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DATES: 1939-present; the discovery of oil in the Kingdom, and the importance of Saudi oil as a force in the world

King Abdul Aziz ibn Abdul Rahman, known in the West as "Ibn Saud" (he would have been better known as "Abu Saud") was well established as King of the Nejd and the Hijaz when he was contacted by various oil interests about prospects for oil. The Ikhwan, having cleansed the cities of organized opposition to state-inflicted notions of Islamic orthodoxy, were themselves safely purged. The pilgrimage traffic was slowing as a result of the global depression and possibly because of repressive measures taken in the colonies; hence, about the only state service the king could provide was to feel 2,000 people at his personal table [*]. The British forces in Iraq were by then confined to the RAF bases at Habbaniyya (nr. Fallujah) and Shu'aiba (nr. Basrah), and Whitehall was not in the giving vein.

ARAMCO: In May of 1933, King Abdul Aziz Bin Abdul Rahman Al-Saud, who had founded the modern Kingdom of Saudi Arabia the previous year, listened attentively as the text of a draft agreement was read to him. After a pause, he turned to his Finance Minister Abdullah Sulaiman and said: "Put your trust in God and sign."

The agreement he was referring to authorized Standard Oil of California (Socal) to explore for oil in what is now the Eastern Province of the Kingdom - the starting point for a decades-long venture that would make Saudi Arabia the largest oil producer in the world. It would also set the stage for the close Saudi-U.S. relations that would grow rapidly in coming decades and extend into all areas of cooperation.

This story is recounted in considerable detail in Cities of Salt, by Abdelrahman Munif. Munif has insisted his work is fiction, but if so, if is very faithful to the path of events that followed:

ARAMCO: Saudi Arabia's King 'Abd al-'Aziz Al Sa'ud, hopeful but not sanguine, had given all possible cooperation to the venture, and not long after October 1938, when the presence of oil in commercial quantities was officially declared, plans began to unfold for his visit to al-Hasa, as the Eastern Province was then known.

In the spring of 1939, the king and his retinue moved east from Riyadh in a caravan of 2,000 people in 500 cars, across the red sands of the Dahna and along desert tracks to a place near the oil camp, officially named Dhahran only 10 weeks before. In an atmosphere of conviviality, the visitors set up a city of 350 white tents within view of the camp for festivities which included inspections, banquets, receptions and boat rides in the Gulf.

The timing of the visit coincided with the completion of a 69-kilometer (43-mile) pipeline from the Dammam oil field to the port of Ras Tanura, where the tanker D.G. Scofield lay waiting. On the last day of celebrations, Stegner recounts, King 'Abd al-'Aziz Al Sa'ud unhesitatingly "reached out the enormous hand with which he had created and held together his kingdom in the first place, and turned the valve on the line through which the wealth, power and responsibilities of the industrial 20th century would flow into Saudi Arabia. It was May 1, 1939.

The Saudi oil was slow in reaching full stream. During the war it reached 58,000 bbl/day, or slightly more than 0.5% of current output. The immense strain on supplies and shipment of capital equipment, coupled with nightmares of overproduction, delayed exploitation of the fields until the reconstruction of Europe was underway. Output reached 500,000 bbl/day in 1945, and 2 million bbl/day in 1965, still high enough to keep prices low. Abdul Aziz died in 1953, and was succeeded by his son Saud. Unlike Abdul Aziz, whose spending habits were formed under conditions of dearth, Saud was unprepared to handle money. He increased bribes to the notables, so they would allow him to recruit a huge palace guard (clad in desert white, rather than convention khaki uniforms). He also got involved in Arab politics, demanding the rejection of the Jewish state and a pan-European alliance with Gamal Nasser. The relationship with Nasser and Saud was close at first; Saud terminated relations with Britain and France during the Suez Crisis, sent $10 million to Nasser, and exhorted Jordan not to join the Baghdad Pact (a Western-sponsored alliance linking Iraq, Iran, and Pakistan).

However, the relation soured after the Egyptian government became a Soviet satellite and merged with Syria as the United Arab Republic. It was revealed that Saud had plotted to assassinate Nasser. Five years later, the two countries would begin a proxy war in North Yemen. The money flowing into the coffers of the tribal leaders was speeding ahead of revenues, so that the elites had huge incomes and the state had a deficit. To make matters worse, there was a strike of Aramco workers in 1956. Saud appointed his brother Faisal as effective head of the state, but was dismissed as king in 1964.

Faisal was more technocratic than Saud, the rake. He was still vehement about Arab unity and defeating Israel, but he was also keen to develop Saudi ability to manage its great oil wealth. He developed the oil ministries and the university at Jiddah to enable this. He also introduced television broadcasting in 1965, causing a nephew to lead an attack of zealots against the station; the nephew was shot dead by police.

The oil funded the purchase of modern everything: militaries, buildings, and recognition by the Arab world. Faisal, in turn, dedicated revenues to growth of an all-Saudi workforce in its joint venture with Chevron, Aramco. It continued to expand output until 1973, when its grip on the world oil supply was made painfully obvious.

While the House of Saud was friendly to the West, it had a core of passionate commitment to the cause of Palestinian liberation. The creation of Israel, in the eyes of nearly all Arabs, had meant the dispossession of hundreds of thousands of their brethren; that this had occurred in the neighborhood of a Holy Place, was an additional cause of anger. In point of fact, Israel's Jewish population were refugees from the Holocaust, and their harsh new circumstances compelled them to adopt the outlook of figures like David Ben-Gurion; they were compelled, after the creation of Israel, to seek colonial patrons in the region in order to receive training for their soldiers, material aid for their army, and intelligence for their officers. Given the behavior of the Great Powers in the region, it is difficult to blame the Israelis for doing this, but it meant that the leadership would become, with each passing generation, more bloody-minded towards the Arabs and more implicated in colonial violence. Israel was, for example, the most effective of the coalition of 1956 to destroy Nasser's regime in Egypt. For this reason, the Arab world from the beginning saw the Jewish state as both a spiritual affront and as an urgent danger to their hard-won liberties.

In the period 1956-1969, this was not a major obstacle to close ties between the US government and the Saudi monarchy. US support for Israel was slight during this period, and Washington typically thwarted Israeli objectives (or rather, those of Israel's primary allies). Saudi Arabia's output of oil was rapidly approaching the 10 million bbl/day point, while OPEC was formed in Baghdad (1960) to enable member states to manage their output in the light of global market outlooks. We do not approve of economic determinism on this site, but it must be pointed out that Saudi Arabia, with the most cheaply recoverable oil, did tend to maximize royalties at the lowest prices of OPEC members, while countries with costlier oil recovery tended to be more truculent, more eager to see prices high, and less concerned about the impact of prices on the global economy.

Faisal and other members of OPEC combined to begin the colossal increase in oil prices early in 1973. The price swiftly soared to such levels that the developed nations, including the USA, suffered massive increases in inflation. In the UK, inflation hit 25% in 1975; in the USA, inflation peaked at 14% in mid-1980. In a desperate bid to restore control over the money supply, wage and price controls, then draconian increases in interest rates, were used by the central banks of the world to tame inflation. In Argentina, the hyperinflation led to the 1976 Process Junta, in which some 30,000 people were killed. In Latin America, this crisis touched off balance of payments crunches, then debt crises that triggered massive economic collapse from Mexico to Chile. The massive infusion of cash had to be rolled over, and the preferred destination was the financial markets of Western Europe and the USA. Hence, the massive outflow of cash as payments for oil imports (by developed nations) was offset by an even larger influx of cash for investment and lending.

For the 3rd world, the soaring prices of oil resulted in a lost decade. The only benefit, if it can be called one, was that the real exchange rates of many 3rd world countries fell so far that they were far more price-competitive with the 1st world than before; however, the local cost of energy for domestic consumption was doubly aggravated by the local currency's fall against the US dollar. The great landlords in countries such as Guatemala, Turkey, Bolivia, Pakistan, Egypt and elsewhere were suddenly faced with the opportunity to sell cash crops in the West at rising prices (denominated in local currency), leading to a boom in the mechanization of agriculture and massive displacement of rural proletariats from subsidence plots farmed for generations. This, in turn, meant increased pressure on urban centers, a massive expansion of cities in the 3rd world, and increased demand for oil precisely because the price was rising!

This phenomenon is seldom reported, except as a series of unrelated events. First, the huge increase in oil prices did create an implosion of states in response to debt loads; in many cases, these governments had traditionally subsidized some of the costs of oil consumption in order to sustain their urban populations. This suddenly was impossible At the same time, the sudden increase in OECD purchasing power relative to the 3rd world meant new markets for industrial labor and cash crops; in theory, a fortunate match, except that countries required a massive infusion of capital and entrepreneurial skill that was unavailable. Maquilladoras (factories set up in Mexico across the border with the USA) were suddenly very lucrative for firms with special attributes, like Xerox; and they did retard the growth of wages in the USA thereafter. Finally, the massive exodus of campesinos from farms in Latin America and South Asia caused something of a panic for development agencies at the time, because cities were bursting under the strain of huge migrations.

The price of oil was driven down as an inevitable effect of the huge profits made by the producers. A boom in offshore development presently followed, accompanied by dramatic increases in non-OPEC output. At the same time, all of the industrial countries, especially Japan, focused on replacing oil with capital (such as more efficient machinery). Nigeria's output surged, and then Saddam Hussein launched an attach on Iran (22 September 1980), causing both belligerents and allies to boost output to pay their bills. The price plummeted, probably causing the USSR to implode economically; oil and PNG had been that country's main export. At the same time, the political composition of OECD nations had shifted to the right, with most anti-labor and anti-nationalist political regimes ascendant from Washington to Tokyo and Bonn.

OPEC had failed in its objective to dislodge Israel or produce a kinder, gentler West. Saudi Arabia and Gulf emirates had, however, clearly benefited from the boom in asset accumulation. Revenue streams from assets abroad were, in some years, greater than the revenues from oil. And from the perspective of the conservative landlord class for whom the Saudis spoke, the triumph was unambiguous. The new leadership in Pakistan, for example, of Zia ul-Haq and Ghulam Ishaq Khan was resolutely opposed to social liberalism and economic nationalism. So was an even more important ally: Washington.

(Part 4)

SOURCES & RECOMMENDED READING: Prof. Albert Hourani, A History of the Arab Peoples, Harvard University Press, 1991;

Prof. Ira M. Lapidus, A History of Islamic Societies, Cambridge University Press, 1988;

Abdelrahman Munif, Cities of Salt (1989); The Trench (Vintage, 1993); Variations on Day and Night (1994); dates refer to translations from the Arabic by Peter Theroux

Barbara Stallings, Banker to the Third World, 1983

Library of Congress Country Studies: Saudi Arabia

ONLINE: Department of Energy EIA Country Briefs: Saudi Arabia

CIA World Factbook: Saudi Arabia

International Labour Organisation (ILO): LABORSTA Internet data Wikipedia Entry, Saudi Arabia; history of; insurgency in; Saudi Aramco; King Abdul Aziz ("Ibn Saud");