the economic good sense of a long-term relationship between the two countries; and so, there will be no incentive to halt the deterioration in relations.
A Western diplomat told the Herald: "It's reasonable to assume that the US is working on Iraq as a way to be less reliant on the Saudis. If Washington can install a friendly regime in Baghdad, it will be reckoning that in time it can get Iraq up to speed as an oil producer with a Saudi-like capacity to control the market. That would wreck OPEC's power to control prices."
And Sheik Zaki Yamani, the Saudi oil minister who ran OPEC during the convulsions of the 1970s, predicted that, fired up with renewed foreign investment, Iraq could be producing 7 billion barrels a day and that, he said, "would be the end of everything for OPEC".
There are a lot of ifs in these equations. What looks like a "friendly Baghdad regime" to Washington will look like a puppet to much of the world; Washington could well end up in an arm wrestle with the new regime on its OPEC membership; it will take years for Iraq to get into the same production league as Saudi Arabia; and the notion of immediate control of Iraq's oil resources implies the installation of a new regime without a bout of civil war - which is probably less than a 50-50 prospect.
Washington's loud insistence that it must impose democracy in Iraq, in the hope that it will spread through the Muslim world, is prompting a mixture of concern and black humour. And diplomats in the region are warning that a free vote in Saudi Arabia probably would be the equivalent of an express courier delivery of the world's greatest oil reserves to Islamic radicals, just as democracy in Pakistan would cede them control of Islamabad's nuclear arsenal.
Brad Bourland, chief economist with the Saudi American Bank in Riyadh, said: "A lot of Saudis are worried about Iraq as an OPEC-buster, but I'm not sure that it's a significant part of the US policy deliberation - at best it's a fringe benefit in the minds of some."
But he spelt out the serious, long-term implications for other oil producers as Iraqi production comes back on stream: "After a war in Iraq we are looking at a shift in the industry's tectonic plates - anything that changes Iraqi production will change the industry, because someone will have to sacrifice market share. The Saudis will have to take oil off the market or get OPEC to reduce output".
"Some day Iraq will have the capacity to play a similar market role to the Saudis, to be able to counter the OPEC hawks like Libya and Iran. But after 10 years out of the market, it is unlikely that Iraq would want to have any idle capacity. So it's hard to be optimistic about any sustained increase in demand for Saudi oil or sustained high prices."
All of which suggests that in time the US probably could get its policy dream of a weakened OPEC, which now controls only 37 per cent of the oil market, compared with 55 per cent at the time of the 1973 oil shock.
But for now? Bourland, describing the Osaka performance of the Energy Secretary, Spencer Abraham, as "unrealistic; but almost threatening", said that the Bush Administration clearly had abandoned a drive by its predecessor towards co-operation with OPEC on prices. "It was a 180-degree turn away from the de facto co-operation of the Clinton years," he said. And, on top of that, Bourland said economic pressures on both sides were driving the US and the Saudis out of sync on their notion of what was a fair price. The Saudis used to work on a $US18-$20 range, but now had fixed on about $US25.
Pricing is complex. If the producers push it too high they make the development of more-costly alternative production sources more attractive - hurting themselves in the long term; if they set it too low to compete for market share, they hurt themselves again. A Russian oil executive was quoted last week as being temporarily happy with the existing arrangement: "The fear factor has pushed prices up and nothing is coming out of Iraq. But in 18 months [after a US invasion] prices will have plummeted and we'll be in deep trouble."
And, at the end of the day, the Saudis still need to be handled carefully, because they could say to hell with everyone and simply flood the market - earning as much revenue on a low-flow $US30 a barrel as they would by increasing the flow and cutting the price to a reckless $US17. But there is always a check on any Saudi market activity that looks like assistance to the US - a backlash at home.
JUST as vexing for Washington, as it sees a glimpse of price liberation in a redeveloped Iraqi oil industry, is the extent to which Saddam Hussein has already mortgaged the post-sanctions or post-regime-change industry to Russia, France and China.
Earlier this month the Iraqi authorities blocked attempts by the Herald to see up close its oil industry, which is operating at only a third of its pre-Gulf War capacity. We were allowed only distant glimpses of the Majnoon oilfields, near the southern city of Basra, for which the French have won development rights. However, in Baghdad, we got access to the Doura oil refinery which was virtually destroyed in the 1991 conflict. The installation is still buckled and bruised from bombing, but it was held together with mechanical quick fixes and industrial staples and staff claimed that it was close to "full" production.
There's billions of dollars and barrels worth of work in restoring and expanding the Iraqi industry. The French companies Elf Aquitaine and Total SA have provisional agreements with Baghdad over as much as 27 billion barrels of Iraqi reserves; three Russian companies - Lukoil, Zarubezneft and Machinoimport - have their paws on up to 15 billion barrels; China's National Petroleum Corp is in there, too.
In a telephone interview from Amherst, Michael Klare observed that the wily Saddam had selected companies from the nations that were most likely to blunt any US designs on Iraq: "His hope was to persuade them not to act against Iraq and this now has become a part of the diplomacy at the United Nations.
"But the problem facing the US is that these deals give the Russians, the Chinese and the French potential control of Iraq's untapped reserves. Nothing can happen while sanctions are in force. But if they are lifted and the regime or one of its choosing remains in power, Iraq's vast untapped reserves would fall under the control of non-US companies. Some of them would sell on the world market, but America would have no assurance that they would be available to satisfy their future energy requirements. Obviously, the only way to make sure this doesn't happen is to engineer 'regime change' and install a government that will cancel the agreements."
Sure enough, in the UN game of bluff and blink, Russian and French diplomats who had previously presented themselves as concerned global citizens have in the past few days emerged as commercial hucksters, seeking to protect their Iraqi market share in the face of a growing expectation that the US would play a lead role in rebuilding postwar Iraq.
Post-Soviet Russia has become one of the world's top oil producers, refusing to work with OPEC as President Vladimir Putin has become something of a diplomatic peacock, attempting to position Russia as a friend of all three of Bush's "axis of evil" nations - Iraq, Iran and North Korea - while at the same time staying on good terms with Bush.
Yet Moscow may have been the first to blink. Putin has been holding out against the US demand for a tough new weapons inspection resolution by the UN. But his team in New York reportedly has indicated to the US that Moscow would support the US in return for trade guarantees worth billions and membership of the World Trade Organisation. Russia is owed more than $US7 billion by Iraq in pre-Gulf War debt and recently it closed a $US40 billion, long-term trade deal with Baghdad.
Just how high the stakes are was underscored by James Woolsey, a hawkish former CIA director who is close to the Iraqi opposition groups, when he told The Washington Post: "It's pretty straightforward. France and Russia have oil companies and interests in Iraq. They should be told that if they are of assistance in moving Iraq towards decent government, we'll do the best we can to ensure the new government and American companies work closely with them. If they throw in their lot with Saddam, it will be difficult, to the point of impossible, to persuade the new Iraqi government to work with them."
The US-backed Iraqi National Congress opposition group is letting it be known that it wants to review all deals done with Saddam. The group's chairman, Ahmed Chalabi, has urged the formation of a US-led consortium to redevelop Iraq's oil industry.
And the INC's Washington director, Entifadh Qanbar, seemed to take some delight in revealing this week that the Russians had raced a diplomat to his office to reassure him that Moscow's Iraqi dealings had been based on historic and economic relations - nothing to do with Saddam. Intriguingly, noises of co-operation are being heard from Paris, too.
They can do all the deals they like, but there is no certainty about what state the industry will be in after a war.
Calls early this month by Iraqi Vice-President Taha Yassin Ramadan for Arabs to attack US targets in the region have fuelled worst-case scenarios that a desperate Saddam might torch the Iraqi industry, as he did in Kuwait; or that he might launch attacks on the Saudi, Kuwaiti and other Gulf oil industries. In which case, Sheik Yamani warned, the oil price could spike on either side of the $US100 mark.
When Saddam invaded Kuwait in 1990 oil was selling at $US16 a barrel. As the invasion became the hostage drama it shot to $US38. Where will it go this time? Who will be manipulating it? And to what end?
For now, the urge to give history a label even as it is happening has forced many to embrace Bush's name for this global upheaval - the war on terror. History, however, may well record it as the first oil war of the 21st century.
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