As American as Saudi Oil

On this day in 1938, workers struck oil in Dhahran, Saudi Arabia, a discovery that would fundamentally shape the United States in the decades to come. In 1978, George Jerome Goodman, who wrote about economics under the pen name Adam Smith, travelled to Saudi Arabia with the U.S. treasury secretary and wrote about the experience for our February issue:

Dammam No. 7, Saudi Arabia’s first oil well (Wikimedia)

Saudi Arabia is one of the most intensely fascinating places I have ever been. Consider: Slavery was abolished in 1962. There were no public women’s schools in 1962, and when the first women were admitted to their segregated schools, the National Guard had to be called out to protect the school against irate religious fathers. In 1957 Saudi Arabia was virtually bankrupt, even with the oil already flowing. Before oil, it was a desert kingdom living off goats, dates, and pilgrims on the way to Mecca—a million pilgrims a year. Luckily for the West, oil and Mecca are in the same kingdom, for that removes the godless Russians as an alternative.

Ten months later, Goodman returned to the pages of The Atlantic in “Maybe I Am Easily Scared,” addressing the precarious state of the U.S. economy in the late ‘70s and worrying about “The Saudi Connection”:

It would be hard to find another time in American history when we were so dependent on a specific part of the world or on a single country, let alone one that is sparsely populated and is still tribal. And it is ironic to contemplate that the country should supply us a commodity we need for a currency that it does not need, though it does need our banks and our friendship. Economics veers quickly into politics.

On that note, this week also marks the 25th anniversary of the end of the Gulf War. In July 1991, a few months after the dust cleared on Operation Desert Storm, the cover of The Atlantic asked, “Was the Gulf War in the National Interest?” We took a pro/con approach the question, with Joseph S. Nye Jr. answering in the affirmative. “Oil, order, and weapons proliferation” were, according to Nye, the “three most serious reasons” for U.S. involvement in the Persian Gulf—both to protect Saudi Arabia from invasion and to expel the Iraqi military from Kuwait. Nye emphasizes the ripple effect that would have occurred if Saddam Hussein had seized control of the region’s oil:

The numerous editorials that compared America’s five percent dependence on Gulf oil with Japan’s 37 percent dependence were misleading, for they ignored the effects of global economic interdependence. Oil is a fungible commodity: it flows to the highest bidder. As long as the world market depends on the Gulf for a third of its oil, shortfalls there will jack up world prices and everyone, including the United States, will pay more for oil. Those higher prices are like a tax on the world economy, stimulating inflation and depressing demand, hurting rich and poor alike. Higher oil prices have two kinds of effects on the U.S. economy: a larger import bill (economists call this a change in the terms of trade), and shocks to the economy that interrupt growth (economists call these macro-economic effects).

He turns to the flip side of the lost oil—in the hands of Saddam:

It would be nice to believe that the additional income would have been devoted to economic development [and reconstruction following the Iran-Iraq War], but that belief is inconsistent with the Iraqi President’s past behavior, which has been aimed at turning Iraq into the dominant military power in the region. The additional revenues would have permitted a dramatic increase in Iraq’s already impressive ability to import modern weapons and the technology necessary for producing weapons of mass destruction.

Saddam Hussein had already demonstrated his chemical weapons capability, against Iran and against his own Kurdish civilians. In addition, he was developing biological weapons, extending the range of his ballistic missiles, and covertly importing components for a nuclear-weapons program. Despite alarmist reports by some pundits, at the time of the war Iraq was probably still at least five years away from having a deliverable nuclear weapon. If he aspired to be the Bismarck of the Arabs, eliminating those nations friendly to the West and finally confronting Israel, the next decade in the Middle East promised to be one of escalating violence and loss of life. Facing such a prospect, those who believed that a conflict with Saddam Hussein was inevitable concluded that sooner was better than later.

That paragraph is laden with historical irony, given the post-9/11 case for invading Iraq and the resulting nine years of war and occupation. Christopher Layne, in his counter-essay to Nye’s, insists that the Gulf War was not in America’s national interest. Here’s Layne on “the oil argument”:

The need to prevent an Iraqi invasion of Saudi Arabia was a key consideration for Washington, and the Saudis would not have asked for U.S. assistance unless they had reason to believe that an attack was imminent. However, this threat could have been--and was--countered without war, through deterrence, containment, and the economic embargo of Iraq. (Apparently this was precisely the course of action recommended by the Chairman of the Joint Chiefs of Staff, General Colin Powell.) Moreover, such a strategy could have been implemented with far fewer than the 200,000 U.S. soldiers initially deployed in Operation Desert Shield. A limited and temporary U.S. air, naval, and ground presence would have sufficed to dissuade the Iraqis from further aggression and to buy time for Saudi Arabia and its regional allies to organize an all-Arab defense of the desert kingdom.

And turning to Saddam:

[T]here was always the possibility that Saddam Hussein’s Iraq (or some other OPEC power in the future) could have chosen to behave in an economically irrational fashion by using its oil resources to achieve political or ideological objectives rather than wealth. Over time, of course, the requirements of supply-and-demand equilibrium would force such a rogue oil producer to return to an economically rational oil-pricing policy. In the intervening period, however, the U.S. and world economies might suffer unpleasant dislocations.

But this simply illustrates a basic problem: the Persian Gulf is an endemically turbulent region. Even now, after America’s victory, access to Persian Gulf oil remains precarious. One of the Gulf War’s key lessons is clear: rather than absorbing the costs of preparing for, and perhaps fighting, future Middle Eastern wars, America would be better off developing other energy sources and cutting its reliance on imported oil.