Preparing for Arab Oil

The lifting of the Arab embargo on oil sales to the U.S. had been coming so long that when it was finally announced last week most of the emotional impact had been spent. Not so the economic impact. Within a day of the official announcement, President Nixon proclaimed the end of gasless Sundays in the U.S. General Motors canceled layoffs of 27,000 workers that had been scheduled to begin this week, in the hope that greater availability of gasoline would halt the deep slump in car sales. Gulf Oil slashed prices of jet fuel, kerosene and heating oils between 1.5-c- and 5-c- per gal., while Texaco announced a penny-per-gal. cut on gasoline--welcome signs of a break in the seemingly endless inflationary escalation of oil prices.

All these actions reflected an expectation that renewed Arab exports would increase U.S. petroleum supplies by as much as 1.6 million bbl. per day by May, enough to close most of the current energy gap. Yet deep uncertainties remain about the course of Arab oil production and world crude prices. The Arabs lifted the embargo in recognition of U.S. efforts to arrange a Middle East settlement. But there remains a threat that the Arabs could close the spigot again in June if they judged that the U.S. had not pushed hard enough to secure, among other things, an Israeli pullback in the Golan Heights. The Arabs will meet in Cairo on June 1 to "review" American efforts along these lines, and could reimpose the embargo if they are dissatisfied.

President Nixon, who had warned the Arabs not to attach any "conditions" to the lifting of the five-month-old embargo, chose not to regard the decision to review as being a condition. That was a wise diplomatic attitude; without such a string attached, it is unlikely that the divided Arab* could ever have agreed on a plan for resuming exports to the U.S. As it was, Syria and Libya refused to join in the decision, taken in Vienna at a meeting of the Organization of Arab Petroleum Exporting Countries.

Key Questions. Egypt and Saudi Arabia wanted the embargo ended unconditionally, but Algeria argued for a more cautious approach. Still, the final decision, conditional as it was, represented a major softening of the Arabs' demands. They had once vowed to keep the embargo in effect until Israel agreed to withdraw its forces from all occupied Arab territory, including Jerusalem.

The key questions now are how much oil the Arabs will actually make available and at what price. On these issues, too, there are serious divisions. Not all the Arab nations have been rigorously observing their proclaimed 15% cut in production below last September's levels. Libya, for example, pumped 93% as much oil during January as it did last September, and Saudi Arabia cranked out 91% as much. Last week Saudi Oil

Minister Ahmed Zaki Yamani declared that his country would supply the U.S. with 1 million bbl. a day, implying a production boost all the way back to September levels. That move alone would cut the projected U.S. petroleum shortfall about in half. But Yamani's Arab brethren declined to disclose how fast they intended to pump and ship oil.

The main reason for their silence is that the Arabs now face a tough choice between increased output and higher prices; they cannot have both. U.S. Energy Chief William Simon estimates that during the embargo period world daily demand for oil fell 5 million bbl. below prewar forecasts, to 46.4 million bbl.

Even if oil becomes more abundant, demand is not likely to grow much--in part because the Arabs have taught the world the need for energy conservation. in part because at present exorbitant prices, roughly $11 per bbl. for crude, the world's consumers simply cannot afford to buy much more. Any big influx of Arab oil into world markets would almost inevitably produce a temporary oversupply that could crack prices.

Hot Debate. Recognizing these economic realities, the Saudis are striving to persuade the other members of OPEC (which includes several non-Arab states) to cut prices to a more reasonable level. They may fear that sky-high oil prices threaten the stability of the industrialized nations, where much of their petro-wealth is stored. Another reason: price cuts might prolong world dependence on oil by discouraging large-scale efforts to develop alternate sources of energy, such as the U.S. Project Independence. (One proposal being circulated in Washington, and presumably noticed by the Saudis, envisages spending as much as $98 billion over the next 14 years to subsidize a synthetic-fuel industry that would tap the nation's stores of shale oil and coal.) But some OPEC members--among them Libya and Iran--favor yet another oil price boost. After hot debate at last week's OPEC meeting, the oil exporters could only paper over the division by agreeing to freeze present prices for three months as a compromise.

In the U.S., some brands of gasoline could cost even more at the pump in coming weeks because many refiners will be blending high-priced Arab crude into their product and importing expensive fuel from Europe. But shortages should ease quickly; the Federal Energy Office will permit an immediate 11 million bbl. drawdown from refiners' inventories, the fourth so far this year.

Exxon announced last week that it would increase supplies to gas stations from 83% of their 1972 usage to 95%. Still, some FEO officials are proceeding on the assumption that the energy crisis is far from over. They are now trying to decide what conservation measures will be needed if the Arabs do unsheathe their oil weapon again in June.

*--Abu Dhabi, Algeria, Bahrain, Egypt, Kuwait. Qatar and Saudi Arabia.

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