Why Saudi is now in play

February 21, 2011

Oil prices are going through the roof today, and gasoline prices at the pump will follow, as we get the first regime-rattling news in a major oil-producing state. What’s happening is that the sketchy news out of Libya makes the country look like it’s on fire – Col. Muammar Qaddafi may be spending his last days in power. And even though no oil supplies have been disrupted, traders are engaging in some casino behavior and bidding up prices to new two-year highs. Here is some video.

Look for more of the same going forward if — as seems as likely as not — unrest strikes Saudi Arabia. That is because Saudi is the linchpin of global oil prices, satisfying a full 10 percent of total global demand, and possessing by far the majority of the capacity to produce much more in the case of an emergency — such as if Libya’s 1.6 million barrels a day of oil production abruptly is taken off the global oil market.

We keep hearing that al-Saud rule is safe (and the al-Sabahs of Kuwait, along with the al-Thanis in Qatar). But retaining power is only one metric for oil price stability. The chink in the Saudi armor is its oil-saturated, Shia-dominated Eastern Province. Here is Dharan, the headquarters of Saudi Aramco; the humongous 5-million-barrel-a-day Ghawar oilfield; the 800,000-barrel-a-day Qatif and Abu Safa oilfields; the gigantic Ras Tanura oil port; and the Abqiaq processing center. Because of all this, the king has nailed down every movable part in the province with overlapping protection — private Aramco security, Interior Ministry forces, the National Guard, and the military, all of them manned largely by Sunni personnel and loyal to the royal family.

Even so, if the Shia population does start protesting, we will see the oil market’s version of pandemonium.

Greg Priddy, a global oil analyst at the Eurasia Group, a New York-based political risk firm, tells me that there is “a definite threat of a spillover” of trouble. “I won’t be surprised if there is unrest in the Eastern Province,” Priddy told me over the weekend.

Why does Priddy say that? Quite apart from Shia unhappiness, the Eastern Province is linked to Bahrain by a 16-mile-long causeway. Today, there’s relative calm in Bahrain as the opposition puts together a united front for negotiation with the ruling al-Khalifa family. But there has been on-again, off-again Shia unrest both in Bahrain and the Eastern Province, and Bahrain’s upheaval could reignite and be contagious. Saudi Arabia is sufficiently worried to publicly vow to step in “with all its capabilities” to make sure that Bahrain’s 229-year-old monarchy doesn’t fall.

Trouble could also flow into Saudi from Yemen. Yemenis have been rising up against President Abu Abdullah Saleh. If an outpouring of refugees from Yemen into Saudi Arabia results, and they decide to put down roots, they could “destabilize the Saudi government because you would have a population group demanding political rights who don’t see themselves like you,” says Priddy.

Frank Verrastro, director of energy and national security at the Center for Security and International Studies in Washington, told me that, should it become clear that unrest is spreading from Bahrain, the Saudis will cut off the causeway. “That said,” Verrastro continued:

unrest in the east, (were it to occur) proximate to critical facilities at Abqiaq, Ras Tanura and nearby production, would undoubtedly send oil prices rising for two reasons: 1. [Saudi Arabia] has the bulk of the globe’s spare capacity (which is the “buffer” being counted on to offset any other disruptions); and 2. As the world’s largest oil resource holder and exporter, any real protracted threat to supplies is a huge deal globally.

So trouble in Saudi Arabia no longer seems notional. Libya makes it more plausible.


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