RIYADH, SAUDI ARABIA -- The Saudi oil weapon, potentially the region's most powerful force, has remained sheathed and is unlikely to be used to weaken Iranian military capabilities in the Persian Gulf conflict, according to Saudi and diplomatic sources.
Although Iran's conduct has created anger and apprehension here, the Saudi royal family has decided that the kingdom's own need for a steady, high income and stable oil markets is more pressing in the long run than the desire to undercut Iran's ability to pay for its war with Iraq, these sources explained.
Ayatollah Ruhollah Khomeini's revolutionary Islamic government thus is likely to continue receiving a helping Saudi hand in negotiations to regulate petroleum sales and keep prices high for members of the Organization of Petroleum Exporting Countries. Because their interests coincide, Saudi Arabia and Iran have followed oil policies within OPEC that have run along parallel tracks for some time, an industry analyst said.
"We will not change our oil policies to get at Iran," a Saudi source predicted.
"They are keeping oil policy separate from the war," a diplomatic source said.
The Saudi decision to keep oil and diplomacy on separate courses has had a major impact on current gulf battles and on the overall course of the Iran-Iraq war.
Oil is at the heart of increased fighting in the gulf over the past week. President Saddam Hussein of Iraq justified his renewed attacks on Iranian shipments by pointing out that oil sales bring in the foreign exchange that allows Khomeini to pursue the seven-year-old war.
Unlike Iraq, which exports oil in pipelines crossing Turkey and Saudi Arabia, Iran depends entirely on tanker shipments through the gulf for exporting its oil.
Even more devastating than Iraq's air attacks in the gulf, however, would be a Saudi move to pump large quantities of oil and allow world prices to plummet. Overproduction, chiefly Saudi, drove prices down last year, at one point to below $9 a barrel.
Saudi Arabia, which has the capacity to produce more than 12 million barrels a day, showed then that it could shift the world market acting alone.
But OPEC nations, including Saudi Arabia, have been seeking more recently to keep prices at $18 a barrel. To do so, they have agreed on a production ceiling of 16 million barrels a day for all 13 member states, including 4.3 million for Saudi Arabia.
Iran refused to abide by the accord, calling its quota too low. The higher prices brought about by lower production nevertheless have benefited Tehran considerably.
This is a key point for the war effort because, according to a well-informed diplomat, Iran's foreign reserves had fallen low. Iran, without a politically motivated arms supplier providing easy credit, often has paid premium prices for weapons and supplies needed in its conflict with Iraq, he pointed out.
The higher oil prices also have raised Iraq's income. But with backing from Saudi Arabia and other Arab oil producers, combined with longstanding arms supply channels to the Soviet Union and France, Iraq could absorb another oil price crash more easily than Tehran, sources here said.
Seeking to raise its revenues, Iran stepped up exports to more than 2 million barrels a day during the recent lull in attacks on gulf shipping. The halt in attacks lasted from July 20, when the U.N. Security Council called for a cease-fire, until Aug. 29, when Saddam Hussein ordered Iraqi aircraft back into action despite requests for patience from the United States, Saudi Arabia and other countries.
The Saudi production flood was designed by the former oil minister, Ahmed Zaki Yamani, to discipline other OPEC members and force them to abide by quotas over the long run. But it brought such a sharp price drop that an economic slowdown intensified here, producing grumbling among many Saudis grown used to a permanent boom.
Eventually, the economic slowdown and discontent led to Yamani's dismissal and a reversal in the policy, an oil analyst said.
"People tend to forget the Saudi royal family needs popular backing, and they didn't have it when revenues dropped," he said.
The 1987 Saudi budget, reflecting last year's slowdown, projected a $14 billion deficit. The gap has led Saudi rulers to concede they are dipping into the kingdom's multibillion-dollar reserves to cover current expenditures.
This marked an abrupt turnabout in a country where, over the last two decades, development projects have been decided upon with little regard for cost. It also demonstrated anew to Saudi rulers their dependence on high oil prices and stable markets.
In addition, industry analysts calculate that up to 800,000 barrels of Saudi oil a day have been committed in advance as payment in a new kind of barter for purchases and development projects. These commitments, coupled with OPEC production quotas, also have the effect of limiting future oil revenues and increasing the kingdom's need for stable prices and production rates, an industry source observed.
An $8 billion Saudi purchase of 72 Tornado advanced fighter-bombers and other warplanes from Britain, for example, was concluded with a promise of 400,000 barrels a day to British Petroleum and Shell instead of cash.
More recently, the Swedish ABV Rock Group announced it is on the verge of a first-phase contract to begin building giant underground fuel storage tanks near Saudi military bases. This project also will be paid for with commitments of future oil production.
The entire project has been estimated at nearly $4 billion. The preliminary phase and another agreement on construction of an oil refinery have led Saudi Arabia to commit another 200,000 barrels of oil a day, according to the Middle East Economic Survey.