The Gulf Co-operation Council could be turning itself into the club of Arab monarchies as it considers bringing Jordan and Morocco into its fold, a move that would strengthen the political and economic capacity of the two countries’ leaders to fend off any popular challenge.

In a surprise announcement late on Tuesday, the GCC, which joins six oil-producing Gulf Arab states, said it was considering a request by Morocco and Jordan to join the bloc, even though the two poorer countries have little in common with existing members.

Following a GCC summit in Riyadh, Abdullatif al-Zayani, the secretary-general, said foreign ministers would be holding talks with the two non-Gulf countries to complete the procedures required for membership. It is not yet clear if membership will be granted or in what form.

The GCC was formed in 1981 in the wake of the Iranian revolution as an alliance of oil-producing monarchies, including Saudi Arabia, Qatar, the United Arab Emirates, Bahrain, Kuwait and Oman.

Efforts at economic integration have been only partly successful, undermined by rivalries and political divisions.

As republics dominated by family rule have proved most vulnerable to popular revolts this year, however, the GCC has been asserting itself, closing ranks to protect its members from the changes sweeping the region. GCC troops were sent to Bahrain to support the ruling Sunni family, helping it crush a Shia uprising. Meanwhile, the organisation pledged $20bn in financial aid to Bahrain and Oman, another Gulf monarchy that was hit by protests.

Saudi Arabia, the heavyweight in the GCC, has also been dismayed by the willingness of the US to abandon long-time allies such as Egypt’s Hosni Mubarak, who was ousted this year, and to criticise a Bahraini intervention, which Riyadh insists was needed to counter Iranian meddling.

Diplomats say GCC states have been sending the message that no Gulf ruling family will be allowed to fall – nor will Iran, which is seen as the biggest regional threat, be permitted to take advantage of the unrest in the region.

Khalid al-Khalifa, Bahrain’s foreign minister, said on Twitter that Jordan and Morocco were “clear examples of good, wise governance and real political development”. The GCC, he added, had “a vital interest in joining together with them”.

Mustafa Hamarneh, a Jordanian political analyst, said the GCC move was a sign that Jordan belonged to the “conservative monarchy club”. What all the countries had in common, he said, was that “they see eye to eye on all the main issue: on Iran, on Bahrain and on the question of political reforms”.

Membership in the GCC would be a boost for the Jordanian monarchy, if it went ahead, but would prove a setback for groups seeking reform, he added.

Hassan al-Mostafa, a Saudi writer, said the possible integration of the two countries into the GCC was an attempt to “reshape the region” by creating new alliances at a time when a democratically elected Egyptian government was likely to follow a more independent foreign policy, possibly becoming friendlier with Tehran.

“The GCC will also help Jordan and Morocco to avoid pressure or collapse of these regimes,” he said. “But Moroccans and Jordanians are more politically active and won’t accept the GCC dictating foreign policy.”

Dris Ben Ali, a Moroccan economist who has been advocating political reforms, said he was concerned about the political rationale behind a potential membership in the GCC, which might be aimed at halting Morocco’s move towards a “democratic, parliamentary monarchy” that could become a model for others in the region.

Early last week, US President Barack Obama sent a letter to Saudi King Abdullah, delivered in person in Riyadh by US National Security Advisor Thomas Donilon. This happened less than a week after Pentagon head Robert Gates spent a full 90 minutes face to face with the king.

These two moves represented the final seal of approval of a deal struck between Washington and Riyadh even before the voting of UN Security Council resolution 1973. Essentially, the Obama administration will not say a word about how the House of Saud conducts its ruthless repression of pro-democracy protests in Bahrain and across the Persian Gulf. No ”humanitarian” operations. No R2P (”responsibility to protect”). No no-fly or no-drive zones.

Progressives of the world take note: the US-Saudi counter-revolution against the Great 2011 Arab Revolt is now official.

Those ‘pretty influential guys’

The wealthy, truculent clan posing as a perpetual absolute monarchy that goes by the name House of Saud wins on all fronts.

Last month’s ”Day of Rage” inside the kingdom was ruthlessly preempted - with the (literal) threat that protesters would have their fingers cut off.

With the price of crude reaching stratospheric levels, and with Saudi refusal to increase production, it’s a no brainer for Riyadh to dispense with a few billion dollars in pocket change to appease its subjects with some extra 60,000 ”security” jobs and 500,000 low-rent apartments.

King Abdullah also recently ”received a verbal message” from the emir of Bahrain, Sheikh Hamad bin Khalifa, on the thriving ”bilateral issues” - as in Saudi Arabia ruthlessly repressing the pro-democracy protests in Bahrain by invading their neighbor and deploying their ”security” advisers.

The House of Saud’s violent reaction to the peaceful protests in Bahrain may have been a message to Washington - as in ”we are in charge of the Persian Gulf”. But most of all it was dictated by an absolute fear of Bahrain becoming a constitutional monarchy that would reduce the king to a figurehead; a nefarious example to the Saudi neighbors.

Yet as much as real tensions between Iranian Shi’ites and Arab Shi’ites may persist, the Saudi reaction will end up uniting all Shi’ites, and turning Iran into Bahrain’s only savior.

As for Washington’s reaction, it was despicable to start with. When Sunnis in Iraq oppressed the Shi’ite majority, the result was Iraq shocked and awed to destruction by the neo-cons. When the same happens in Bahrain, liberal hawks have the Sunnis get away with it. (As much as there’s been plenty of spinning to the contrary, the Pentagon’s Gates knew Saudi Arabia would invade Bahrain on the spot, on a Saturday (the invasion started on Sunday night).

Not that Washington cares that much any way or another. Last week, in a Chicago restaurant, President Obama qualified the emir of Qatar, Hamad bin Khalifa, as a ”pretty influential guy”. He praised him as ”a big booster, big promoter of democracy all throughout the Middle East’.’ But Obama didn’t notice there was an open mike, and CBS News was listening; so he added, ”he himself is not reforming significantly. There’s no big move towards democracy in Qatar. But you know part of the reason is that the per capita income of Qatar is $145,000 a year. That will dampen a lot of conflict.”

Translation; who cares whether these ”pretty influential guys” in the Gulf reform or not as long as they remain our allies?

The Saudi war of terror

Way back in 1965, the opposition in Bahrain was accused (by the colonial British press) of Arab nationalism (the nightmare of assorted colonialists and also US imperial designs). Now, it is accused (by the al-Khalifas and House of Saud) of sectarianism.

The House of Saud has predictably terrorized the majority-Shi’ite democracy movement in Bahrain with fear, loathing and - what else - sectarianism, the ultimate pillar of its medieval Wahhabi ideology. For intolerant Wahhabis, Shi’ites are as heretical as Christians. Shi’ite holy sites in Bahrain are being demolished under the supervision of Saudi troops. Bahrainis via twitter are stressing Saudis are using ”Israeli tactics”, demolishing ”unauthorized” mosques.

Once again, this may only lead to a total radicalization of the Sunni-Shi’ite divide across the Arab world. Everyone who followed the Bush administration-provoked Iraq tragedy remembers that when al-Qaeda blew up the revered Shi’ite shrine of al-Askari in Samarra, in 2006, that was the start of a horrible sectarian war that killed tens of thousands of people and sent hundreds of thousands into exile.

The House of Saud (as well as the US and Israel) backed Mubarak in Egypt until the 11th hour. They all knew if that ”pillar of stability” fell, the other (Saudi) would also be in danger. For all its bluster, the House of Saud’s actions are essentially moved by fear. In recent years it has lost power in Lebanon, Iraq, Palestine and now Egypt. Its ”foreign policy” consists in supporting ultra-reactionary regimes. The people? Let them eat kebab - if that. Their last bastion of power is the Gulf - crammed with political midgets such as Bahrain or Kuwait. With a little thrust, The House of Saud could reduce all these to the status of mere provinces.

Not yet. As the House of Saud developed its counter-revolutionary strategy, the Saudi-Israeli alliance morphed into a Saudi-Qatari alliance. Qatar could be destabilized via the tribal factor - the Saudis had attempted it before - but now they needed a close ally. And that, unfortunately, explains Qatar-based al-Jazeera’s meek coverage of the repression in Bahrain.

It took only a few days for the House of Saud to force the Gulf Cooperation Council (GCC) to toe the new hard line: we are the top dog; there’s no room for democracy in the Gulf; sectarianism is the way to go; our relationship with Israel is now strategic; and Iran is to blame for everything. The ”Persian conspiracy” is the key theme being deployed by the hefty Saudi propaganda machine especially in Bahrain and Kuwait.

Israeli hawks, not surprisingly, love it. There’s plenty of flower power - or downright lunatic - rhetoric in the Israeli press about a ”strategic alliance” between Tel Aviv and Riyadh, ”similar to the one between the Soviet Union and the US against the Nazis”.

And guess what - Obama is to blame for it. Without this strategic alliance, according to the Israeli narrative, the whole Gulf will fall ”victim of a nuclear Iran”, and the Obama administration won’t lift a finger to save anybody. Obama is vilified as someone who ”only confronts and abandons allies”, while emboldening ”evil” Syria and Iran. It’s a narrative straight out of the Loony Tunes.

Shallow grave or bust

Trying to understand the stakes, Rupert Murdoch’s Wall Street Journal got it all backwards, blaring there’s a new Cold War between Saudi Arabia and Iran. That’s what you get when you regurgitate PR by ”Saudi officials”.

It’s the House of Saud incendiary manipulation of sectarianism which is angering Shi’ites everywhere - not only Iranians; that may turn the Islamic Republic into the only substantial defender of all Shi’ites against Wahhabi medievalism.

It’s the House of Saud counter-revolution against the Great 2011 Arab Revolt - condoned by the US - that has shattered America’s ”credibility on democracy and reform”.

All this while the ”traditional security arrangement” with Washington is not even working anymore. The House of Saud is not stabilizing global oil prices; by refusing to increase production, it will let it reach $160 a barrel-levels quite soon. And meanwhile the White House/Pentagon keeps protecting that medieval bunch that were the first to recognize the Taliban in the mid-1990s, and whose billionaires finance jihadis all across the world.

The Gulf political midgets are now in the process of being homogenized - and kept under a leash - by House of Saud force. Those Gulf kings and emirs may preserve their golden thrones - for now. But expect plenty of cultural and religious violence ahead; plenty of nasty tribalism and sectarian wars, with no possible political evolution and no possible development of a modern civil society. No surprise; fear and loathing are embedded in this reactionary House - an axis of multiple evils in itself that should only deserve a shallow grave in the desert sands.

By Pepe Escobar

Dozens of unemployed university graduates and teachers staged rare protests in two Saudi cities on Sunday to demand jobs and better wages in the biggest Arab economy, which is struggling to reduce joblessness.

Saudi Arabia, the world’s No. 1 oil exporter and a U.S. ally, is an absolute monarchy that does not tolerate public dissent. There is no elected parliament or political parties, and newspapers tend to carry the official line.

Over 20 protesters gathered outside the education ministry office in Jeddah while around 20 collected outside the ministry in the capital Riyadh, witnesses and participants said.

“God willing, I’ll be here until Friday if I have to. We don’t care anymore after seven years of unemployment. We have no other choice,” said Omar Alharbi, a 34-year-old Arabic language teacher who took part in the Jeddah protest.

“I plan to stay here until we find a solution,” he said.

The father of six now works as a teacher in a private school making only 1,800 riyals ($480) a month, below the country’s unemployment handout of 2,000 riyals.

Despite its oil wealth, Saudi Arabia, which is rolling out its third straight record budget this year, is struggling to reduce unemployment which reached 10 percent in 2010.

In a move to stave off public dissent gripping much of the Arab world, King Abdullah ordered handouts exceeding $100 billion to be spent on housing, infrastructure, health care and security. It also included a 2,000 riyal unemployment benefit.

Saudis in private firms compete with foreigners who agree to work for lower wages. Teachers are offered 1,800 riyals a month in a private school for a job that pays around 9,000 riyals a month in government schools, protesters said.

Some of the protesters said they had been unemployed since 2003. They estimated the number of unemployed Saudi Arabic language teachers to exceed 10,000.

Saudi Arabia has not seen the kind of mass uprisings that have rocked the Arab world this year, but a number of protests have taken place in the Eastern Province, where most of the kingdom’s oil fields are.

Almost no Saudis in major cities answered a Facebook call for protest on March 11, in the face of a massive security presence around the country.

Earlier this year, some 250 unemployed graduates gathered at the education ministry in Riyadh to demand employment and vowed to continue demonstrating until the government produces jobs.

The group later dispersed after hearing promises from ministry officials saying they will deal with their issue.

“We expect to hear promises to calm us down and disperse us but we will be back. We will be back until they find a solution,” Alharbi said.

President Ali Abdullah Saleh is still resisting the popular clamor for his removal that has convulsed Yemen since protesters toppled Egypt’s Hosni Mubarak four weeks ago, but the odds are stacking up against him. About 30 people have been killed, mostly in the rebellious south, in clashes between Saleh’s security forces and the tens of thousands of protesters turning out daily across the country.

So far Saleh and his foes have avoided the bloody all-out battles for control such as those unfurling in Libya, where an equally determined Muammar Gaddafi is fighting for survival.

The Yemeni leader, who has ruled for 32 years by cannily navigating tribal politics, installing clan relatives in top security posts and rewarding loyalty with cash and favors, may be reluctant to go down the Gaddafi route, yet the prolonged standoff in the streets carries mounting risks of violence.

Police and security men fired into demonstrators near Sanaa University late on Tuesday, killing one and wounding 80.

“The events of last night illustrate that Saleh is willing to use increasing violence in an effort to maintain his rule,” said Sarah Phillips, a Yemen expert at Sydney University.

“The problem he has is that opposition to his regime is incredibly diverse, both geographically and in terms of what people want, after the immediate desire of seeing him step down, and that he now has very little that he can offer people.”

There is no sign of any let-up in the swelling protests against Saleh by Yemenis who blame him for what they see as decades of high-level graft, poverty and neglect.

“The momentum now is with the opposition, both protesters and the political parties, and that’s become increasingly clear,” said Shadi Hamid of the Brookings Doha Center.

“We saw the largest pro-democracy protests in Yemen’s history last week. We’re seeing more opposition unity.”

Saleh, already combating revolts in the north and south, as well as an ambitious al Qaeda wing, has been losing the support of once-allied tribal sheikhs, lawmakers from his ruling party and Muslim clerics, but the army and police still seem loyal and the president’s Saudi and U.S. allies have not deserted him.

The veteran leader may accept that he cannot extend his rule indefinitely. “At this time, the most he would hope for is to preside over a transition period until the end of his term in 2013,” said Yemeni political analyst Abdul-Ghani al-Iryani.

WAR CHEST

The 68-year-old leader, using what opposition MP Abdulmoez Dabwan calls a “war chest” of cash, can also bring out loyalist crowds in his defense — this week his party organized free lunches for hundreds who then joined a pro-Saleh demonstration.

Saleh has pledged to quit in 2013 and not hand power to his son, but rejected an opposition plan proposed last week for political reforms and a timetable for his departure this year.

Ali Omrani, a former member of Saleh’s party, said Yemenis were no longer satisfied with vague promises from the president.

“He needs to offer something very clear about the peaceful transfer of power. He has to start with the security services and make a gesture — at least begin removing his relatives.”

Saleh accuses his foes of threatening Yemen with chaos and portrays himself to the West as a bulwark against al Qaeda. His government this week asked foreign donors to stump up $6 billion to fund its budget deficits over the next five years.

“Yemen wants more money to come in and Saleh wants to really try and fragment and fracture the protesters,” said Gregory Johnsen, a Yemen scholar at Princeton University.

“He believes if he can do that, he can continue to survive. But a lot of the protesters are wise to the game… and are trying to stand in solidarity with one another,” he said, citing the so-called Houthi northern rebels and southern secessionists.

Saleh’s challenges have multiplied in recent years as oil and water resources dwindle in Yemen, an unruly land of mountain and desert where guns abound and central authority is lax.

“The inability of the central government to deliver basic public services, the absence of law and order and the fragmentation of society have created the ideal environment for autonomists, secessionists, insurgents and irredentists to emerge and flourish in many parts of the country,” said Khaled Fattah, at Scotland’s St Andrews University.

The protests feed off youth unemployment, hunger and corruption, but many of Yemen’s 23 million people are also fed up with an autocratic leader who denies them a voice — and are impatient with opposition parties trying to cut deals with him.

Hamid, the Brookings analyst, said Saleh’s strategy was to stall and promise dialogue without altering the fundamental structure of the system in hopes the protests lose steam.

“But I don’t think we should be under the illusion that Saleh is going to become a democrat overnight,” he added.

Iryani said Saleh’s entourage was probably pressing him to fight it out and if the power balance shifted in his favor he might even opt for Gaddafi-style force — although in Egypt and Tunisia the military refused to suppress popular protests.

“The army has not been tested against the people yet. When it does, I expect it to disintegrate quickly,” he said.

Source Reuters

Bahrain, like Tunisia and Egypt answers the people’s call for change with violence, leans heavily on other countries to keep its dictatorship monarchy in place.

To discuss the recent events in Bahrain, Press TV talks with Ali al-Ahmed the director of IGA Institute for (Persian) Gulf Affairs.

Press TV: Where is the situation headed in Bahrain? Will it be next in line after Egypt?

Ali al-Ahmed: Well it is too early to say, but Bahrain has been simmering under a veil of anger and contempt for the ruling al-Khalifa who have stolen the country of Bahrain, its future, its wealth and its freedom.

Bahrain is one of the most corrupt oppressive regimes in the Persian Gulf so it is a strong candidate for revolution; it has been for years. So let’s hope that the people of Bahrain will push hard and they will get there if they continue and endure like the people of Egypt and the Tunisian people.

Press TV: Of course, one thing that has been common during the protests in Tunisia and Egypt and now in Bahrain is that instead of taking in reforms the governments have resorted to violence including in Bahrain. Why do you think that is?

Ali al-Ahmed: The government of Bahrain is supported by other countries such as the US, which gives aid. There are similarities between Egypt and Bahrain in this way that Bahrain receives aid from the American government.

And there is a huge naval base in Bahrain that was given by the ruling family there and this is one of the reasons that the American government has been supporting clearly the monarchy in Bahrain. And in addition Saudi Arabia has been supporting the monarchy in Bahrain because they are worried about their own population rising and imitating the protesters in other Arab countries.

The Bahraini government itself is weak. If it was not supported by the US and the Saudi monarchy it would not take it but a few days for it to flee.

Cable dated:2008-06-03T15:39:00C O N F I D E N T I A L SECTION 01 OF 04 RIYADH 000868SIPDISNEA FOR DAS GGRAY DEPT OF ENERGY PASS TO A/S KKOLEVAR, DAS AHEGBERG, AND MWILLIAMSON TREASURY PASS TO A/S CLOWERY, DAS BAUKOL AND CMORAVEC DHS PASS TO TWARRICK AND DGRANT CIA PASS TO TCOYNEE.O. 12958: DECL: 06/03/2018 TAGS: EPET ENERG EFIN SA

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Summary
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¶1. (C) Minister Naimi’s offer of an additional 300,000 barrels per day (bpd) in the wake of President Bush’s visit had minimal impact on crude prices; some analysts stated 500,000 bpd-plus would be needed to impact crude prices near $128/barrel. Market analysts in Riyadh point out widespread petrol subsidies in China, India, and the Middle East ensure price feedback mechanisms are broken; they therefore predict crude demand will continue to rise there. Governments are abandoning plans to roll back petrol subsidies in the face of escalating food inflation. Our contacts are concerned languishing refining margins are driving down refinery utilization. Recession may be the one brake on crude prices in the near term, but our contacts are divided on its impact. Their crude price forecasts range between $90 and $150/barrel.

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Saudis Resist Continued Requests for Significantly More Production ——————————————-

¶2. (C) The oil industry newsletter “Foreign Reports” summed up the industry’s take-way from the President’s recent visit: “Responding to demand, not demands - The message from Riyadh this afternoon may be summed up: Saudi Arabia can and will respond to increased demand from its refining customers by increasing its production, but it will not respond to politically-motivated calls for more oil.” Minister Naimi was careful to point to customer requests to justify his announcement of a increase in production of 300,000 bpd. The increase should bring Saudi Arabia’s June production to 9.45 million bpd. By Monday, OPEC price hawks, Libyan oil official Shukri Ghanem among them, jumped in to criticize Minister Naimi’s decision “to cave in to requests from the U.S.”

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Is this Market Broken?
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¶3. (C) Here in Riyadh, our banking sector contacts are focused more on long-term market disequilibirium. Like energy economists worldwide, they are scratching their heads, asking how we can slow this spiral of escalating crude prices. Brad Bourland, Chief Economist, and Paul Gamble, Head of Research from Jadwa Investments, one of the newly-established Saudi investment banking houses, are concerned the price feedback loop between crude and finished petroleum products is increasingly tenuous globally. Bourland points to analysis by Deutschebank’s Adam Siminsky, who posits a growing disconnect between the crude and finished product markets.

¶4. (C) Bourland explains while crude has increased by nearly 6 times in the last four years, gasoline prices in the U.S. have at most tripled. While consumers complain vociferously about rising pump prices, nonetheless they are not absorbing the full brunt of rising input prices. The refining sector is absorbing the growing pricing differentials between crude and finished products, leading to plummeting refining utilization rates in the U.S. For example, refining utilization rates fell to 84 percent in the U.S. recently. Bourland noted the U.S. majors would continue to operate their vertically-integrated refineries - as they have little choice but to move their crude through the

RIYADH 00000868 002 OF 004

system. However, under these price conditions, independent refiners operate in the red, and many are simply idling their capacity. The Petroleum Economist confirmed that in March, many refiners ran at a loss.

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Poor Price Elasticity in China, India, ME: Food Price Inflation is a New Complication
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¶5. (C) Bourland noted that given the widespread public subsidies in China, India, and the rapidly growing markets of the Middle East, there is no pass-through of these higher crude prices to the consumer in much of the world’s market. Essentially there is no price signaling, “go slow” sign in the form of higher prices for consumers as crude rises. As a result, he expects we will continue to see unrestrained demand growth, especially in the Middle East and China.

¶6. (C) Bourland was not optimistic about prospects for encouraging greater price elasticity in the world energy markets. Inflation, particularly food inflation, recently has become a front-burner issue for many nations. Pressed consumers in many nations have recently found themselves on a knife’s edge regarding food security, and are not likely to peacefully accept the rolling back of petrol subsidies which have become effectively institutionalized. Bourland also cautioned that Saudi Arabia’s domestic consumption of crude continues to grow by about 100,00 bpd annually, ensuring a tight global market for the foreseeable future.

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U.S. Market Demonstrates Elasticity, but Price Responses in Europe also Limited
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¶7. (C) Bourland believes the U.S. market is demonstrating some price elasticity in the downstream market, and this is beginning to curb consumption. In the U.S., pump prices are rising sharply. He noted gasoline in Connecticut, for example, had hit $4.50/ gallon. Gamble, a British citizen, noted that in Europe, the pump price is heavily weighted towards the government’s tax take, so the impact of rising crude prices is felt much more slowly. Consumer response in Europe is also correspondingly slower. Europe’s ability to respond with transport measures that might have a near-term impact on per capita fuel consumption is also limited, as most people already take public transportation or drive fuel efficient cars.

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IEA Pessimistic on Prospects for Greater Price Elasticity ———————————-

¶8. (C) Energy Attache queried Dr. Nobuo Tanaka, the Executive Director of the International Energy Agency, during a recent presentation at the International Energy Forum in Riyadh about the prospects for introducing greater price elasticity in the global market. Specifically, in November 2007, China had announced it would begin rolling back subsidies. Dr. Tanaka indicated that the harsh winter weather and the associated transportation problems at the Chinese New Year had largely halted roll-out of China’s program. He was not optimistic about other large developing nations following suit with new roll-backs. In light of the recent tragic earthquake in Sichuan, it is likely China will be in no position to force a politically unpopular subsidy roll-back on the population now.

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Jadwa Forecasts $90 Barrel Oil for 2008; SABB Forecasts $150 —————————————-

RIYADH 00000868 003 OF 004

¶9. (SBU) Looking forward, Jadwa Investments forecasts an average price of $90/barrel for oil 2008, with a drop to $70/barrel by the end of 2008. Jadwa forsees a constant monthly downward trend in demand, due to the U.S. economic recession and its impact on the global economy. Bourland noted Jadwa’s analyses departed from DeutscheBank’s forecast of an average barrel of $105 for 2008. On the other hand, Dr. John Sfakiankis, from the Saudi British Bank, an HSBC subsidiary, remarks that the U.S. is already in recession, and crude prices nonetheless continue to rise. He predicts crude prices topping $150/barrel “are not unlikely” by the end of the summer.

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$15 Billion/Month into Official Reserves
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¶10. (C) Bourland estimates the Saudi state is earning roughly $1 billion/day now in oil revenues, of which it expends roughly half, and adds the other half to its official reserves. He noted SAMA added $15 billion to its reserves in March, the seventh month running that reserve additions totaled more than $10 billion. “The amounts are overwhelming,” Bourland summarized. He also explained that although the Saudi Arabian Monetary Authority (SAMA), the central bank, continued to hold U.S. Treasury bills, it was also diversifying. SAMA’s Investment Department “prides themselves on being diversified,” he related.

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Dollars: The Unloved Currency as Saudis Wait for a Possible Re-Valuation —————————————-

¶11. (C) This enormous influx of petro-dollars is largely held by SAMA. Bourland explained that Saudi investors, however, are currently hoarding riyals. They continue to be afraid of being caught out by a possible re-valuation in the USD-pegged currency. He noted investors continue to anticipate an eventual re-valuation, but “the pressure is not like it was last fall” when the fixed exchange rate came under heavy speculative attack in November. Instead, Bourland sees Saudis hoarding riyals because the “U.S. markets would go on sale” if the Saudi government re-values. Bourland pointed out it was difficult for Saudi investors to even find large quantities of U.S. dollars, saying “it’s hard to get $500 million or $1 billion in USD, the banks don’t want to hold that much.” Bourland stated he does not see much Saudi money involved in hedge funds or other speculative instruments allegedly running up crude prices.

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“The Money is Safer in the Ground”
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¶12. (C) Bourland noted that the confluence of demands to manage this enormous cash flow, and the challenges to managing growth in the oil sector were beginning to worry the Saudi leadership. He referenced recent comments from an informed source in the oil sector who explained that Saudi Aramco was scaling back proposed future expansion plans. Quoting King Abdullah’s recent comments (ref B) that Saudi Arabia would cap production capacity at 12.5 million bpd and “leave crude in the ground for its children”, Bourland remarked, “There are more accidents, there are escalating costs (in the oil sector). I think the King is reaching the conclusion that the money is safer in the ground than in the bank. He doesn’t want to see it squandered.”

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Saudi MinPet: “Blame it on the Weak Dollar”
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¶13. (C) The Saudi Ministry of Petroleum has noted to us in

RIYADH 00000868 004 OF 004

consultations throughout 2007 and in January 2008 that much of the run-up of the price of crude could be blamed on the gradual decline in the USD, as crude contracts are priced in dollars. We concur to a certain extent, but as crude has surged beyond $110/barrel, and the dollar seems to have found a bit of a floor in recent weeks, we find this argument less compelling. As well, crude priced in euros and yen has also surged to new record highs in recent weeks. Taking inflation into account is another issue. The Economist noted in April that crude would have to hit $134/barrel to equal in inflation-adjusted terms 1981’s record crude prices. Two weeks ago, the NYMEX market did just that.

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Comment
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¶14. (C) Our Mission now questions how much the Saudis can now substantively influence the crude markets over the long term. Clearly they can drive prices up, but we question whether they any longer have the power to drive prices down for a prolonged period. The May announcement of a 300,000 bpd increase in production barely dented price escalation. It appears unlikely Saudi Aramco could muster the million or more barrels which appear to be needed to make a dent in the normally upwards price trajectory. Saudi Aramco’s ability to sustain such a production increase for a year or more raises serious questions. A series of major project delays and accidents XXXXXXXXXXXX over the last couple of years is evidence that Saudi Aramco is having to run harder to stay in place - to replace the decline in existing production. Additional production would likely come from increasingly heavy crude which the world lacks sufficient capacity to easily refine. The Saudis appear dis-inclined to discount its heavy crude sufficiently, so the market is dis-inclined to purchase it. In neighboring Iran, the regime is now purchasing floating storage for heavy crude which has no takers. While this Mission is far from embracing doomsday “Peak Oil” theorists, Saudi Aramco’s challenges are significant.

¶15. (C) King Abdullah’s recent comments on “leaving some oil in the ground” did not set new oil production policy, but hewed to the previous Saudi commitments to build a capacity of 12.5 million bpd. Nonetheless, his remarks may hint at an emerging conservationist ethic in Saudi Arabia — extending beyond energy to encompass how the Kingdom will more broadly husband its resources for future generations. Bourland highlights the King’s concerns with energy issues, but also his growing worries with how his successors will manage and secure the Kingdom’s financial patrimony as well.
GFOELLER
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Reference ID: 08RIYADH868
Created: 2008-06-03 15:03

Cable dated:2008-05-07T17:53:00C O N F I D E N T I A L SECTION 01 OF 02 RIYADH 000732SENSITIVE SIPDISNEA FOR DAS GGRAY DEPT OF ENERGY PASS TO A/S KKOLEVAR, MWILLIAMSON, AND DASAHEGBURG TREASURY PASS TO A/S CLOWERY CIA PASS TO TCOYNEE.O. 12958: DECL: 05/07/2018TAGS: EPET ENERG ECON NI SA

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Summary
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¶1. (C) In a May 6 meeting with Assistant Minister of Petroleum (MinPet) Prince Abdulaziz bin Salman bin Abdulaziz Al-Saud, he outlined the Ministry’s latest thinking on record-high crude prices, and OPEC’s general refusal to budge on possible production increases. Contrary a few months ago, Prince Abdulaziz promised no relief on production or pricing. He told the Energy Attache that the Ministry was “extremely worried about demand destruction” in the U.S. as a result of the latest financial crisis indicators. However, he also fretted about squeezed refining margins in the U.S. and globally, noting the grave impact on U.S. refining utilization, currently running a scant 84 percent. He asked if the USG could assist the current political situation in Nigeria, where the production has collapsed to about a million barrels per day (mbpd) during the last week as a result of militant attacks and strikes. On the anti-OPEC lawsuits, he explained Saudi Arabia continued to gather amicus briefs for the now-consolidated cases in Texas. He generally dismissed the further threat of NOPEC legislation, saying if Congress could have passed the legislation, they would have done so already.

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“Refining Margins Shocked,” Refining Utilization Falling
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¶2. (C) Queried about Monday’s record surge in crude prices to above $120/barrel, Prince Abdulaziz noted, “We are extremely worried about demand destruction, like in the early 1980s. Aramco is trying to sell more, but frankly there are no buyers. We are discounting crudes, now we’re at a $10 differential between West Texas Intermediate (WTI) and Dubai Light, sometimes as much as a $12-$13 differential. Our buyers still bought less in April than they did in March.” Prince Abdulaziz attributed the lack of willing buyers to the current low refining margins. He indicated that that current high crude prices were squeezing refining margins, as refiners were unable to pass on the full brunt of crude prices to the end consumer. “There are no refining margins, refining margins have been shocked. It’s purely technical, not policy-induced. There are commercial impediments.” The consequence of poor refining margins was a declining refining utilization rate. Prince Abdulaziz fretted, “the U.S. refining utilization is 84 percent now, it’s usually above 90 percent. The quickest relief would be if crude prices would come down from these highs, if some of these political crises would resolve.” He queried if the USG could do anything to assist current political situation in Nigeria.

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“Grey Area of Demand Destruction, We Must Hold Our Guard” ——————————————— ————-

¶3. (C) Prince Abdulaziz dis-missed speculation that King Abdullah’s press statements last week on Saudi Arabia planning to cap production capacity at 12.5 million barrels per day and leave oil in the ground for future generations represented a new policy. He stated, “It’s a statement of fact, we need to be credible. We’re pumping more than 9 million bpd, and right now, there is a grey area of demand destruction. We must hold our guard, and wait and see what happens with potential demand. Vice President Cheney was very complimentary about our maintaining spare capacity. We are honest with our commitments, we’ve been credible with our program. The other producing countries should do it the way

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we do. If we announce new capacity, we budget for it, we allocate for it, we acquire rigs, we have timelines. We don’t have pipedreams, if we make an announcement, we are certain to supply it.

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Anti-OPEC Lawsuits and NOPEC Updates
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¶4. (C) On the issue of pending lawsuits against Saudi Aramco and the national oil companies of other OPEC member and oil producing nations, Prince Abdulaziz indicated:
-the lawsuits had been successfully consolidated into one court in Texas;
-Saudi Arabia had worked with most other OPEC nations to file amicus briefs with the court.
-To Iran’s offer to file an amicus brief, Saudi Arabia had said, “thanks, but no thanks,” recognizing it probably would not be helpful in a U.S. court;
-The Mexicans and Russians would also file amicus briefs.
-The Norwegians also now have a case filed against them in Florida, so are reluctant to file an amicus brief.
Prince Abdulaziz believes the Departments of State and Justice seem to be coming around to filing a Statement of Interest (SOI) on behalf of the Saudi government in the lawsuits, but noted the White House was still concerned about the political optics of such a move. He felt such concerns were mis-placed now, particularly with respect to possibly fueling NOPEC legislation.

¶5. (C) Prince Abdulaziz indicated that if NOPEC had the strength to pass it would have done so already, but it hasn’t, in large part he felt due to the Administration’s clear opposition. He argued the lawsuits and NOPEC had much in common: “The Adminstration needs to be consistent in its policy. The effects of the lawsuits are very similar to that of NOPEC, but the plaintiffs are individual companies, rather than the Attorney General.” Prince Abdulaziz added, “Frankly our Embassy feels that once people are aware of the ramifications of such legislation, they’ll be reluctant to abuse it. The Minister has been very candid to explain the ramifications, which would be far more serious for the U.S. economy and energy markets than the Saudi markets.”

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Comment
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¶6. (C) Prince Abdulaziz seemed more comfortable with the state of play in the anti-OPEC lawsuits, his considerable earlier anxiety much diminished. He appears to have largely dis-missed NOPEC legislation as a credible threat for now. We are concerned that the Saudi energy leadership does not seem sufficiently well-advised on how the current high oil price environment is fueling U.S. election year “resource nationalism,” and how this might impact our bilateral relationship in future years. In this vein, King Abdullah’s recent comments that Saudi Arabia would cap its production capacity at 12.5 million bpd and leave crude in the ground for its children — while representing no new initiative or substance — seemed ill-timed at a moment when the market is looking for calming words from the world’s energy market leader. GFOELLER
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Reference ID: 08RIYADH732
Created: 2008-05-07