Unity Against a Rat Race

As early as 1941 FORTUNE described Walter Levy as "a distinguished authority on world oil," and his eminence has only increased over the decades. He researched Nazi oil targets for the U.S. Office of Strategic Services in World War II, later directed the State Department's oil intelligence operations. Now Levy, 67, heads his own Manhattan-based consulting firm and has acted as oil adviser to every Administration since Truman's. Speaking at last week's TIME conference on the Middle East, he gave a sobering energy message. Excerpts:

Even before the Iranian revolution, the problem of oil supply and demand was a difficult one for the importing countries. There was just no way known to us to cover demand in the mid-1980s from supplies that would be physically, not to mention politically, available.

The OPEC countries have produced what we needed, allowing us to waste oil and allowing them to waste revenues on development programs that, to a very considerable extent, are futile. These programs will not provide economic independence when the oil begins to peter out.

The oil-exporting countries have become aware that it no longer serves their interests just to produce what we need. Sooner or later, maybe sooner because of the events in Iran, they will decide that they are better off slowing up development efforts. They will pump less oil because they will need less revenues.

We have not yet experienced supply shortages, but they are coming; they will be tough. Even in the second half of this year we may have severe problems covering our demand. But, although the supply problems are urgent, important and difficult, they can be handled by rationing and, if necessary, mandatory allocations. They are not as threatening as the inflation, balance of payments and overall financial problems resulting from the enormous increases in the spot price of oil.

Small and big traders and middlemen are charging huge spot-market premiums over and above the OPEC price. Because profits can reach billions a year, you have to expect that the spot trade will increase by hook or crook, and I mean the words literally. When OPEC sees how much money is made on its oil by in-between traders, the producing countries will have no political choice but to increase their own prices and divert more oil to the spot market. That was clear from the moment the Iranian crisis broke. Our Government was made well aware of it, but nothing was done.

As the shortages continue and demand remains high, the spot premium will simply be imposed on the higher posted cartel price. That would mean we will have, sooner or later, another OPEC increase following the first increase. And the higher OPEC price will not increase the supply of oil in world markets by one single barrel.

What do you do with a problem that will affect the whole world economy? There is nothing I would like more than to be proved wrong, but I believe we are in a rat race against increasing crude and product prices of a massive order. The impact could be much more serious than any 5% supply shortage.

I have reluctantly concluded that the only way to deal with this is for the importing nations to unite in terms of not permitting crude that is traded at premiums to enter their countries. In short, we should prohibit the import of any oil or oil products that sell above the official posted prices. Perhaps this prohibition should be coupled with an international allocation scheme. This is a proposal that will appeal to nobody because it means more Government in business. But what is at stake is the economic welfare of all our countries. When that is at stake, I believe that even though what one suggests should be done looks difficult--if not impossible --one has no right not to try.

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