Oil

Shibley, welcome back to Berkeley.

Pleasure to be back here.

So what are U.S. interests in the Middle East?

You look at it at this stage and you say, "What could be so compelling about America's interests that America may be prepared to go to war?" It's hard to know what interests would drive the country to war on the scale that we are preparing. But there are important interests in the Middle East that remain.

One is oil. Yes, oil is still important. A lot of people have assumed that Middle Eastern oil has diminished in value because of the proliferation of other producers. Other people think that we can wean ourselves from importing Middle Eastern oil. The reality of it is that there's only a single, seamless market. It really doesn't matter where you buy or sell oil. It's just one market. And the Middle East will play an even bigger role in that market in the future. Today, it accounts for two-thirds of the proven oil reserves. It only accounts for 25 percent of the oil supply. Just simple arithmetic. As time goes on -- in fact, within a decade -- most likely all new oil in the market is going to come from the Middle East. It's still about oil, in part. So that's clearly an interest.

Let me just clarify this. What we're talking about is, for example, with the rise of China, China is going to need Middle Eastern oil. So even people who are only at the table in a limited way will be there.

Undoubtedly. China, in fact, imports 60 percent of its oil today from the Middle East and is likely to be importing up to 90 percent of its oil from the Middle East. As you know, their dependence on oil is increasing because of the incredible growth that they're experiencing, particularly in certain sectors of the economy -- cars, for one thing. This year, Volkswagen is going to sell more cars in China than it is selling in the United States of America. It gives you a picture of what is happening in China. Obviously, China is trying to invest in the Gulf.

Now, all of this doesn't mean that you need to have military presence. Historically, in fact, the trend has been very clear. It is really a demand and supply problem. The market takes care of itself. The oil producers are going to sell. They need the income. They can't help it. And they're going to buy the best products available in the market, regardless of the political calculations. In fact, even during the Cold War, Middle Eastern states traded in oil along a pattern that was completely independent from the political coalitions and alliances that they built. So why would you need military presence in that strategy? I'm not sure that you do.

In the American calculation, historically, there has been one factor that has influenced the American strategy, dating back to 1949, and that is that the U.S. feared not only cutting off of Middle Eastern oil to the West, but it sought to deny that oil to powerful enemies. It wasn't just the fear of not getting the oil at reasonable prices, but it was the fear that if you have a powerful enemy controlling so much of the world oil, they would be even more powerful and in that sense, they would be more threatening.

That strategy began with Truman, in relation to the Soviet Union. Truman put a policy in place that was called a "denial policy." That policy stipulated blowing up the Arabian oil fields if a Soviet invasion were imminent, the logic being not to empower the Soviets further by controlling them. They went to the extent of considering the use of radiological weapons in the oil fields to accomplish the task. In fact, the CIA, in a 1950 study that was recently declassified, talked about the options and ruled out the radiological weapons option, in part, because it wasn't very good as a conservation measure. It would have denied the Soviets the use of the oil, but it also would have made it harder for the West to control them upon reoccupation. They opted, instead, for a conventional strategy to blow the oil fields if, in fact, the Soviet invasion were imminent.

And Eisenhower in the mid-fifties, after the Suez Crisis, broadened that doctrine to include not only threats from the Soviet Union, but from what he considered to be threatening regimes in the Middle East, after the upheavals in the region after the Suez Crises. So the U.S. has had a strategy all along that was predicated on the assumption that you cannot allow powerful and unfriendly states to control so much of the world's oil because it will empower them and make them potentially threatening.

Before we get to the other interests, let's go on a little more with oil. Help us understand why Saudi Arabia is important in this equation. From reading your book, which covers all of this, one gets the sense that it's like going to a gas station and "topping off." That's what they always can do in the last resort: add more oil.

Well, that's important. If you look, first of all, at their own reserves, they alone account for more than 25 percent of the proven oil reserves, globally. You can imagine, therefore, how important they are in the marketplace. But more than that, they have a huge production capacity, bigger than anyone else, and they have a leeway to make up the slack in the market, to make up shortages in the market, for example, if Iraqi oil were to come offline for some reason. And they can withhold. Moreover, their oil is very cheap to produce. It might cost somewhere between two and three dollars a barrel. In fact, if the Saudis wanted to behave irresponsibly from the point of view of the international market, they could drive a lot of people out of business by underselling for a long period of time, and then charging higher prices. So, they have the capacity.

They have actually played a moderating role, because of the political relationship. In fact, that's been the price of that political relationship. What the U.S. has gotten from the Saudis, largely, is this moderating role on the oil market, although the Saudis, in part, have played that game for their own interest. They certainly had other calculations in maintaining the low price. For example, if in war with Iraq you have the Iraqi government blowing up its oil fields, or the oil fields being blown up accidentally and being out of the market for something like a year, longer than they were out of the market in Kuwait (which was about six months), what would happen in terms of the economic shock, the high oil prices? Who is going to moderate that? Well, really, only the Saudis can play the role of picking up the shortage. That's why they remain very, very important. One can imagine scenarios in a war with Iraq where they will be even more important.

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