Saudi-U.S. relations: The partnership draws closer

The economic relationship between the U.S., the world's lone superpower, and its biggest oil exporter reaches back decades. But it has entered a new stage in the 1990s. This is the last in AP Special Correspondent Charles J. Hanley's two-part series on U.S.-Saudi relations.

RIYADH, Saudi Arabia (AP): Quietly, steadily, in a slow parade west of supertankers and a digital flow east of dollars, the U.S.-Saudi partnership has drawn tighter since the Gulf War.

America's oil imports have risen by a third. Saudi oil revenues have more than doubled. And in a fast-changing world, the mutual dependence of the superpower and the petro-power has become a dominant geopolitical fact of post-Cold War life.

To a British economist, it represents a "return of American hegemony in the international oil system." To an American oilman, it's a trap. To a Saudi dissident, it's a betrayal. And to Iraq it's bad news -- very bad news.

"Saudi Arabia would like the embargo on Iraqi oil maintained as long as possible," says international oil expert Fadhil Chalabi. In America, it has a powerful partner for achieving that.

Energy is only one strand in a web of U.S.-Saudi economic ties that has grown in the six years since an American-led army rolled back Iraqi aggression in the Gulf.

Statistics tell the story: U.S. products, 16 percent of Saudi imports before the war, now make up 24 percent. Imports from America -- computers and turbines, cigarettes and F-15 fighters -- totaled $7.3 billion last year.

The story plays out, too, in the streets and government corridors of this sprawling capital: in the gleaming new Toys R Us store in north Riyadh; in the Cadillacs and Suburbans cruising the desert roadways; in the two dozen American economists at work in the Finance Ministry; in the U.S. business advisers hired to counsel King Fahd, led by James A. Baker III, secretary of state during the Gulf War.

Oil has long linked the two countries, "but now we have a much more complex and dynamic relationship," U.S. Treasury Secretary Robert Rubin told the U.S.-Saudi Arabian Business Council, a group formed since the war.

But for all the complexity, oil remains key.

As U.S. oil output declined, imports climbed. America's Saudi imports last year -- 1.25 million barrels a day -- were twice the level of 1986. Saudi oil revenues, meanwhile, grew from $22 billion before the war to $50 billion last year, halting an economic slide that began in the mid-1980s.

Some say an "entente" has been forged since the war, that the United States has agreed to protect the Gulf monarchies and remain a dependable customer in exchange for reliable supplies at stable prices.

"You'll never find anything in writing, but all events suggest that things are under control," said energy scholar Peter Odell of the London School of Economics.

This "hegemony" is a force for oil price stability, he said. The Saudis' spare capacity would enable them to ratchet production up or down to influence prices.

U.S. officials dismiss talk of secret agreements. But they acknowledge the two governments regularly consult on the oil market -- and especially, lately, on the anti-Iraq embargo. It was high on the agenda of recent U.S.-Saudi talks in Washington.

The U.N. embargo, imposed after Iraq invaded Kuwait in 1990, shut down Iraqi oil exports of 3.2 million barrels a day. Limited sales have been allowed since December, but the embargo remains a disaster for the Iraqi economy -- and a godsend for the Saudis. In the absence of Iraqi oil, Saudi exports surged to 8 million barrels a day from 5.4 million.

London's Center for Global Energy Studies, headed by Sheik Ahmed Zaki Yamani, the former Saudi oil minister, determined that Saudi Arabia has earned more than $100 billion in oil revenues from the embargo -- more than covering the $55 billion the war cost the Saudi treasury.

With the bonus billions, the Saudis largely maintained government spending on their fast-growing population, deferring expected increases last year in gasoline, electricity and other subsidized prices.

That kind of economic security helps keep the lid on in a land with an increasingly vocal dissident movement. And that means, Chalabi said, the Saudis cannot allow Iraqi oil back on the market, where it could drive down prices or force a cutback in Saudi exports.

"Saudi Arabia cannot live with lower oil revenues," said Chalabi, a former secretary-general of the Organization of Petroleum Exporting Countries who now runs Yamani's think tank. "It could have a far-reaching effect on the political situation inside the country."

A key Saudi official said this danger is overstated, that growing Asian oil demand will mean an expanding market for all producers.

"So the question of Saudi Arabia reducing production is not going to be a factor in the future," Abdulaziz N. Al-Orayer, deputy finance minister, said in an interview.

But a well-informed foreign source in Riyadh, who is in touch with Saudi thinking, said the Saudis are, indeed, working against the return of Iraqi oil. "They don't want it coming suddenly onto the market," he said.

Although the sanctions have been maintained because of Iraq's efforts to build weapons of mass destruction, Western officials suggest they may stay as long as Saddam Hussein rules Iraq.

To some Americans and Saudis, meanwhile, the real problem is the oil partnership itself.

The surge in U.S. oil imports - from 30 percent of consumption in the mid-1980s to 54 percent last year - leaves the American economy too reliant on outside sources, U.S. energy conservationists say.

Some describe the billions the Pentagon spends to protect Gulf oil as a giant "welfare" program for U.S. energy multinationals.

"I think you're trapped now," said well-known Texas oilman T. Boone Pickens. "It would take years to work your way out of this problem."

The U.S. General Accounting Office advises Americans to enjoy the "trap." Lower-priced oil saves the U.S. economy billions of dollars a year, it reported in December.

But what looks like a boon to American drivers -- relatively cheap oil -- looks like a ripoff to some Saudis.

"Oil policy should have to do with the interests of our country, not of America," Saad Al-Faqih, an exiled Saudi dissident, said in London.

For those trying to break the monarchy's hold on this country, the ever-tightening U.S.-Saudi partnership -- military, economic, political -- is an ever-bigger target.

For the Saudi economy, the long slide is over -- for now. It began when oil prices crashed from more than $30 a barrel in the early 1980s to as low as $10 in 1986, turning a flood of oil revenue into a relative trickle. The 1990-91 Gulf War was a second jolt, costing Saudi Arabia an estimated $55 billion. The Saudi government's budget first fell into deficit in 1983, when it began spending tens of billions from its $120 billion in financial reserves. National per-capita income plunged from $18,800 to $6,700 by 1995.

In 1995, the government had to reach into the ordinary Saudi's pocket -- not by imposing taxes for the first time, but by reducing subsidies of electricity, water, telephone and other consumer costs. Gasoline prices were doubled to about 4 riyals per liter (60 U.S. cents a gallon). And further subsidy cuts were planned for 1996.

But then the recovery kicked in.

Oil prices gradually firmed up -- they now hover over $20 a barrel. And a valuable byproduct of the Gulf War helped even more: Saudi oil largely filled a market gap left by embargoed Iraqi oil, boosting Saudi exports almost 50 percent.

"There's no need for further measures because the economy has performed much better than expected," Abdulaziz N. Al-Orayer, deputy finance minister, said in an interview in Riyadh, the Saudi capital.

Kevin R. Taecker, chief economist for Saudi-American Bank in Riyadh, said that since market conditions point to higher oil prices, "they've got it knocked until at least 2000 as far as the budget is concerned."

But economists uniformly urge the Saudis to press on with diversifying their economy, before the next oil slide.

Window: The UN embargo, imposed after Iraq invaded Kuwait in 1990, shut down Iraqi oil export of 3.2 million barrels a day. In the absence of Iraqi oil, Saudi exports surged to 8 million barrels a day from 5.4 million.