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Modeling OPEC behavior: economic and political alternatives

Published online by Cambridge University Press:  22 May 2009

Theodore H. Moran
Landegger Professor and Director, Program in International Business Diplomacy, School of Foreign Service, Georgetown University, Washington, D.C. In 1977 and 1978 he had responsibility for international energy and Persian Gulf security affairs on the Policy Planning Staff, U.S. Department of State.
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The predominant approach to modeling OPEC behavior depends upon the assumption that economic self-interest provides the best predictor of the cartel's price and production strategy. With rational monopoly behavior, the exogenous characteristics of the oil market determine an optimal price path for the group. But OPEC members have diverse economic as well as political goals. And uncertainty about oil market responses provides substantial leeway to argue about what is optimal. An examination of the five key OPEC price decisions since 1973 shows that an operational code of advancing political priorities on Arab-Israeli issues while deflecting security challenges better explains Saudi Arabia's decision-making than the economic optimizing approach. Moreover, no economic formula alone is consistent with Saudi behavior. The balance of internal and external forces of a political or security character on Saudi leadership suggests more of a tilt toward price hawkishness than pure considerations of economic self-interest would indicate. This tilt is reinforced by a systematic weakness on the part of the U.S. government to exercise a sustained countervailing influence on the Kingdom on behalf of moderation.

Copyright © The IO Foundation 1981

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This paper was assisted by participation in the Stanford Energy Modeling Forum VI, which is sponsored by the Electric Power Research Institute, the Gas Research Institute, and the Department of Energy. It has benefited from comments from M. A. Adelman, William Hogan, Henry Nau, Joseph Nye, William Quandt, and Martin Zimmerman.

1 The most widely found elements in modeling OPEC behavior are a) rational monopoly pricing b) with an exhaustible resource c) with a multi-part cartel. There are modeling efforts, however, that incorporate the idea of economic self-interest on the part of OPEC without proceeding explicitly through this sequence of formal steps. Some of these approaches, as embodied in simulation and “interdependence” models, will be dealt with later in the text.

2 Hotelling, Harold, “The Economics of Exhaustible Resources,” Journal of Political Economy, 04 1931Google Scholar. See also Solow, Robert M., “The Economics of Resources or the Resources of Economics,” American Economic Review, 05 1974Google Scholar; Peterson, F. and Fisher, A., “The Exploitation of Extractive Resources: A Survey,” Economic Journal, 12 1977Google Scholar; and Pindyck, Robert, “Gains to Producers from the Cartelization of Exhaustible Resources,” Review of Economics and Statistics, 05 1978Google Scholar.

3 Strictly speaking, total returns must be equalized after adjusting for different categories of risk. Thus, “money in the bank” may be more secure than “oil in the ground” if the owner with a choice fears revolution in his country, or vice versa if he fears that his financial assets might be frozen by a foreign government. For an interpretation of how this affects Saudi behavior in practice, see the section “Saudi politics” below, and footnote 87.

4 Under competition, net price stands for market price less marginal cost. With monopoly, it is the rent (marginal revenue minus marginal cost) that must be expected to rise at the discount rate.

5 The dynamics of oligopoly behavior suggest that a major producer like Saudi Arabia will build more capacity than a Hotelling-analysis would suggest, even if the capacity is left idle, for use in disciplining other oligopoly members, insuring against natural supply disasters, and discouraging the development of higher priced substitutes. See “The political modeling of Saudi oil decisions” below.

6 Peterson and Fisher, “Exploitation of Extractive Resources”; and Herfindahl, O. C. and Kneese, A. V., Economic Theory of Natural Resources (Columbus, Ohio: Charles E. Merrill, 1974)Google Scholar.

7 Nordhaus, William D., “The Allocation of Energy Resources,” Brookings Papers 3 (1973)Google Scholar.

8 Sweeney, James, “Economics of Depletable Resources: Market Forces and Intertemporal Bias,” Review of Economic Studies, 02 1977Google Scholar; Stiglitz, Joseph, “Monopoly and the Rate of Extraction of Exhaustible Resources,” American Economic Review, 09 1976Google Scholar; and Robert Pindyck, “Gains to Producers.” This conclusion assumes that extraction costs are positive and/or the elasticity of demand is rising. Stiglitz gives an interesting (but implausible) demonstration that if extraction costs are zero and demand elasticity is constant the monopoly and competitive price trajectories will be equal.

9 A number of economic optimizing modelers leave the treatment of OPEC at the level of a single actor, “dominant firm,” or “unified enterprise.” cf. Gilbert, Richard J., “Dominant firm pricing in a market for an exhaustible resource,” The Bell Journal of Economics, 1978Google Scholar; Salant, Stephen W., “Exhaustible Resources and Industrial Structure: A Nash-Cournot Approach to the World Oil Market,” Journal of Political Economy, 10 1976Google Scholar. (For an unpublished attempt by Salant to examine intra-OPEC behavior, see my footnote 11.) Cremer, J. and Weitzman, M. L., “OPEC and the Monopoly Price of World Oil,” European Economic Review 8, 1976CrossRefGoogle Scholar. For the unified monopoly approach to be helpful in modeling the real world, one would have to postulate a trusted system of side-payments among the OPEC members over time.

10 Hnyilicza, Estaban and Pindyck, Robert S., “Pricing Policies for a Two-Part Exhaustible Resource Cartel: The Case of OPEC,” European Economic Review 8, 1976CrossRefGoogle Scholar. See also Pindyck, Robert S., “The Economics of Oil Pricing,” Wall Street Journal, 20 12 1977Google Scholar, and “OPEC's Threat to the West,” Foreign Policy, Spring 1978.

11 This differs from Nash's better known noncooperative theory of bargaining. In the latter, each player ignores the effect of his actions on the strategies of the other. Salant, “Exhaustible Resources,” for example, uses the Nash noncooperative framework for a “unified actor OPEC” that maximizes its own discounted profits in the aggregate while taking as given the sales path of the competitive fringe outside the cartel. When Salant tries to apply the Nash noncooperative approach to internal OPEC dynamics (“Imperfect Competition in the International Energy Market: A Computerized Nash-Cournot Model,” unpublished paper, 1980)Google Scholar, however, the requirement that a “large extractor” optimize his profit accumulation while assuming others are doing the same appears to put a country like Saudi Arabia into the role of passive residual supplier. This results from the requirement that no player be able to influence or manipulate the reactions of the others.

12 Hnyilicza and Pindyck argue that Nash's cooperative solution to the bargaining problem is in fact the only outcome that satisfies axioms of rationality, feasibility, Pareto optimality, independence of irrelevant alternatives, symmetry, and independence with respect to linear transformation of the set of payoffs. For an extended proof, see Hnyilicza, and Pindyck, , “Pricing Policies,” p. 146Google Scholar.

13 On the importance of “focal points” and “rules of thumb” under conditions of conflict and uncertainty, see Schelling, Thomas, The Strategy of Conflict (Cambridge: Harvard University Press, 1960)Google Scholar; Baumol, W. J. and Quandt, R. E., “Rules of Thumb and Optimally Imperfect Decisions,” American Economic Review, 1964Google Scholar.

14 Pp. 152–53.

15 Eckbo, Paul Leo, The Future of World Oil (Cambridge, Mass.: Ballinger, 1976)Google Scholar.

16 Some analysts, e.g. those who stress “interdependence,” adduce further reasons why the Saudis should pull the OPEC price in a much more moderate direction than the hawkish members of the cartel: namely, the desire to ensure the stability of international financial institutions, the health of the countries in which they have investments, and the strength of the currencies in which their nonpetroleum assets are denominated. In the “interdependence” perspective, the growing number and size of commercial, financial, and investment relationships between the largest energy producers and the largest energy consumers will act as a constraint on oil price policy. Like the rational monopolist approach, the interdependence argument is also built on the idea of economic self-interest as the motivating force behind OPEC behavior. Modelers who confine themselves to monopoly pricing in international energy markets capture only a portion of the hypothetical constraint produced by “interdependence,” namely the drag on aggregate economic activity in the consuming countries caused by high energy prices. For the interdependence argument, see Choucri, Nazli with Ferraro, Vincent, International Politics of Energy Interdependence: The Case of Petroleum (Lexington, Mass.: Lexington Books, 1976)Google Scholar; and Bohi, Douglas R. and Russell, Milton, Limiting Oil Imports: An Economic History and Analysis (Baltimore: Johns Hopkins University Press for Resources for the Future, 1978)Google Scholar.

17 Willett, Thomas D., “Conflict and Cooperation in OPEC: Some Additional Economic Considerations,” International Organization, Autumn 1979Google Scholar; Singer, S. Fred, “Limits to Arab Oil Power,” Foreign Policy, Spring 1978Google Scholar; Ben-Shahar, H., Oil: Prices and Capital (Lexington, Mass.: D.C. Heath, 1976)Google Scholar; and Kalymon, B. A., “Economic Incentives in OPEC Oil Pricing Policy,” Journal of Development Economics 2, no. 4 (1975)CrossRefGoogle Scholar. For modelers who leave OPEC at the level of a unified actor, the impact of Saudi Arabia is felt pulling the cartel toward a moderate price path not through the kingdom's hypothetical role in intra-OPEC bargaining but through the addition of the weight of Saudi reserves and discount rate in constructing aggregate estimates for the cartel as a whole.

18 Friedman, Milton, Newsweek, 4 03 1974Google Scholar. Enders, Thomas, “OPEC and the Industrial Countries: The Next Ten Years,” Foreign Affairs, 07 1975Google Scholar; “The International Energy Situation: Outlook to 1985,” Central Intelligence Agency, April 1977 and subsequent research papers titled “The World Oil Market in the Years Ahead.”

19 For a summary of early post-embargo estimates, see Riefman, Alfred, “U.S. Energy Policy: A Perspective on Major Immediate Issues,” Library of Congress, Congressional Research Service, 24 07 1975Google Scholar.

20 Energy Modeling Forum VI, Stanford University, 1980–1981. The models are Gately/Kyle, IEES (Kilgore), Choucri, Salant/ICF, ETA-MACRO (Manne), WOIL (Naill, Stanley-Miller), Kennedy/Nehring, Ervik, MIT-World Oil Project, British Petroleum, and OILMAR (Potter).

21 For an optimistic view of the geological prospects for oil, seeGrossling, Bernardo, “A Long-Range Outlook of World Petroleum Prospects,” Joint Economic Committee, Subcommittee on Energy, U.S. Congress, 2 03 1978Google Scholar. Grossling develops comparative statistics on intensity of drilling activity and suggests that petroleum resources might be more than two or three times larger than conventional industry views if exploration activity elsewhere were to equal efforts in the United States (77% of all drilling for petroleum in the world has been done in the U.S.). His estimate of recoverable conventional oil is 2.5 to 6.0 billion barrels. For a more pessimistic view, see Nehring, Richard, Giant Oilfields and World Oil Resources, Rand Corporation for the Central Intelligence Agency, 06 1978Google Scholar. Nehring argues that additions to world oil resources have been primarily a function of the rate of discovery of giant oil fields (only 10% of known crude oil resources comes from the 20,000 plus fields smaller than 100 million barrels each). Since the early 1960s, the rate of discovery of giants and supergiants has dropped, and, Nehring suggests, will continue to do so as the easiest and most promising areas are explored. His estimate of ultimately recoverable conventional crude oil is 1.7 to 2.3 billion barrels.

22 Houthakker, Hendrik, The World Price of Oil: A Medium-Term Analysis (Washington, D.C.: American Enterprise Institute, 1976)Google Scholar.

23 Brown, William M. and Kahn, Herman, “Why OPEC is Vulnerable,” Fortune, 14 07 1980Google Scholar.

24 Cf. Stobaugh, Robert and Yergin, Daniel, eds., Energy Future: Report of the Energy Project of the Harvard Business School, Appendix by Sergio Koreisha and Robert Stobaugh (New York: Random House, 1979)Google Scholar.

25 Energy and the Economy, Energy Modeling Forum I, Volume I, 09 1977Google Scholar. The models are Hudson-Jorgenson, Kennedy-Niemeyer, Pilot, Wharton, DRI-Brookhaven, and Hnyilicza.

26Demand Elasticities Poll,” memorandum from Manne, Alan, Stanford University: Energy Modeling Forum VI, 28 05 1980Google Scholar. In this survey, twenty-four modelers responded that there was less than a 20% probability that the elasticity for primary energy demand exceeded these figures. For a similar finding of wide disparities in elasticity estimates, see Bohi, Douglas R., “Price Elasticities of Energy Demand: An Introduction,” Resources, Summer 1980Google Scholar.

27 For an excellent analysis of the problems in modeling energy markets on the demand side, especially the construction of the price elasticity of demand (the amount by which a given price will reduce demand with aggregate economic activity held constant), the income elasticity of demand (the amount by which a given price rise will reduce aggregate economic activity, and hence demand), interfuel substitution (e.g., coal for fuel oil), and inter-factor substitution (capital and labor for energy), see Energy Modeling Forum IV, Stanford University, Aggregate Elasticity of Energy Demand, 08 1980Google Scholar. This study points out that modeling difficulties are aggravated by extensive data limitations, measurement problems, and divergences in classification schemes, even including rigorous definitions of the concepts of primary energy, aggregate elasticity, and constancy of aggregate economic activity. A further analysis of the difficulties in reconciling elasticity estimates (even those derived from “virtually identical” data) is given in Bohi, “Price Elasticities of Energy Demand.”

Beyond forecasts of supply and demand for energy per se, there is the problem of predicting the rate of OECD economic growth (or its major components such as U.S. economic activity) all other things being equal. The difficulties in perfecting the latter technique are extensive, yet the impact of small variations on the weakness or tightness of the market for OPEC oil is quite large. In comparing the results of eleven energy forecasts made between 1977 and 1979, Susan Misner finds that aggregate economic growth assumptions are the largest factor in explaining the differences among the predictions. Misner uncovers an anomaly in these forecasts, however; the higher the GNP estimate, the lower the demand for oil! “ A Comparison of Energy Forecasts: 1977–1979,” unpublished discussion paper, International Energy Program, Stanford University, 10 1979Google Scholar.

28 Energy Modeling Forum VI, 1980–81.

29 Middle East Economic Survey (hereafter MEES), 29 November 1976. For the Shah's use of statistics to portray himself a leader of the “moderates,” see Pahlavi, Mohammad Reza, Answer to History (New York: Stein and Day, 1980)Google Scholar.

30 MEES, 25 December 1978.

31 For the oil industry, see Adelman, M. A., The World Petroleum Market (Baltimore: Johns Hopkins University Press for Resources for the Future, 1972)Google Scholar. For the copper industry, see Moran, Theodore H., Multinational Corporations and the Politics of Dependence: Copper in Chile (Princeton: Princeton University Press, 1974)Google Scholar.

32 “Documentary Rundown on World Reactions to U.S. Campaign for Lower Prices,” MEES, 4 October 1974, p. 2. In the analysis that follows, inflation figures come from International Financial Statistics (IMF), measures of growth and industrial activity come from Yearbook of National Accounts Statistics (United Nations), and estimates of OPEC capacity come from The Petroleum Intelligence Weekly.

33 “Yamani Proposes Cutting Posted Price of Arabian Light to $9/Barrel and Invites Iran to Cooperate with Saudi Arabia in this Endeavor,” MEES, 31 May 1974, p. 1, supplement; “Yamani says OPEC's posted crude prices $2/bbl. too high,” The Oil and Gas Journal, 30 September 1974, p. 17.

34 “Documentary Rundown on World Reactions to U.S. Campaign for Lower Oil Prices,” MEES, 4 October 1974.

35 “U.S.-Saudi agreement should help oil climate,” The Oil and Gas Journal, 17 June 1974, p. 38.

36 “Saudi Arabia Plans Major Oil Auction for Early August,” MEES, 26 July 1974. Simon met with the Finance and Planning Ministers, as well as the Governor of the Saudi Arabian Monetary Agency, before he talked with Prince Fahd. They were the officials most likely to be receptive to an oil position buttressing the international financial system as well as sensitive to the counterproductive nature of an OPEC price rise at that time, since Saudi funds were being sought to expand the IMF's petrodollar recycling facility. The Petroleum Intelligence Weekly called the auction “the long awaited sale that may set the direction in crude oil prices” (29 July 1974). According to the Middle East Economic Survey, the lower market price would be used for the crude sold to the Aramco owners as well.

37 “Gulf States React to Price Reduction Moves,” MEES, 2 August 1974, p. 1; “Otaiba Emphasizes Resolve to Maintain Oil Prices,” MEES, 9 August 1974.

38 12 August 1974.

39 The Oil and Gas Journal, 18 November 1974, p. 47. At the time of the auction, the Iranian position was summed up by Finance Minister Hushang Ansari: “If Mr. Yamani wishes to make a gift to the rich industrialized countries, he can do so from his own treasury.” The Oil and Gas Journal, 12 August 1974.

40 18 November 1974. The Saudis orchestrated the tax jump/price fall arrangement with Qatar and Abu Dhabi prior to its acceptance at the December OPEC meeting. For Yamani's subsequent appeal to Secretary Simon to help relieve the pressure from Iran, see footnote 43.

41 The Oil and Gas Journal, 4 August 1975, p. 39.

42 “Shah Says Iran Faces $4 Billion Deficit in 1975,” MEES, 1 August 1975.

43 On 3 September Yamani wrote a “strictly personal” letter to Treasury Secretary Simon saying that Saudi Arabia could not hold to an independent position on oil prices unless the U.S. used its influence with the column, Shah. Jack Anderson's, Washington Post, 21 09 1976Google Scholar; Oppenheim, V. H., “Why Oil Prices Go Up (1): The Past: We Pushed Them,” Foreign Policy, Winter 19761977Google Scholar. For an account of the attempt to link oil and other issues (or the lack of such linkage) in the 1974–77 period, see Nau, Henry, “U.S. Oil and Security Policies in the Middle East: Links Between Energy and Defense,” George Washington University, 06 1980Google Scholar, xerox.

44 “OPEC: A Battle of Wills,” MEES, 19 and 26 September 1975, p. 1.

45 The Oil and Gas Journal, 6 October 1975. The ability to characterize oil prices in either real or nominal terms is used by the Saudis to try to take the edge off criticism on the part of fellow producers, or consumers.

46 “Pressure Mounts for Oil Price Increase in January,” MEES, 11 October 1976; “Some OPEC Views on the Impending Oil Price Increase,” MEES, 29 November 1976.

47 On Carter's position see MEES, 18 October and 15 November 1976.

48 Yamani's explanation of the Saudi decision on television in Jiddah, 22 December 1976, reproduced in MEES, 10 January 1977.

49 MEES, 20 December 1976, 3 and 10 January 1977. For the Aramco expansion program, see MEES, 19 September 1977.

50 MEES, 10 January 1977.

51 The Shah made his “act of aggression” statement on French television; see MEES, 24 January 1977. For the visit of the Iranian Minister of War to see King Khalid, see MEES, 7 February 1977.

52 Iran had predicated its 1976–77 budget on exports of 5.4 mbd. The preceding year it had run a deficit of $2.4 billion.

53 Yamani consistently claimed that bad weather rather than bad nerves was the softener of Saudi policy. Saudi production in March was 9.5 mbd, April 9.5 mbd, and May 8.1 mbd (in May there was a fire at the Abqaiq oil facilities). In June, the rest of OPEC concurrently agreed to forego an additional 5% jump in July.

54 There was also a debate about the technical condition of their major oil fields. For details, see The Future of Saudi Arabian Oil Production, a Staff Report to the Subcommittee on International Economic Policy of the Committee on Foreign Relations, U.S. Senate, April 1979. While the report catalogues Saudi oilfield limitations, the evidence presented combined with the extreme assumptions needed to construct a pessimistic outlook for Saudi production possibilities (such as no new oil discoveries and no addition to reserves in existing Saudi fields despite a history of recalculating existing fields upward) in fact support the contention of the Aramco partners that a very long production plateau above 12 mbd is quite feasible from a technical point of view.

Senior Saudi officials consistently disputed the idea of technical limitations on their oilfields; see MEES, 12 March 1979. Yamani commented on the Senate study: “I read that report, I had to smile. For a layman—not even for someone who knows about the oil business—the U.S. reserve is about 38 billion barrels and they are producing almost what we are producing in Saudi Arabia, though our reserves are several times bigger than those of America and our oilfields are not exhausted as the U.S. ones are. So the man in the street might even question that statement.” MEES, 12 April 1979.

Aramco estimated proved crude oil reserves of 113.4 billion barrels and probable reserves at 177.9 billion barrels at the end of 1979, both up from a year earlier despite record output: Wall Street Journal, 20 May 1980. For the Saudi view, “Shaikh Yamani pointed out that Saudi reserves were continuing to increase from year to year, with annual production more than offset by discoveries and additions to reserves” (MEES, 5 May 1980).

55 “U.S. Plea for Oil Price Freeze Unlikely to Cut Much Ice With OPEC,” MEES, 7 November 1977. Iranian opinion was being expressed, however, at a level below the Shah.

56 “Pre-Caracas Price Consultations Gather Momentum,” MEES, 14 November 1977.

57 Petroleum Intelligence Weekly, 31 October 1977.

58 MEES, 20 March 1978, p. 2. The campaign to win approval of the FI5 sale to the Saudis began in the Fall of 1977.

59 Throughout the Fall of 1977, the Saudis canceled water injection and separation equipment associated with their previous expansion program (requiring the payment of large penalty costs). If technical worries about pressure maintenance were predominant in the capacity cutback decision (as the Senate Foreign Relations Committee Study argues) rather than the desire to be less exposed in the battle between producers and consumers over the course of oil prices, they would hardly have cut back on the water injection program.

60 MEES, 21 November 1977.

61 “Venezuela Turns Down U.S. Proposal for an Oil Price Freeze,” MEES, 29 November 1977; MEES, 19 December 1977.

62 MEES, 12 February 1979.

63 Interview with National Iranian Oil Company Chairman Hassan Nazih, MEES, 2 April 1979. For Arab criticism of Saudi Arabia for filling in the gap left by Iranian production declines, cf. “Algerian News Agency Criticizes OPEC States Which Have Raised Output,” MEES, 26 February 1979.

64 “Prince Fahd Says No Decision Taken on Production Increase: Calls for Immediate Dialogue Between U.S. and P.L.O.,” MEES, 2 July 1979; “Yamani Links Oil and Palestine Issue,” MEES, 9 July, 1979; “Carter Receives ‘Personal Commitment’ from Prince Fahd on Increased Saudi Production,” MEES, 16 July 1979.

65 Fahd, Prince, interview with Arnaud de Borchgrave, Newsweek, 26 03 1979Google Scholar.

66 Samore, Gary, “Determinants of Oil Policy,” Kennedy School of Government, Harvard University, unpublished draft, 05 1980, p. 14Google Scholar.

67 Saud, Prince: “Without a solution to the Palestinian problem there is no hope of restoring stability not only in Lebanon but in the region as a whole. This is what we told Harold Brown and what we have continually stressed to our American friends.” MEES, 12 03 1979Google Scholar. See also, “Fahd Fears Regional Convulsions,” MEES, 26 March 1979.

68 “Prince Fahd to Visit Washington in March,” MEES, 12 February 1979; “Fahd Postpones Washington Visit,” MEES, 5 March 1979; “Vance Sees Decline in U.S.-Saudi Links,” New York Times, 9 May 1979.

69 In Samore, Gary, “Determinants of Oil Policy,” p. 15Google Scholar.

70 MEES, 2 April 1979.

71 As Sheik Yamani has characterized the Saudi strategy, “I have never said that oil will not be used as a political weapon. I have said repeatedly that oil is a political weapon which can be used in different ways. In fact we have never stopped using this weapon. For example in 1973 we used it for a specific purpose, namely to draw the attention of the Western nations to their dependence on the Arabs. Again in 1977 and earlier, when we adopted a particular stance vis-a-vis the oil price issue, we used oil as a weapon not only to remind the Western nations that they are dependent on the Arabs but also that they can rely on the Arabs in the sense that the friendly attitude of the Arab states should be taken into account by the West in their political calculations.” MEES, 2 June 1980.

72 Some simulation models hypothesize that OPEC prices will vary as a function of OPEC capacity utilization, but include no method of determining how close to capacity the largest cartel member will be willing to produce nor how much capacity it will decide to build. Cf. Gately, D., Kyle, J. F., and Fisher, D., “Strategies for OPEC's Decisions,” European Economic Review, 12 1977Google Scholar; and Gately, D., “Simulating OPEC Pricing Behavior in the World Energy Market,” Discussion Paper, International Energy Program, Stanford University, 01 1980Google Scholar.

73 Two factors make the Saudi position on Arab-Israeli issues particularly difficult for U.S. officials to deal with. First, the Saudis tend to have a more uncritical view of Palestinian groups, especially the Fatah, than others who have had more direct dealings with them (Syrians, Jordanians, Iraqis, Egyptians). Second, because of the desire not to arouse opposition, the Saudis are more bland about being able to accept “whatever solution the Palestinians determine for themselves,” from full autonomous armed nation, to semi-demilitarized state, to entity associated with Jordan, than the Front-Line Arab governments. Cf. “Arab Reactions to Camp David Peace Agreement: Saudi Arabia,” MEES, 25 September 1978; “Interview with Prince Fahd on the Egyptian-Israeli Treaty,” de Borchgrave, Arnaud, Newsweek, 26 03 1979Google Scholar; and “Interviews with Crown Prince Fahd and Prince Abdullah,” Washington Post, 25 May 1980. Within the PLO, the Saudis have tended to support the Fatah at the expense of the leftist groups. Quandt, William B., “Saudi Arabia's Foreign and Defense Policies in the 1980's,” Brookings Institution, 06 1980, xeroxGoogle Scholar.

74 Saudi behavior parallels, with exaggerated impact, what Stephen Krasner has discovered about the decision-making of large corporations: it is precisely in the strongest oligopolies that corporate managers can engage in very broad satisficing strategies with regard to economic achievement and use (or be pressured by outsiders into using) their discretionary power on behalf of political goals whether or not those goals are congruent with profit maximization. In the Saudi case, there is simultaneously more discretion (because of the uncertainty about what constitutes long-term profit maximization) and more vulnerability to outside pressures (because the kingdom does not enjoy the equal protection of the laws against those who dislike its actions) than in the case of corporate behavior. See Krasner, Stephen, “Business-Government Relations: The Case of the International Coffee Agreement,” International Organization, Fall 1973Google Scholar.

75 “Kuwait's Tougher Oil Stance,” New York Times, 17 April 1980.

76 Cf. “Poor Nations Drop Oil-Price Proposal: Group of 77 Instead Accepts Vow by OPEC of Cash Assistance to Help Their Economies,” New York Times, 18 November 1979.

77 For the Saudi reaction to U.S. attempts to bolster its security presence in the Gulf after the fall of the Shah, see “Frustration Marks Saudi Ties to U.S.,” Washington Post, 6 May 1979.

78 For a rare public glimpse of this point of view, see “Oil Price Rises by OPEC Next Year Aren't Likely to be Fought by Carter,” Wall Street Journal, 23 June 1978.

79 J. P. Smith of the Washington Post suggests that this may have been the motivation behind Secretary Schlesinger's suggestion to Prince Fahd that the Saudis adopt 12 mbd for technical reasons as their ultimate capacity plateau. Smith's is the most charitable interpretation for a bizarrely perverse episode, which aggravated Saudi suspicions that the Aramco partners were grossly mishandling the management of Saudi oil reservoirs, strengthened the hand of those conservationists in the Saudi hierarchywho wanted to lower the capacity target from 16 mbd to 12 mbd, and rendered much more costly any future American effort to persuade the Saudis to enlarge their capacity (whether or not such capacity is used). Smith, J. P., “CIA Trims Saudi Oil Estimates; Experts are Skeptical,” Washington Post, 5 02 1978Google Scholar, and “CIA Again Revises Estimates of Saudi Oil Output Potential,” Washington Post, 11 February 1978. For Schlesinger's position upon returning from Saudi Arabia, see “Don't Count on Saudi Arabia to Produce More than 12 Million B/D Says Schlesinger,” MEES, 30 January 1978; and Hersh, Seymour, “White House and Aramco at Odds on Oil: Officials in Administration Allege Mismanagement of Saudi Fields,” New York Times, 8 02 1978Google Scholar. Oil industry and senior Saudi petroleum officials dismissed the idea of technical limitations on capacity expansion above 12 mbd, but other Saudi government authorities acknowledged that the assertion left them “disturbed.” “New Chief of Aramco Says Saudi Arabia Is Capable of Producing Much More Oil,” New York Times, 6 January 1978; MEES, 12 March 1979; MEES, 9 July 1979.

80 For an insightful discussion of the positions of individual members of the Saudi hierarchy, see the essay by Samore, Gary in Deese, David A. and Nye, Joseph S., eds., Energy and Security (Cambridge, Mass.: Ballinger, 1980)Google Scholar.

81 For defense as well as a criticism of large expenditures on behalf of programs of modernization, see “Saudi Industry Minister Qusaibi Reiterates Determination to Go Ahead with OilBased Industrial Projects,” MEES, 1 January 1979; “Saudi Arabia Pursues Development on a Vast Scale,” New York Times, 3 March 1980; “Oil Pressure: Saudi Arabian Citizens Urge Slash in Output but Leadership Resists,” Wall Street Journal, 7 April 1980. DrBachir, Faisal, Deputy Minister of Planning, asserted that the takeover of the Grand Mosque in Mecca and the uprising of Shiites in the Eastern Province in late 1979 reinforced, rather than retarded, spending on welfare and modernization (New York Times, 7 03 1980)Google Scholar. Hisham Nazer, the Minister of Planning, however, has argued on behalf of lower oil production and a slower pace of development spending.

82 For an account of this phenomenon, see “U.S. Aides Say Corporation Is Threat to Saudi Stability” and “Saudi Prince Is Said to Have Made a Fortune in Business,” New York Times, 16 April 1980.

83 MEES, 2 October 1978; 9 July 1979; 5 May 1980.

84 The conservativeness of Petromin's geologists leads to pressure maintenance practices that may in fact lower the ultimate recovery of Saudi oilfields (e.g., water injection from the periphery of the field as opposed to pattern injection throughout the field). Cf. The Future of Saudi Arabian Oil Production.

85 Cf. “Prince Sultan Says Saudi Arabia Does Not Bargain on Oil Prices,” MEES, 20 March 1978; “Saudi Defense Minister Opposes Use of Oil Weapon for Political Ends,” MEES, 29 October 1979.

86 Saudi officials refer frequently to their stewardship responsibilities to ensure a heritage of wealth for future generations. In addition to the Hotelling problem of weighing the appreciation or depreciation of the value of their petroleum assets in the ground versus the appreciation or depreciation of the value of those assets if converted into financial instruments, they have other considerations as well: (1) whether the assets if converted into financial instruments can be frozen or seized abroad; (2) whether the assets if left in the ground will pass into the hands of a hypothetical post-coup political regime hostile to them and their children; and (3) whether a balanced portfolio of financial assets subject to foreign seizure is more or less risky than an undiversified portfolio of below-ground assets subject to domestic seizure. Since 1978, the predominant method of covering all contingencies is to limit production (saving oil for future generations), accept higher prices (making up for depreciating financial assets by adding to those assets), and keep domestic spending up (allowing for the creation of diversified private fortunes for the provision of one's own children).

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