The Hindu Business Line : Saudi Arabia looks ahead

The Saudis have for long had a special relationship with the US. But that equation is about to undergo an alteration with China and India becoming the focal points of Riyadh's economic and political diplomacy. Why is this change being effected at this juncture?

WHEN King Abdullah bin Abdulaziz Al Saud of Saudi Arabia signed the joint declaration (the first by any Saudi monarch with any country) along with the Prime Minister, Dr Manmohan Singh, on January 27, he was making an important statement of his strategic intentions as far Saudi Arabia's geo-political policy was concerned.

Briefly, hitherto, the Saudis have had a special relationship with the US (and the West). But that policy is about to undergo an alteration with China and India becoming, in a manner speaking, the focal points of Riyadh's economic and political diplomacy for at least the next 20 years.

The obvious question is, why is this change being effected by Riyadh at this juncture? One Indian official quoted by the International Herald Tribune says that a "fundamental driver seems to be a Saudi desire to move away from a monocultural situation, where they have one big friend, one big product, and they are based on one big idea, the Islamic idea".

According to this view, the Saudis are now in the midst of a process of "looking at broad-basing their diplomacy". But what precisely has gone wrong with the settled relationship that is now sought to be changed?

The paper quotes Arab and American experts who feel that India and China have an "additional significance for the kingdom", namely, that they are "low-maintenance customers that buy its oil without meddling — as Washington does — in Saudi affairs".

As Mr Chas Freeman, a former US Ambassador to Saudi Arabia and a diplomat who has also served in India and China, says: "The important thing is that monogamy is not enough for the Saudis anymore. They've decided to take a couple of other wives. This is a logical move by the Saudis, not one against the United States, but a step away from over-dependence on America".

More specifically, in the past, the US wanted Saudi oil, offered protection in return and asked for little else.

More recently, according to Mr Freeman (as quoted by the International Herald Tribune), "the simplicity of this bargain became embarnacled with all sorts of other agendas, including women's rights, human rights, religious freedom and other issues that Saudis either find irksome or difficult to address", adding pithily, "None of these issues arise with the Chinese or India". Analysts have been reported as saying that Saudi overtures to countries such as India and China "are also designed . . . to engage with rising powers that are far less interested than Washington is in what Saudi Arabia does within its borders".

The upshot, as Mr Freeman sees it, is that "the relative monopoly of the United States is in the process of being broken". The question to ask is, why at this juncture? Is there any specific reason that could explain the timing of the strategy-change decision?

One reason, of course, could be that King Abdullah has assumed his new position only recently (August 1, 2005), and the change can be explained by the fact that a new Saudi ruler is bringing with him a new set of ideas on the conduct of the kingdom's foreign policy.

This is a transparent enough ground for the change, the entire process also being aided by the gradual shift in international geo-politics towards a system where the economic resurgence of Asia is in the process of leaving a strong footprint.

There is also another reason that could have gone into Riyadh's calculations which deals more with the changing world oil scenario than anything else.

The central point of this argument is that along with the economic resurgence of Asia, the focal point of international oil demand will shift decisively to Asia, and it is expected that sensible and prudent suppliers of oil will react proactively and build comfortable ties with the new principal players on the demand side.

Indeed, a former CIA director has been quoted as saying that "the growing economic importance of China and India portends the substantial effect their growth will have on oil demand", and that "so drastic will be the effect of such partnerships on global oil prices" that the US will have to "vigorously pursuing... alternatives to conventional oil and vehicle efficiency at a much faster pace".

There is another important input from the crude supply side which could explain Riyadh's decision to deepen its links with countries like India and China on a long-term basis, which would have the effect of reducing its over-dependence on, say, the US, in the process reducing the impact of any retaliatory action some economies may like to contemplate taking in a persisting tight oil-supply situation.

According to some oil analysts, a global oil-production peak could very likely develop between 2005-2010, which would lead to a systemic shortage-oriented crude market resulting in prices consistently moving northwards.

The pressure on a supplier like Riyadh would also increase manifold by virtue of the fact that OPEC production would most likely outstrip non-OPEC output.

According to a former chairman of Indian Oil Corporation, this overtaking of non-OPEC production by OPEC is expected around 2008, an event which could "trigger a marked shift in oil market dynamics with a threat to US economic and political dominance, and increased influence of OPEC on global economy".

Not without reason has the Saudi King, on his recent visit to both India and China, made a concerted effort to forge cooperation in the energy sectors of the two countries, which would have the long-term effect of putting into place a steady crude-supply chain, which would provide some measure of security to Saudi Arabia's crude markets.

Investment in refineries has been an important part of Riyadh's initiative to deepen cooperation in the petroleum sector in both the countries, and since most refineries are geared to a particular type of crude input, it will not be wrong to say that the Saudis are actually trying to set up markets that will be captive at a time when uncertainty could rule the world market.

For India at least, the arrangement could turn out to be profitable because of the higher value-addition that petroleum products command in the international market, which explains why there is not much concern today about the excess refining capacity in the domestic economy over actual requirements, resulting in money-spinning exports. This, in fact, is what the energy section of the joint declaration is all about.

Among other things, the document focuses on the point that both countries would develop "a strategic energy partnership based on complementarity and interdependence", the building-blocks being "reliable, stable and increased volume of crude oil supplies, through "evergreen" long-term contracts; cooperative and joint ventures, both in the public and private sectors, in the upstream and downstream oil and gas sectors in India and Saudi Arabia as well as in third countries; Saudi investments in oil refining, marketing and storage in India, subject to commercial viability; and setting up of India-Saudi ventures for gas-based fertilizer plants in Saudi Arabia".

Apart from the export proceeds generated by petro-product sales from the refineries and other downstream units that may be set up following the cooperation agreement, the other tempting pie in the Saudi basket for New Delhi is of course the petro-dollars stashed away in Saudi coffers.

Clearly, the use of even a minuscule part of this hoard for investment in Indian infrastructure could work wonders for the national economy, which was openly referred to by the Prime Minister in his address to the Indo-Saudi business meet on January 25.

Among other things, Dr Singh said: "The Indian economy will now need massive doses of investment in every conceivable area. Our requirements of foreign investment are particularly large in the field of power, telecommunications, roads, ports and housing sectors.

"Investment needs for the power and telecom sectors alone are estimated at over $100 billion over the next five years! Transportation infrastructure, including airports and railways, will require another $55 billion over the next 10 years. I therefore invite the business community of the Kingdom of Saudi Arabia to take advantage of these opportunities to further establish mutually beneficial Joint Venture projects". The big question is, will they? If they do not, the new era in India-Saudi Arabia relations will work more to the strategic advantage of Riyadh than New Delhi.

While economically, from the Indian point of view, this would be a sub-optimal arrangement, in geo-political terms the benefits could turn out to be more impressive, which would be long-term justification enough for the understanding just arrived at between the two countries.

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