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A Complicated Alliance

Author: Lee Hudson Teslik
Updated: May 16, 2008

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Seventy-five years ago this month, California’s Standard Oil Company closed a deal with the finance minister of Saudi Arabia, a country the United States had only officially recognized two years earlier. The agreement granted the oil firm an exploration contract and initiated a multifaceted and sometimes thorny bilateral economic relationship. Today, oil still dominates U.S.-Saudi ties, which went on display May 16 when President Bush met Saudi’s King Abdullah. But the fairly straightforward buy-sell dynamic between the world’s leading importer and leading exporter of crude is increasingly complicated by a host of other issues, from security cooperation to currency concerns.

Bush’s meetings with Abdullah spotlighted this complexity. The past year has witnessed a historic run-up of oil prices, and some analysts are now projecting a “super-spike” (WSJ) that could bring even greater price increases. With U.S. consumers feeling the pinch, Bush pressed Saudi officials to boost oil production as a way of easing prices. U.S. senators have already threatened to block a major arms deal (AFP) between the countries if oil prices continue their rise.

Some analysts say this focus is misguided. Given the way crude oil trades, there is only so much that can be done by Saudi Arabia, which already produces nearly a quarter of the world’s crude. To a certain extent Riyadh already runs interference for Washington within the Organization of the Petroleum Exporting Countries (OPEC), where some member states, including Iran and Venezuela, are pushing for production cuts (IHT). Saudi’s King Abdullah, who holds significant sway in the bloc, has resisted these calls and argued that OPEC should hold production steady. Given this dynamic, few analysts were surprised when Abdullah rebuffed Bush's calls for production hikes (WSJ).

Meanwhile, a host of other issues are bubbling. The United States has sought a close working relationship on counterterrorism with Saudi Arabia, which is home to a conservative, majority Wahhabi Muslim population and is the origin of fifteen of the nineteen 9/11 hijackers. Under pressure from Washington, Saudi Arabia has launched new efforts to crack down on militants, including programs to find and rehabilitate jihadists (USNews). The U.S. State Department outlines the different means of counterterrorism cooperation it is pursuing with Riyadh in its 2007 Country Reports on Terrorism. These include intelligence sharing and encouraging Saudi Arabia to play a broader role as a stabilizing force in the Middle East. Along the same lines, Washington has long sought Riyadh’s support as a Sunni counterbalance to Shiite-dominated Iran and its proxies, including the militant group Hezbollah.

But even as cooperation proceeds on counterterrorism, new economic issues have arisen. High crude prices have left Riyadh flush with dollar reserves, and the country’s effort to diversify these reserves potentially spells concern for Washington. The country recently launched its first formal sovereign wealth fund (EIU). The initial fund is smaller than many analysts had expected, but the Financial Times reports it could evolve into something much larger. With the U.S. dollar already declining in value against many currencies, some analysts worry pools of money like the Saudi fund could accelerate this trend as they work to diversify away from dollar-backed assets. At least thus far, however, this doesn’t seem to have happened. In a recent paper, CFR’s Brad W. Setser says accumulation of dollar reserves in the Persian Gulf region has actually outpaced diversification away from the dollar, despite fears of a sell-off.

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