169. Briefing Paper Prepared by the National Security Council Staff1
SAUDI ARABIA
The following is a basic reference package on Saudi Arabia. It is not comprehensive but does concentrate on those aspects that might be of most interest to you and which could come up in the course of your conversations with King Faisal and other Saudi officials. Recent correspondence between the President and King Faisal is also included for your background. Ambassador Nick Thacher will be prepared to provide you any additional background information you may require.
General Background
There are two basic facts about Saudi Arabia that stand out above all others—its wealth and its backwardness (see economic fact sheet at Tab A).
The basis for Saudi Arabia’s wealth is, of course, its gigantic petroleum reserves, which are by far the world’s largest, and the increasing world demand for petroleum products. Just to cite a few illustrative figures, Saudi petroleum reserves are conservatively estimated at 130–140 billion barrels and some geologists think that they are at least twice or thrice this figure. This compares to a total of an estimated 530 billion barrels in the world—450 billion barrels in the Eastern Hemisphere (350 in the Arab world) and perhaps 80 billion barrels in the Western Hemisphere (40 in the US). By 1980, unless there are dramatic, new and unexpected discoveries elsewhere in the world, only Saudi Arabia and Iraq for sure will still be able to look forward to increases in their production. Even more significantly, given the continuation of present trends, the US will be importing about 20% of its petroleum requirements from Saudi Arabia by 1980. Natural gas also exists in vast quantities in Saudi Arabia but only a small fraction of it is being exported.
With the recent revenue and “participation” settlement, Saudi Arabia has also emerged as a potential money power in international finance. The OPEC “participation” agreement concluded in October and in the process of final approval by the Arab governments in the Persian Gulf, provides for 25% control of the equity, oil production and profits of the companies now and up to 51% control by 1983. The [Page 537] compensation issue, which held up the negotiations for so long, was finally settled by an agreement on a formula compensating the companies on the basis of the “updated book value” of their investments, an amount over twice as much as OPEC originally offered.
Saudi reserves presently stand at about $2.5 billion, are rising by about $100 million a month and, by a projection of present trends, would reach a total of $100 billion in the early 1990s. The Saudis may already, however, have reached the point where they have more revenue than they can constructively spend. Many believe that if the oil is to continue to flow uninterrupted, the Western world in general and the US in particular are going to have to give the Saudis better alternatives to leaving the oil in the ground.
Despite this great wealth, Saudi social and political life is still very conservative and traditional. King Faisal’s rule, though benevolent, is highly personalized and authoritarian. Many of the country’s approximately 5.5 million people still lack a sense of common nationality and lead a primitive life in the desert. Conservative Islamic values permeate the society, even to the point where some Saudis will not accept interest payments on investments.
US–Saudi Relations
US interests in Saudi Arabia are chiefly economic and center principally on Saudi oil—on maintaining access to oil sources and ensuring a continuing supply of oil to the US, Europe and Japan. ARAMCO— which is owned by Standard Oil of California (30%), Standard Oil of New Jersey (30%), Texaco (30%) and Mobil (10%)—is our largest single investment abroad and a major contributor to our balance of payments.
The US is the chief supplier of goods to the Saudi market.
The US is heavily committed to improving Saudi Arabia’s defense capability. The Saudis look to us as their principal source of military equipment and in recent years have spent an average of over $30 million annually for weapons. A US Military Training Mission has been in Saudi Arabia for years. We have built a modern transportation system for the Saudi Army and during the last year agreements have been concluded under which the US will assist the Saudis in further expanding and modernizing their air force, navy and national guard. We have just approved an extensive modernization program for the Saudi National Guard which will probably be done by Raytheon under a government-to-government agreement.
Over the last year or so our relations with the Saudis have also begun to broaden and deepen on the political level. King Faisal paid an official state visit to Washington in May of 19712 and in the course of [Page 538] his talks with the President a good rapport was established. Since then the President and the King have carried on a fairly extensive correspondence which seems to have extended the understanding on both sides and there have been a series of high-level Saudi visits to Washington. The most recent in this series includes:
- —In June King Faisal’s brother, and Defense Minister Prince Sultan came to the US as a guest of Secretary of Defense Laird.3 The highlight of that visit was a call which Sultan paid on the President during which he presented a paper with an unusually good statement of Saudi strategy for enhancing its security (see Tab B).4 Among other things, this paper for the first time indicated that the Saudis are beginning to develop a realistic strategic view of their region that regards a strong Jordan as crucial, cooperation with Iran as imperative and Saudi moderating influence on the Egyptians as useful. In response, the President wrote Faisal a letter intended to encourage the Saudis to develop their policies along these lines.5 [Comment: Unfortunately, the Saudis have not lived up fully to their emerging strategy, and anything you might conveniently say to encourage them on Jordan would be most useful. We would especially like to see them contribute more financial assistance to King Hussein of Jordan.]6
- —During a visit here by Faisal’s son, Prince Sa’ud—whom you met— King Faisal wrote the President in July asking him to use his good offices with the parent companies of ARAMCO to encourage their flexibility in the then on-going OPEC “participation” negotiations (see Tab C). The President’s response was friendly but also supportive in a general way of the companies’ position and they feel it contributed to a more satisfactory outcome. The main point was that our two countries and the Free World generally had a strong interest in a settlement that could be viewed as fair by both parties and provide for a lasting relationship. Flexibility was crucial and there was a need to balance short-term financial advantage against long-term security interests in strengthening the forces of moderation in the world. [Comment: The OPEC “participation” settlement is viewed as being about the best possible the companies could have obtained under the circumstances. It would be appropriate for you to note the relative Saudi moderation on the participation issue and our common interests in responsible actions in this area in the future. Any emphasis you put on the potential the Saudis have to show the other more radical Arabs a successful but reasonable alternative will reinforce the points the President has been trying to get across to the Saudis.]
- —The President currently has another letter on his desk from King Faisal which will be answered soon (see Tab D) which sets forth the Saudi view on the need for early US action to achieve Israeli withdrawal from occupied Arab territory and urgent US assistance to the Yemen Arab Republic. This is always a difficult subject with an Arab and Faisal feels strongly about it, especially the Jerusalem question. [Comment: Because of your relationship with the President, Faisal may also make a strong pitch to you on these topics. You can safely pass on the Yemen subject by simply promising to inform the President. On the peace settlement effort, you could point out that the President has said that he intends to give this a “very high priority” during his second term and that you know he wants nothing more than a just and lasting peace in the Middle East.]
Yamani Proposal
In late September of this year Saudi Oil Minister Yamani during a visit to Washington made an official and public proposal that Saudi oil be let in to the United States on a preferential basis without duty and that large Saudi investments in the US oil industry be permitted.7 In return for this, Saudi Arabia would direct its oil exports to the growing US market. The Saudi motives behind this proposal actually seem to be more political than economic in that they would obviously like us to become a powerful protector for them against the Soviets (whom they greatly fear) and other governments in the area who pose a potential threat to them (presumably Iran and Israel as well as radical Arab regimes). Through an arrangement like the Yamani proposal, the Saudis probably hope to create a self-reinforcing link which would guarantee our oil supplies and their security.
The Yamani proposal is still under active consideration by the Administration. It is obviously very attractive since it would assure that a large part of the increased balance of payments drain that will be caused by increased oil imports in the future would be offset by Saudi investments in the US. Moreover, if this investment went mainly into oil refining and distribution ventures, the Saudis would have an incentive to protect their investment by ensuring the continued and stable supply of oil. On the negative side, the extension of either quota or tariff preferences to the Saudis would conflict with our GATT obligations and would probably impel the Shah, the Kuwaitis and other oil exporters to demand similar treatment. Such an agreement would also lead our OECD partners to seek similar arrangements thereby driving up prices and eliminating the oil industry’s flexibility to respond to supply emergencies.
[Page 540]Some positive response to the Saudi initiative is required. The only thing holding us up at this point is a debate within the Administration about how far it is desirable to go down the Yamani track at this point and what might be equally attractive alternative approaches that the Saudis would accept and which would present fewer difficulties for us.
Given your relationship with the President and deep involvement in international economic affairs, the Saudis will probably bring this proposal up with you at some level. In any response, you can above all reassure the Saudis of our strong desire for close cooperation in petroleum and financial affairs and, of course, welcome large Saudi investments in the US.
Biographic sketches of the leading cast of Saudi characters are at Tab E.
A detailed map is at Tab F.
- Source: National Archives, Nixon Presidential Materials, NSC Files, Box 1287, Saunders Files, Saudi Arabia. No classification marking. All tabs, with the exception of Tab F, are attached but not printed. Tab F is not attached. A handwritten note by Saunders reads: “for Connally in preparation for Saudi Arabian trip.”↩
- See Document 151.↩
- See Documents 159–161.↩
- See Document 160 and footnote 2 thereto.↩
- See footnote 4, Document 161.↩
- All brackets are in the original.↩
- See Document 164.↩