It's been more than a week since youthful Saudi Arabian demonstrators bucked the regional trend and cheered their ruler, celebrating his return to the kingdom from medical treatment abroad. Saudi Arabia remains relatively calm in a Middle East burning with revolutionary fervor. All is not well in the desert kingdom, however, despite the respect many Saudis feel toward the frail 86-year-old they call the Custodian of the Two Mosques, King Abdullah bin Abdul-Aziz Al Saud.
Saudi Arabia is a strange amalgam of a fundamentalist brand of Islam that looks to the 7th Century for inspiration and an efficient, enlightened energy corporation, Saudi Aramco, that belongs to the 21st. This harnessing of old and new may be nearing the end of its useful life. Saudi Aramco has been the cash register that pays for social stability, but it will have a harder time financing the kingdom in coming years as the cost of finding and producing oil goes up and a needy population grows. In any case, Aramco oil may be as much a curse as a blessing—it breeds complacency, feeds corruption, and finances the puritanical strain of Islam, Wahhabism, which speaks against that corruption.
The Saudi kingdom, as big as the U.S. east of the Mississippi River, is ringed by revolts in Bahrain, Yemen, and Oman. It is undemocratic, inegalitarian, and economically sluggish. It has high youth unemployment (30 percent in 2009) and a disgruntled Shiite population in its oil-rich Eastern Province. Investors are getting nervous. On Mar. 2, the benchmark Tadawul All Share Index went down for the 13th day, falling nearly 4 percent, to its lowest close since April 2009.
King Abdullah, a gradualist reformer who has pushed back against the Wahhabi enforcers, may not be to blame for this state of affairs, but it's his to deal with as long as he sits on the throne. He has enlisted Saudi Aramco to help. The king is trying to diversify the economy with projects such as King Abdullah University of Science and Technology, at which women can study with men and don't have to wear veils. Saudi Aramco built the campus for him. Entrepreneurship isn't exactly blooming on the peninsula, so the king is also placating the populace the old-fashioned way, with money. On his Feb. 23 return to the kingdom, he ladled out some $35 billion in Saudi-style stimulus, including pay raises for government workers and freedom for some imprisoned debtors. Indirectly the funding will come from the government's single biggest revenue source: royalties and dividends from Saudi Aramco.
So far, King Abdullah's reliance on Aramco has been a wise choice. "Aramco is hands down one of the most advanced oil companies in the world," says Jamie Webster, a researcher for PFC Energy in Washington. The company is also the most progressive, technologically excellent organization in the kingdom. It is a world leader in extraction of oil from onshore fields, with the patents to prove it. Its residential compounds for expatriates are among the few places in Saudi Arabia where women can drive with impunity.
Owned by a venture of four American oil companies until its nationalization in 1973-80, Saudi Aramco is now 88 percent Saudi by head count. Although the King can command it to raise or lower production for geopolitical reasons, Saudi Aramco has been spared from royal micro-management. "The objectives of the state are better served if the national oil company is commercially structured and run," Ali Ibrahim Al-Naimi, then Saudi Aramco's chief executive officer and now oil minister, noted at a 2004 OPEC conference.
The demands on Saudi Aramco keep growing. Maintaining production, let alone increasing it, is getting more expensive as its big fields age. It must sell energy at below-market rates to encourage industrial development. Saudi Arabia may have more oil than its Gulf neighbors do, but with a population of 26 million it also has a great many mouths to feed. Gross domestic product per capita is just a third of America's. The kingdom on Dec. 20 published a budget for the current fiscal year (1432-33 on the Muslim calendar) projecting a deficit amounting to 7 percent of spending.
This is hardly an imminent crisis. The regional upheaval is boosting the kingdom's revenue by raising oil prices. In a pinch the kingdom can draw on its gold and foreign-currency reserves—$450 billion worth, fourth in the world behind China, Japan, and Russia, according to the CIA World Factbook. In the long run, though, there's a risk that Saudi Aramco's payout of royalties and dividends to the kingdom could fall short of what's required to buy the loyalty of the king's subjects. In a less likely but not unthinkable scenario—call it the Venezuela option—some future King, out of desperation, orders Saudi Aramco to curtail its investment in the fields to free up more money for the royal budget. The goose that lays the golden eggs dies of starvation.
"I don't think Saudi Aramco's big challenge is finding oil," says Valerie Marcel, author of Oil Titans: National Oil Companies in the Middle East. "Its main challenges are things that are out of its control: If domestic needs for jobs and money grow too fast, the government may start intervening more in its business—that is something it would like to prevent at any cost."
Whether Saudi Aramco can keep the oil flowing matters not only to King Abdullah but to the world, because the company is the only one with substantial spare production capacity that can be put to use in an emergency. Aramco claims it can produce 12.5 million barrels of oil per day, vs. current output of about 9 million. That's probably correct, says Andrew Laven, BP's (BP) vice-president for Middle East trading. In a display of Saudi power on Feb. 28, oil futures slipped after Saudi Aramco CEO Khalid Al-Falih said the company was ready to compensate for any shortfall in crude supply caused by turmoil in Libya. Saudi Arabia's ability to calm global markets in periods of high stress gives the kingdom important political influence. If Saudi Aramco's spare capacity shrinks, oil prices will become even more volatile.
Volatility threatens more than just the oil market. Saudis, while mostly quiescent today, are aware of the democratic tide rising around them. "There are no more borders for ideas," Mai Yamani, an anthropologist who is a daughter of former Saudi Oil Minister Ahmed Zaki Yamani, told Bloomberg TV on Feb. 28. More than 100 Saudi activists, writers, and academics warned King Abdullah in a recent letter of corruption, nepotism, and "the widening gap between state and society," telling him the conditions "require a serious review." On Facebook, activists are calling for a Mar. 11 "day of rage."
How does this end? Probably not in full democracy. The kingdom is staging elections for the first time this year, but they are only for members of city councils, and only men can vote. The likely successors to King Abdullah are considered less reform-minded than he is. Most likely the Saud family, having united Saudi Arabia by the sword in 1932, will try to keep it lubricated with oil wealth. That will keep the pressure on Saudi Aramco to continue delivering.
What we have learned in the Middle East and North Africa this year is that the old rulers—even the most stable of them—are playing for time. Saudi Aramco may outlast the family that took it over.