Here They Come Again

Conservation, cartel-style: less production, more profit

When the oil ministers of the world's least beloved cartel jet into Caracas next week for their final sock-it-to-'em meeting of the decade, there will be some important and worrisome differences from past gatherings. OPEC will be fixing prices against a backdrop of almost unprecedented global upset brought on in large part by its own actions. More than that, in its headlong rush for profits, the 13-nation cartel has been rapidly losing even the appearance of self-control over pricing and production.

As a result of OPEC's policies, worldwide inflation has been sent soaring to ever increasing heights. Meanwhile, global economic growth has stalled and the international financial system itself has been thrown into turmoil. In 1980, oil-importing nations expect to hit what economic jargoneers have labeled a "synchronized recession." Now no one can be sure how high the cartel will push oil prices beyond their present official maximum of $23.50 per bbl., but demand for petroleum makes a substantial increase certain. Single shipments of crude are being sold on the spot market for as much as $40 to $45 per bbl. This shows just how much people are prepared to pay for oil in the pinch that has been created by the loss, for much of this year, of some 2 million bbl. of crude per day from Iran.

A further big rise in price would do shocking damage. For example, a jump to $30 per bbl. would lift OPEC's total 1980 revenues to about $300 billion, constituting a huge new international tax on economies everywhere.

More and more OPEC members are discovering that they can collect just as much by cutting production. Kuwait, Iraq, the United Arab Emirates, Algeria and Libya have all announced cutback plans for 1980, and others are likely to follow. Warns Gulf Oil Corp. President James Lee: "We estimate that OPEC could cut its exports by about 8 million bbl. per day, or nearly 25%, and still maintain balanced economies for its members." Reason: as the cartel sold less oil, the price for the diminished supply would automatically surge.

While OPEC becomes richer, the rest of the world will grow poorer. For example, suppose oil hits $30 before the end of next year. Instead of a projected balance of payments surplus in 1980, the U.S. could wind up with a deficit of $15 billion, further weakening the dollar.* Overall, the combined balance of payments deficit for all industrial nations would climb from this year's $16 billion to perhaps as much as $40 billion in 1980. Developing nations would be hurt worst, since many of them have no exports of real value to count on at all. Their debts, which already total some $300 billion, would swell by perhaps another $60 billion, requiring poor nations to borrow yet more billions.

The outlook is clouded for OPEC itself, especially for the so-called dollar-surplus states of Saudi Arabia, Kuwait, the Emirates and Qatar, which together hold more than $90 billion in U.S. dollars and other U.S. financial assets that will continue to slip in value as the cartel's prices climb. These surplus states probably will not go along with any effort to dump the dollar as the currency of the world oil trade, a move that would undermine the value of the greenbacks they already hold. But Iran and Libya are urging OPEC to switch from dollars to a so-called basket of currencies, which presumably would include German marks, Swiss francs and other Western money, and a fight at next week's meeting seems likely. In the doubtful event that OPEC did take such a step, demand for those currencies would send their value soaring on money markets as the dollar plunged.

The days are gone when Saudi Arabia, by far the biggest producer with 30% of the cartel's output, was able to exert a moderating influence. More and more cartel members, and even factions in the royal family itself, view the desert kingdom's traditional support for the U.S., and Washington's repeated pleas for maximum OPEC output at the lowest price, as ultimately damaging to the producing states. Anti-American rioting in Iran has made involvement with the U.S. seem even more unwise. Such oil ministers as Iraq's fiery Tayeh Abdul-Karim and the Emirates' Mani Said Utaiba argue that it is stupid to swap valuable and nonrenewable oil for increasingly inflated dollars that Washington might some day freeze anyway, as it has done in the case of Iran.

Saudi Arabia can no longer even hold down prices by threatening to flood the world market with crude, a tactic that Petroleum Minister Ahmed Zaki Yamani successfully employed as recently as late 1976. The key reason is that the Saudi fields are reaching maturity, and it would take years of work and billions of dollars in fresh investments to boost daily production of about 9.5 million bbl. by very much for any length of time.

A new power alignment seems likely to emerge in Caracas: a loose coalition among Saudi Arabia, Iraq and Kuwait, the Persian Gulfs three biggest Arab producers, which now dominate the Persian Gulf trade as Iran sinks deeper into internal chaos. Instead of moderate price increases, higher production and cooperation with Washington, the outlook for the cartel as a whole seems to be for substantially higher prices, tighter supplies and increasing disinterest in whatever the U.S. seeks.

*In 1979, the U.S. will spend some $62 billion on imported oil, an average of $800 per American household.

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