Keeping the Saudis Wealthy

The following is an article by Gal Luft in the Baltimore Sun:

At a time when Americans are engaged in a heated debate about cutting domestic social services and entitlement programs, we are forced to fund more and more social programs — for other nations. How so?

In February, after seeing fellow Sunni Muslim regimes destabilizing throughout the Middle East, Saudi King Abdullah rushed back from New York, where he was recovering from a back injury, to the kingdom to stave off any potential spillover. After all, if Egyptian President Hosni Mubarak had been ousted, anyone could be. In an attempt to pacify its subjects, the House of Saud announced a "stimulus package" that included an increase in subsidies, a 15 percent salary raise to all government employees, and housing benefits to military and religious groups in exchange for support of his ban on protests.

In total, $133 billion was committed — equivalent to 86 percent of the Saudi regime's $154 billion 2011 budget approved before the disturbances. (For the sake of comparison, the $787 billion economic stimulus plan implemented by the Obama administration constituted 25 percent of the U.S. federal budget.) Saudi Arabia is not the only country where money was used to pacify disgruntled masses. Kuwait's Emir Sheikh Ahmad Al Sabah increased his country's budget liabilities by nearly 10 percent, committing to provide each of the country's 1.12 million citizens some $3,572. In addition, he offered citizens free essential foodstuffs for one year, at the cost of $1 billion.

Why should we care about this? Because — thanks to the inflexibility of our gasoline-dependent energy system — the bill for keeping these Persian Gulf monarchies in power is now being footed by every American.

Saudis and Kuwaitis pay no income tax, and oil revenues provide 90 percent of the government's money. For years, the Saudis, who de facto control the OPEC oil cartel, have ensured that oil revenues are sufficient to balance their budget and ensure cradle-to-grave services to their booming population. When the budget grows, so does the need for higher per-barrel prices. According to a recent Bloomberg survey of oil analysts, the expensive response to the protests increased the break-even price of oil by an extra $15.50 per barrel. No wonder that the Saudis announced last month a production cut of 800,000 barrels per day, despite the fact oil prices are above $100.

The premium on the price of oil exacted by the increase in Gulf social spending adds about 35 cents to the price of a gallon of gasoline Americans pay at the pump, or roughly $6 per fill-up. Since oil goes into everything we buy, from food to plastics, propping up the House of Saud could add $1,500 annually to the expenditures of the average American family.

Buckets of ink have been spilled trying to explain high oil prices. Members of OPEC have laid the responsibility on anything from market speculation to the weakness of the dollar and the Federal Reserve's monetary policies. These all may have some impact, but the reality is much plainer: The price of crude is the price the Saudis need to exact from their clients to balance their budget.

The Saudi birthrate is among the highest in the world. With 40 percent of the population under age 15, this means that the pressure on the House of Saud to generate ever more oil revenues will only grow. So will the amount of wealth countries around the world, rich and poor alike, will be forced to transfer to authoritarian regimes that buy their legitimacy with our money.

This scandalous practice will last as long as the new cars rolling onto U.S. roads can run on nothing but oil-based fuel.

The bipartisan Open Fuel Standard Act was introduced recently by Rep. Roscoe Bartlett, Republican of Western Maryland, along with his colleagues Reps. John Shimkus, an Illinois Republican; and Eliot Engel and Steve Israel, both New York Democrats. It would ensure that cars sold in the U.S. are opened to fuel competition so drivers can compare prices per mile and make on-the-fly choices between gasoline or diesel and nonpetroleum fuels made from natural gas, coal and biomass.

The wholesale price for methanol, a natural gas-derived alcohol, is $1.28 a gallon — without any subsidies. As methanol packs less energy per gallon than gasoline, a consumer would pay $3.25 to travel the same distance, well below the current national average of $3.95 for gasoline. Other fuels, such as ethanol, compressed natural gas and electricity, are also fully competitive with gasoline. But unless we have choice at the pump, we will not be able to enjoy their lower cost — and sclerotic regimes will continue to use our money to bribe their subjects to prevent them from storming the palaces.

Gal Luft is executive director of the Institute for the Analysis of Global Security. He is co-author of "Turning Oil into Salt: Energy Independence through Fuel Choice." His email is luft@iags.org.