Argument

To Drill or Not to Drill

The coming American oil boom is bad news for Saudi Arabia. How the kingdom responds could very well determine if it survives.

Current trends in the global energy market don't look good for Saudi Arabia. First, the International Energy Agency projected in November 2012 that the United States will surpass the Gulf petrogiant as the world's top energy producer by 2020. Then, last week, it revealed that North America, buoyed by the rapid development of its unconventional oil industry, is set to dominate global oil production over the next five years. These unforeseen developments not only represent a blow to Saudi Arabia's prestige but also a potential threat to the country's long term economic well-being -- particularly in the post-Arab Spring era of elevated per-capita government spending.

But if the kingdom's outlook is decidedly bleak, its official response has been muddled. Within a period of just five days last month, two senior Saudi Arabian officials laid out starkly different versions of their country's oil production plan. In an April 25 speech at Harvard University, Prince Turki al-Faisal, a former head of Saudi Arabia's top intelligence agency and the current chairman of the King Faisal Center for Research and Islamic Studies, announced that the kingdom is set to increase its total production capacity from 12.5 million barrels per day (mbd) today to 15 mbd by 2020, an amount that would easily make it the world's top oil producer once again. But five days later, in a speech at the Center for Strategic and International Studies in Washington, DC, Saudi Arabian Minister of Petroleum and Mineral Resources Ali al-Naimi conveyed an entirely different message, rejecting Turki's statement out of hand. "We don't see anything like that, even by 2030 or 2040," he said. "We really don't need to even think about 15 million."

So what are we to make of this 2.5 mbd discrepancy? Considering the world's dependency on petroleum and the projected growth in global demand for oil, it's certainly not chump change. In fact, 2.5 mbd is roughly equivalent to the entire production capacity of major oil producers like Mexico, Kuwait, Iraq, Venezuela, and Nigeria. Whether or not Saudi Arabia plans to ramp up its production, in other words, is relevant to virtually every household on the planet.

One might be tempted to dismiss Turki's grandiose projection on grounds of technical ignorance and defer to the man who is actually in charge of the country's oil industry. That is certainly one way to read the official inconsistency. But in Saudi Arabia, how much oil to produce is first and foremost a political decision. Unlike Naimi, a petroleum engineer who climbed up the ladder of Saudi Aramco, Turki is a member of the royal House of Saud, and when it comes to politics, his views are not less important. The dispute between the two boils down to a major strategic decision Saudi Arabia will have to make in the coming years: whether to drill more or to drill less.

With no revenues from personal income tax and 40 percent of its 28 million citizens under the age of 15 -- not to mention a male population that is mostly employed in the bloated public sector -- Saudi Arabia is heavily dependent on oil revenues to provide cradle-to-grave social services to its people. And the financial liability has only gotten heavier since the Arab Spring forced the regime to fight public discontent with ever more gifts and subsidies. To make things worse, Saudi Arabia is the world's sixth -- sixth! -- largest oil-consuming country, guzzling more crude than major industrialized countries such as Germany, South Korea, and Canada. With so much of its oil consumed at home, the kingdom has only 7 mbd to export -- even as government expenditures are on the rise.

All this is to say that in order for Saudi Arabia to guarantee its economic viability, it must ensure that the breakeven price of oil -- the price per barrel it needs to balance its budget -- matches the country's fiscal needs. This breakeven price -- the "reasonable price" or, as the Saudi Arabian euphemism has it, the "fair price" -- has risen sharply in recent years. "In 1997, I thought 20 dollars was reasonable. In 2006, I thought 27 dollars was reasonable," Naimi explained in March. "Now, it is around $100 ... and I say again ‘it is reasonable.'"

According to the Arab Petroleum Investments Corporation, the breakeven price is currently $94 per barrel, less than the current spot price for Brent crude. (Iran needs oil to be at $125 per barrel to break even, which explains the feud between Iran and Saudi Arabia within OPEC.)  But absent deep political reforms that create new sources of income, the breakeven price will surely grow. According to Riyadh-based Jadwa Investment, one of the world's most important knowledge bases on Saudi Arabia's economy, by 2020 the breakeven price will reach $118 per barrel. At this point, the Saudi Arabia Monetary Agency's cash reserves will begin to drain rapidly and the breakeven price will soar to $175 a barrel by 2025 and to over $300 by 2030. And this cuts to the heart of the dilemma: In order to balance its budget in the future, Saudi Arabia will need to either drill more barrels and sell them for lower prices or drill fewer barrels -- actively reducing global supply -- and sell each at a higher price.

This is the crux of the Turki-Naimi debate. Both officials understand the centrality of oil revenues to the survival of the House of Saud, but they differ on how best to come up with the money. Turki believes that Saudi Arabia should grow its production capacity in sync with the growth of the global economy. But Naimi, the person who will actually be charged with meeting this goal, prefers to keep capacity as it is and, if needed, even let it slide. If history is our guide, Naimi's way will prevail. Since 1980, as the world economy grew by leaps and bounds, oil prices more than quadrupled in real terms. Yet Saudi Arabia, which sits atop of one fifth of the world's economically recoverable reserves, has barely increased its production capacity.

Another potential explanation for Naimi's reluctance to grow capacity is that he knows what Sadad al-Husseini, the former head of exploration at Saudi Aramco, allegedly told the U.S. consul general in Riyadh in 2007. According to a leaked cable published by WikiLeaks, Husseini said that Saudi Arabia may have overstated its oil reserves by as much as 40 percent, meaning that production at current levels is unsustainable.

If Husseini's claim is true, it means there is only one way for the kingdom to make ends meet: Keep prices high by stalling the development of new capacity while adjusting the production of oil downward to offset any growth in supply emanating from the American oil boom. It also means, contrary to popular belief, that the current rise in U.S. domestic production will have minimal impact on global crude prices, and hence on the price we pay for gasoline at the pump. Oil is a fungible commodity and its prices are determined in the global market. If the United States drills more, Saudi Arabia will simply drill less, keeping the supply/demand relationship tight and prices high.

The Turki-Naimi dispute is not an academic one but one with potentially serious implications for the future of the world economy. Whether or not Saudi Arabia likes it -- and it almost certainly does not -- the global energy market is about to get more competitive. In a competitive market, oil should be supplied by all producers roughly in accordance with their geological reserves and marginal costs. There is something profoundly wrong when the United States, which sits atop barely two percent of global conventional oil reserves, produces more barrels per day than Saudi Arabia, a country with reserves ten times bigger.

Saudi Arabia presents itself as a responsible producer sensitive to the needs of consuming countries. These needs are surely growing. It would only be appropriate for the kingdom to grow its capacity in kind by making additional investments. Should Saudi Arabia decide not to do so, the United States should use its vast reserves of cheap natural gas as a trump card. Once cars and trucks sold in the United States are capable of running on fuels made from natural gas and its products -- whether compressed natural gas itself, liquid fuels such as methanol, or natural-gas derived electricity -- the price of transportation fuel will be determined by free and diversified commodity markets, not decisions made in Riyadh.

A system in which oil consumers are forced to pay a rising "reasonable price" per barrel in order to fund Saudi Arabia's ever-growing fiscal obligations is unsustainable, especially in a time when most cash-strapped countries are looking for ways to reduce their own fiscal obligations. As the world moves gradually toward more reasonably priced methods of powering vehicles, the kingdom would do well to drill into the brains of its people -- and that includes women -- as vigorously as it drills into the ground.

FAYEZ NURELDINE/AFP/Getty Images

Argument

A Murder in Woolwich

Was the brutal south London killing of a British soldier actually an act of terrorism?

Some things change, some stay the same. For the first time in eight years, after the London bombings of July 7, 2005, a British citizen has been killed on British soil in a radical extremist attack -- this time in the gruesome slaying of an off-duty soldier in southeast London on May 22. Video footage of the bloodstained perpetrators and multiple eyewitness accounts suggest British citizens were again guilty of the crime. In both cases, the attackers' motivations were expressed in the language of religion -- specifically, Islam.

But much has changed since that July morning when Britain was horrifically awakened to the world of post-9/11 domestic terrorism. The 2005 bombings were suicide attacks in which the perpetrators killed themselves and 52 others, injuring approximately 700 more. If nothing else, the human cost was quantitatively less in the attack this week -- and the perpetrators did not take their own lives. In 2005, moreover, the bombings were relatively well coordinated, hitting four separate targets in different parts of London. In comparison, the murder of Lee Rigby near his barracks in Woolwich would have required exceedingly little in the way of planning. As tragic -- and as sensational -- as his murder was, it was not a repeat of the 7/7 bombings.

In the aftermath of the bombings, I served as deputy convener for the British Home Office's working group on "tackling extremism and radicalization." Our findings identified multiple motivating factors that appear to be present whenever a terrorist attack takes place: radical ideology, opposition to British foreign policy, and identity-based or socioeconomic grievances. These factors vary from person to person -- and their relative importance to a given attack often fluctuates -- but their role in any terrorist attack is almost a foregone conclusion. Despite the fact that these factors continue to exist in Britain, however, the country has not experienced any attacks on the scale of the 7/7 bombings. In fact, the real story of the May 22 attack seems to be its low-tech execution and apparent lack of preparation.

Over the coming days and weeks, the British public will probably be animated by discussions of whether or not this was even a terrorist attack -- a debate that ultimately will be settled in a court of law, but has not halted senior politicians from drawing their own conclusions. That decision will not be without consequence, as there are specific legal provisions that apply to terrorism that could drastically affect sentencing in any trial. The definition of terrorism under the relevant provisions in English law would seem to apply to this case, but again, that will be for a judge to decide.

The discussion will not end there, though. British society at large -- and its elected politicians -- will need to decide if the current definition makes sense -- or whether knifing someone on the street ought to be treated as murder regardless of the motive. Indeed, the most similar incident in recent memory was last month's stabbing by a suspect of Caucasian origin of a Pakistani man in Birmingham. The police have not ruled out the possibility of racial motivation in that case, but it was not reported as a terrorist attack. Accordingly, the incident was treated as a simple police matter -- far from warranting a special cabinet session chaired by the prime minister.

While the words "terrorism" and "terrorist" are often flung around liberally by the news media, they have been used far more sparingly in legal terms. Since the Sept. 11, 2001 attacks, only 107 convicts in Britain have been classified as "terrorists" under English law -- and herein lies some good news. Since 9/11, more than 2,000 people have been arrested under legislation pertaining to terrorism in Britain; of those, 312 were convicted of terrorism-related offenses, including murder, illegal possession of firearms, and explosives offenses, and the rest were convicted of non-terrorism related offenses or released. Since the 7/7 attacks in 2005, there have been many more terrorist plots on British soil, but they have all been foiled, with the would-be perpetrators not only being halted, but convicted through the legal process.

Britain now must identify the roots of what happened on May 22, an exercise that will ultimately necessitate difficult policy choices. In 2005, three areas of particular importance had already been identified: religious radicalization, rejection of certain foreign policies, and social isolation or other socioeconomic grievances. All of these were widely accepted within the security services, police force, and larger professional counterterrorism sector -- but each was handled with varying degrees of seriousness, and not without counter-productive measures.

In subsequent years, the first factor, radicalization, was certainly taken a lot more seriously inside and outside of government. But it's not clear how much this actually achieved. This is particularly the case when one considers that the radical ideology that animates terrorists is not being taught in religious institutions in Britain, but outside of the country entirely. The predominant opinion in the British security establishment is that the key sources for such radical ideas are not within local mosques -- but via the borderless Internet from preachers that do not reside in Britain. Demanding that Muslim British institutions "take the war to the extremists" might be an attractive fix, but it fails to recognize where the problems actually lie -- and how solutions might be found. Indeed, such institutions are essentially irrelevant to this discussion, as they have little or no impact, positive or negative, on radical extremists at present.

Coupling security paradigms with socioeconomic factors proved even less helpful. The government's PREVENT strategy, which was supposed to neutralize potential radicalizing forces, actually undermined both security and community cohesion by conflating the two, confusing the priorities within each, and leading to a more securitized public discourse vis-à-vis Muslim communities. Years on, those communities in Britain are increasingly vilified in mainstream media and public discourse -- and not just by far-right pundits. Anti-Muslim rhetoric can even turn deadly: We know, for example, that Anders Breivik was moved to massacre people in Norway two years ago by exactly this kind of discourse. Likewise, it is entirely possible that the killing of Mohammed Saleem in Birmingham may have been motivated by a similar ideology as well.

The issue of foreign policy is a little more controversial to be sure, but in 2010, Eliza Manningham-Buller, the former director general of MI5, declared to Parliament: "Our involvement in Iraq radicalized, for want of a better word, a whole generation of young people -- not a whole generation, a few among a generation -- who saw our involvement in Iraq and Afghanistan as being an attack upon Islam." The videos of the 7/7 bombers, as well as the callous videotaped confession of the attacker on Wednesday, bear out that at least in their minds, they were acting in response to unjustifiable British action against Muslim communities overseas. That kind of sentiment is unlikely to dissipate anytime soon, and may serve to animate, rightly or not, others in the future. Unfortunately, there is little that can be done to prevent that.

As problematic as the official response to the 7/7 bombings has been, it appears that at least one lesson has been learned since then: Investigations into such attacks must be approached with full and total transparency in order to minimize the risk of them happening again. In the aftermath of the 7/7 attacks, the British government resisted all efforts to launch an official public inquiry into the conduct of the country's security services. Eventually, an inquest was held, but without covering all aspects of the circumstances leading to the bombings. This time, however, the government appears to be acting more quickly, immediately announcing a House of Commons inquiry after it emerged that the two men arrested in connection with the May 22 attack had been known to MI5 for eight years; one man is being questioned by the police after revealing on the BBC that the suspect told him MI5 tried to recruit him at one point. When one considers that one suspect, Michael Adebolajo, was apparently best friends with a British soldier, seemingly without any conflict, one really has to ask: "What happened?"

There is indeed a radical religious interpretation at work in inspiring and motivating young men to carry out such deeds -- that should not be underestimated. Yet, there are also other factors that need to be recognized in order to be appropriately dealt with. Whether it was a terrorist act or not in terms of legal definition matters less than ensuring that British society at large comes through this episode intact, and refuses to allow radical ideologues to direct the British collective response. That is, after all, precisely what radical extremists desire -- to restructure and redefine how Britons live. They cannot be allowed to win.