Falling Oil Revenues Won’t Make Gulf States Pushovers

As the Arab members of the Gulf Cooperation Council met last week to devise a strategy to halt the dramatic decline in oil prices, the United States found itself in an ironic position. Twenty-five years ago, it worried that the growing power of oil-producing nations, especially in the Middle East, posed a significant challenge to U.S. interests in the region. Today, it faces the opposite worry: that plummeting oil prices may undercut the stability of friendly Arab states. With the United States bracing for another possible confrontation with Iraq, the relative economic weakness of U.S. Gulf allies will not ensure their support for U.S. actions and may even make such support less likely.

Following the 1973 Arab-Iraeli war, Arab oil producers imposed an oil embargo against nations that supported Israel, including the United States. Their goal was to compel Israeli withdrawal from the occupied Arab territories. It was one of the clearest instances in international history in which economic muscle was used to try to force political change.

The embargo didn’t achieve its stated goal, but it forced Secretary of State Henry A. Kissinger to devote weeks of diplomatic time to trying to resolve the Arab-Israeli conflict. It also inspired President Richard M. Nixon’s administration to devise a new energy strategy to make the United States less dependent on Middle Eastern oil.

But the biggest effect of the embargo was on the economies of the oil-producing states. As these states took control of their own resources, oil prices went through the roof. Within three years, prices rose more than fourfold. The resulting income for oil producers, especially the largest, Saudi Arabia, gave them unprecedented clout. Through substantial trade and generous foreign aid, the Saudis became one of the Arab world’s most powerful states. Egypt’s economy, which had been the Arab world’s largest, dropped to fifth in a few months. By 1980, per-capita income in Saudi Arabia reached nearly $16,000, on par with the industrialized world.

The consequences of the recent decline in oil prices have been similarly breathtaking. Converted to inflation-adjusted 1998 prices, the price of a barrel of oil has dropped 80% since its peak in 1980. The effects of this decline on the oil-producing Gulf nations have been exacerbated by huge population increases in the region. Add the financial fallout of the Iran-Iraq and Gulf wars, and the result is startling. For example, rich in surplus capital in the early 1980s, Saudi Arabia must now borrow to meet its financial commitments. Its per-capita income has declined by half, even in nominal terms, since 1980.

While such economic troubles affect the foreign policies of Gulf states, especially foreign aid as an instrument of policy, they are unlikely to profoundly change the Saudi-U.S. relationship or broader U.S. policy in the Gulf, in the short term. Indeed, aside from the 1973 embargo, the region’s history of the past 25 years reveals little connection among oil exports, imports of goods and politics. Accordingly, the Gulf states’ relatively soft opposition to threatened U.S. military action in Washington’s most recent confrontation with Baghdad was not the product of a loss of leverage stemming from falling oil prices. On the contrary: A deepening economic crisis, by increasing public discontent, might make it harder for Saudi Arabia, in particular, to support unpopular military strikes against Iraq, especially if there was no assurance that the strikes would bring down Iraqi President Saddam Hussein.

There is a better explanation than falling oil prices for what appears to be the Gulf states’ more conciliatory tone toward U.S. policy on Iraq.

* First, the Gulf states were concerned about the costs of repeated confrontations with Iraq that result in no change in the status quo. Every time Hussein challenges the U.N. sanctions regime and the United States responds with military threats, regional and domestic tensions increase. Some of the costs of the military mobilization are borne by the Gulf states, especially Kuwait. The repeated crises stir up fears of instability, which only adds to the general fatigue that comes with being Hussein’s neighbor. Increasingly, the Gulf states are looking for another way to deal with Iraq.

* Second, the most recent confrontation with Iraq came at a time when there was progress on the Arab-Israeli front, with President Bill Clinton dedicating much of his time to the issue. This movement undercut Arab critics of U.S. policy and encouraged Arab parties who want the negotiations to succeed.

* Finally, the Gulf states accepted U.S. policy toward Iraq only after securing the support of two key Arab states, Egypt and Syria. Egypt was keen on seeing progress in the Palestinian-Israeli talks, and Syria needed Gulf support for its own confrontation with Turkey over the Kurds.

The most important consequence of the falling oil prices will probably be internal reform. Already, Saudi Arabia has reversed its longtime strategy of discouraging foreign investment in its oil sector. Many oil experts believe that such investments, and the economic reforms that would flow from them, would revitalize the Saudi oil industry. In an environment of oil-industry consolidation and cautious investment strategies in the face of low oil prices, Saudi Arabia’s superior reserves and the relatively low cost of tapping them would give it an edge. The inability of the Saudi government to meet public economic expectations, furthermore, will necessitate political reform. It may even force the government to consider measures to control the rate of population increase. Another Gulf state that applies Islamic law, Iran, has successfully undertaken such measures.

By the standards of the developing nations, the Gulf states remain rich despite the dramatic decline in oil prices. Saudi Arabia still sits on top the world’s largest proven oil reserves, and oil remains an indispensable commodity whose quantities can only diminish. But the oil-producing Arab states will not again enjoy the strategic advantage they had in 1973. Nor will their currently weakened position enable the United States to turn the tables on them on issues like Iraq.