Unsheathing the Political Weapon

After long muttering vaguely about using their abundant oil as a "political weapon," the newly unified Arab leaders finally unsheathed it last week. They vowed to cut the oil production on which the fuel-short West depends and to raise prices sharply. That oil squeeze could easily lead to cold homes, hospitals and schools, shuttered factories, slower travel, brownouts, consumer rationing, aggravated inflation and even worsened air pollution in the U.S., Europe and Japan.

The Arabs took three steps:

1) Ten Arab countries meeting in Kuwait decided that each month from now on they will reduce oil output at least 5% below the preceding month. The cutbacks will continue, they said, "until an Israeli withdrawal is completed, and until the restoration of the legal rights of the Palestinian people."

2) King Feisal of Saudi Arabia, the biggest Mideast producer, at first decreed a 10% cut in output. But by week's end, as the war seemed to be going against the Arabs, he announced a total ban on oil shipments to the U.S. Presently, 3.4% of the crude oil consumed daily by the U.S. comes from Saudi Arabia. Libya, Algeria and Abu Dhabi also announced embargos.

3) Six Persian Gulf oil countries lifted the posted price of crude oil (a theoretical figure on which royalties and taxes are based) by a stunning 70%, to $5.11 per bbl. It will keep Arab oil revenues rising--helping to pay for the war against Israel--even as fewer barrels are shipped out. It will also force Americans, Europeans and Japanese to pay as much as 5-c- per gal. more for gasoline, heating oil and other products.

Parts of the Arab oil strategy are still unclear. The communique from Kuwait, for instance, left deliberately vague the political conditions under which the 5%-a-month production cuts would be restored; it made no attempt to define "Palestinian rights." Further, the Arabs promised to slash shipments only to "unfriendly" countries. That pledge is impossible to carry out because the Arabs have little control over where oil goes once it leaves their ports.

Some Western diplomats and oilmen thought that the production cuts were about the most modest that the Arabs could have agreed on. In fact, before settling on the 5%-a-month formula, the Kuwait conference rejected proposals for a three-month total shut-off of oil exports and for an immediate 50% reduction in production.

None of that is really reassuring, though; the Arabs essentially have the West over a 42-gal. oil barrel. World oil use will more than double during the 1970s. Slaking that intense thirst requires continual swift increases in output, and there is only one place they can come from. The desert sands of the Arab nations hold at least 300 billion bbl. of easily recoverable oil, or 60% of the proven reserves in the non-Communist world. Merely by increasing production more slowly than the West desires--let alone reducing it--the Arabs could cause considerable discomfort.

The severity of the blow will vary widely from region to region:

THE U.S. superficially would seem well able to withstand a sellers' boycott. The nation now imports about a third of the 17 million bbl. of oil it burns each day, but no more than 11% comes from the Arab countries. Cutbacks could prompt other major suppliers to reduce sales to the U.S. in order to conserve supplies in a tight global market. Even so, an eventual 25% slice in Arab output would cut U.S. supply about 2,000,000 bbl. a day.

Unfortunately, those barrels are critical. The U.S. is running short of oil and needs every drop it can get. Airlines are discussing scheduling fewer flights. Democratic Senator Henry Jackson of Washington has introduced a bill that would, among other things, lower the speed limits on interstate highways to 50 m.p.h. or less and force some utilities to convert from oil to higher-polluting coal. The most chilling aspect of an oil embargo--literally--is that the U.S. might be unable to stay warm this winter. The Interior Department figures that the nation will have to import 650,000 bbl. of heating oil a day to supply adequate heat, but Economist Lawrence Goldstein of the Petroleum Industry Research Foundation fears that other countries will sell only 350,000 bbl. a day. White House Aide Melvin Laird offers this advice: "I'd buy a sweater."

WESTERN EUROPE imports 72% of its oil from the Arab countries, and it has even fewer alternative sources than the U.S. Price increases could add $1 billion to Britain's trade deficit next year. Supply shortages will take longer to show up--about a month's supply of Arab oil is headed for European ports in tankers already at sea--but eventually shortages are a real threat. Giovanni Theodoli, president of Chevron Oil Italiana, fears a 20% drop in Italian crude-oil imports over the next six months, and worries that "we are not going to have enough energy to support our industry." The British government already has printed ration books and stacked them in post offices.

JAPAN has to import almost all of its oil, 82% from the Mideast. Surprisingly, the Japanese are fairly calm, largely because they believe that they can negotiate special deals with the Arabs. Perhaps they can, but the deals would be swung at the expense of U.S. and European supplies, and of higher prices for the Japanese consumer.

All this assumes that the Arabs actually carry out their threats. Before last week's moves, U.S. Energy Expert Robert Hunter expressed skepticism that an Arab oil cutback would work, even as part of a war against Israel, because "every oil producer would be watching every other one to see which was trying to carve out a larger place in long-term markets by violating a proclaimed embargo."

In the Arab nations the West is facing something new: a group of countries that do not need the money that they could get by expanding output. By 1980 the Arab countries will be getting at least $50 billion a year for their oil. The Arabs believe, with some justice, that the price of oil can go only one way--up. Oil kept in the ground is thus a kind of savings account. It will be worth more in, say, 1976 than it is today.

What can the West do to counter the Arab oil weapon? There has been some talk of freezing the billions of dollars of Arab accounts in Western banks. M.I.T. Professor Morris Adelman, a leading oil expert, goes so far as to advocate a threat of military occupation of some Arab oil fields. Much more constructively, the West could form a consumers' cooperative that would allocate supplies among nations. The U.S. has made some attempts in this direction, but they have not got far. There is, in fact, a strong danger that the exact opposite will happen: consuming countries would bid against each other for available Arab oil, starting a kind of worldwide auction.

Oil consumers could also greatly accelerate research into ways of efficiently developing non-Arab sources of fuel. The Rocky Mountain shale and Athabascan tar sands of Canada may hold more oil than all the sands of the Arab deserts; some estimates run as high as 1.5 trillion bbl. Liquefication and gasification of coal could provide a low-polluting way of using that superabundant fuel. But the capital investment required is staggering: $5 billion to $7 billion to get 1,000,000 bbl. of oil a day out of shale or tar sands. Senator Jackson has been advocating a U.S. emergency research effort similar to the Manhattan Project that produced the atomic bomb. James Akins, the newly appointed U.S. Ambassador to Saudi Arabia, goes further to suggest a supranational authority that would coordinate research among all the oil-consuming countries.

Both ideas are sound. Indeed, by prompting the consuming nations to investigate seriously new sources of energy, and to rethink their profligate energy-using habits, the Arabs could eventually do the West a favor. But that is for the very long run; meanwhile, the U.S. and other oil-consuming countries had best prepare for a real squeeze.

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