OPEC's Dangerous Game

On the eve of Carter's energy message, another oil price shocker

It could not have come at a more delicate time. As the oil ministers of the 13 members of the Organization of Petroleum Exporting Countries gathered in Geneva for a specially scheduled policy review session, the U.S. President was not only wrapping up an Egyptian-Israeli peace agreement that is bitterly opposed in much of the Arab world, but he was also preparing to announce some energy measures that would stress increased domestic oil production to reduce the nation's perilous dependence on the OPEC cartel. Throughout the industrialized world, meanwhile, governments were struggling to keep alive a recovery from a sharp recession that in large part had been caused by the big jump in oil prices since 1973. In this atmosphere, the cartel's decision was a shocker.

After two days of stormy meetings, the OPEC ministers agreed to raise their prices for the second time in a little more than three months--on this occasion by 9%, bringing the cost of a barrel of the marker crude, Saudi Arabian light oil, to $14.55 per bbl. Though that alone would fatten OPEC'S already bulging bank accounts with an additional $20 billion annually from the U.S., Western Europe and Japan, as well as more foreign exchange from the have-not nations of the Third World, the cartel also moved to allow individual members to stick on whatever price-gouging surcharges and premiums they think they can get away with. That made official policy a tactic that many producing countries have been following all winter anyway. Finally, as if to add insult to financial injury, the OPEC representatives went out of their way to try to put the blame for the increase on the industrial countries, which they chide for not curbing both energy consumption and the inflation that is eroding the value of their petrodollars.

One of the most vocal blame layers at the Geneva meeting was Saudi Arabia's Oil Minister, Sheik Ahmed Zaki Yamani, whose country has long been regarded as OPEC's principal voice for pricing restraint. Indeed, the Saudis, along with the delegates from Ecuador, Gabon, the United Arab Emirates and other moderates, managed to temper the egregious price demands being made by the hardliners, including the Iraqis, Iranians, Libyans and Algerians, who came to Geneva calling for increases of as much as 20% to 30%. But Yamani declared that his country's role as a "moderate" may not last much longer. Hurling a rhetorical threat at the oil-consuming countries at a press conference at the end of the OPEC meeting, Yamani said bluntly: "It is up to you now. Saudi Arabia can do nothing more for the West. Americans can do a lot, but unless they act, the world will have another price increase by June."

The cartel, which had raised its official price by 5% in January, achieved its new 9% boost by putting into effect on April 1 a series of phased increases that had been planned for the rest of 1979. There were worrisome signs that the OPEC countries, including Saudi Arabia, Iraq and other producers, were determined to make their new price offensive stick by limiting production now that Iranian output is once again climbing. Bragged Iraq's fiery Oil Minister, Tayeh Abdul-Karim: "No one country can affect this market now. As Iran's production goes up again, ours will go down."

The bravado was quickly underscored by a rash of surcharge announcements. Algeria and Libya both added $4-per-bbl. premiums to their much-in-demand low-sulfur oil, as did Nigeria, a nation that has made a practice of haphazardly squandering its petrodollars almost as blithely as Americans waste oil. Kuwait, Iran and Venezuela tacked on $1.20-per-bbl. surcharges. Mexico, though not an OPEC member, also got in on the gouging game; it added 73-c- per bbl.

One measure of just how helpless the U.S. has come to think of itself in dealings with OPEC was that investors seemed relieved that the official increase was "only" 9%. When that news reached Wall Street, stocks surged in their best one-day rally in five months. In Washington, the State Department called the rise "untimely and unjustified," and let it go at that. About the only Washington official to speak out strongly was Senator Henry Jackson. Besides showing OPEC's "greed," he said, the price boost reflected "a punitive doctrine" by Arab oil states eager to condemn the U.S. for acting as midwife to the Egyptian-Israeli peace treaty.

OPEC'S price rises do heavy damage. Third World countries that do not process oil will suffer grievously from slower growth, higher inflation and wider trade deficits. Similar penalties will be inflicted on Western Europe and Japan. The U.S., because it is the biggest customer for OPEC crude, will suffer the brunt of the latest increase. The effects will be felt just as signs of the long awaited economic slowdown are appearing.

The housing market has begun to weaken slightly, and auto sales are not moving quite so briskly as they did last autumn. Consumer spending has also begun to slow somewhat, yet inflation, which in February hit an average annual pace of more than 15%, continues unchecked. By Administration estimates, last week's rise in imported oil costs should add another one-quarter to one-half point to the rate.

That estimate may be much too low. Not only will the OPEC action add at least 2-c- to the already rising costs of gasoline, but as the price goes up, people will demand bigger paychecks from their employers. That will spread the increases through the whole economy, multiplying the impact. The latest OPEC boost will have a direct adverse effect on the nation's balance of payments. Last week the Commerce Department released some cheering figures showing that the trade deficit shrank in February to a 22-month low, in part because of a $700 million decline in oil imports from Iran. The OPEC increase, which could cost the economy as much as $1billion a month, will send the deficit bouncing right back up again.

More than almost anything else, the nation needs an energy program that can blunt the OPEC threat. The world simply cannot be presented with the continuing spectacle of its most powerful economy slipping into energy bondage to a handful of regimes that aim for one of history's most massive transfers of wealth from other countries. Nor should Americans tolerate complacent reassurances that everything will be all right if folks would just put on sweaters and drive at 55 m.p.h. What good is conservation if the cartel can make up for declines in demands by simply pushing up the price?

The way to beat OPEC is with an all-out program to increase domestic energy output. With abundant reserves of coal, tar sands, shale oil, natural gas and even forests and woodlands, the U.S. has a storehouse of energy that can last for centuries. Most important, the nation needs to expand its domestic petroleum output and the way to start is by dumping the Government's five-year-old hodgepodge of oil price controls. At a minimum, allowing U.S. crude prices to rise to world levels would help to discourage waste --though probably not as much as decontrol proponents contend.

The real benefit of decontrol is that it would generate perhaps as much as $15 billion annually in revenue that could be spent on drilling for oil in inaccessible places like the outer continental shelf, and on development of the costly technologies for extracting oil from tar and shale, and for coal gasification. Last week's atomic power plant accident in Pennsylvania will heighten objections to nuclear energy, and that will be yet another reason to speed the development of the nation's fossil-fuel resources.

Carter has all along urged higher domestic crude-oil prices, but when his first energy bill was gutted in Congress, he put the idea on hold. Now the need to act has grown too urgent to ignore, but just about any move would bring yet more inflation. As one top White House staff member told TIME Washington Correspondent Johanna McGeary last week: "It's a damn awful situation to be in."

Unfortunately, in it the President is. As McGeary reports: "Ever since his return from the Middle East, Carter has spent hour after hour poring over position papers and option memos prepared by his energy and economic advisers, trying to work out the most effective, least objectionable energy policy. At one point he grew so dismayed at the lack of politically and economically painless options open to him that he sent his staff back to rethink everything. They returned with the same proposals."

By week's end Carter had decided at long last to take the painful but necessary step of lifting price controls, which he has the administrative power to do when they come up for renewal next month. His likely method: bumping prices up sharply at first, then easing them more gradually to world levels by September 1981, when controls will have expired in any case. Full decontrol would add about 10-c- to the cost of gasoline at the pump.

The tough question now is how to make sure that the profits of decontrol are invested in increased production. Tight supplies worldwide are causing a surge in oil-company earnings, and decontrol will push them up even more. People hear endless pleas from the industry for decontrol, but they grow cynical when they see some of the most profitable corporations, like Mobil and Exxon, invest in department-store takeovers and the development of office products to compete with Xerox and IBM.

Carter rightly realizes that some tax on the profits of decontrol is needed. He wants part of the money to be returned to the oil companies for the specific purpose of plowing it into increased production and some of it to be set aside in a federally administered trust fund to finance development of alternative sources of energy by a wide variety of companies. In addition, a portion of the revenues would have to be returned to consumers to help cushion the shock of exploding fuel prices.

Carter tried and failed to persuade Congress to pass a somewhat similar tax two years ago. Now he is planning to ask all over again, but success is by no means assured.

Some officials are already talking about spending the revenues on things that have nothing to do with energy. One Treasury Department idea being examined by staffers on the House Ways and Means Committee is to use the proceeds to cut the size of the huge Social Security tax increases that Congress voted last year to go into effect beginning in 1981.

Whatever the ultimate shape of the package, the President and his advisers were having trouble right up to week's end just deciding how to present it. Carter's initial idea was to give a television address along the lines of the "moral equivalent of war" speech he made two years ago this month. But all that most Americans now remember of that occasion is that he called the nation to the energy barricades, then shrank from leading the fight. This time aides were urging him to choose a more subdued format. No matter where he speaks, Carter's audience will include not just the American people but the OPEC cartel. Until he presents an energy plan that sharply and permanently reduces the nation's dependence on foreign oil, OPEC will just grow richer and richer.

This file is automatically generated by a robot program, so viewer discretion is required.