The United States, which consumes 25 percent of the world’s average daily output of oil, imports nearly half of its oil needs and by mid-1999 obtained about 15 percent of its oil imports from Saudi Arabia. In 1999 Saudi Arabia replaced Venezuela as the chief supplier of oil to the U.S. market. The United States is the largest of Saudi Arabia’s trading partners, and Saudis have invested heavily in oil refining and marketing ventures in the United States. American oil companies led the way in exploring and developing Saudi Arabia’s oil resources, and the security of U.S. access to the kingdom’s hydrocarbon resources has been at the heart of the “special relationship” that has developed over the past 50 years between these two otherwise quite dissimilar countries.

Despite this history of close relations, the partnership between Saudi Arabia and the United States has not always been an easy one. The “oil shocks” of the early 1970s, especially the oil embargo imposed by King Faisal in 1973-74 to protest U.S. support for Israel during the October 1973 Mideast war, produced serious if temporary strains in the relationship. More recently, the volatility of the international oil market has once again created a clash of interests as the Saudi search for higher oil revenues and price stability challenges an American economy accustomed to plentiful supplies of cheap foreign oil.

In March 1999, following a 30-percent drop in crude-oil prices during the previous year, OPEC members led by Saudi Arabia and Venezuela agreed with other major oil exporters like Mexico on a strategy to restore oil prices to the $18-20 range by instituting a series of production cuts. By October, however, crude oil prices had soared to well over $30 per barrel. Meanwhile, oil prices in the United States hit their highest sustained levels in a decade, with gasoline prices reaching two dollars a gallon at the pump by mid-year.

Several factors, of course, contributed to this situation, including low stockpiles, technical difficulties with refinery throughputs, domestic distribution problems, and cutbacks in exploration and development of new oil resources when the price was depressed in the mid-1990s. For many Americans, however, the responsibility for higher gasoline and heating fuel prices rests primarily with the actions of foreign oil producers and specifically the Gulf Arab states.

In consequence, one began to hear during the 2000 election campaign calls for aggressive diplomatic and economic action by the U.S. government to lessen the economic and political impact of the oil price hikes. For the first time in years, senior American government officials, including Secretary of Energy Bill Richardson, found it necessary to travel to major oil-producing countries, including those in the Gulf, to urge that production levels be increased. Some OPEC production increases did take place in September and November, and by the end of 2000 the price of benchmark North Sea oil had fallen to $24 a barrel.

Fearing that the price was now dropping precipitously, leaders of the six Gulf Cooperation Council states meeting in December instructed their petroleum ministers to do whatever is needed to keep the oil market stable and to achieve the current OPEC target price of $25 per barrel. On January 2, 2001, an unnamed Saudi official reportedly stated that his country’s leaders believe that OPEC at its January 17 ministerial meeting should cut its production by 1.5 million bpd. OPEC “radicals” like Venezuela and Libya reportedly are calling for even more drastic reductions.

In response, the outgoing Clinton administration has announced that it will urge OPEC to maintain existing levels of supply. While introducing Secretary of Energy-designate Spencer Abraham to the press, President-elect George W. Bush stressed the need for a national energy policy to lessen dependence on imported oil but added that a cornerstone of his administration’s policy will be to work with U.S. friends in the producing countries to assure adequate and affordable supplies. It seems probable, therefore, that high-level discussions with the Saudis and other major U.S. suppliers about oil price and availability will be an early and important priority for the new administration.

In preparation for such discussions, Secretary Abraham and his advisers could profitably include in their briefing packages Nawaf Obaid’s brief analysis of petroleum policy making in Saudi Arabia. Obaid, a Saudi native with a master’s degree from Harvard’s John F. Kennedy School of Government, believes that the United States, as the world’s largest petroleum importer, needs to understand better how the kingdom makes its petroleum policies and influences international oil production. He asserts that even U.S. government officials often misidentify key Saudi decision makers and fail to recognize the social, cultural, economic and regional constraints on Saudi government leaders. Rectifying this general deficiency is one of the main purposes of his book.

In particular, Obaid stresses that the Western stereotype of the Saudi government as a corrupt, inefficient and incompetent Saud family enterprise run by the whim of ignorant princes is very much outdated. Focusing on the making of petroleum policy, he argues that the government has been moving steadily toward a more formal, professional and bureaucratic structure that increasingly resembles modern Western models of public administration. Saudi oil policies are not being made capriciously but instead represent the cautious and consensus-building approach that Obaid believes characterizes the Saudi style of governance generally.

Obaid’s book can be conveniently divided into four parts. In the first chapters (and in two appendices) the author provides thumbnail sketches of the major actors in Saudi policy making. These include senior princes, especially Crown Prince Abdullah, who has been de-facto regent of the kingdom since January 1996; officials in the government’s petroleum-policy apparatus; and senior executives of Saudi Aramco, the country’s national oil company. Policy decisions are made within the Supreme Council for Petroleum and Mineral Affairs, a body that coordinates and supervises the work of all government agencies engaged in petroleum matters, including the Ministry of Petroleum and Mineral Resources, the Petroleum Ministerial Committee and Saudi Aramco. Oil policy is therefore the result of interaction between the kingdom’s top political leaders and royal and non-royal Saudis with technical qualifications and experience in oil and financial matters, many of them U.S.-educated. Obaid observes that within this body there has been a real debate between those who have advocated the strategy of maintaining higher oil prices at the cost of accepting a lower market share for Saudi oil and the proponents of a strategy based on accepting lower prices to preserve and expand market share.

The next two chapters describe the Saudi response in 1998-99 to weakening oil prices. There were drastic cutbacks in government expenditures on public works, social programs and even arms purchases. Efforts were also made to raise more revenue by charging higher fees for services and pressing for payment of delinquent bills by consumers of public utilities. One important initiative was the crown prince’s invitation to international oil companies to submit proposals for projects to expand the electric power and water sectors. Obaid discusses the prospects for outside investment in the Saudi oil sector, noting that foreign investment in “upstream” (exploration and production) projects has so far been resisted by Petroleum Ministry and Saudi Aramco officials. Decisions on this controversial issue are currently in abeyance since the 1999-2000 production cuts have created additional excess capacity. Another initiative, of course, was the agreement with Iran and other OPEC “price hawks” to cut production to raise oil prices. Obaid notes that these cuts were a policy success, in that they not only restored OPEC solidarity but the higher prices sufficiently out- weighed the loss of Saudi market share. (On December 18, 2000, a press release by the Saudi Ministry of Finance and National Economy estimated that GDP had grown by 15.5 percent during 2000 and the oil sector by 39.4 percent at current prices.)

Despite these recent improvements, however, the Saudi economy continues to suffer from major structural problems. Obaid states that Saudi leaders recognize that the current return of higher oil prices is not a permanent solution to the kingdom’s economic difficulties. Diversification beyond the government-controlled oil sector is necessary. Saudi interest in joining the World Trade Organization, Obaid believes, will require swifter progress on economic liberalization. Debt reduction also will depend upon reducing expenditures on unprofitable state enterprises. The king has tasked the crown prince and his advisers with privatizing key state industries, among them Saudi Airlines, the Saudi Consolidated Electric Companies and Saudi Telecommunications.

The third part of this book deals with Saudi Arabia’s oil policy, with separate chapters on relations with other oil exporters and with consumers, including the United States. Obaid makes the point that “Saudi Arabia’s foreign policy is in many ways a subset of its oil policy” and that the Saudi leadership is today pursuing more assertively its policies toward both groups. He notes, for example, Crown Prince Abdullah’s steps to achieve better relations with Iran without exacerbating difficulties with the UAE, which continues to dispute Iran’s occupation of the islands of Abu Musa and the Tunbs. Both countries are important members of OPEC, and their cooperation is essential to the kingdom’s current efforts to coordinate OPEC oil-production strategy. At the same time, Saudi interest is in maintaining good relations with consumer countries, especially the United States, in the face of increased competition with other exporters for market share.

The concluding chapter of Obaid’s study sets forth several “insights” into the status of the “Oil Kingdom” one century after the late King Ibn Saud re-established Saudi rule in Arabia. Noting the “irrational nature of OPEC membership,” Obaid argues that OPEC should be reorganized to eliminate smaller producers and to bring in major producers currently outside the cartel, i.e., Mexico, Norway and Russia . An “Organization of Large Petroelum Exporting Countries” (OLPEC) would, he suggests, wield more influence on petroleum policy and pricing and would more accurately reflect the reality of the world oil-export market. In return, he insists the United States and other consumers would benefit from greater price stability. He acknowledges that small producers like Qatar and Algeria are strongly opposed to such a reorganization. Were the Saudis to lead such an effort, it would increase existing bilateral frictions with the Qataris and might pose a serious threat to GCC cohesion, although Obaid thinks that the resulting higher level of petroleum prices could “ease the transition” for those forced to leave OPEC.

Entering the debate within the Saudi petroleum community over the long-term policy choice between maintaining prices through global production management (i.e., OPEC solidarity) and “flooding the market” with cheap oil to enhance Saudi market share at the expense of other producers, Obaid comes down in favor of the latter strategy. He reasons that if the Saudis encouraged foreign investment in both upstream and downstream oil projects and raised the kingdom’s productive capacity to 16 billion bpd, which it then sold for as little as five dollars a barrel, higher-cost producers would be forced out of the market. Through privatization and other economic reforms, Saudi Arabia could raise additional funds to cover government expenditures and prevent severe economic dislocation for the seven years he estimates it would take for oil revenues once again to reach a level at which they balance government expenses. In addition to a stable and rational stream of income, Saudi Arabia would be freed of having to bargain with other oil producers over price and production levels and would be able to turn its energies and talents toward solving other longstanding problems at home and in the region.

Finally, Obaid seeks to reassure American readers that despite U.S. unhappiness over Saudi Arabia’s new assertiveness on oil prices and its demonstrations of independence on other issues, i.e., the ending of sanctions on Iraq, the “special relationship” with the United States is not in danger. On the contrary, under Crown Prince Abdullah’s leadership, the regime is taking pragmatic steps to strengthen its political as well as its economic stability. The United States would do well to encourage such fiscal conservatism through foreign direct investments and more joint ventures in offset programs. While Riyadh may now be less willing to accept U.S. advice automatically and may more often go its own way in regional and international affairs, these steps reflect more closely the views of the Saudi public. This will actually strengthen the monarchy and enable it to resist threats to U.S. interests posed by radical Islamists.

One need not accept Obaid’s policy recommendations to appreciate the overall value of his analysis of the issues confronting Saudi oil-policy makers. Complex issues are discussed lucidly and concisely. The brief biographic sketches of Saudi policy makers should be useful to those U.S. officials and corporate executives who may be encountering them for the first time and wish help in identifying the advocates of the competing oil strategies. While there is a certain cheerleading aspect to this book, Obaid’s argument that under Crown Prince Abdullah Saudi policy making is rational, professional and pragmatic is a useful antidote to some other recent books depicting the monarchy as hopelessly mired in corruption and incapable of reform.

In writing this book, Obaid relied primarily on media and other publicly available sources. He also interviewed extensively Saudi and foreign observers familiar with the kingdom, among them oil-company officials and U.S. diplomats. Particularly intriguing are his citations of interviews he held with unnamed representatives of U.S., British, French and even Russian intelligence services. Another interesting feature of this book is that it was written with the assistance of The Washington Institute for Near East Policy, a research organization generally regarded as pro-Israel. That a Saudi scholar felt comfortable having his work published by the Institute is perhaps a telling comment on the changed climate in Middle Eastern relationships that was emerging until the “alAqsa intifada” once more widened the gulf between Arabs and Israel and its supporters.