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The strapped Saudis

We're all in luck: Late last year the scholarly United Nations published World Economic and Social Survey 1995, a learned paper that confidently predicts that the supply of the world's most important commodity will meet demand precisely during the next 15 years, and that prices will remain comparable to today's levels _ and may even decline.

We're talking, of course, about oil.

If it comes to pass, the U.N. forecast is certainly welcome news for the West. We'll be able to buy gasoline at today's prices _ cheaper than they were in the 1950s when adjusted for inflation _ through the year 2010.

We can continue snapping up Chevy Suburbans without going bankrupt at the pump. And we can put off fretting about things like alternative fuels and hand-pushed lawn mowers.

So what if the U.S. imports 8-million barrels of oil a day out of the 20-million it consumes? The stuff is cheap _ dirt cheap.

Before we celebrate, though, let's consider a place where much of the world's black syrup comes from. What about Saudi Arabia, the world's largest oil producer?

The size of the U.S. east of the Mississippi, Saudi Arabia sits on 25 percent of the world's proven oil reserves _ 260-billion barrels. Yet for all of its strategic importance, we haven't heard that much about this mysterious place since the oil shocks of the early 1980s.

What might happen to this critically important country if oil prices are flat or decline during the next 15 years?

Back in 1981, it was as if the whole of Saudi Arabia _ all 10-million of the nation's inhabitants _ had won the lottery. The gross national product reached $16,010 per resident that year, up from $2,130 in 1973.

Saudis began receiving unlimited free telephone service and free medical care. Water, electricity, gasoline and domestic air fares were subsidized by the government. Each Saudi prince got a minimum monthly allowance of $20,000, even as the number of princes swelled to 6,000. King Fahd bought scores of tanks, missiles and planes.

At the time, Western scholars proclaimed that a permanent shift in the world's wealth was underway. Oil would soar to $100 a barrel, and we, who import half our oil, would be forced to drive vehicles the size of bumper cars.

The take on Saudi Arabia: incredibly rich, incredibly stable (because the royal family was in complete charge), a huge ally of the United States (our most valuable ally in the Middle East), and soon to be our largest creditor.

Winning the lottery isn't always a blessing. If you're a self-made entrepreneur who's put a business together brick by brick, friends and relatives don't necessarily assume they deserve a share of the spoils.

But work a modest job, win $20-million in the lottery, and the world feels as though it's as entitled to your oysters as you are. After all, you didn't sweat for the money, did you?

All of King Fahd's friends and family arrived with their hands out. The 6,000 princes (a bunch of whom were unemployed) had wives and children, aunts and uncles, nieces and nephews. Could Fahd forget that King Faisal had been assassinated by a nephew in 1975?

There was so much money it was easy to try to appease all of the demands for handouts _ and for more than 12 years, Saudi Arabia has run a budget deficit trying to meet those demands.

Forgotten in the hysteria over hydrocarbon, however, were the laws of supply and demand. Westerners began to drive smaller cars, adjust their thermostats, and buy energy efficient appliances. So the demand for oil slowed.

Meanwhile, high prices triggered an exploration and drilling boom. Supply increased. There was only one possible outcome: lower prices.

Now, 15 years later, the pressure on Saudi Arabia is severe. Per capita GNP is less than half of what it was in 1981. The water shortage is a disaster in the making.

According to Said K. Aburish's The Rise, Corruption and Coming Fall of the House of Saud, the kingdom's real international debt, including off-balance sheet items, now totals more than $60-billion. At the rate Saudi Arabia is sinking into the sand, that figure could rise to $100-billion by 1997.

To my amazement, even the religious ulemas, long silent, have begun to protest the corrupt and profligate ways of the monarch and his huge and overgrowing family. They were particularly galled in 1987 when Fahd gave $300-million in spending money to his 14-year-old son.

To service its debt, Saudi Arabia must now do what it and many other nations in the Organization of Petroleum Exporting Countries don't want to do _ pump more oil at ever-declining prices, thereby creating more supply, which will yet again drive down prices.

To keep their restless societies from exploding and to pay their international debts, these countries can't afford not to pump all the oil they can sell _ and yet they can't afford to pump much more, either.

We tend to think of Saudi Arabia's neighbors as the greatest threat to the kingdom's stability: Yemen, Bahrain, Iran, and Iraq. But it is really other Saudis who are most dangerous.

From a safe base in London, Arabian dissidents hurl bricks at the regime they hate. Meanwhile, Islamic fundamentalists at home cannot forgive the king for embracing anything Western.

A third group, the enlightened, modern Muslims, are angry because they want a Western-style democracy.

King Fahd sits _ once again _ atop the world's largest family business. Yet it is a business in disarray _ one that must now figure out how to divvy up a shrinking pie.

The man himself is known to be terminally lazy _ he sometimes doesn't look at urgent state papers for months on end _ and he is widely recognized as a drunk, a womanizer, a gambler, and a man greedy for yet more billions.

The most dangerous internal threats are probably the princes.

Since the death of Fahd's father, Ibn Saud, in 1953, the kingdom has had four of his sons as rulers. Now, doubtless bowing to internal pressure, the 74-year-old Fahd has declared that his successor need not be his 72-year-old half-brother; rather, the best prince should be chosen.

The race is open, wide-open. And a wide-open race in Saudi Arabia may eventually come to mean that anything goes.

So, here's the picture: Despite all that oil, the Saudis are running out of money.

The Shi'ite minority shares little of the honey pot and is increasingly aggravated over the House of Saud's greedy royal scheme. As the noose tightens around their throats, the Shi'ites realize their Islamic birthright has been kept from them.

What follows for the rest of us if Saudi Arabia collapses from a civil rebellion?

We in the U.S. would have a big problem. We use 25 percent of all the oil produced in the world. When Saudi Arabia is in flames, can we send troops to the region around Mecca, Islam's holiest site? Very unlikely.

Suppose Iran or Iraq joins the fray? Fighting a war against Iran and Iraq will be a lot more difficult than was fighting Iraq over Kuwait on a limited front.

A clever rebel will marry dissatisfaction over the corruption and high living of the extended royal family with the supposed desecration of holy sites, such as Mecca and Medina.

These holy sites will make great cover for all kinds of mischief. The United States will never be easily able to send troops to defend the holy cities of Islam against outraged Muslims.

In Bahrain, next door to Saudi Arabia, riots broke out last year, and in Qatar, also next door, the government changed when a sheik overthrew his father. Both are oil-rich principalities.

One rebellion might be a fluke, but two show a pattern: Expectations were aroused when people floated on vast sums of money.

Those vast sums have now dried up, and the oceans of money won't rise again until the current world order is so disrupted that oil shortages cause prices to soar.

I can't imagine that a Saudi Arabian revolution will be a smooth, bloodless takeover. Oil production will most likely fall in the process. Indeed, the oil fields might be a prime target during the struggle, as we saw in Kuwait.

So what will happen? I know what won't happen. The United Nations' prediction that the supply and the price of oil will be stable for the next 15 years will not come to pass.

Historically, there are ups and downs in the financial markets, whether it's stocks or bonds or commodities. Except for the artificially rigged price of gold from 1935 to 1970, no commodity has ever been stable or bearish for 30 years.

Bet on it: The price of oil will again be volatile. Something will happen to upset the world's delicate supply-and-demand balance.

We, who are so dependent on imports for our oil, should be attentive to the ragged Tent of Saud, whose skirts are flapping dangerously in the first gusts of a harsh desert windstorm.

Jim Rogers teaches finance at Columbia University and appears on CNBC, where he comments on the interaction of geography, politics and economics.

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