Saudi Arabia's Growing Petropower

"Never before in history has a country had to introduce electricity, running water, telephones, telex and color television all at the same time. "

So muses one Saudi Arabian businessman about his country's frenetic pace of development. His comments point to a paradox of swiftly growing importance for the world economy. By many of the standard measures of power, Saudi Arabia should be a weak state. Its population is sparse: only 7.5 million people in a country twice the size of Western Europe. Its army is tiny: a mere 35,000 men. Economically, the country is only in the beginning stages of industrialism. It suffers from what elsewhere would be debilitating inflation (prices are rising about 40% a year), and so many of its workers are illiterate that it is heavily dependent on imported foreign laborers.

Vast Reserves. Yet in a world menaced by the specter of energy shortages, Saudi Arabia possesses one source of power that far outweighs all its drawbacks: a pool of oil so vast that it may almost equal the combined reserves of the Western Hemisphere and the Soviet Union. According to one current study, whether the world starts running short of oil to power its machinery as early as 1981 or considerably later in the century depends primarily on how rapidly the Saudis choose to pump out their crude. And high prices for the petroleum have given the Saudis an enormous pile of cash--reserves rocketed from $0.7 billion in 1970 to $27.8 billion last April--that confers tremendous leverage in world finance.

Accordingly, Saudi Arabia is emerging from decades of isolation to exercise a powerful influence for stability in the Middle East, and is becoming the closest and most helpful ally of the U.S. among the Arab nations. Economically, the Saudis demonstrated their clout last week by forcing the majority of the 13 members of the Organization of Petroleum Exporting Countries to forgo a scheduled 5% hike in oil prices. In December the Saudis split OPEC by refusing to go along with its decision to raise prices by 10% on Jan. 1 and another 5% on July 1; instead, the Saudis and their allies in the United Arab Emirates posted only one 5% raise.

OPEC's decision not to make the July 1 boost was part of a compromise to mend the schism. For their part, the Saudis and the Emirates will boost their prices to the general OPEC level (whether all at once or in stages still was not clear at week's end). Though that means oil will cost more in the second half of this year than in the first, the winners were clearly the Saudis--and to some extent consumers. The Saudis are fond of pointing out that if everybody settles now at 10%, the price of Middle East oil for the full year will average lower than it would if they had stayed at 5% and everybody else had gone up 15%.

President Carter expressed satisfaction at OPEC's restraint and said he hoped oil prices would remain stable for the rest of the year. He can rely for help on a special relationship, grounded in mutual self-interest, that is developing between the U.S. and Saudi Arabia. To a degree, the Carter Administration's demands for Israeli withdrawal from the occupied areas taken in the 1967 war represent Washington's growing awareness of the need to keep good relations with the Saudis and other moderate Arabs. The U.S.-Saudi relationship is based on a simple proposition: American protection for a country that, though it is rapidly buying modern arms, is still virtually undefended, in return for Saudi petroleum.

The Saudis have more oil than even the present figures on proven reserves (110 billion bbl.) indicate. Last year Saudi Arabia passed the U.S. to become the world's second largest oil producer, and this year it may overtake the Soviet Union to become No. 1. Even so, as the country's suave Oil Minister, Ahmed Zaki Yamani, told TIME Correspondent Wilton Wynn, "In the past year we discovered more oil than we produced. In the future, we will double our reserves." At present the country is producing about 9 million bbl. a day, but Frank Jungers, chairman of Aramco, the once American-owned consortium, says: "We're headed for 16 million bbl. daily production capacity by 1982." Aramco will be 100% bought out by the Saudi government by year's end, but its American management has been retained.

Safeguarding Investments. As the latest OPEC episode demonstrates, the Saudis can be expected to wield their petropower prudently. Some of the other Arab oil producers want to use oil as a means of bringing the West to its knees and destroying Israel in the process. But the Saudis want to keep their customers healthy so that they can sell them plenty of oil. Also, as strict Muslims and fervent antiCommunists, they fear that an economic crisis in the West could so weaken Saudi Arabia's supporters that their own country would be vulnerable to Communist designs. Since the Saudis cannot possibly spend all their petrodollars at home, they have to make enormous investments in Western Europe and the U.S. ($14 billion in U.S. financial securities alone). They want to safeguard those investments.

Because of their vast size and huge needs, the U.S. and Saudi Arabia are ideal economic trading partners. Saudi Arabia wants just about everything the U.S. has--and lots of it. The Saudis are striving to develop a modern defense system, and this year they will spend $10.7 billion on weapons, many from the U.S. The U.S. is building coastal defense vessels for the fledgling Saudi navy and training the crews. American firms have contracts totaling $17 billion for goods and services sold to Saudi Arabia. Thirty thousand Americans are now working in Saudi Arabia, at jobs ranging from installing computers to searching for new oil deposits. Saudi purchases from the U.S. are running so high that--according to Saudi estimates--the jobs of 600,000 American factory workers are directly dependent on those sales. As the Saudi development plan picks up momentum, the number could grow to 2 million by 1980.

The policy of partnership is supported by King Khalid ibn Abdul Aziz, who succeeded the slain Faisal ibn Abdul Aziz al Saud in 1975, and the older men, mostly royal princes, who run many of the ministries. But the men who breathe life into the policy are a lively, hard-driving group of young technocrats whose attitudes are shaping the country. They are known as the "American Mafia," because they were educated in the U.S. The best known of the group is Yamani, 47, who studied at Harvard. Not a member of the numerous royal family (there are more than 3,000 princes), Yamani is a superb technocrat who combines an encyclopedic knowledge of the world oil industry and markets with political insight and dramatic flair.

Other American Mafia members:

> Prince Saud, 36, a son of the late King Faisal and a 1965 economics graduate of Princeton, is now Foreign Minister. Tall and spare, he bears a striking resemblance to his father. The prince worked his way up in the Ministry of Petroleum, where he became Yamani's deputy before switching over in 1975 to foreign affairs.

> Ghazi al-Qusaibi, 37, Minister of Industry and Electricity, received his master's degree in international relations from the University of Southern California. A big, round-faced man, Qusaibi wears thick-lensed glasses because, as he explains, "when I was a child in Al Hasa province, I almost went blind as we had no medical facilities." He presides over the single largest industrial project in history: the construction of an $11 billion gas-gathering project that will take the natural gas flared away at Saudi wells and liquefy it for shipment abroad.

> Hisham Nazir, a graduate of the University of California at Berkeley, is Minister of Planning. That makes him boss of the world's largest and most ambitious development plan: a fiveyear, $142 billion scheme to build plants, roads and housing.

> Abdel Aziz Qoreishi, another Southern Cal graduate, is governor of the Saudi Monetary Agency, a position equivalent to chairman of the U.S. Federal Reserve Board.

> Prince Mohamed, another son of Faisal and a business-administration graduate of Menlo College in California, is the chief of Saudi Arabia's water-desalination agency. He must grapple with his country's Midas-like curse: wherever explorers drill for water, oil shoots up. The prince directs a $12 billion program to build 35 desalination plants in five years that would produce 600 million gal. of fresh water daily.

Inevitably, Saudi Arabia's quickened economic pace is creating severe problems. So far, the progress of the development plan has been uneven: shortages of labor, port congestion and housing problems kept the Saudis from spending money as quickly as they would like. But Nazir is making breakthroughs. One example: a crash program to improve the ports has cut waiting time for unloading ships from 90 days last year to almost zero. Says Finance Minister Mohamed Abdel-Kheil: "The textbooks used to speak of the need for land, labor and capital, but we have to add another factor: time."

As more than 1.5 million foreign workers have arrived to labor on development projects, rents have soared 600% in 18 months to ridiculous levels. A house in Jedda rents for $2,200 a month. Foreign firms are required to bring along prefab housing for their workers. Turnover is high among foreign workers. The Saudis imported thousands of Egyptians only to see them leave after saving up their high wages for a few months. Europeans and Americans are often bored by austere moral standards imposed by Saudi Arabia's ascetic Wahabi sect of Islam.

Ultralavish consumption, a hallmark of Saudi royalty until frugal Faisal put an end to such waste, has been resumed with a vengeance by the newly rich private Saudis. For a Saudi millionaire, a Learjet is a must--even if he does not need it. He must own houses abroad, in London, Paris, Switzerland and the U.S. Rich Saudis also have a weakness for stretched-out Mercedes cars with built-in bars at $75,000 each.

One of the greatest status symbols is heavy drinking. Booze is strictly prohibited in Saudi Arabia, but vast numbers spend their new riches on getting smashed every day. This is a sign of great wealth, since bootleg Scotch sells for $120 a bottle. One Saudi businessman risked penalties by importing his whisky disguised as crated furniture. One day a worried customs official called him from the airport. "You'd better come and pick up your crate of furniture quickly," he warned. "It's leaking."

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