Prospects for Price Cuts

His belt pinching after feasts of roast lamb and pilaf, his legs a bit wobbly after trying them at Arab dancing, William Simon left the Middle East last week feeling justifiably tired but optimistic. The Treasury Secretary's hectic ten-day, four-country barnstorming had ended on the upbeat. Not only will Saudi Arabia take steps that could reduce world petroleum prices but that country will probably also invest much of its swelling surplus of petrodollars in U.S. Government securities.

The "recycling" of the Saudi funds into special nonmarketable Treasury securities could greatly ease the strain on the U.S. balance of payments and decrease chances that a fast shuffle of oil dollars from one currency into another would provoke international monetary chaos, if the investments are not short-term. Crucial details, including how much the Saudis would invest and at what interest rates, remain to be worked out. But Old Bond Trader Simon was confident that as much as $5 billion to $10 billion might be involved. "I had no trouble selling them," he said. "They were already agreed in principle."

More important, the Saudis announced that for the first time they will auction some of the more than 5 million bbl. of oil daily that they receive from their 60% ownership of the Arabian American Oil Co. (Aramco). Unlike Kuwait, which two weeks ago announced that it will no longer auction its crude because offered prices were too low, the Saudis will accept whatever they are bid. The first auction will take place in August and could involve most of Saudi Arabia's share of Aramco's output. Initially the oil will probably sell for as much as $10 per bbl., but during later auctions the price could drop by as much as $2 per bbl. Big reason: the non-Communist world's oil production of 49.8 million bbl. daily has been outstripping consumption of 48 million bbl. daily, a 4% oversupply that will continue to press downward on prices.

A price drop would lighten the burden on the oil-importing nations, which this year face the prospect of spending $ 100 billion for foreign petroleum, a fivefold jump since 1972. But as Saudi Oil Minister Sheik Ahmed Zaki Yamani stressed, compassion had little to do with the Saudi drive to lower prices. The Saudis, he said, want to avoid a "worldwide recession because that will hurt us," and to prevent rising unemployment and inflation from strengthening "the leftists in the major industrial nations." Moreover, Yamani warned, economic weaknesses in the West could shift the balance of power in favor of "the Eastern bloc, Russia and China. They are self-sufficient in their energy."

Any price cut will be opposed by the other nations in the Organization of Petroleum Exporting Countries, most of which are eager for yet another boost. Algeria and Venezuela are considering cutting back production in an attempt to keep prices at their current levels. In Kuwait, the government recently beat back an attempt by some members of Parliament to slash daily output to 1.5 million bbl. from 2.5 million bbl.

Shoveling Money. Non-Arab Iran also opposes any price reductions. Iran needs every petrocent that it can get to finance the Shah's foreign loans and investments, which already total roughly $10 billion. Some Iranian economists fear that if oil prices fall, Iran will be short of cash to meet its commitments. Still, the Shah keeps shoveling out the money. Last week Iran agreed to loan $ 1.2 billion to Britain. By arranging a direct nation-to-nation loan and bypassing the commercial Eurodollar market where they had previously raised cash, the British indicated that they no longer consider banks capable of recycling the huge sums of petrodollars involved. If so, the only alternative would be for governments themselves to take over the job, probably through the kinds of deals that Bill Simon believes he brought back from Saudi Arabia.

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