Daniel heradstveit

The International Dimension
The United States fought the Gulf War in 1990-91 essentially over oil (Sebe and Le Bras, 1999, p. 111). The United States saw an immediate need to safeguard Saudi oil reserves and supplies, to keep them from Iraqi control, because Kuwait, then occupied by Iraq, bordered on the oil-rich eastern province of Saudi Arabia (Gillespie and Henry, 1995, p. 12). The United States also wanted to prevent a strong Iraq emerging from the fusion of Iraqi and Kuwaiti assets in the ground and in the financial markets, which would dominate the Gulf and eventually the Middle East.
Some ten years after the Gulf War, Iraq was re-emerging as a force in Middle East politics and in the oil market. Iraq had regained some political initiative, especially with the deterioration of the Israeli-Palestinian conflict since the autumn of

36
Oil in the Gulf: Obstacles to Democracy and Development
2000, and the United States was essentially being forced to consider reactive measures. As the United States did not manage to unseat Saddam, the choice was overthrowing the regime by force, meaning invasion and occupation - with a high political risk. The alternative would have been to tacitly accept the Saddam Iraq and see sanctions erode. For the United States, Iraq under Saddam represented an immense risk. US oil companies risked remaining outside as Asian, European and Russian oil companies moved into Iraq. French Total had signed a letter of intent for oil development with the Saddam regime. Russian Lukoil maintains it had a contract, although cancelled by Saddam. In the Middle East, the United States risked facing, on hostile terms, an economically progressing and politically more influential Iraq, which would ultimately represent an oil market risk.
The US motives for going to war against Iraq appear multiple and complex, but the desire to control the Middle East seems to have been an overriding concern. Oil, directly and indirectly, evidently has been a significant factor (Roberts, 2003, p. 19). In hindsight, the alleged weapons of mass destruction may appear as a pretext for invading Iraq. The concern about regime change will be tested by a successful transition to democracy in Iraq and the eventual willingness of the United States to accept Shi’i majority rule. A more material motive may have been to establish Iraq as an alternative and a competitor to Saudi Arabia as a large oil supplier and price maker in the oil market, and thus to diversify the oil supply and price risk. Another motive could have been to secure positions for US oil companies and to avoid Asian, European and Russian oil companies making an inroad, as happened in Iran and Libya due to the US-imposed ban on investment in those countries. Finally, the desire to secure Israel from a potentially dangerous enemy to the east and divert attention from the Palestinian crisis should not be forgotten.
During the 1990s, oil in the Caspian region and Central Asia figured prominently in US policy. More recently, high oil prices have served to renew US interest in Caspian and Central Asian oil (Kalicki, 2001). At stake for the United States is not only access to the region’s oil and gas, but also trade and political positions. The campaign against Afghanistan following the September 2001 terrorist attacks has for the first time provided the United States with a military presence in Central Asia, in Uzbekistan. For the United States, fighting terrorism in this way can go together with securing oil interests. In the mid-1990s, US gas interests were actively pursuing pipeline projects to bring oil and natural gas from Central Asia, in particular Turkmenistan, through Afghanistan to Pakistan and eventually India (Rashid, 2000, p. 157 ff). At that time, US oil companies were on speaking terms with the Afghan Taliban regime. Today, Central Asian oil and natural gas provide motivations for the United States to secure a position in Afghanistan, although the outcome is uncertain and there is competition with Chinese and Russian interests.
With rising security concerns, the Gulf states (see footnote 1) became more attentive to US oil interests. These states had an interest in exchanging US protection for other favors. Insofar as Iraq or Iran or both represent a military or political threat to the Gulf states, they also provide incentives to the latter to
The Predicament of the Gulf Rentier State
37
improve their relations with the United States. Oil policy is their major instrument, other means being investment and military purchases. Against this backdrop, Saudi Arabia and Kuwait, as well as the United Arab Emirates, have a security policy interest in the United States needing their oil, whether directly for physical supplies or indirectly to stabilize the market. The external threat, perceived or real, and the subsequent need to maintain close links with the United States hamper political development in the Gulf states, because of the risk that truly representative institutions might choose differently.
For Saudi Arabia and Kuwait a major risk, in the future as in 1990, is to be caught between US and Iraqi interests, or perhaps a coalition of Iraqi and Iranian interests. Saudi Arabia, apart from being politically threatened by Iraq, is also likely to feel threatened in its long-term economic interests. Saudi Arabia has an equally strong interest in not provoking Iraq, or Iran and Iraq together. After Iraq’s withdrawal from Kuwait, there has been a legacy of distrust, even though Iraq was forced to disarm. In the case of a successful US-led regime change in Iraq, the risk for the Gulf states is to be of less importance to US interests.
The persistence of real or perceived foreign threats and tensions between the major Middle Eastern oil exporters is likely to retard both economic and political development. The best way to secure a more harmonious economic and political evolution therefore is to secure regional stability and peace, preferably through comprehensive disarmament. Especially important here are Iraq and Israel, the two most heavily armed countries. This is a long haul, requiring the active participation of the various countries of the region as well as the major foreign powers (Katzman, 1998, p. 27).
Securing oil supplies demands comprehensive political reform in the Middle East, reform that can promote democracy and peace. Today, there is hardly any Arab or Middle Eastern democracy. The Middle East is the world’s most militarized region, with a huge and complex conflict potential. Promoting democracy in the Middle Eastern oil-exporting countries is in the West’s interest, even though it would mean discontinuing support for old friends and would involve transitory risks. Promoting democracy would also mean building institutions to secure the rule of law, with an independent judiciary, freedom of expression and assembly, including the right to organize independent labor unions, which could help in reducing the disparities of wealth and income, and promoting a private sector to provide alternative income sources and jobs. Such measures would come at the expense of the West’s old friends, but could make many new, young ones. Oppressive regimes that leave no hope for peaceful change foster terrorism, and should be condemned and contested by the West (Ibrahim, 2001). The risk for the West is that oppressive governments will use terrorism as a pretext for more oppression, provoking more opposition, instability and eventually more terrorism. In this perspective, consistently promoting democracy and the rule of law is also the best strategy for the West to combat terrorism and secure oil supplies at the same time.
Likewise, promoting peace in the Middle East is in the West’s interest. It can stabilize oil supplies, although it would mean taking Arab interests seriously, put-

38
Oil in the Gulf: Obstacles to Democracy and Development
ting pressure on Israel to give up Palestinian land and terminating sanctions that hit Iraq’s civilian population, not the rulers. Promoting peace would also mean discontinuing massive arms sales and actively engaging in a policy of regional disarmament that would include both Iraq and Israel.
Finally, promoting peace and securing oil supplies would mean including Iran and Iraq in a framework of regional co-operation, not excluding them, as has been US policy until now. To safeguard oil interests, the United States needs friends and allies, not foes. It cannot, as the only surviving superpower, defend important interests unilaterally. Russia until the 2003 war seemed to be a winner here (Peel,

2001). Iran may forego a historical opportunity to become more closely integrated economically and politically with the outside world because of the conflict between reformers and conservatives. In this perspective, the continuation of the US sanctions against Iran, embodied in the Iran-Libya Sanctions Act, ILSA, renewed in the summer of 2001, appears both thoughtless and contrary to US economic and political interests. In the redefinition of the United States’ friendship needs, Israel may lose, especially as the Sharon government has managed to embarrass the United States and appear as an active force of instability in the Middle East (Financial Times, 2001). By changing policies in this direction, the West can hope to reduce the motivation and potential for terrorism, while enhancing the basis for economic and political co-operation and interdependence, as well as securing oil supplies. Unless a more comprehensive settlement can be reached in the Middle East, Saudi Arabia, until the 2003 war, seemed likely to be torn between fears of a stronger Iraq, motivating closer links with the United States, and the perceived need to improve relations with Iraq, motivating more political distance from Washington. After the war, Saudi Arabia’s position may be more precarious, especially if the US occupation of Iraq is politically successful, making Iraq the favored partner of the United States in the region. An unsuccessful US occupation would have repercussions on Saudi internal politics as well as on foreign policy, leading to more distance from Washington. A way out of the dilemma for Saudi Arabia seems to be closer links with Iran. Against this backdrop, US-Saudi oil relations may also have to change. The need to keep some distance from the United States for the sake of domestic political balancing may induce Saudi Arabia to be a less compliant residual oil supplier, opting for a lower output and higher oil prices. That would help Iran, but not the United States. Whereas it will take a decade at least to make Iraq an oil power, Saudi Arabia is and will remain the arbitrator of the oil market and oil prices. Moreover, France and especially Russia could delay new Iraqi oil development through the international court system in case an Iraqi regime should favor US oil interests.
The Predicament of the Gulf Rentier State
39
References
,, Amuzegar, Jahangir (1999), Managing the Oil Wealth, I.E. Tauris, London. Aziz-Chaudhry, Kiren (1997), ”Economic Liberalisation and the Lineages of the Rentier State”, in Nicholas S. Hopkins and Saad Eddin Ibrahim (eds), Arab Society, The American University in Cairo Press, Cairo, pp. 345-58. Bierschenk, Thomas (1991), ”Die Golfstaaten: politische Stabilitat trotz okonomischem
Wande!”, in Pawelka, Pfaff and Wehling (eds), pp. 95-108. Cappelen, Adne and Choudhury, Robin (2000), The Future of the Saudi Arabian Economy,
Statistics Norway, Oslo. Cause in, F. Gregory (1994), Oil Monarchies, Council on Foreign Relations Press, New
York.
Crystal, Jill (1990), Oil and Politics in the Gulf, Cambridge University Press, Cambridge. Dinmore, Guy (2000), ”Iran’s Unsteady Ship”, Financial Times, December 12.

* Ehteshami, Anoushiravan (1995), After Khomeini, Routledge, London. Ende, Werner (1991), Auf der Suche nach der Idealen Gesellschaft, in Pawelka, Pfaff and
Wehling (eds), pp. 64-72. Fargues, Philippe (1994), ”Demographic Explosion or Social Upheaval?”, in Salame (ed.),
pp. 156-79. Financial Times (2001), ”U.S. Rebukes Israeli Leader as Coalition Tensions Rise”, October
6-7. Gillespie, Kate and Henry, Clement M. (1995), Oil in the New World Order, University
Press of Florida, Gainesville, Florida.
Halliday, Fred (1974), Arabia Without Sultans, Penguin Books, Harmondsworth. Humphreys, R. Stephen (2001), Between Memory and Desire, University of California
Press, Berkeley, California. Ibrahim, Anwar (2001), ”Growth of Democracy Is the Answer to Terrorism”, International
Herald Tribune, October 11. Ismael, Jacqueline S. (1993), Kuwait: Dependency and Class in a Rentier State, University
Press of Florida, Gainesville, Florida. Kalicki, Jan H. (2001), ”Caspian Energy at the Crossroads”, Foreign Affairs, Vol. 80, No. 5,
pp. 120-34. Katzman, Kenneth (1998), Searching for Stable Peace in the Persian Gulf, U.S. Army War
College, Carlisle, Pennsylvania. Kemp, Geoffrey and Pressman, Jeremy (1997), Point of No Return, Brookings Institution
Press, Washington, DC.
Kepel, Gilles (1994), ”Le monde arabe apres 1’accord israelo-palestinien”, in Gilles Kepel (ed.), Exils et Royaumes, Presses de la Fondation Nationale des Sciences Politiques, Paris, pp. 21-9.
Khalaf, Roula (2001), ”Why They Hate Us”, Financial Times, October 5. Kubba, Laith (2001), ”Domestic Politics in A Post-Saddam Iraq”, in Joseph A. Kechichian
(ed.), Iran, Iraq and the Arab Gulf States, Palgrave, New York, pp. 65-82. Luciani, Giacomo (1994), ”The Oil Rent, the Fiscal Crisis of the State and Democratisa-
tion”, in Salame (ed.), pp. 130-55.
Mantran, Robert (1989), L’expansion musulman, Presses Universitaires de France, Paris. Moisi, Dominique (2001), ”Tragedy that Exposed a Groundswell of Hatred”, Financial
Times, September 24.
Morse, Edward L. (2000), ”Oil Price: Turning Point?”, Middle East Economic Survey, Vol.

43, No. 50, December 11.

40
Oil in the Gulf: Obstacles to Democracy and Development
Nairn, Mouna (1992), ”Les contradictions des heritiers de Khomeiny”, Le Monde, December
6-7, pp. 1 and 7. Owen, Roger (1992), State, Power and Politics in the Making of the Modern Middle East,
Routledge, London. Owen, Roger and Pamuk, Sevket (1999), A History of the Middle East Economies in the
Twentieth Century, Harvard University Press, Cambridge, Massachusetts. Pakravan, Karim (1997), ”The Emerging Private Sector: New Demands on an Old System”,
in Gary G. Sick and Lawrence G. Potter (eds), The Persian Gulf at the Millennium, St.
Martin’s Press, New York, pp. 115-26. Pawelka, Peter (1991), ”Der Irak als ’Rentierstaat’”, in Pawelka, Pfaff and Wehling (eds),
pp. 38-63. Pawelka, Peter, Pfaff, Isabella and Wehling, Hans-Georg (eds) (1991), Die Golfregion in
der Weltpolitik, Verlag W. Kohlhammer, Stuttgart.
Peel, Quentin (2001), ”Washington’s Balancing Act”, Financial Times, October 1. Penrose, Edith and Penrose, E.F. (1978), Iraq, International Relations and National Development, Ernest Benn, London. Rashid, Ahmed (2000), Taliban, I.B. Tauris, London. Richards, Alan and Waterbury, John (1990), A Political Economy of the Middle East: State,
Class and Economic Development, Westview Press, Boulder, Colorado. Roberts, John (1990), ”Piecing together the Peace Jigsaw”, The Energy Compass, December
14.
,- Roberts, John (1995), Visions and Mirages, Mainstream Publishing, Edinburgh. Roberts, John (2003), Oil and the Iraq War of 2003, ICEED, Boulder, Colorado. Salame, Ghassan (ed.) (1994), Democracy without Democrats? I.B. Tauris, London. Sebe, Charles and Le Bras, William (1999), Indomptable Iraq, Le Semaphore, Paris. Simon, Steven and Benjamin, Daniel (2001), ”Myths of American Misdeeds”, Financial
Times, October 2. Toscane, Luiza (1995), L’hlam, Un autre Nationalisme? L’Harmattan, Paris.
Chapter 2
The Future of the Saudi Arabian Economy: Possible Effects on the World
Oil Market
Adne Cappelen and Robin Choudhury
Introduction
#
The vast oil resources of Saudi Arabia have enabled the country’s population to enjoy a standard of living much higher than they otherwise would have experienced. Domestic production of other tradable goods and services is quite minimal. Domestic demand has been kept afloat by government budgets, even though the government budget and the current account have been in deficit since 1985-86. This lack of funds restricts the government’s maneuverability in policy-making. There has generally been poor economic development during the 1990s. Gross domestic product (GDP) per capita has been stagnant or even declining over the past ten years and severe financial imbalances have subsequently emerged. Saudi Arabia’s current political and social structure is probably not adequate to handle severe economic problems that perhaps cannot be avoided much longer. These economic problems could lead to changes in policies or in government.
This chapter focuses on alternative economic and political developments that could reshape the future of Saudi Arabia. We start with a brief summary of the historical, political and economic background followed by a description of two scenarios for the Saudi economy. First we outline a future based upon the continuance of the current policies for another decade; this is the baseline. The first alternative scenario explores possible effects from policy reforms in taxation and privatization. The second alternative scenario explores possible effects from changing oil policies. The chapter finally discusses what these domestic scenarios might imply for the relations between Saudi Arabia and the Organization of Petroleum Exporting Countries (OPEC). In our opinion it is not likely that Saudi Arabia will act on its own within OPEC and there are both economic and political arguments that lead us to conclude that Saudi Arabia is likely to maintain its support for OPEC.

42 Oil in the Gulf: Obstacles to Democracy and Development
Historical and Political Background
Saudi Arabia in its present form was created in 1932 as an absolute monarchy with the Al-Saud family as the ruling power. The legitimacy of this family’s rule has its origin in a religious and political compromise established in 1744 when the Muslim leader Mohammed bin Abdel-Wahhab sought refuge with Mohammed bin Saud. At that time, the latter was leader of a geographically central but small portion of what today is Saudi Arabia including the area of Riyadh. Together they started a campaign across Arabia aimed at attaining wider control of Arabia for the Al-Saud family and concurrently giving supremacy to orthodox Wahhabism. By 1810 Saudi forces had gained control over much of what today is Saudi Arabia. However, in

1818, the Saudi forces had lost most of their territory to Ottoman Empire counterattacks. During the nineteenth century Saudi forces tried once again to recapture lost territory but were thwarted by the Al-Rashid (another Arabian tribe from an area north of the Al-Sauds) who received the support of the Ottoman Empire. For a time the Al-Sauds were even forced to take residence in what today is Kuwait.
In 1902 the Al-Sauds succeeded in winning back Riyadh from the Al-Rashid and in 1932 Abdel-Aziz bin Abdel-Rahman, or Ibn-Saud, declared himself King of Saudi Arabia. When he died in 1953, his 34 surviving sons inherited the Kingdom. Ibn-Saud’s successor, King Saud, established the first Council of Ministers, a collective system of government among the sons of Ibn-Saud. The Council of Ministers has both legislative and executive power although the final word is with the King. The council is generally composed of members of the Royal family, families related to it and in some cases technocrats such as Oil and Mineral Resources Minister Ali bin Ibrahim al-Nuaimi.
In 1992, following the Gulf War, political opposition and pressure from Western governments resulted in King Fahd issuing three government-related decrees. The first was the Basic Law of Government, which could be viewed as the present constitution of Saudi Arabia. In this decree, human rights are guaranteed by the state as long as they are in accordance with Islamic sharia. The second decree established the Consultative Council that now consists of 90 members appointed (not elected) by the King. The members of this council are mostly former senior government officials or highly educated individuals associated with tribal leaders, but the council also includes a few members from religious opposition groups. Its function is strictly advisory and decisions are accepted only if approved by the Council of Ministers and ultimately the King himself. The third decree instituted regional authorities in order to create a clearer hierarchy within regions and between central and local government. The members of the regional councils are also chosen by the King and are mainly tribal leaders and members of prominent merchant families.
The changes in government that took place could be seen as responses to political pressure both of domestic and foreign origin. One the other hand, they could be regarded as adaptations of the traditional system of governing by consensus. The population of Saudi Arabia was some 12 million (nationals) in 1992, twice
The Future of the Saudi Arabian Economy: Possible Effects on the World Oil Market 43
the population from the time of the first oil price hike in 1973 (”OPEC I”). When Ibn-Saud died in 1953, the population was less than four million. This population explosion will put a government of consensus under pressure to develop new institutions for making political compromises. How should the various interest groups be allowed to and able to express their interests? The two new councils based on the 1992 decision can be seen as attempts to address this question, though the late King Faisal had already proposed these councils in 1962.
What are the main interest groups in Saudi Arabia and how might they shape future policies? We shall distinguish between three main groups: the Royal family, the religious community and the emerging business community. The main political force in Saudi Arabia is the Al-Saud family, amounting to some ten thousand depending on how far from the main line of inheritance one chooses to draw the line. Rivalry and factions within the family are likely, causing some uncertainty concerning succession. These factions could form alliances within the family or with factions of the religious or emerging business communities. The Royal family enjoys a material standard of living and privileges that are possible only for a minority in any country. As the family rapidly increases in size, the financial burden increases. This burden, combined with the Westernized and affluent lifestyles, provokes hostilities among other citizens and particularly among religious groups. Governing by consensus will be increasingly difficult if the living standard of the members of the Royal family must be financed by taxes on ordinary people. According to the Basic Law of the Kingdom, ”taxes and fees are to be imposed on the basis of justice and only when the need arises”. Even if not taken literally this will limit the potential increase in resources spent by the Royal family as a whole.
The present Saudi compromise builds upon the historical compromise between the Royal family and religious Wahhabism, and implies that the Saudi population in general should benefit from the oil revenues of the Kingdom through generous provision of public services and subsidies. In practice this has largely been achieved by providing well-paid jobs to Saudis in the government or in companies controlled by the government or by the Royal family.
With the present King Fahd being ill, his half brother, Crown Prince Abdullah, is regarded as being in charge of daily policies and is the most likely successor to King Fahd. Abdullah is considered to be less pro-Western than King Fahd, particularly in light of his very active and quite successful foreign policy and specifically in his pro-Arab policy. The 1997 Iranian election of Mohammed Khatami as president has helped to bring Iran closer to the Arab countries; and Saudi Arabia and Iran have signed agreements to increase both economic and cultural links. The closer contact between the two countries was probably also important in establishing cutbacks in oil production within OPEC; a step which led to more than a doubling of oil prices during 1999.
It is important to the purpose of this chapter to examine Saudi Arabia in a wider context and specifically to examine its relationship to the ”Arab nation”. The final collapse of the Ottoman Empire at the end of the First World War and the release of territories resulting from the 1920 peace accord in Sevres allowed the emergence

44
Oil in the Gulf: Obstacles to Democracy and Development
of the territorial states of the region. The new states in the region have not, however, been able to establish themselves as strong nation-states. One superficial indication of this phenomenon is that the Egyptian, Syrian and Iraqi national anthems and flags have changed four times since the Second World War. The question of a successor to the Ottoman Empire is still considered viable in some circles and, according to El-Harmassy (1987), there is more loyalty to the idea of a large Arab nation than to the present Arab states. It is in this perspective that one could understand the surprisingly large Arab popular support that Saddam Hussein received when he occupied Kuwait.
The majority of Muslims in Saudi Arabia are Sunni but there is a significant Shi’i minority in the eastern oil-rich region. The government began to suspect this minority of having links to Shi’i groups in Iran when riots in the Shi’i region coincided with the Iranian revolution in 1978-79. However, with the establishment of closer ties to Iran and political changes there, religious opposition cannot be considered a Shi’i phenomenon. Instead, during the first half of the 1990s there was a growing religious opposition within the Sunni majority and a more radical clergy emerged. One issue the religious critics often focus on is the close relationship between Saudi Arabia and the United States. In particular the government’s reliance on United States troops to defend the country against Saddam Hussein was seen by many Saudis as a loss of honor in that a non-Muslim army had to defend Islam’s Holy Land. Another issue is that large sums have been spent for many years to build up Saudi military capacity apparently without much success. The car bombs in 1995 and 1996 were additional indications of the anti-Western and antiAmerican sentiments present in Saudi Arabia. The Royal family has hoped that the religious leaders (ulema) would be able to control the critics and thereby maintain the historical compromise between Wahhabism and the Royal family. It is therefore of some interest to note that Crown Prince Abdullah’s foreign policy focuses on improving relations with other countries around the Gulf, including Iran. His policy in this respect is regarded as quite successful and popular.
Economic development in Saudi Arabia since the 1970s has not only brought higher income for the country as a whole, but has also created a Saudi business class. Government policy has been to nationalize not only oil companies but also to provide beneficial conditions for national companies generally. Therefore, until recently it has been difficult for foreign companies to establish themselves without a Saudi national counterpart. However, the policy does seem to be changing as reflected in the following actions. In June 2001 three large areas of virgin desert were opened to foreign consortia, allowing them to tap and use whatever natural gas they may find. The deal also enables upstream development of hydrocarbons that earlier were the preserve of the nationalized Saudi Aramco. Oil reserves are, however, still in the control of the state, even what may be found in these new areas. International companies have also been commissioned to develop downstream uses; plans include building power, desalination and petrochemical plants. But still the government will have to open up the economy more and policies must
i ne future oj me sauai i\raoian economy: rossioie i^jjecis on me vvoria un mantel t3
be changed if Saudi Arabia is to become an additional Arab Gulf state accepted by the World Trade Organization (WTO).
The Royal family and other Saudi nationals are the main entrepreneurs in the economy. The links formed between the Royal family and the business class can be seen partly as an attempt to widen the political basis for the government in a country without parties or civil society in any Western sense. However, these links are put under strain as oil revenues have diminished and the government must delay payments to the private sector. Other complexities arise because there are no clear borderlines between the government and the private economy of the Royal family. Contracts are widely believed to be part of a ”gift” system rather than being market based. Competition is thus limited, thereby driving up costs for the government. A last component of discontent with the government is the increasing hidden unemployment and unequal distribution of income and wealth. The business class is therefore generally in favor of liberal reform.