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Ray
16 May 08,, 15:41
A Complicated Alliance


May 15, 2008
Author:
Lee Hudson Teslik

A Complicated Alliance

President Bush and King Abdullah in January 2008. (AP/Pablo Martinez Monsivais)

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 will go on display May 16 when President Bush meets 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 spotlight 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 is widely expected to press 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 oil. 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, some analysts say if Bush lectures Abdullah on oil prices, he will be met with little more than polite smiles (Reuters).

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.

A Complicated Alliance - Council on Foreign Relations (http://www.cfr.org/publication/16255/complicated_alliance.html)



and


Understanding the New Financial Superpower –
The Management of GCC Official Foreign Assets
Brad Setser, Council on Foreign Relations1, former RGE Monitor
Rachel Ziemba, RGE Monitor
December 2007
Executive Summary

By the end of 2007, GCC Sovereign Wealth Funds (SWFs) will manage over $1 trillion. GCC central banks – counting the non-reserve foreign assets of the Saudi Arabian Monetary Agency (SAMA) -- will manage another $460 billion. Their combined portfolio will thus approach China’s $1.7-1.8 trillion portfolio in size. Adding McKinsey’s estimate for the “private assets” of major Gulf investors, including those of the ruling families, total Gulf investment abroad would far exceed $2 trillion.

Higher spending cut into transfers to oil funds earlier in the year, but overall official asset accumulation is set to rise to about $200 billion (above its 2006 level of about $175 billion) on the back of higher oil prices in q4 and central bank intervention to offset speculative private inflows. GCC investment funds, led by Kuwait and the UAE, likely received $85 billion in new capital, slightly more than in 2006. SAMA likely received $60 billion this year, a bit less than in 2006.3 The smaller GCC central banks are likely to add over $50 billion to their reserves– much higher than in 2006 ($5 billion). The large GCC investment funds almost certainly reduced the dollar share of their portfolio in recent years. However, one surprising conclusions that emerges from our analysis is that the Gulf as a whole has not diversified away from the dollar. The rise in
the reserves of Gulf central banks – still mostly in dollars -- offset any reduction in the dollar share of the GCC’s sovereign wealth funds. Dollar assets likely accounted for $130 billion of the estimated $200 billion in official asset growth in 2007 (just over 67%) -- compared to an estimated $90 billion of a $150 billion total in 2006 (60%). The GCC official sector consequently remains a key source of financing for the US – probably
second only to China

More at:

http://www.cfr.org/content/publications/attachments/SetserZiembaGCCfinal.pdf

It appears to be a cul de sac!

Saudi Arabia has the potential to upset the apple cart, not only for the US, but also for the world!

Any way out of this mess?

Equilibrium
16 May 08,, 16:50
and



It appears to be a cul de sac!

Saudi Arabia has the potential to upset the apple cart, not only for the US, but also for the world!

Any way out of this mess?

The 1970's demonstarted the lmitations of oil production and curtailment, voluntary or otherwise. The producing nations that thought that they had leverage over the consuming developed nations and that the new found wealth they had accumulated brought them instant riches were brought down to earth when their currencies suffered massive inflation, produced a global economic upheaval which lowered demand and their societies became aware of the gulf between the new technocratic elite and the increasing wealth of the elites and their increasingly desperate condition as they suffered most from the inflation these governments caused.

The fate of the Shah of Iran who prided himself on modernization and had a vision of Iran becoming a regional and global power funded by petrodollars was the first warning. The economic chaos in the developing economies through the early '80's-early 90's resulted in the loss of their wealth and put many nations in a position even worse than before the oil crisis.

tiskew
29 May 08,, 09:38
The central institution of the Saudi Arabian government is the Saudi monarchy. The Basic Law of Government adopted in 1992 declared that Saudi Arabia is a monarchy ruled by the sons and grandsons of the first king, Abd Al Aziz Al Saud. It also claims that the Qur'an is the constitution of the country, which is governed on the basis of the Sharia (Islamic Law). According to The Economist's Democracy Index, the Saudi government is the ninth most authoritarian regime in the world.
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Quite interesting that a country like this is an Alliance of US ;p
Should Saudi be an enemy because it's not a democratic country of US or it should be saved by US?
Just curious.