Thursday, September 16, 2010

Saudi Arabia Buys Peak Oil Insurance With $60B Arms Deal

Saudi Arabia is seeking the U.S. government's approval for the largest foreign arms sale in U.S. history.  It wants to buy $60B worth of advanced fighter aircraft and helicopters.  That's significant enough to set tongues wagging inside the Beltway and elsewhere.

Media discussion centers on Saudi Arabia's supposed desire to counter potential threats from Iran or serve as a competing regional hegemon that can offer a security umbrella to other Gulf Arab states.  Other commentators speculate that these weapons could be used against Israel.  The historical record speaks otherwise.  Saudi Arabia contributed a token ground force to the Arab-Israeli War of 1948, a token number of aircraft to the Six-Day War in 1967, a token force to the Yom-Kippur War in 1973, and has been absent from all other Arab wars against Israel.  The Saudi armed forces have yet to demonstrate the competence in combined arms offense within an Arab coalition that would be required to successfully strike at Israel, so that interpretation is unrealistic. 

A more realistic use for these weapons would be against a much weaker Gulf sheikhdom or against the Shiite region of southern Iraq.  Energy analysts wonder at Saudi Arabia's lack of transparency in reporting its oil reserves.  One of the hottest topics in the petroleum industry right now (thanks to the late Matt Simmons) is a guessing game over the peak production date of Saudi Arabia's supergiant Ghawar field.  If Saudi Arabia had to obtain new reserves in a hurry, the quickest way would be through military intimidation of a smaller neighbor. 

Oil is the kingdom's only real export and the revenue it produces is the only thing sustaining modern Saudi life.  Diversification into alternative sources of income will prove extraordinarily difficult.  The House of Saud must have noticed that the Dubai experiment in building high-entropy resorts in a wasteland is a miserable failure. 

Saudi Arabia's supergiant fields, particularly Ghawar, will face peak production at some point.  If the kingdom uses its new weapons to extract oil and gas concessions from weaker Gulf states, we will know that Saudi oil production has peaked.
Nota bene:  Anthony J. Alfidi has no investments in Saudi Arabia.