Round 1 to the Saudis

OIL Round 1 to the Saudis

In the bitter scrap that pits Saudi Arabia and the United Arab Emirates against the eleven other members of the Organization of Petroleum Exporting Countries, it is far too early to predict the ultimate winners. But so far, the minority of two seems to be ahead. The Saudis appear to be attracting enough new customers to force their rivals into production cutbacks and price fiddling.

The schism started a month ago at an OPEC price-setting conference in Qatar, when Saudi Oil Minister Ahmed Zaki Yamani and his allies in the Emirates refused to go along with the majority's demand for a 10% hike on Jan. 1, to be followed by a further 5% hike at midyear. The Saudis and the U.A.E. limited their increase to 5% for the full year. Thus, for the first time since OPEC began quintupling petroleum prices in late 1973, the oil cartel split into opposing camps. In order to hold down prices, the Saudis, who are OPEC'S largest producer (8.5 million bbl. per day) and the possessor of the world's largest proven reserves (151.8 billion bbl.), threatened to increase production in order to lure customers away from their higher-priced rivals. So far, there are these signs that the Saudi strategy is working:

> Iran, OPEC'S second largest producer (5.7 million bbl. per day), conceded last week that it already has lost nearly half ite orders from independent oil companies, which unlike some of the big multinational concerns are not bound by long-term contracts. As a result, Iran expects total sales in 1977 to decline about 10% below original predictions, and will cut production accordingly. Venting their wrath, the Iranians warned that companies reducing purchases would be placed on an OPEC blacklist and presumably denied deliveries in the event of future scarcities.

> Kuwait, the fourth largest OPEC producer (2 million bbl. per day), conceded that its production is running below normal. Many of Kuwait's customers obviously were shifting their orders to Saudi Arabia, which produces the same heavy-grade heating oil that has been the mainstay of Kuwaiti petroleum exports.

> Indonesia has in effect failed to post the immediate 10% increase that it voted for in Qatar. Instead, the Indonesians have increased prices less than 6% on a grade of crude that accounts for more than half the country's output. The motivation seemed to be a desire not to tempt Japan--the buyer of most of Indonesia's oil--to turn to Saudi Arabia for oil. Said one official of the Mining Ministry: "What is the fun of fixing high prices if the Indonesian crude subsequently is not sold out?"

The real test of oil prices will not come for two or three more months. Then the big international oil companies will have sold off the huge stockpiles of oil that they bought in anticipation of an OPEC increase, and will begin scrambling to buy more. Exxon has stated that it intends to market more low-priced Saudi oil in the West and will refine much of it in its huge complex on the island of Aruba, off the coast of Venezuela, which until now has processed local crude almost exclusively. Whether the Saudis and Emirates can and will increase output enough to satisfy demand cannot be judged now. But Round 1 clearly has gone to Yamani & Co.

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