How Much to Pay the OPEC Piper?

If the 1974-75 recession conferred any small compensatory blessing on the industrialized world, it was a respite from the energy crisis. Shortages of oil gave way to a worldwide glut, and prices stabilized. But consuming countries failed to use the lull to start any significant oil-conservation programs, or to develop alternative sources of energy rapidly enough. Indeed, they have grown even more dependent on the Organization of Petroleum Exporting Countries; the U.S., for example, now imports about 40% of its oil, v. 29% before the time of the Arab embargo in 1973. Now, the consuming countries are about to pay the OPEC piper for their neglect. In mid-December, oil ministers of OPEC'S 13 member nations will gather in Qatar. "Are we going to hike our prices?" asks Iran's Hamid Zaheri, OPEC spokesman. His answer: yes. The only real question is how much.

The Tab. U.S. and foreign experts who convened at the University of Colorado's recent energy conference in Boulder, fully expect that the current price of $11.51 per bbl. (for low-sulfur crude at the Persian Gulf) will rise anywhere from 10% to 20%. As OPEC members see it, the industrialized nations can well afford the tab. The world recession seems to have largely lifted, and crude oil sales are rising as a result. Tanker charters have emerged from the doldrums, as top customers have scrambled to stock up on crude before the price rises again, often paying a 25-c- or 30-c- premium on each extra barrel.

Some OPEC members are pushing for as hefty a price increase as they can get away with. Venezuela's Minister of Mines and Hydrocarbons, Valentin Hernandez, has already called for a 25% oil price boost, and Iran's Shah Mohammed Reza Pahlavi came out for at least a 15% price increase. Both countries want the additional revenues so they can press ahead with their ambitious plans for industrialization.

There are many counterbalancing forces. One is the stance of Saudi Arabia, which has by far the world's largest known oil reserves. Though they could produce 11.8 million bbl. of crude a day, the Saudis are limiting daily output to 8.5 million bbl. This hold-down allows other OPEC members to produce at capacity without causing so great a glut :? as to push prices down. As a result, cartel members must give great weight to Saudi views, and the Saudis have consistently talked moderation. At the cartel's last meeting in Bali in May, their A refusal to raise prices at all effectively determined OPEC policy. At the December meeting, significantly, they have pledged to use their influence to keep the increase small.

Price Jump. Also, OPEC'S stated justification for a price boost is that it must maintain favorable "terms of trade" --that is, catch up with inflation in the industrial world, so that the selling price of a barrel of crude will buy as large a quantity of Western imports as it did in, say, early 1974. To oil consumers that argument seems extremely specious: the early 1974 terms of trade were achieved after a 400% jump in oil prices, and that leap caused no small part of the Western inflation that OPEC complains about. Even so, John Lichtblau director of the U.S. Petroleum Industry Research Foundation, contends that a 3% to 7.5% rise in oil prices would give OPEC members as much import-purchasing power as they have ever had. OPEC statisticians, to be sure, may see it differently. Lichtblau's figures, for example, do not include boosts in the prices of the Western military hardware that some OPEC nations have been buying heavily.

Data Resources, Inc., a Lexington Mass., consulting firm, has worked out-what impact oil-price rises of varying sizes would have on the U.S. economy Its computer studies indicate that a 10% hike would have only a "marginal" effect, because the nation still has price controls on almost all of the oil that it produces. A 25% boost would lower real gross national product by .7%, or $9.1 billion, by the end of 1978--enough to slow the recovery measurably.

Industrial nations with faltering economies--especially Britain and Italy --and all the developing countries would be much harder hit. To pay their oil bills, they might well have to divert money from productive investments, thus increasing inflationary pressures and hurting their efforts to reduce unemployment. The psychological shock could be serious too. Says Economist Paul H. Frankel of London's Petroleum Economics Ltd.: "It is not at all certain that the world recovery is fully established. If the global economy is beginning to move down instead of up, OPEC'S price rise could be a critical factor aggravating that trend."

Western economists hope that the oil cartel is aware of all this and will not take the risk of triggering another world recession. Says one expert: "OPEC members have realized that their rapidly expanding economies depend on the industrial world." The betting right now is for a 10% rise in the price of oil--which would, ironically enough, elicit a sigh of relief from all the nations that will have to pay the growing fuel bill.

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