We are entering a potentially historic moment of opportunity in U.S. oil strategy. The current reassessment of U.S. foreign policy is perhaps more far-ranging than any undertaken since the onset of the Cold War in the late 1940s. Energy strategy is a key part of this reassessment, an impetus driven in large part by renewed public concerns about our oil dependence on the Middle East.
Counter-intuitively and (in many cases) counterproductively, our efforts to externalize our energy problems takes us to places where our influence is significantly weaker than inside our own borders. Increasingly, many Americans worry about the cost-in money, lives, and U.S. credibility-of trying to secure stable oil supplies by attempting to dominate the Middle East. Our domestic political inability to forge rigorous compromises to achieve energy security-with liberals calling for greater conservation and conservatives for increased domestic production-has left official Washington reduced to vocal but fruitless hand-wringing about increasing U.S. oil imports and our continued dependence on Middle East oil.
Rhetoric about "breaking opec" is more a wish list item than a practical aim. Indeed, much of the debate about U.S. energy policy, with its stress on achieving lessened dependence on foreign supplies through largely unilateral action in the foreign arena, flies directly in the face of harsh market realities. The foremost of those realities is the role of increasing consumption-especially by the United States-in driving petroleum markets. Accepting this reality is a vital first step in forging a practical medium- to long-term strategy that will minimize the risks of severe supply disruption and skyrocketing prices.
A Most Unsatisfactory Status Quo
No one is satisfied with the current energy policy status quo; but few seem willing to make the hard decisions and uncomfortable compromises necessary to do anything about it. And no party has sole ownership of the status quo. It represents a continuation of the policy of successive Administrations in Washington over the past quarter century in encouraging diversity of global oil production, cooperation with major oil producers-especially Saudi Arabia-to ensure stable markets, research in alternative fuels as a hedge against long-term price increases and reliance on a robust strategic petroleum reserve for use in cases of extreme market volatility.
The Bush Administration has continued to pursue much of this agenda, as outlined in its formal energy strategy (the so called "Cheney Report"). While many of the domestic elements of the Report were and remain controversial, most of its language devoted to the international arena could have been written under the Clinton Administration, or indeed under Bush I, Reagan, or Carter.
The centerpiece of the status quo is "the special relationship" with Saudi Arabia - a strategic quid pro quo under which the United States would guarantee the security of Saudi Arabia in return for Riyadh's cooperation in keeping a reliable flow of moderately priced oil to international petroleum markets. The first pillar of the special relationship is the decisive role that Saudi Arabia plays in international oil markets. Riyadh is not only the world's largest exporter of oil, but possesses a quarter of the global petroleum reserves and, significantly, excess capacity for use in an emergency. The second pillar is the ability and willingness of the United States to intervene militarily should Saudi Arabia be threatened. Washington did so, most notably when it rushed troops to Saudi Arabia when Iraq invaded Kuwait in 1990.
The September 11 attacks, however, renewed the impetus to reassess the U.S.-Saudi relationship. The fact that Osama Bin Laden and 15 of 19 suicide bombers were Saudi nationals lent the long-standing neoconservative critique of Saudi Arabia great public salience. Since 9/11, neoconservative commentators have stepped up their attacks on Saudi Arabia, openly branding the Kingdom as an "enemy", and have included Riyadh in the list of Middle East capitals-along with Tehran and Damascus-where "regime change" would be desirable.1
Despite this firestorm of criticism, the formal U.S. relationship with Saudi Arabia has not changed. Saudi Arabia has diligently-albeit more quietly-continued to raise its oil production in times of war and/or market emergency. Senior officials in both Riyadh and Washington also continue to downplay differences. Indeed, Energy Secretary Spencer Abraham has cultivated Saudi Arabia, even going so far as to suggest tacit U.S. approval of opec price bands and financially supporting the establishment of a secretariat for a new international energy forum in Riyadh.
The Neoconservative Vision for Oil Policy
So, are there alternatives to the unsatisfactory status quo? Some neoconservatives offer one: a radical shift of policy that would see Washington play an altogether more assertive role in the oil arena. Diversity of supply would not just be an economic end but a strategic means. The United States would attempt to drive down the price of oil, break the ability of the Organization of Petroleum Countries (opec) to set prices, and deprive unfriendly states-including Saudi Arabia-of revenue. The neoconservative approach resembles U.S. oil strategy during the Cold War, when, during the Reagan Administration, Washington encouraged Saudi Arabia to suppress prices in order to cause economic damage to the Soviet Union.
Neoconservative concerns (and increasingly left of center commentators as well) center on a belief that oil revenues permit countries like Libya, Iran and Saudi Arabia to sustain authoritarian regimes and promote anti-American policies. Collusion on production levels through opec, in turn, sustains those rents at a high level. Saudi Arabia, though nominally an ally of the United States, plays a particularly pernicious role under neoconservative ideology, by using its immense oil revenues and leadership in opec to promote the Kingdom's own brand of fundamentalist Islam-Wahabism-in the Middle East and Central Asia.
At one level, the neoconservative argument is logical: low oil prices-in addition to providing substantial economic benefits for the U.S. and global economies-will reduce the revenue available to oil states, which sponsor terrorism or pursue the acquisition of weapons of mass destruction. But it both overestimates the ability of the United States to sustain low international oil prices and underestimates the consequences of a general decline in oil prices for oil producing allies of the United States. It assumes that the United States will be able to persuade major oil producers like Russia and a post-occupation Iraq to pursue policies against their own economic interests. And, not least, the neoconservative alternative neglects the very huge risks should its approach actually succeed and prompt sufficient hardship in Saudi Arabia to cause a "regime change" in Riyadh. Indeed, recent history demonstrates that any radical domestic political change in oil producing countries leads to suppressed output, whether that change is in an "anti-American" direction (the Islamic revolution in Iran) or a "pro-American"one (the collapse of Communism in the Soviet Union).
Russia to the Rescue? Maybe, Maybe Not
Reducing-if not ending-our reliance on Saudi Arabia requires cooperation with other major oil producers. Russia leads the list. Russian oil output has recovered sharply from its lows of 6 million bpd in the mid-1990s. It reached 8.6 million bpd by mid-2003 and is expected to exceed 9 million bpd by the beginning of 2004. Exports show an equally dramatic increase, now making Russia the largest non-OPEC exporter in the world, and second only to Saudi Arabia in total world exports.
There are a number of reasons for the recovery of Russia's oil sector. They include greater political stability, improved legal environment, lower domestic costs because of the ruble devaluation of 1998 and higher world oil prices since 1999. But the rise of private Russian oil companies-notably Lukoil, Yukos, Sibneft and tnk-has clearly been a powerful impetus for expansion. While an ongoing conflict between Yukos and the Kremlin has recently cast a shadow over this success, the new Russian companies remain a dynamic force in the Russian oil sector. A further expansion in exports by nearly two million bpd by the end of the decade is by no means impossible, but will depend on how destructive to investor sentiment the Kremlin's prosecution of Russian oil trendsetter Yukos turns out to be.
U.S.-Russian cooperation on energy in general and oil in specific has been high on the agenda of Bush-Putin summits beginning in the summer of 2001, culminating in the creation of a U.S.-Russian Energy Dialogue after the two Presidents met in May 2002. Given Russia's surprising accommodation to the U.S. need for Central Asian bases to serve as a "staging area" for the campaign in Afghanistan, expectations were high that a new "axis of oil" between Moscow and Washington could be formed-with Russia supplementing, if not displacing, Saudi Arabia.
But Russia faces serious obstacles in its quest to equal, much less surpass, Saudi Arabia, in international oil markets. Despite significant strides over recent years, the Russian business climate remains marked by inadequate rule of law protections, and standards of transparency, accountability, and protection of minority shareholder rights are honored as much in the breach as in adherence. There is a clear Russian preference for its own industry -most recently a resurgence of assertion by state-controlled firms. In short, despite the acquisition of tnk by British Petroleum, Russia may find it difficult to attract the tens of billions of dollars in private investment necessary to make its ambitious oil expansion plans a reality.