An Enduring Handshake: Saudi Oil and US Strategic Security

The Saudi Prize

THE United States needs oil. The Saudis have plenty and must sell it, since they lack virtually every other necessity, from water to a viable national defense. US oil companies are available to close the loop for a handsome profit. That convergence of interests, so obvious today, would become apparent by 1943, a decade after a US company signed a concession to explore Saudi Arabia for oil.

Later events, such as Saudi Arabia's gaining control of price and production levels and most of the oil profits, or its participation in two oil embargoes of the 1970s against the US for supporting Israel, in retrospect seem mere surface tremors that failed to shake the bedrock-solid, mutually advantageous relationship.

"We're Running Out of Oil," proclaimed the title of a 1943 article by Harold Ickes, the US Interior secretary. "If there should be a World War III," he wrote, "it would have to be fought with someone else's petroleum, because the United States wouldn't have it."

Indeed, five years later the US changed permanently to an oil-importing nation, writes Daniel Yergin in "The Prize." Being short of oil was a very precarious situation as the country turned its attention to containing the global spread of communism. If sparks from Korea, Vietnam, or smaller proxy conflicts ignited the next world war, how would the US fuel its forces?

Secretary Ickes provided the answer, dispatching a team of geologists to assess Middle East reserves. A member of the party later described the region's oil as "the greatest single prize in all history."

In 1989 Saudi Arabia was known to contain 258 billion barrels, or 25.9 percent of the world's reserves. Sources at Saudi Aramco, the national oil company, say that new discoveries south of Riyadh will push the 1990 figure up to 28 percent of world oil.

To ensure access to Saudi oil in 1943, the US government at one point tried to buy the Saudi oil concession outright from US companies. Mainly, though, succeeding US administrations adopted a friendly, protective posture toward the kingdom.

President Truman wrote to King Abdelaziz in 1950 to renew assurances that "the United States is interested in the preservation of the independence and territorial integrity of Saudi Arabia. No threat to your Kingdom could occur which would not be a matter of immediate concern to the United States." During the war against Iraq, President Bush lived up to that guarantee.

The question of a fair division of profit from Saudi oil was evolving in favor of the host country over the guest oil company. Encouraged by the US government and fearful of nationalization, the US companies renegotiated the terms of the concession in 1950, giving the Saudis half the profits.

That took money away from the US treasury, not the companies, since they deducted the extra payment to the Saudis from their income tax. The State Department saw this as an easy way to bolster an anticommunist ally without having to get an aid bill through Congress.

Eventually, producing countries would not be content to tax oil company profits, which sometimes declined unannounced during periods when the market was glutted. They wanted control of the price and production decisions, but first had to learn the business.

Over Aramco's objections, former oil minister Zaki Yamani told a biographer, he pushed the development of what today is King Fahd University of Petroleum and Minerals. Ultimately, Aramco gave the university a $20 million grant.

By the 1970s, the Saudis wanted to be not just managers, but owners. So the reluctant parent companies agreed to sell all of Aramco's assets to Saudi Arabia, effective 1976.

The Saudis paid book value for all the petroleum facilities, but not a cent for the billions of barrels of reserves Aramco had discovered. Those the Saudis had always owned, Mr. Yamani insisted. The American companies weren't cut out entirely. They continue to provide management services and market much of Saudi oil.

For reasons that are not clear, the Saudis never signed the transaction documents. Typical of the excellent working understanding that has prevailed all along, everyone fulfilled the terms until 1989. Then the agreement was superseded by the formation of Saudi Aramco by the new oil minister, Hisham Nazer.