Results of a Lifted Embargo

It was the Arab oil embargo that escalated the U.S. energy shortage from a pinch to a crisis--and at the end of last week the Arabs seemed to be on the verge of turning it back into a pinch. Over the weekend, Arab oil ministers began serious discussions of the possibility of lifting the five-month-old ban on oil sales to the U.S. Washington officials privately expressed high hopes that they would also agree to pump oil again at the rates reached before the Arab-Israeli war broke out last October (production has since been cut 15% below that level). If so, the U.S. could expect a marked easing within a few months of the strain on its fuel supplies, especially gasoline, though prices will decline slowly--if at all--and conservation measures would still be needed.

Quid Pro Quo. At week's end nothing was certain. Though Arab leaders agreed that a meeting of oil ministers should be held to discuss lifting the embargo, they seemed in conflict on whether it should be in Cairo on Sunday or Tripoli on Wednesday. It is unlikely, though, that Libyan Leader Colonel Muammar Gaddafi, a blunt critic of the U.S., would permit a meeting in Tripoli that was likely to lead to an elimination of the oil cutoff. Algeria, Kuwait and Syria were also opposed to ending the boycott. Some of the other Arab states would probably agree to a compromise--perhaps lifting the embargo in stages keyed to Israeli withdrawal from occupied Arab land.

But Secretary of State Henry Kissinger has made it diplomatically clear that the U.S. expects an end to the embargo as a quid pro quo for his peacemaking efforts in the Middle East, and the most influential Arab leaders have been responsive. Egyptian President Anwar Sadat has been pressing the oil-producing states to resume shipments to the U.S. King Faisal of Saudi Arabia agrees; his oil minister, Ahmed Zaki Yamani, stated flatly last week that the embargo had served its purpose and should be scrapped.

Without an increase in production, however, an end to the embargo would mean little: it would only enable the U.S. to bid against Europe and Japan for oil supplies that would still fall well short of world demand. But Washington experts expect that an easing of the embargo will be accompanied by a decision to boost output back to prewar levels--if not this week, then soon thereafter. Whenever it happens, says Federal Energy Chief William Simon, it would "make our job a hell of a lot easier. We will be able to supply industry with 100% of its needs and allow it to grow." Another immediate result: the Government would dismiss any thought of imposing nationwide gas rationing; the ration coupons that Government printing offices are still turning out would never be used.

The reason is that U.S. imports of crude oil eventually would probably rise by a million bbl. a day or more. That would about cut in half the "shortfall" of 2.2 million bbl. a day now projected for the second and third quarters--even if there were no restraints on demand. In fact, high prices and the continuation of such conservation measures as the 55-m.p.h. highway speed limit probably would hold down demand too, perhaps shrinking the shortfall to a mere 600,000 bbl. a day.

Gas Gains. Oil shipments to the U.S. would begin to pick up within a few weeks after the embargo ended because oil companies could divert some Arab-oil-laden tankers at sea away from Europe and Japan to American ports. Companies could also quickly release some of their inventories for sale on the assumption that there would be enough oil available worldwide to fill their later needs. In addition, more refined products could be shipped in from Europe, which has barely felt any supply pinch. Still, it would be several months before the flow of foreign oil was back to normal because of the time needed to charter ships, load them at the Persian Gulf and sail them to the U.S.

Most important, a resumption of Arab oil shipments would increase painfully tight gasoline supplies, especially along the hard-hit East Coast. Gasoline supplies* nationwide are now running about 15% to 20% below demand; the gap, it is estimated, would drop to about 2.5% if the embargo ended and conservation programs were maintained. Without waiting for a lifting of the embargo, Mobil announced last week that it will draw on its European inventories to import an additional 14 million gal. of gas into the U.S. in the next few weeks.

By contrast, there are few signs that the boycott's end would bring a quick drop in soaring fuel prices. In fact, prices initially could go even higher, because oil companies would be bringing in more high-priced crude from the Middle East and expensive petroleum products from Europe. Gasoline, some analysts think, could go to 70-c- per gal. in the months immediately ahead.

Long-Range Ease. Longer range, prices could ease off. Some Arab leaders such as Yamani favor reducing crude prices from their present giddy levels of $10 per barrel or more and will press their view at a meeting of the Organization of Petroleum Exporting Countries in Vienna this week. Even if they lose, the expansion of supplies that would result from a return to prewar Arab production levels is widely expected to bring crude prices down to about $7 per barrel in a year or so.

Welcome as all this would be, it still would not mean that Americans could go back to burning fuel at their old wasteful pace. Scarcities of energy were cropping up in the U.S. before the embargo; the nation is short of refining capacity to meet its needs even if it could import all the crude it might wish. And the Arabs are unlikely to increase production enough in future years to supply an unrestrained growth in world demand. Simon thus is already warning against assuming that an end to the embargo means that all limits are off. The FEO, he pledges, will be "very cautious" in lifting restraints on demand.

*The nation's gasoline stocks were up to 226 million bbl. on March 1, v. 217 million bbl. a year earlier. But the latest figure does not reflect withdrawals for Government-ordered emergency allocations to 26 states and the District of Columbia.

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