What It Will Cost the U.S.

Jobless may rise by 1.4 million

It was supposed to be the price rise that would somehow stabilize the chaotically climbing cost of petroleum on world markets. So much for wishful thinking. Instead of a single, stable price for crude, the 13-nation Organization of Petroleum Exporting Countries last week gave the oil-thirsting world its worst petro-gouging in more than five years. Rich and poor alike, the oil-importing nations are still struggling to recover from the recession that followed OPEC's huge price rises of 1973 and 1974. The latest assault, which is expected to send an incredible $182 billion cascading into the cartel's overflowing coffers by year's end, is almost guaranteed to plunge even the strongest economies into an oil-greased slide all over again.

Inflation, already at double-digit levels in the U.S. and climbing rapidly in many other industrial nations, will go still higher. Economic growth will slow to at best a crawl, and unemployment will grow, in the U.S. by perhaps as much as 1.4 million in the next twelve months. In short, for the second time in a decade, the threat of an OPEC-induced global slump is imminent.

Last week's action, the second OPEC money grab in only three months, creates an official split in the cartel's price structure. After three days of closed-door bickering between avaricious hard-liners like Iran and Algeria and so-called moderates like Saudi Arabia and tiny Qatar, the cartel finally settled on its two-tier pricing "compromise." In theory, it would let members' consciences be their guide in deciding just how much money to charge--anywhere from $18 to $23.50 per bbl. In practice, the scheme seems little more than a device for institutionalizing chaos, which in recent weeks has sent the price of oil leaping to as much as two and even three times the officially quoted rate of $14.55 per bbl. After the cartel's communique was read to reporters at the Hotel Inter-Continental, and delegates had rushed to their gas-guzzling limousines parked at curbside, Saudi Arabia's natty oil ministers Sheik Ahmed Zaki Yamani, said, "I don't blame you if you are confused."

The new system technically lifts the official, or "bench mark," price of crude to a record $18 per bbl., up fully 42% since the first of the year. That is the price that Saudi Arabia, Qatar and the United Arab Emirates will charge. The other ten OPEC members, which account for almost two-thirds of the cartel's exports, will sell at $20 per bbl. Reason: most are already charging an average of $17.50 per bbl. as a result of premiums and surcharges, and a rise of a mere 500 per bbl. hardly seemed worth the trouble.

Whatever the new base level, all members will also get to charge so-called differential premiums of up to $3.50 per bbl. The differentials, which traditionally have been set at no more than a small fraction of the base price, are supposed to be applied solely to specially attractive crudes, such as Nigeria's and Libya's low-sulfur oil, which is now much in demand for refining into gasoline. Veteran observers of past OPEC behavior expect the differentials soon to be turning up as part of the price for almost any grade of cartel crude. As a portent of things to come, the Algerians announced that they would immediately start charging the top dollar possible $23.50.

Though the cartel made a halfhearted effort to pass off the new price structure as a ceiling on the rising cost of crude, not even the delegates seemed to believe it. With world demand exceeding supply, nations appear willing to pay virtually any price. Said one Indonesian delegate: "We're faced with a shortage of oil that seems irreversible. It is hard to believe that prices can be kept down." The former U.S. Ambassador to Saudi Arabia, James Akins, now a private oil-industry consultant, asserts, "The first time that any oil-importing nation offers a price above the ceilings OPEC will sell."

OPEC adds injury to insult when hardliners like Iran and Libya keep threatening to cut back production in order to prop up prices. Remarked one middle-of-the-road delegate: "You just cannot believe how greedy these Iranians have become. They think they have invented the wheel." One of the cartel's greediest leaders, Libya's strongman, Colonel Muammar Gaddafi, touched off a mini-panic on Wall Street at week's end. An Arab magazine quoted him as threatening to halt Libyan oil exports for up to four years and appealing to other oil producers to do the same. Said he: "The more we store the oil in our ground, the better it will be for us."

If Libya, which pumps some 2 million bbl. daily and is the cartel's fifth largest producer, were to take such a step, the additional squeeze on world petroleum supplies would be devastating. Even though Gaddafi has made bombastic threats before and never carried them out, the shares of Occidental Petroleum and Marathon Oil, both big users of Libyan crude, came under such intense selling pressure on the New York Stock Exchange that trading had to be briefly halted. Only later was it learned that the irresponsible threat was probably inspired by nothing more than pique. Earlier in June, a U.S. State Department mission had turned down a Libyan offer for a long-term supply of petroleum in return for a U.S. Government pledge to cut off arms sales to Gaddafi's much feared Egyptian opponent, Anwar Sadat.

In Geneva, Yamani did his best to persuade the cartel to hold the line at $18 per bbl. At one point, the Harvard-educated sheik grew so frustrated with the demands of Iran, Libya and Algeria, which were calling for a base price of at least $25 "to $26 per bbl., that he threatened to walk out of the conference. That led OPEC Chairman Mani Said Utaiba, of the United Arab Emirates, to convene a rump meeting in his private upstairs suite. It was during that gathering, at which Utaiba served dates from his home country and Arab spiced tea, that the compromise was struck.

The deal showed the weakening hand of the Saudis in cartel policy. A variety of factors keep that country from fully tapping its reserves to slow the price spiral:

P: The upheaval in neighboring Iran, which the Saudi royal family attributes to the social unrest and rising expectations produced by the Shah's eagerness to exploit his own nation's petroleum reserves to the maximum.

P: The continuing fury of Arab states at the U.S.'s key role in arranging a separate peace between Egypt and Israel.

P: The fact that the maturing Saudi fields can no longer be operated at full throttle without risking damage to the underlying geologic strata.

Yamani has said several times in recent weeks that Saudi Arabia might well be willing to boost its output, now at 8.5 million bbl. per day, by up to 1 million bbl. if the consuming nations would just curb their craving for crude. But almost no one at the conference appeared to take him very seriously on that point. Observed one conference member: "When Yamani threatens a production increase, he is firing with blank bullets."

Lacking effective restraints by the moderates, or even much selfdiscipline, the cartel now seems to be embarked on a course that could severely shake international trade, banking and monetary stability. Mindful of their success in recycling petrodollars in 1974, when surging oil prices sent more than $112 billion pouring into cartel bank accounts, Western bankers until recently have remained confident about their ability to manage the task a second time. But OPEC's revenues are now growing more than half again as fast as they were in 1974, and bankers no longer seem so secure.

One worry is that developing nations--Turkey, Peru, Zaire, and many others--have piled up some $220 billion in foreign debts, largely to help pay for oil imports since 1973. Banks are growing wary of lending more money lest the countries be unable to make their payments. Yet withholding the loans might push the debtor nations into bankruptcy.

If the banks cannot find safe borrowers, they may simply have to turn away some OPEC depositors. That would make the idea of collecting inflation-debauched dollars in return for oil even less appealing to OPEC members than it already is. As if to hint at its next bombshell, the cartel's final communique declared, almost in passing, that if the dollar continues to slide in value against other currencies, OPEC would reconvene and vote to sell its crude only in return for a "basket" of currencies, such as the Japanese yen, the West German mark, the Swiss franc and perhaps British sterling.

That prospect sent a chill through the financial centers of Europe. If the U.S. were forced to pay for OPEC oil priced in part in the currencies of the nation's trading partners, the value of those currencies could shoot through the roof, even as the once mighty greenback crashed through the floor. The dollar in recent months has gained in value abroad, but after OPEC's warning it began once again to slide in nervous trading.

In many ways the biggest victim of the cartel will be the largest importer of petroleum, the U.S. OPEC'S increases are expected to add perhaps 100 or more per gal. to gasoline prices by year's end, lifting a typical family's automotive fuel bill by $250. According to one estimate, food prices will go up by some $70 per family, since energy is used intensively throughout the food chain, from farm to supermarket. Anyone unfortunate enough to heat his home with oil is likely to find that the cost of keeping warm in the Northeast this winter will rise by $270.

The grim tattoo of statistics will give new force to calls for an emergency tax cut. The nation's bill for oil imports will grow from $42 billion in 1978 to some $65 billion in 1979--in effect, a direct levy of fully $747 per year on every American taxpayer. To keep consumer spending from going into a freefall, the Government may be forced to chop its own receipts instead. But doing so would widen the federal deficit and pump yet more inflation into the economy even as output is declining. Quite a bit of U.S. economic policy is being made as much in Riyadh and Tehran as in Washington.

Last week's events should have made even clearer that the world's petro-woes are caused not by the oil companies, not even by the bureaucrats, but by the cartel. Whatever their past excesses, it is not the companies but OPEC's members that have banded together to exploit the world shortage of oil and to make that shortage more acute by holding back production. The response of the industrial nations, a forced limit on petroleum imports, will, their leaders agree, bring about a lowering of living standards. In the immediate future, the U.S. most likely will be able to accomplish its goal of holding imports to 8.5 million bbl. per day only by taking one of two harsh steps: either rationing gasoline or eliminating price controls on it. The former would lead to a bureaucratic mess; the latter would probably aggravate inflation. The choice is hard. But, as in so many matters in the crisis caused by OPEC, there is no middle ground.

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