D. A. Rustow, "U.S.-Saudi Relations and the Oil Crises of the 1980s," Foreign Affairs, April 1977

Overview

Rustow sees America’s considerable dependence on imported oil as a dilemma rooted in a lack of aggression in energy development and conservationist policies. He argues that American-Saudi relations in the next decade (1977-1987) will be the result of how the aggregate supply and demand for oil intersect in the upcoming years. The quickness of this approaching equilibrium will be determined more by the agenda of the Saudi government rather than growing American consumer demand, which therein lies weakness.

Summary

Predicting energy usage cannot be done with any sort of precision. Before 1973, world energy consumption was moving at about the same rate as aggregate GDP. With those two factors put together as a ratio, or “energy coefficient,” experts predict it will fall slightly in the upcoming future, more so if conservationist policies are developed with success. However, there are a few cautions:

1.) reduced energy consumption in the US has not meant less dependence on OPEC imports -domestic production (oil, natural gas, coal, nuclear) has grown very little if not declined

2.) very small shifts in economic growth or energy consumption rates translate into exponential change as time passes (growth rate of 5%, energy coefficient of 1.0, means increased consumption by 63% in a decade)

3.) the illusions of the North Sea and Alaska; do have oil, but not enough to meet the increasing American demand

Forecasting energy production can become just as arduous. Many estimates come in concerning how much oil OPEC-importing countries need. This is a gross misunderstanding. “Rather, it becomes imperative to to examine what motives and considerations will determine the amounts of oil that countries such as Libya, Kuwait, Venezuela, Iran, Iraq, and above all Saudi Arabia will allow to be extracted from their subsoil and offered to the world market of the 1980s.” It’s basically a flip-flop of the common generalization. However, even though OPEC countries won the right to unilaterally determine the price of oil, OPEC member countries have never set a ceiling on overall production. However, all of the member countries minus Iraq did cut production by as much as 26% when they used that as their “oil weapon” against the US and others. There are five information sources that help to forecast oil production from a correct perspective.

1.) past production

2.) legal limits on production

3.) installed capacity

4.) proven reserves

5.) additional oil resources

The criteria that influences OPEC governments production relate to geology, politics, and economics. Some countries, for example Iran, has tried to hurry exploration in order to put away maximum reserves to aid more quickly in their development. Therefore, they have been among the OPEC’s price hawks. Other countries like Saudi Arabia, who had excess capacity of more than “2/3 of Iran’s total production and more than the total production of any one of OPEC’s other 11 members,” have a solid foundation of factors leading into total production. They are as follows:

1.) price moderation: have repeatedly opposed price increases

2.) preventing a price break

3.) preventing excessive price rises

4.) Arab leadership: continually prude with multilateral subsidies

5.) Pressure on the US: as long as the US is pushing for Israel, the likelihood of the Saudi’s meeting our requests verbatim is slim to none; this would only happen if they were offered unusual opportunities for investing the surplus

Where will the supply of OPEC countries and demand for OPEC oil meet? Just as the aforementioned suggests, we don’t know. But if we do run into an oil shortage, Saudi Arabia’s compliance would turn into a dilemma. They can either increase production indefinitely while keeping prices in sync with inflation, leaving them with reserves on hand they really don’t want. Or, they could “reintroduce a production limit” that would leave production under the market forces.

Summary by Shawn Gaide