The Foreign Service Journal, December 2003

capacity, rendering it much easier to agree to restrain output. Given these dynamics, OPEC’s rhetoric became tougher in the late 1990s, with oil ministers defending their choices to attain a “fair” price for OPEC oil despite the ramifications for global economic growth rates. Leaders in OPEC countries cannot be seen as delivering benefits to Western consumers at the expense of their own citizens; such perceptions would leave regimes more vulnerable to public attack and more susceptible to the efforts of opposition parties and groups. “Things have changed,” observes the 52- person task force on Strategic Energy Policy Challenges for the 21st Century. “These Gulf allies are finding their domestic and foreign policy interests increasingly at odds with U.S. strategic considerations, especially as the Arab-Israeli tensions flare.” In the aftermath of 9/11, U.S. political rhetoric also became tougher and more strident. America’s special relationships with Mideast oil exporters have been placed under greater scrutiny, and debate has more pointedly focused on the security problems associated with increasing dependence on Middle East oil. Some commentators would like to see Washington play an altogether more assertive role in the oil arena. In this view, diversity of supply would not just be an econom- ic end but a strategic means. The United States would attempt to break the ability of OPEC to push up prices, and thereby deprive unfriendly oil states of revenue. However, it is obvious that having oil revenue is neither a necessary nor sufficient condition for funding terror- ism or developing weapons of mass destruction — to name but two distinctly unfriendly policies. More sig- nificant, the challenge to reduce dependence on Middle East oil supply is by itself daunting. The Unique Position of Saudi Arabia The Middle East currently supplies more than one third of global oil demand. According to the International Energy Agency, more than 60 percent of the world’s remaining conventional oil reserves are concentrated in the Middle East, one quarter of them in Saudi Arabia alone. Depending on the pace of development of new resources and technologies, and on policies in consumer countries, this percentage could rise considerably in the future. In its World Energy Outlook 2000 reference case, the IEA forecasts that the Middle East share of world oil supply will rise to over 40 percent by 2020. The U.S. Department of Energy predicts that the need for OPEC oil could rise from 28 million b/d in 1998 to 60 million b/d in 2020, with the majority of supplies having to come from the Middle East, in particular Saudi Arabia. Within the Middle East, one country holds a uniquely commanding position in the global oil market: Saudi Arabia alone is responsible for almost 10 percent of world supply, and it maintains the largest share of spare idle production capacity of any nation in the world. (Iran, Iraq, Syria, Sudan and Libya collectively produce approximately 8 million b/d, or another 10 percent of the world supply.) Moreover, Riyadh’s cush- ion of spare capacity represents more than three-quar- ters of all global spare capacity. The kingdom is the only oil producer in the world that can single-handedly replace, within a short period of time, the total loss of exports from any other oil producer. There is no other nation that currently has enough spare capacity to do this. Moreover, Saudi Arabia is also the world’s largest exporter, generally selling almost 100 percent more than Russia, its next largest export competitor. Diversification of supply is one approach to reduc- ing dependence on Middle East oil suppliers. But diversification of supply requires, among other things, access for foreign investors to develop new production — and more than half of the world’s current oil and gas reserves are located in places where the government controls access, and private companies are not allowed to explore. According to PFC Energy Consultants of Washington, D.C., only 19 percent of global oil and gas reserves allow full international oil company access. Fully 60 percent of oil and gas reserves are controlled by national oil monopolies with no equity access allowed to outside investors. The remaining reserves are held by Russian companies (13 percent) or other state firms that allow limited equity access by foreign investors. Market Outlook: A Delicate Balance Limiting demand growth is another approach to reducing dependency. Some analysts are forecasting that oil market conditions may improve in the coming years if demand growth is held in check over the remainder of the decade. This will require concrete F O C U S 26 F O R E I G N S E R V I C E J O U R N A L / D E C E M B E R 2 0 0 3