Saudis Struggle to Face Reality--Hard Times

Only four years ago, roads outside Saudi Arabia’s cities were littered with rusting hulks of late-model luxury automobiles, abandoned at the first sign of mechanical trouble because money was plentiful and skilled mechanics were scarce. Today, though, with falling oil prices and sluggish demand, the desert kingdom is struggling to face up to a new reality of hard times.

The plight of the Saudis, who remain rich by almost any standard except that of their own recent history, may not evoke much sympathy. However, U.S. Middle East specialists, in both government and business, are watching the situation anxiously, for if the Saudis botch their belt-tightening efforts, it could produce dire political and economic consequences for the West.

Regime Remains Stable

So far, the government of King Fahd seems to be coping effectively with a drop of more than 75% in its oil revenues since 1981. U.S. experts say the regime remains stable, although not quite as much so as it was at the peak of the oil boom. The economy, too, seems to be adapting to the coming lean years with fewer problems than experienced by some newly “poor” oil-producing countries.

The stakes are extremely high for the United States and other Western nations, both economically and strategically. Analysts who try to prepare for the worst possible case say that a revolution in Saudi Arabia is very unlikely but not impossible--and that if the Saudis should go the way of Iran, the impact on the West could be far greater.

Saudi Arabia controls about a quarter of the world’s known petroleum reserves, and despite the present slack market for oil, the Saudis could cause plenty of international mischief if they chose to do so.

William Quandt, a former National Security Council staff member who is now a senior fellow at the Brookings Institution in Washington, said it would be truly frightening if Saudi Arabia were to be taken over by someone like Libya’s Moammar Kadafi.

“Look at how much little Kadafi has been able to screw things up in Africa with his few billions (of dollars),” Quandt said. “The Saudis have far greater resources than Libya. So far, when Saudi Arabia has chosen to spend its money for political purposes, it has usually been on behalf of courses we can support. If that money went to the troublemakers, it could be difficult.”

Quandt said he believes that the Saudi royal government will weather the storm without radical change. However, he added, “since we missed the Iranian situation so badly, I think we should admit that we don’t know what the situation in Saudi Arabia really will be. I don’t think it (revolution) is going to happen, but, to be honest, I’d have to say you have to give some probability to it.”

Some key economic statistics are considered secrets in Saudi Arabia, but U.S. experts, interviewed by The Times, say that enough is known to identify some trouble signs:

- American contractors, including the huge construction companies that built the Saudi Arabian infrastructure in the past decade, are struggling to collect $500 million to $750 million in unpaid bills. The Saudi government contends that payment delays are a result of disputes over contract terms, and it denies following a policy of slow payment. However, one American who does business in the kingdom said: “It’s not a policy, it’s a shortness of cash. It is the inevitable effect of a much-tightened market.”

- The kingdom’s budget of $56 billion may be as much as $20 billion in the red. With about $100 billion in overseas investments left from the $150 billion salted away in the years when oil revenue flowed faster than it could be spent, the Saudis can cover deficits of that kind for at least five years without borrowing or imposing taxes. However, the government is reluctant to deplete its reserves, so it has cut public expenditures by an estimated 23% and has announced plans to lay off 600,000 foreign workers over a five-year period. Also cut have been some of the subsidy programs that eased the life of the average citizen.

- The Saudi middle class--created almost from scratch by the oil boom--is beginning to grumble that the Royal Family continues to spend lavishly on its own comforts while private businessmen are asked to cut back. The discontent seems to be mild so far, but it could grow. One official said King Fahd does not seem to realize he has a growing public relations problem because “it is a kingdom, and people tend to take the edge off the truth when talking to the king.”

- Saudi students, returning from universities in the United States and elsewhere, are finding it increasingly difficult to obtain the sort of high-paying jobs that made millionaires of the students who returned only a few years ago. On the other hand, virtually all Saudi students continue to return home after college; they are not--at least, not yet--remaining abroad the way students from Iran, India and some other countries often do.

- Major projects--including a $1-billion oil refinery--have been canceled, and there is far less business available for construction giants like Bechtel, which has reported a 39% drop in revenues. U.S. businessmen say that Saudi Arabia is still a good place for foreign investment but that the market is far more competitive than it used to be. One businessman said, “You can’t just pick it up off the streets anymore--you have to compete for it.”

A worldwide recession that began in 1980 cut sharply into demand for oil. At the same time, consumer countries, suffering from repeated price increases engineered by the Organization of Petroleum Exporting Countries, reduced oil needs further through conservation. World production slid from 63 million barrels of oil a day in 1979 to 54 million barrels last year. And OPEC prices fell from an average of $34.50 per barrel in 1981 to $27 on the “spot” market today.

The recession eased, but the expected surge in oil production did not follow. Consuming nations are sticking to their conservation programs, and the world has found that it can get by on less petroleum.

For Saudi Arabia, the production picture is even more stark. As recently as 1981, the Saudis were producing 10 million barrels of oil a day; this year, the figure is about 2.5 million and may be drifting lower. The widely respected Middle East Economic Survey reported last week that Saudi crude oil production has dipped to 2.2 million barrels a day so far this month, following production of 2.6 million barrels in July.

Billion a Month

Thus, the Cyprus-based newsletter said, the Saudi government might need between $1.5 billion and $2 billion from its financial reserves to cover public spending this month alone.

The Riyadh regime, alone among its OPEC partners, has continued to charge the cartel’s official price, while other members have offered deep discounts in an effort to increase demand--and production. Because of their pricing policy, the Saudis have absorbed a disproportionate share of the worldwide decline in production, dropping far below their OPEC quota of 4.35 million barrels a day.

The Saudi oil minister, Sheik Ahmed Zaki Yamani, repeatedly has threatened other OPEC members that if they do not keep to the cartel’s agreements, his government will join in price cutting. During the recent OPEC meeting in Vienna, Yamani summoned oil company representatives to his hotel suite to tell them to expect a sharp increase in Saudi production. However, the statements apparently were a bluff; the kingdom has not made good on its threats.

From an economic standpoint, Saudi Arabia could easily win a price war. With the lowest production costs in the industry, the kingdom could turn a substantial profit by selling more oil at lower cost. At $10 per barrel, for instance, Saudi Arabia could corner much of the world market because in many countries the cost of production is higher than that.

‘Politics Are Terrible’

“The economics (of price cutting) are not bad, but the politics are terrible,” the Brookings Institution’s Quandt said. “To make enemies of everyone in your immediate environment is very un-Saudi-like.”

Moreover, questions are being raised about the regal life style of the king and his many half-brothers and nephews, who have made billions of dollars and hold most key government positions.

Much of the criticism is directed personally at Fahd and, to a smaller extent, at his brother, Prince Sultan, who is defense minister and second in line for the throne. Fahd and Sultan are considered the most pro-American of the senior members of the royal family. By contrast, Crown Prince Abdullah, who has never been tagged with Fahd’s and Sultan’s playboy image, is more critical of Washington and more friendly to often-radical Syria than are other Saudi leaders.