Politics a New Game in Oil Power

By George Russell.

"We are going through an emergency, a very real one." So said Mexico's Finance Minister, Jesus Silva Herzog, as he emerged from a conference on the international debt crisis in London last week. Silva Herzog was not alone in that assessment. In the Caribbean resort town of Cancun, his boss, Mexican President Miguel de la Madrid Hurtado, was closeted for 13 hours with Venezuelan President Jaime Lusinchi to discuss the plummeting world oil prices that are squeezing their heavily indebted economies. The two issued a communique expressing their "profound concern" over conditions in the oil market, which, they said, created "an extremely unstable situation."

Halfway around the world from Cancun, a similar flurry of nervous consultation took place. In the Saudi Arabian capital of Riyadh, Hussain Lwasani, the Iranian Foreign Ministry's director for African and Arab affairs, met with Saudi Foreign Minister Prince Saud al Faisal. Lwasani's mission, said a Saudi spokesman, was "related to the current oilmarket situation." A day later, Major Khoualdy Humaidi, a member of Libyan Strongman Muammar Gaddafi's governing Revolutionary Command Council, showed up for a session with Saudi King Fahd. Later, it was announced that the 13-member Organization of Petroleum Exporting Countries would hold an emergency meeting in mid-February.

That frenzy of togetherness was an indication of growing dismay among many of the world's major oil-producing countries, as they seem unable to halt a major price war that has dramatically depressed the value of their most important product. The war, caused by a surplus of some 2 million bbl. of crude oil a day flooding onto world markets, showed no signs of abating last week. The spot price of oil, which two weeks ago fell through the $20-per-bbl. barrier for the first time in seven years, closed last week at about $18.75.

It was increasingly clear that a watershed of possibly historic dimensions had arrived for the beleaguered Third World petropowers. In the '70s, when oil-price hikes seemed limitless, eager representatives from the industrialized world made pilgrimages to the doors of the oil-rich, looking to buy petroleum and to sell everything from weapons to steel mills. In the Middle East, the cascade of petrodollars brought about novel configurations of regional power, with Saudi Arabia taking a leading role. Bankers rushed to lend billions of dollars to such oil producers as Mexico and Nigeria, which were embarked on crash development programs. Always there was the worry that the industrialized world would be brought to its knees by a cutoff of the precious and ever more expensive petroleum supply.

Now, as the flood of oil revenue dries up, another kind of wrenching social and political retrenchment is under way among the oil producers, and the risks for world order and stability are unpredictable. If concerned countries, including the U.S., do not act, as Mexico's Silva Herzog put it, with "speed and wisdom," the deepening plight of the former petropowers may lead to upheaval.

The greatest pain of adjustment focuses on the high-debt, industrializing oil producers, led by Mexico, which has a foreign debt of $96.4 billion. Last week Mexico slashed its crude-oil prices by an average of $4 per bbl. The move, which will cost the country close to $2.2 billion in revenues this year, comes at a tense moment. Earlier in the week in Mexico City, tens of thousands of workers and students marched through the center of a capital still marred by last September's disastrous earthquake to protest the belt-tightening economic policies of the De la Madrid government. The demonstrators demanded a moratorium on payments of the foreign debt.

As a result of De la Madrid's economic programs, unemployment may be as high as 20%, while annual inflation remains at more than 60%. Says Fidel Velazquez, leader of the 3.5 million-member Confederation of Mexican Workers: "The majority of workers cannot endure more sacrifices."

Such problems have eroded popular confidence in the ruling Institutional Revolutionary Party (P.R.I.), essentially a monopoly political group that changes its near absolutist leader every six years. The P.R.I. has dominated Mexico for more than half a century. During that time, says Manuel Garcia y Griego, a historian at the prestigious Colegio de Mexico, "economic growth has been the central pillar of the functioning of the system." Bruce Bagley, a Washington-based Latin American expert at Johns Hopkins University's School of Advanced International Studies, warns that "if oil prices hold below $20 per bbl., it will be a disaster."

The U.S. has already indicated it wants no such thing. The Reagan Administration hopes that Mexico will become the first major debtor to take advantage of the so-called Baker initiative, named after Treasury Secretary James Baker. Under that scheme, certain debtor countries would be allowed access to billions of dollars of increased credit.

Similar but less explosive problems confront Venezuela (foreign debt: about $35 billion). Originally, the country expected $12.4 billion in oil revenues this year. Now experts estimate the total at slightly more than $10 billion, and that may be optimistic. Late last week Venezuela announced that it was cutting some oil prices by $3 per bbl. Venezuela began imposing austerity measures in 1984, and these have led to an unemployment rate of 13.3%. The current administration has risked a public backlash by hiking the prices of such basic commodities as bread, milk and gasoline.

In Nigeria (estimated foreign debt: $20 billion), where there have been two military coups in the past two years, the petrocrisis could not have come at a worse time. The second coup, in August, led to the accession as President of Major General Ibrahim B. Babangida, who in December announced a stiff austerity budget to begin rebuilding the devastated local economy. The latest oil-price collapse, however, has not helped the government in its planning, having made Nigeria's projections of $8.1 billion in oil revenues this year appear decidedly optimistic.

Egypt is yet another oil-exporting country with potentially explosive social problems that may worsen as a result of the petrorecession. Even though it does not stand in the front rank of oil producers, Egypt last year earned some $2.1 billion from oil sales, an important element of President Hosni Mubarak's budget. The country's foreign debt is nearly $30 billion. The latest oil-price drop has already cost Egypt up to $900 million on an annual basis. That loss limits the government's ability to provide the heavy food and energy subsidies that so far have prevented Egypt's 50 million citizens from storming the streets in protest.

The low-population countries of the Persian Gulf--Saudi Arabia, Kuwait, the United Arab Emirates, Oman, Qatar and Bahrain--escape more lightly from the crisis. For them, the petrorecession largely means a scaling back of development plans that crimps, but does not cripple, the living standards of their 16 million people. Saudi Arabia, for example, which sold only about $33 billion worth of crude last year, still has about $80 billion in financial reserves. About 40% of Kuwait's annual income now comes from overseas investments rather than oil production. In addition, most of the gulf countries are probably more stable than commonly imagined. They have been ruled by the same families for decades, and in some cases centuries. Part of Asia and the Middle East could be destabilized, however, if the wealthy gulf states send home hundreds of thousands of visiting workers as construction plans are cut back because of the oil contraction.

The world's diplomats, politicians and financiers will need all their skills, as well as considerable luck, if they are to avoid the turmoil that collapsing oil prices may cause. The problems of falling prices will be very different from those brought about by rising ones, but the damage they cause could be just as serious.

With reporting by Harry Kelly/Mexico City and Christopher Redman/Washington, with other bureaus