U.S. Fails to Curb Its Saudi Oil Habit, Experts Say

November 26, 2002
By JEFF GERTH
NY Times.com


WASHINGTON, Nov. 25 - Nearly a dozen years after the
Persian Gulf war, when reliance on Saudi supplies prompted
calls for the United States to diversify its sources of
oil, America remains as dependent as ever on the Saudis,
according to government and industry officials.

The Saudis supply about one-sixth of United States oil
imports. But what gives Saudi Arabia its considerable
political strength is its role as the only producer with
the spare capacity to replace millions of barrels a day of
lost oil. That amount could be drained from the market
temporarily by an attack on Iraq, according to the
administration's internal assessments as well as outside
experts.

"The Saudis have by far the largest amount of unused
capacity," Guy Caruso, the head of the Energy Department's
Energy Information Administration said.

Relations between Saudi Arabia and the United States have
been strained since the participation of several Saudis in
the Sept. 11 attacks last year prompted close scrutiny of
the country's role in financing and otherwise supporting
Islamic radicalism. But the Bush Administration's strategic
options are clearly limited by American dependence on Saudi
oil.

Saudi Arabia is now producing about eight million barrels a
day, oil executives say. Saudi officials have said publicly
that they could raise their output to 10 million barrels a
day fairly quickly and to 10.5 million within three months.
Most experts, as well as the Bush administration, accept
the Saudi assurances.

If a war halts Iraq's oil exports - estimated at 1.5
million to 2 million barrels a day - the situation will be
manageable, Mr. Caruso said. But it would be harder to
replace a steeper decline in exports, which could occur if
oil supplies from other Persian Gulf producers were reduced
by terrorist attacks or by prohibitive insurance premiums
on oil tankers.

In an interview, Mr. Caruso said the United States
Strategic Petroleum Reserve and stocks in other countries
represented the other best defense against short-term
disruptions.

Established in the 1970's as a response to an oil embargo
by the Organization of Arab Petroleum Exporting Countries,
which is based in Kuwait, the reserve now holds a record
592 million barrels, part of a Bush administration plan to
reach 700 million barrels by 2005.

But because of increased American dependence on imported
oil, the length of time the reserve can compensate for lost
imports has declined from a high of 118 days in 1985 to 51
days at the end of last year. Some oil experts advocate
increasing the reserve to one billion barrels.

Alan Larson, under secretary of state for economic affairs,
went to Saudi Arabia last month to secure assurances that
Riyadh would pump extra oil if it were needed, American and
Saudi oil executives say.

Last month Mr. Caruso's office helped prepare an "oil
market contingency planning" book, based entirely on public
data. The Energy Department has restricted the book's
distribution to keep it from Congress and the public,
according to government officials.

In an interview last month, Mr. Caruso cited a small
portion of the book's contents to illustrate the unique
role of Saudi Arabia.

Because there are no reporting requirements in the
international oil industry, capacity figures vary widely.

Mr. Caruso's agency estimates that Saudi Arabia has
slightly more than half the spare production capacity of
4.5 million to 5 million barrels a day that exists in
member nations of the Organization of the Petroleum
Exporting Countries.

A group of experts led by Larry Goldstein, president of the
Petroleum Industry Research Foundation, estimates that
total spare capacity is only three million barrels, and
that the Saudis control two-thirds of that.

In the three months after Iraq's invasion of Kuwait in
August 1990, the largest oil supply disruption in American
history occurred, with the daily shortfall averaging 4.6
million barrels, government records show.

Prices doubled for a time. But the shortage was largely
offset by increased Saudi oil production, which went from
5.8 million barrels a day in August to 8.5 million by
December, according to data in Energy Department's oil
market contingency planning book.

Some analysts question whether Saudi Arabia actually has
the spare capacity it says it has.

"We all take the Saudi assurances for granted," said
Matthew Simmons, head of Simmons & Company International, a
Houston-based energy advisory firm, but "the last time
Saudi Arabia ever got close to 9 or 10 was in 1980. Their
largest field is 55 years old, and they do not disclose
their field-by-field production data, so we really don't
know for sure."

Government and industry oil experts praise the
administration for its focus on energy security. But they
say it has been too quiet about its plans, given how openly
the issue is discussed in the oil markets and the
administration's own push for more transparent oil markets.


Administration officials say they have adopted a cautious
approach to avoid roiling the markets. "Something said
casually could be misinterpreted and influence the
markets," said one Energy Department official, who spoke on
condition of anonymity.

More than a half-century ago, the United States developed a
close relationship with the Saudi ruling family, tacitly if
not explicitly trading support for the government for
access to oil.

But the events of Sept. 11 raised fresh questions in the
United States about Saudi Arabia: 15 hijackers and much of
Al Qaeda's finances came from the kingdom.

On the Saudi side, the American military presence in the
country is one factor in the "increasingly open challenges"
to the royal family's control, a recently released
assessment by the Central Intelligence Agency says.

Both governments insist that the relationship is as strong
as ever. But the Pentagon has developed regional
alternatives to the use of Saudi military installations,
and a draft of a secret Congressional report has criticized
the Saudis for not cooperating with Americans investigating
the Sept. 11 attacks.

Still, the prospects of a war with Iraq show how oil
continues to bind Saudi Arabia's relationship with the
United States.

The countries' dealings have always been marked by quiet
diplomacy. But according to Bush advisers and officials,
the fear that critics would, perhaps unfairly, link the
administration's policies to the oil industry has added
another layer of secrecy.

"If you are trying to talk about Iraq and if you were not
encumbered by the fear that your actions would be linked to
Exxon Mobil or the oil industry," said one Bush adviser,
who spoke on condition of anonymity, "you'd be talking
about oil issues."

Vice President Dick Cheney tackled the issue of energy
security in the administration's National Energy Policy
report. The report noted that Saudi Arabia's policy of
"investing in spare oil production capacity" had lessened
the impact of oil supply disruptions in any region.

But the report also called for greater "diversity of world
oil production." to avoid possible instability due to
"concentration of world oil production in any one region of
the world."

After Sept. 11, President Bush decided to increase the
American strategic reserve to 700 million barrels. But some
experts say more is needed, in part to reduce the
importance of Persian Gulf producers like Saudi Arabia.

"You want to make it politically impossible for the Saudis
to use their swing capacity as a political club," said
James Woolsey, President Clinton's first C.I.A. director
and one of the advocates of increasing the reserve to one
billion barrels.

President Bush's national security strategy, released in
September, proposed to "enhance energy security" by working
with allies to "expand the sources and types of global
energy supplied, especially in the Western Hemisphere,
Africa, Central Asia and the Caspian region."

The strategy did not mention the Persian Gulf, the source
of most of the world's known oil reserves and virtually all
of the world's spare oil capacity.

Energy security issues were front and center two weeks ago
in Washington at a conference on the economic consequences
of an attack on Iraq. The conference was sponsored by the
Center for Strategic and International Studies in
Washington.

Panel members called for more complete and understandable
data on oil markets, a position supported by the Bush
administration. Energy Secretary Spencer Abraham backed a
Saudi initiative in that area during a forum in Japan.

Experts on the panel said Saudi Arabia's stated intention
to fill in the supply gaps made the outlook for oil markets
more favorable than it was after the sudden Iraqi invasion
of Kuwait in 1990. Moreover, the loss of Iraqi oil exports
would be far less than the loss of 4.5 million barrels a
day that occurred as a result of Iraq's invasion, which
halted Kuwait's production, too.

But the center's analysis included some new problems and a
few unknowns. Commercial petroleum stocks are much tighter
today than in 1990, and there is less ability to substitute
other fuels.

Furthermore, no one knows what President Saddam Hussein of
Iraq might do to his own or his neighbors' oil fields, or
whether sympathetic terrorists might hit oil targets in the
region.

http://www.nytimes.com/2002/11/26/international/middleeast/26OIL.html?ex=1039338665&ei=1&en=8c91ec757e74df92