The Battle of the Barrels Begins

"Traitor!" screamed the Iranian press. "Stooge for capitalism!" The target of that wrath, Saudi Arabian Oil Minister Ahmed Zaki Yamani, smoothly replied with just about the worst possible insult in the Islamic world. He implied that the eleven members of the Organization of Petroleum Exporting Countries, who have announced a two-stage increase of 15% in the world price of oil, v. the 5% increase posted by Saudi Arabia and the United Arab Emirates, are playing into the hands of Israel. Said Yamani: "Israel has an interest in higher prices because they push the West to find alternative sources [of energy] and to end its dependency on the Arabs."

No Harm. This was an astonishing exchange between members of the most successful cartel in world history, but by week's end tempers had cooled a bit. It became clear that the pricing rupture probably does not signal the end of OPEC. Yamani denied rumors that Saudi Arabia would quit the cartel, which would surely have meant its ruin. He also played down earlier threats that Saudi Arabia, already by far OPEC's biggest producer (8.4 million bbl. per day), would substantially expand output in order to undermine the higher prices of the opposing eleven. The radical Libyans, who are among the Saudis' bitterest rivals, were relieved. "At least, I expect they will not harm us," said Libyan Oil Minister Ezzedin Mabrouk.

Perhaps not, but the rupture remains. As of Jan. 1, a barrel of Saudi or Emirate crude will sell for $12.08; a barrel from the other eleven countries will cost $12.70, reflecting an immediate 10% boost (the eleven propose to tack on another 5% on July 1). The two-tier price works out to about an 8% increase in the average price of oil imported by major consuming nations--enough to put a drag on the global economy. French President Valery Giscard d'Estaing estimated that OPEC price boosts since 1973 have hit the French consumer as hard as a 50% hike in income taxes would have, and asked bitterly, "What would happen to a government that decided to increase income taxes 50% and then transferred the money to a foreign country?"

In fact, though, the new prices may not be felt by the world's consumers until spring. Reason: the big international oil companies piled up such huge inventories in anticipation of higher prices that they will be selling off much of the stored oil before they begin buying heavily again. Until then, the oil companies will be under pressure to hold prices to present levels for consumers. The West German government, for example, has forbidden oil companies to raise prices on stored petroleum. Meanwhile, world demand for OPEC oil will plunge so sharply--as much as 3 million to 4 million bbl. per day, guesses J. Wallace Hopkins, deputy executive director of the Paris-based International Energy Agency--as to make it difficult for the eleven to impose their new higher prices.

Once heavy buying does resume, no one really knows what will happen. The key will probably be how much extra oil importers can buy from Saudi Arabia and the Emirates. The Japanese, for example, hope to hold the average price increase on oil they import to 6.5% by switching orders to the lower-priced producers. The six major private oil companies in Japan are suggesting that they may delay scheduled sailings of supertankers to Iran and other high-priced countries in hopes of diverting them to Saudi Arabia or the Emirates.

But most international oil companies are tied by long-term contracts to particular supplying countries. Says Phillipe Laurance, an executive of Compagnie Franc,aise des Petroles: "It's difficult to stop buying oil from a country just because it charges higher prices. You may find out later on that you're going to need to buy from that country again."

Uncertain Future. Also, the amount of "free" oil is small. The Saudis sell only about 6.25% of their daily output on the open market. The bulk of their production is committed to four U.S. companies: Exxon, Texaco, Mobil and Chevron. They stand to benefit most from the two-tier system, but how much of the savings they will pass on to the U.S. consumer is unclear.

Most oil experts expect OPEC to re-establish a common price after its next scheduled meeting in July. But what price? One guess is that the majority eleven will forgo the additional 5% hike set for July, and the Saudis and the Emirates will move up from 5% to 10%. A minority view is that the eleven will be forced to cut their prices by such devices as discounts for crude with a high sulphur content, and the eventual increase will settle somewhere between 5% and 10%. Oilmen see only an outside chance of a price war between the Saudis and their OPEC colleagues--but that chance is strong enough to make the battle of the barrels over the next months a suspenseful struggle.

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