Sleeping With The Devil (3 page)

    PROMOTERS OF ALASKAN, Mexican Gulf, Caspian, and Siberian oil sound
like a broken record when they point out that the United States has been weaning itself from
Saudi oil. They argue that Saudi Arabia accounts for only roughly 8 percent of U.S. crude oil
consumption. They also argue that three of our four main oil suppliers are in the Western
Hemisphere: Canada, Venezuela, and Mexico. True enough. But what they forget to mention is that
Saudi Arabia sits on 25 percent of the world’s proven reserves, maybe barrel per barrel the
cheapest oil in the world to extract. More important, the Saudis own half the world’s surplus
production capacity - two to three million barrels a day. Take the Saudi surplus out of play,
and the market loses its stability and liquidity. It may not seem like much oil, but the
surplus capacity is what keeps the world’s oil markets from going on a facedown roller-coaster
ride during periods of crisis. In other words, no matter what country you buy your oil from,
Saudi Arabia determines world price by how much oil it chooses to produce.

    It was Saudi Arabia that broke the back of the 1973 OPEC embargo
(though not before it enriched itself by tens of billions of dollars). As the Iranian
revolution segued into Iran’s protracted war with Iraq, the Saudis again used their surplus
capacity to keep the oil flowing to the industrialized West. By 1979-80, the Ju’aymah terminal
on the Persian Gulf was shipping about nine million barrels of oil daily, twice its normal
output.

    The same thing occurred during the 1990-91 Gulf War. The Saudis, backed
by a couple of other Gulf states, produced an extra five million barrels a day, making up for
the loss of Iraqi and Kuwaiti oil. Without its surplus capacity, the price of a barrel of oil
likely would have soared to over a hundred dollars.

    On September 12, 2001, less than 24 hours after the attacks on the
World Trade Center and the Pentagon, the Saudis put on the market an extra nine million barrels
of oil, going mostly to the United States. As a result, oil prices stayed low, and U.S.
inflation spiked marginally in spite of the single most devastating terrorist attack in
history. Take that same liquidity out of play with twenty pounds of plastique, and all bets
would be off.

    A DECEMBER 2000 study by the International Monetary Fund looked at the
effect of a hypothetical five-dollar-per-barrel rise in the price of oil. Gross domestic
product in the United States and most European countries would decline .3 percent on an annual
basis. Financial markets would fall, but not to disastrous depths. Nations with a net export of
crude oil would grow in wealth; those with a net import would fall. The Far East would suffer
particularly because it produces so little oil of its own.

    But all that was calculated on what would have been a then roughly 20
percent rise in the price of crude, a mild bump as economic catastrophes go. The terrorist
attack on the Abqaiq oil facility envisioned by the Reagan-era scenarists would remove as many
as 5.8 million barrels of crude a day from world markets, double the three million barrels a
day taken out of production during the OPEC oil embargo, almost double the daily amount lost to
the revolution in Iran and the subsequent Iran-Iraq war, and almost one-fourth the current
average daily consumption.

    What does history tell us about the effects of such a loss? Well,
Americans saw double-digit annual inflation only ten times in the last century, four if you
exclude the effects of the two world wars: in 1974, in the wake of the OPEC embargo, when
inflation soared to 11 percent; and in 1979-81, when inflation topped out at 13.5 percent. By
1981 the price of a barrel of crude had hit $53.39, and regular gasoline was selling at U.S.
service stations for over $2 a gallon.

    The OPEC embargo sent the stock market plummeting. By the time the
Standard & Poor 500 bottomed out in September 1974, it had lost 47.7 percent of its value
in twenty-one months, almost exactly equal to the 47.8 percent lost in the twenty-eight months
beginning in March 2000 as the dot-com bubble burst. Between 1980 and 1982, the index gave up
another 27.1 percent of its value as the unrest in Iran and Iraq rocketed oil to staggering
highs.

    Inflicting selectively heavy damage on the Abqaiq oil-processing center
would almost certainly duplicate those inflation figures and send stock indices plunging again.
A coordinated attack on Abqaiq, Ras Tanura’s Platform Four, and the East-West pipeline’s Pump
Station One, just to pick and choose from dozens of potential targets, would increase both
effects exponentially while leaching the last bit of elasticity from the global oil-supply
chain. The U.S. Strategic Petroleum Reserve would only help prop up international markets for
several months. Unless alternative sources of oil quickly kicked in after that, we’d be in
virgin territory - a kind of economic equivalent of the postnuclear-holocaust world of Nevil
Shute’s 1957 bestseller, On the Beach.

    So what exactly would happen to the price of oil? I’ve surveyed
contacts in the oil industry, but no one could come up with even an approximate figure.
Apparently, good econometric forecasts on this kind of scenario don’t exist. They tell me,
though, that initially we could count on seeing oil hit $80 or $90 a barrel, based on supply
and demand. But this does not factor in the panic that would ensue - wild speculative buying.
And then there is the wild card of run-of-the-mill disruptions occurring at the same time, like
in Nigeria or Venezuela. Now we have oil selling at way over $100 a barrel. But what if chaos
in Saudi Arabia slopped over the border into the other Arab sheikhdoms that collectively own 60
percent of the world’s oil reserves? My contacts won’t even touch that one, but my guess is
that we’d see oil at $150 a barrel or a lot higher. It wouldn’t take long for everything else
to follow suit: economic collapse, world political instability, and a level of personal despair
not seen since the Great Depression.

    Incidentally, Osama bin Laden has a more modest price expectation for
Saudi oil: $144 a barrel. Take that multiple over the current market price, carry it back fifty
years or so to the time when the West became dependent on Arab oil, and work forward from there
- and you would have a wealth transfer on the order of $76 trillion from the industrial
economies to the Muslim world, about $1.5 trillion a year. It wasn’t until 1985 that the
accumulated debt of the United States exceeded $1.5 trillion; 1985 was the first time the U.S.
government budget topped the $1.5 trillion mark.

    FOR THE REAGAN-ERA disaster planners who assessed the vulnerability of
the Saudi oil infrastructure, Iran was the obvious threat. Another decade and the shifting
winds of geopolitics would bring new worries: chaos in Iraq, for instance, spilling across the
border into Saudi Arabia. The given, though, was that any threat to Saudi Arabia’s petroleum
production would come from outside the kingdom. Saudi Arabia was America’s anchor in the Arab
Middle East. It banked our oil under its sand. Losing it would be like losing the Federal
Reserve. Even if the Saudis did turn anti-American, said the argument, they would never stop
pumping oil, because doing so only would end up cutting their own throats. Or at least this was
the assumption.

    But all that was before the morning of September 11, 2001. Before
fifteen Saudi citizens and four other Arabs commandeered four commercial airliners and flew
them and their passengers into the buildings of New York and Washington and the farmland of
Shanksville, Pennsylvania. Before Osama bin Laden became the most popular Saudi in history.
Before USA Today discovered that, during the summer of 2002, nearly four in five hits on a
clandestine al Qaeda website came from inside Saudi Arabia. Before it became known the Saudi
ambassador’s wife in Washington had been sending money, no doubt unintentionally, to the
hijackers. The equations have changed. One report sent to the United Nations Security Council
indicated that Saudi Arabia transferred half a billion dollars to al Qaeda in the ten years
beginning 1992. Old assumptions are off the table. And the new realities are far from
comforting.

    Five extended, dysfunctional families own about 60 percent of the
world’s oil reserves, but the Al Sa’ud of Saudi Arabia control more than a third of that:
potentially one in every five barrels the world consumes. This is the fulcrum that the global
economy teeters on. Meanwhile, the mosques of Saudi Arabia preach a hatred of the West and the
non-Islamic world that is as vitriolic as anything heard in Iran at the height of the
ayatollahs. The kingdom’s mosque schools have become hothouses of militant Islam, the breeding
grounds of Sunni terrorism. Bali, Kenya, Bosnia, Chechnya, and Lower Manhattan all point back
to these schools, to the Saudi state.

    Terrified that the fanatics will one day come after them, the Al Sa’ud
shovel out protection money as fast as they can withdraw it from their Swiss bank accounts.
Never forget that it is the Al Sa’ud who ultimately sign the checks for these mosque schools.
They fund militant Islamic movements in the Middle East, Africa, Central Asia, and Asia for the
same reason. It’s hush money to divert Muslims’ attention from the money the Al Sa’ud are
stealing against the day when they will have to flee the desert for their palaces strung out
along the Riviera; their penthouses glowing against the night skies of Paris, London, and New
York; their mountain aeries bathed by the cool evening breezes of Morocco. The House of Sa’ud,
after all, knows what the West is beginning to learn: Horrors are out there waiting worse than
Osama bin Laden; worse even than Khalid Sheikh Muhammad, the purported mastermind of September
11, who was finally grabbed in Pakistan in early March 2003. The Al Sa’ud know one other thing
as well: They are hanging on by a thread, presiding over a kingdom deeply torn between past and
present, and dangerously at war with itself.

    That’s why the disaster scenarios created during the Reagan years still
matter. That’s why we in the West - Washington, D.C., in particular - have to face up to our
part in cultivating the virus that has infected Saudi Arabia. And that is why we must consider
putting to sleep the host, the House of Sa’ud, if it can’t or won’t cure itself. At the very
least, we will have to consider seizing the oil fields.

    Will it come to that? I don’t know. No one does. The future is never
certain. Maybe the talk out of Riyadh about democratic reforms is more than cover fire. Maybe
the U.S. war on Iraq will undermine all the old assumptions once more. All bets are off if
Islam rises up en masse against the West and its infidel agents. But I’ve spent enough years in
the Middle East to know that in a place like Saudi Arabia, things flow naturally toward their
most combustible mix.

    There’s already more than enough rage against the West and against the
House of Sa’ud. It’s in the air in Riyadh and Jeddah’s bazaars: the conviction that all the oil
money has corrupted the ruling family beyond redemption, that the Saudi leaders have defiled
the faith by allowing U.S. troops into the kingdom. Getting rid of the American military
presence might help, but the brief against the ruling family runs further than the United
States. On the street, the Al Sa’ud are reviled for failing to protect fellow Muslims in
Palestine and Iraq and for standing by helplessly as Islam is humiliated. At the beginning of a
new millennium, many Saudis believe that their country would be better off and the faith purer
if everyone went back to the desert and lived off of dates and camel’s milk.