Six Questions for Kent Moors on Saudi Economic Problems, American Foreign Policy and the Future of Oil

Kent Moors is an expert on oil and natural gas policy, and a professor in the Graduate Center for Social and Public Policy at Duquesne University. He has been an advisor on oil and related policy to the U.S., Russian, Kazakh, Iraqi, Kurdish and Bahamian governments. Moors’s views echo mainstream Democratic thinking on international oil policy, and would likely be reflected in an Obama administration. I recently asked him six questions about the declining fortunes of major oil producers and how the likely impact on American policy. This interview was edited for length and clarity.

1. What sort of shape is the Saudi economy in?

The Saudis never provide documented information on their economy, their oil reserves or revenues, but they clearly have serious problems. They make significant proceeds from exporting oil but they import everything else. The price they pay is dependent on exchange rates, given that their sales are denominated in U.S. dollars. As the dollar goes down, Saudi purchasing power goes down with it — declining 47 percent over the last three years. Meanwhile, their domestic expenditures are increasing significantly. They have a large dependent population and the government has committed itself to providing most services, many free of charge. They have no taxation, but no representation either. There are a huge percentage of unemployed people and half the population is under the age of 26. All the demographics tend towards huge government expenditures.

About 18 months ago, the Saudis started moving their dollar denominated investments out of U.S. sovereign bonds and into Collateralized Debt Obligations, Collateralized Mortgage Obligations, and Structured Investment Vehicles. They did that to increase their return on investment because of their budget squeeze, but they invested themselves right into the credit crunch. They own a lot of paper based on mortgages and other sorts of credit bridges, the values of which have plummeted.

2. What sort of signs are there that the Saudis have money problems?

The Saudis for the first time in years have been quietly going out to European banks for syndicated loans. These are private bank placements, which means you won’t see them easily advertised or published, but it means the amount of Saudi interest payments for debt will go up. They use oil still in the ground as collateral on the loans. That is not an unusual practice, but it does create problems when the expected selling price of crude is declining. The fact that they are moving to generate lines of credit at all shows there is a serious problem. There is also anecdotal evidence that the government is concerned about the budget deficit. Riyadh is attempting to force Saudis to take positions that used to be held by foreign workers and requiring Saudi youth who are getting free education to work part time in exchange.

3. What long-term impact does this have on the international oil market?

Traditionally Saudi Arabia has been a restraining influence on increasing prices or cutting production within OPEC. They usually see higher prices as creating two problems: they lead to lower demand, thereby depressing sales, and encourage interest in the United States in developing alternative fuels. So the Saudis have been on one side of the issue while Iran, Venezuela and Algeria have been on the other urging production cuts. However, twice recently the Saudis have agreed to production cuts — 530,000 barrels per day in September and 1.5 million barrels per day last Friday at OPEC’s emergency meeting. Their reluctance to cutting production is declining considerably for the reason that they are facing the same budget crisis as other OPEC producers when market prices approach $60 a barrel.

4. Why should Americans care that Saudi Arabia has fallen on hard times?

If the situation continues for any time it will lead to political instability in Saudi Arabia. You may not like the fact that the United States is aligned with an undemocratic, monarchal regime, but there’s a blatant security concern. Saudi Arabia is the only country in the world where there’s significant excess crude oil supply. They can put an additional one or two million barrels of oil on the market in a matter of hours. No one else can do that, and that gives them immense strategic value. If Saudi Arabia destabilizes, it also undercuts the last 35 years of American foreign policy in the region.

5. Are other oil energy producing countries in the same situation?

There’s a real crisis brewing In Venezuela. Even Mr. Chavez has indicated concerns about rising expenses and lower revenues. Budgetary difficulties are already surfacing in Caracas. Along with Iran, Venezuela is arguing for bigger production cuts. While Russia is not a member of OPEC and is unlikely to become one, it has nonetheless showed up with high-level delegations at each of the last three OPEC meetings. Moscow may be considering closer coordination with OPEC. This is at least partly a reaction to Western criticism over the recent events in Georgia. Yet it also results from Russian budgetary difficulties emerging. Russian budget balancing and surpluses have been the result of oil export revenues. The budget was calculated moving forward with oil at $70 per barrel. That was considered quite conservative in July when the price was in excess of $147, but when oil went below $70, the Russians began having deficit concerns. The drop off in oil revenues and the credit crunch have been responsible for huge drops in the Moscow stock market.

6. Again, why should Americans care about Russia or Iran or Venezuela?

These are no longer local problems. Whether one likes it or not, the global oil market is now integrated. Problems in these countries have an adverse impact on the amount of oil going into the market and that impacts us. Those who argue for American self–sufficiency, that we can somehow produce the energy we need here in the U.S., don’t understand the nature of the oil market. You can’t put up walls and talk about Fortress America, it doesn’t work. You have to learn to work with people you don’t like, that’s an important rule of international diplomacy. In my judgment, we have about 30 years left of a sustainable crude oil based economy. We need to generate genuine alternative energy prospects but still require adequate supply of crude oil at affordable prices to cover us during the next several decades.