Gen. Alexander Haig The State Department Washington, D.C. Dear Mr. Secretary:
As you prepare for a "familiarization trip" to the Middle East next month, may I be bold enough to call your attention to a bit of economic mythology that in the past has tripped up the experts?
According to this imaginary view, the friendly Saudi Arabians are so anxious to help the United States that they are producing more oil -- at a moderate price -- than it serves their own interest to produce. If they were less sympathetic to the United States, the story goes, they would keep more of their treasure in the ground, delaying the day that desert fields run dry.
Mr. Secretary, the Saudis do a marvelous PR job to perpetuate this little bit of fiction. But I call your attention to a fascinating dispatch -- Feb. 5, 1981 -- in the Christian Science Monitor from C. L. Cranford in Dhahran, Saudi Arabia. There, at a seminar at the University of Petroleum and Minerals, Sheik Ahmed Zaki Yamani was taken to task by one of his fellow countrymen for selling oil cheaper than other members of the Organization of Petroleum Exporting Countries.
Yamani's answer, as Cranford said, was a lesson in international oil economics. Other OPEC countries may have an interest in boosting oil prices as high as possible because their supplies will run out fairly quickly, Yamani pointed out. Algeria, for example, will no longer be an oil exporting country by 1990.
But the shrewd Yamani told his Arab questioner that the Saudis, with huge reserves, must approach things differently, maintaining moderate prices along with a good supply so that the West won't be driven too quickly into developing oil substitutes. Their policy is based on no special consideration of, or love for, the United States. Rather, it involves a search for a price high enough to reflect "the true value of oil," Yamani said, but not so high as to cause a rush of energy research and investment that might knock the Saudis out of the oil business too soon.
"If we were to force the Western countries to invest large sums of money in alternative energy resources, it would take 7 to 10 years to bring about some results of these investments, which would reduce oil demand to a level that would affect Saudi Arabia, which at that time would not find enough markets to sell its oil to meet its economic demands," the Harvard-educated oil minister explained.
Thus, if the Saudis were to lower their production, creating a shortage of oil supplies, that would result in higher prices. In turn, that would speed the West's drive for alternatives to oil, cutting demand for the only commodity the Saudis have to sell on the world market. And that would be something that the Saudis could not afford.
Mr. Secretary, nobody has made this more explicit than Yamani did in Dhahran. So as you deal with Saudi officials on security matters of mutual interest, remember that what they are doing on oil prices and production is based on their best calculation of what is in their own best economic interest, period. We don't owe them anything for it. But if they can make gullible Westerners believe their oil-pricing policy is a favor, well, that's an extra dividend politically.
A blinders-off approach to the Saudis should make it easier for the nation to develop an explicit national policy toward OPEC. Happily, your administration is taking steps to increase funding for the Strategic Petroleum Reserve -- a move the Saudis don't like. You also have the support, as you deal with the Saudi government, of congressional Democrats who argue for the first time that the United States, together with its allies, should come to grips with OPEC, and who now support an expanded SPR. An excellent statement along these lines is included in the recent report of the Joint Economic Committee.
The Saudis, as you know, Mr. Secretary, were able to frighten the Carter administration into scrubbing the SPR. Naturally, the smaller the reserve stocks of any kind, the greater advantage OPEC can take of even small political disturbances in the Middle East.The critical importance of reserves, as the JEC report notes, can be seen by comparing the skyrocketing of prices right after the Iranian revolution, and the contrasting calm in the wake of the Iran-Iraq war, when inventories were at a record level.
Since it's a long flight to Riyadh, Mr. Secretary, let me recommend three supplements to your departmental briefing papers.
The first is a great book on the Middle East, titled "Arabia, the Gulf, and the West" by Prof. J. B. Kelly, which brilliantly explains how the Arabs for years have bamboozled the Western powers (including some fellows who used to sit in your seat).
The second is an article by Israeli economist Eliyahu Kanovsky, visiting professor at Queens College, New York, entitled, "Middle East Oil -- of Diminishing Importance?"
A third is an article by Douglas Feith of the Washington Center for International Security with the self-explanatory title: "The Arab Oil Weapon De-Mystified."
Good reading, and good luck, Mr. Secretary.