Saudi Arabia Is Putting Itself First

More than a week after Saudi Arabia failed to persuade all of its fellow OPEC members to increase oil output, analysts and investors are still trying to sort out the meaning of the fracas. One of the consequences may be the death of OPEC—or at least its irrelevance for the foreseeable future. As Saudi Arabia seeks to manage the fallout from the Arab Spring, the kingdom is engineering a new economic and foreign policy that clearly puts its interests first and those of OPEC second.

The Saudis have been under pressure from Western patrons and Asian customers for weeks to increase oil supplies. Worried that global growth is in danger of seizing up—and that demand for oil will slide as a result—the Saudis decided that to preserve their own growth they had to guard the economic health of their customers by making oil more affordable.

When an unsympathetic group of OPEC members including Libya, Iran, Algeria, and Venezuela shot down the idea of increasing supply, the Saudis vowed they would go their own way. Saudi Aramco, the kingdom's national oil company, quickly contacted refiners in India, China, South Korea, Taiwan, and Europe, asking whether they wanted more oil. Suddenly the Saudis' desire for a modest increase in output was transformed into a determination to show rival oil suppliers that it was still calling the shots in the global energy market. "They came to raise the ceiling, but [OPEC has] wound up killing it," says Bhushan Bahree, an OPEC analyst at IHS CERA (IHS).

In a recovering oil market there is always tension between the Saudis and their Gulf allies—who all have excess oil they can quickly bring to market—and producers such as Venezuela and Iran. The latter two countries lack the wells and developed fields needed to pump more oil on short notice, and often argue for limiting production to raise prices.

At the latest OPEC meeting the civil war in Libya, an OPEC member, and tensions between Saudi Arabia and Iran, the leaders of the two main factions in the cartel, aggravated the differences between the two sides. "Saudi Arabia has invested billions in its oil sector while other members haven't," says Sadad I. al-Husseini, a former senior Aramco executive and now a consultant. "They're still fighting revolutions and confusing foreign and economic policy."

The Iranian-Saudi rivalry has grown especially bitter. Iran, the world's No. 4 oil producer, and Saudi Arabia, the No. 1 exporter, ideally would work jointly to manage oil prices. The Saudis have grown alarmed at the spread of Iranian influence. The Shiite Iranians now influence policy in Iraq, which could turn into a big oil producer.

The Sunni Saudis have accused the Iranians of fomenting dissent in Shiite-majority Bahrain and in Saudi Arabia's own Eastern Province, which has a Shiite majority. Saudi troops spearheaded an Arab force that rolled into Bahrain on Mar. 15 to crush the mainly Shiite demonstrators threatening the Bahraini royal family, who like the Saudis are Sunni Muslims. "Iranian sectarianism is the cause of the tension," says Sheikh Abdul Mohsen Al-Obeikan, an adviser to the Saudi royal court.

The OPEC schism means the Saudi-led Cooperation Council for the Arab States of the Gulf (GCC) will likely become more important in developing energy policy. The council consists of six Gulf Arab monarchies and includes three other major oil producers: Kuwait, Qatar, and the United Arab Emirates. "Saudi Arabia and the other three GCC countries are able and willing to supply whatever the market needs," Saudi Oil Minister Ali al-Naimi said on June 8.

The GCC is not just a mini-OPEC: It's a free-trade union and a military alliance that's growing tighter as the Iranian threat looms larger. The Saudis who marched into Bahrain were part of a GCC force called the Peninsula Shield. To strengthen the alliance, the Saudis have dangled the prospect of GCC membership to fellow Sunni monarchs in Morocco and Jordan—perhaps because these countries could be a source of troops in an Iranian-Saudi showdown. The GCC has also promised $10 billion each in support to Bahrain and Oman, a less well-off member of the GCC. "From Bahrain to OPEC, the kingdom is showing Iran who's boss," says Theodore Karasik, an analyst at the Institute for Near East and Gulf Military Analysis in Dubai.

Oil and the army are two of the Saudis' major weapons. The other is cash. Saudi King Abdullah's pledge of $130 billion in housing subsidies and other services to his own subjects is well-known. Saudi generosity is also extending to Egypt. Although they're dismayed by the ouster of President Hosni Mubarak, the Saudis are trying to influence Mubarak's successors, whoever they turn out to be, by supplying $4 billion in economic assistance.

The Saudis' allies are starting to imitate the kingdom's policies. The Kuwait government sent every citizen, infants included, a payment of about $3,600 earlier this year. Kuwaitis as well as their household servants now get generous allocations of free chicken, rice, sugar, cheese, baby formula, and other food. "It is becoming a burden," says Kamel al-Harami, a Kuwaiti analyst. Yet such policies are helping to keep chaos at bay—goal No. 1 for the Saudis and their allies.

The bottom line Saudi Arabia is forging a new policy that relies less on OPEC and more on its own resources and those of its Sunni allies.

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