One year after the September 11 tragedies, when 15 of 19 airline hijackers came from Saudi Arabia, relations between the kingdom and the U.S. apparently remain intact. Some U.S. observers say it's out of mutual dependence. ("We need their oil, and the House of Saud needs our protection" is one oft-heard phrase.) The actual situation is significantly more complex, and survives because of continued cooperation between the two countries' governments and business leaders. "After more than five decades of a special U.S.-Saudi relationship, Saudi Arabia has not changed its vital relationship with the U.S.," says Judith Kipper, who directs both the Middle East Forum at the Council on Foreign Relations (CFR) and the Middle East program at the Center for Strategic and International Studies in Washington. "In fact, change in Saudi Arabia comes only rarely, and ever so cautiously as to be barely visible. "It is Americans who may be changing their outlook to finally view Saudi Arabia more realistically. Learning to look at Saudi Arabia and other key U.S. allies as they are, and not the way we might wish or imagine them to be, is critical to our national interest." The challenge rises from Saudi Arabia's having such a different system, culture and values that Americans often find difficult to understand and hard to accept. The relationship's strategic value, on the other hand, is crystal clear, she says. With about 25% of the world's oil reserves, Saudi Arabia repeatedly has tried to stabilize markets and prices. "Saudi Arabia's policy of maintaining spare production is based on a belief in the desirability and benefits of stable oil prices," observes Ali I. Al-Naimi, the kingdom's petroleum and natural resources minister. "Experience shows that energy markets are volatile by nature and maintaining price stability requires constantly sound management of the supply side of oil. This has been the case since Day One of the U.S. oil industry-an industry that experienced more than its share of boom and bust cycles. Oil price stability is necessary to encourage a continuous flow of investments into a high-risk business, where cost can vary greatly from region to region." Naimi is candid as he explains the basis for supporting stable world oil markets and prices: "The reason is to see to it that the industry is able to invest in many areas. And it's a selfish reason, from our perspective. We want the continued use of hydrocarbons to be propagated over time. If investments are not made, naturally, supplies will be shortchanged, and people will begin to look at alternative sources of energy. As possessors of the greatest hydrocarbon reserves in the world, we feel this would be somewhat disastrous for us." Alan P. Larson, U.S. undersecretary of state for economic, business and agricultural affairs, considers the kingdom a linchpin of supply reliability to world oil markets. "Saudi Arabia holds the world's largest oil reserves, and its oil policy reflects its own economic interests, which include maintaining the viability of oil as the world's leading fuel source well into the future." Referring to the National Energy Policy that the Bush administration issued last year, Larson said during a CFR conference on Saudi-U.S. energy and economic relations in April that the Saudis have invested in spare oil production capacity and diversified their export routes to both coasts of the country. He suggested that the investments help make Saudi Arabia an even more reliable oil supplier, and can be likened to an insurance policy for the world economy. Saudi Arabia has acted as a balancing producer for some time, noted ChevronTexaco Corp. chairman David J. O'Reilly at the same conference. "Its excess capacity recently had a moderating impact when markets were volatile, such as the weeks following September 11 and more recently, when Iraq announced that it would withhold oil exports for a month," he said. "Of course, no one would argue that diversity of oil supply is not important for every country that relies on oil imports. Multiple sources of oil are important for consuming countries. Diversity of supply means security of supply. "Nevertheless, the numbers speak for themselves. Saudi Arabia, with 260 billion barrels of reserves, possesses almost one quarter of the world's oil reserves and about 10 million barrels per day of production capacity. The world needs, and will continue to need, Saudi oil for a long time to come." The kingdom's state oil company, Saudi Aramco, is meeting its major 2002 objectives while operating in an extremely challenging global energy market, according to its midyear accountability report. "Operational excellence programs are contributing to shareholder value by resource management and strategic marketing initiatives. Innovative technologies and enhanced employee competencies continue to contribute to the company's competitive advantage. A new Innovation Initiative was launched recently to encourage employees to identify opportunities, create breakthroughs and find better ways to perform their responsibilities," the report states. Saudi Aramco also holds a 50% interest in Motiva LLC with Shell Oil Co., giving it an important presence in U.S. downstream oil markets from the Gulf Coast through the Southeast, Mid-South and Mid-Atlantic states to New England. Motiva's assets include four refineries with 825,000 barrels per day of total throughput capacity, approximately 4,800 Shell and 8,200 Texaco stations, and a network of terminals and pipelines. Saudi Aramco's involvement dates back to the mid-1980s, when it took a 50% interest in Star Enterprise LLC, which Texaco Inc. formed to operate its eastern U.S. refining and marketing business. Motiva was formed on a similar basis in 1998 when Shell Oil added its eastern U.S. downstream operations to the joint venture. Texaco divested its stake at the end of 2001 to satisfy Federal Trade Commission requirements as it merged with Chevron Corp. Others cite Saudi Arabia's efforts to attract more foreign investment in businesses beyond oil and gas. "The early involvement of the U.S. corporate sector in the development of our oil industry was at the heart of Saudi Arabia's rapid transformation into a bustling modern economy," says Ibrahim Al-Assaf, the kingdom's minister of finance and national economy. "This mutually beneficial relationship has since flourished into a major trading and investment partnership, built on a steadfast commitment to the free enterprise system." Establishment of the Saudi Arabian-U.S. Joint Commission on Economic Cooperation in June 1974 enhanced that relationship. "Thousands of Saudis have benefited from the commission's training and development programs. U.S. experts, recruited by the commission, also have provided us with substantial technical assistance in many areas," Assaf says. The U.S.-Saudi Arabian Business Council, which was established in 1994, has increased collaboration between the two countries' business sectors, making U.S. companies the largest foreign investors in the kingdom. "For good or bad, Riyadh now probably has as many McDonalds, Pizza Huts and other fast-food chains as you will see in any U.S. city," says Assaf. At the same time, the U.S. has attracted substantial Saudi investment, with some estimates placing it in the hundreds of billions of dollars. "The joint commission's efforts, along with the contributions of the thousands of Saudi graduates from U.S. universities, have been instrumental in transferring not only knowledge and skills, but also U.S. work practices to Saudi Arabia," says Assaf. "In time, this has led to the adoption of U.S. production technology and manufacturing techniques in the private sector. Equally important is the prevailing business culture that emulates the focus of major U.S. companies on efficiency, effectiveness and competitiveness." The Saudi-U.S. relationship changed from one of shared dependence into a shared partnership during the last half of the last century, maintains Naimi. The transfer of the former Arabian American Oil Co.'s assets from the U.S. partners to the Saudi government was timely and orderly, and had none of the rancor that characterized other countries' nationalization of private-company assets in the 1960s and 1970s, he says. Today, Saudi Arabia is undertaking an ambitious plan to restructure its economy. "This massive effort will not only bring strong economic growth in the coming years, but also will create excellent investment opportunities, including those from the U.S." These include four major initiatives involving energy: • The gas initiative, where eight multinational oil companies will invest more than $25 billion during the next five years in gas exploration and production, as well as power generation, desalination and chemical facilities;' • Creation of a holding company by the petroleum and mineral resources ministry with private Saudi investors to provide support industries and services to petroleum and energy companies in Saudi Arabia and other countries. "This new holding company will provide the umbrella under which subsidiaries will be created to provide opportunities for international companies to invest in joint ventures with Saudi companies," says Naimi. • Expanding gas supplies for petrochemical production, with a strategy of using low feedstock prices to attract private capital to expand the kingdom's petrochemical industry. "To realize this goal, we are building the necessary infrastructure to move gas from the Eastern Province fields, where it's produced, to industrial sites elsewhere in the kingdom." • And an initiative to link Saudi Arabia's mineral resources with its hydrocarbons. One of the most ambitious plans involves building a 1,100-mile railroad into the northern part of the kingdom from Riyadh in the central part of the country, which will be connected with existing tracks to the Dammam on the Arabian Gulf. The railroad will bring phosphate deposits from the north, which has some of the world's largest deposits, to plants along the Persian Gulf, which will produce fertilizer for export. ChevronTexaco's O'Reilly suggests it also would be important for the economy to become more diverse and attract investments in other businesses and industries from both Saudi and non-Saudi sources. "Saudi Arabia has a well-documented high birth rate and a rapidly growing young population entering the work force," he says. "Economic diversification is, and will be, critical. Saudi Arabia will need more labor-intensive, knowledge-intensive and service-business growth." In recent years, the kingdom has taken some positive steps to improve the business climate, he adds. "Continuing these reforms is an essential dimension to its economic health, and they should provide U.S. companies outside the energy sector with new investment opportunities not available in the past." Kipper cautions, however, that sharing a petroleum strategy does not always translate to other areas of concern or make Saudis more willing to give Americans a wider glimpse into their society. The desert kingdom is a tribal society that follows a strict and extremely conservative interpretation of the Koran, she says. "Tradition and the critical social role of the extended family is the glue that holds it all together," observes Kipper. "Many Saudi men and women are absolutely bicultural, which appears contradictory or even hypocritical to some Americans. They may be educated in the U.S. or Europe, own homes, raise children and live a totally Western lifestyle when they are away from the kingdom. What is truly remarkable is that most seem to have no problems adjusting when they return to Saudi Arabia." Although its per capita income jumped to about $16,000 annually following the Arab oil embargo in 1973-74, it has dropped to about $6,000 in the time since, Kipper says. Part of this is because Saudi Arabia's population doubles about every 20 years, with seven being the average number of children per married woman. Approximately half of Saudi Arabia's population is under the age of 18. While Kipper considers threats to the government's stability exaggerated, she adds that the events of September 11 raise serious and unavoidable questions for the Saudis about the evolution of their society. "How to be a modern Islamic state in a globalized world is what the Saudis have to ask themselves. Serious domestic challenges in the kingdom are exposed now to a world asking what Saudi Arabia is going to do about them."