Penny-a-Gallon Pinch

Maybe it was the fleshpots and schlag parlors of lovely Vienna, amid which the Organization of Petroleum Exporting Countries assembled for its quarterly meeting last week. Whatever the reason, the gathering of the 13-nation cartel that controls about two-thirds of the non-Communist world's crude oil eventually dissolved into a Mad Hatter's tea party of illogic. The sharply rising oil prices imposed by O.P.E.C. in the course of the past year have been largely responsible for spiraling international inflation. Yet delegates of the oil-producing nations, with only Saudi Arabia dissenting, voted to impose additional tax and royalty charges of 330 per bbl. on production to cover their own higher costs caused by inflation.

The O.P.E.C. nations, said Interior Minister Jamshid Amuzegar of Iran, expect oil companies to absorb the increase. That is most unlikely; instead, the already high price of gasoline will probably go up about a penny a gallon. In the U.S., John C. Sawhill, head of the Federal Energy Administration, denounced the O.P.E.C. move as "economic blackmail" and said it underscored the need for continued price controls on U.S.-produced oil (see following story).

O.P.E.C.'s decision also served as a needed reminder that oil prices these days are set not by free-market economics but by politics, particularly in the Middle East. Economics would dictate a cut at this time instead of a disguised increase in oil prices. World demand has been held down because, after the quadrupling of prices by O.P.E.C. in the past year, consuming nations cannot afford to buy as much oil as they would Eke and the crude shortages of last winter have given way to a surplus.

Venezuela, Kuwait and Libya, however, are now cutting production to eliminate that surplus. Venezuela, whose biggest customer is the U.S., has reduced output by about 450,000 bbl. daily, to a total 2.95 million bbl. One item on the O.P.E.C. Vienna agenda was the coordination of production cuts in order to make sure that prices do not drop.

Going Along. The O.P.E.C. decision last week to increase charges was embarrassing for Saudi Arabia, the world's largest producer. The Saudis are torn between supporting the cartel and sustaining their hard-pressed international customers. Saudi Oil Minister Ahmed Zaki Yamani has publicly advocated a cut of $2 per bbl. or so on the grounds that the oil producers are part of the Western economic system and they could not profit by bankrupting their customers. After conferences with King Faisal, Treasury Secretary William Simon returned from Jidda two months ago with encouraging news: the Saudis in August would hold an auction that would let the market set lower prices. The auction was canceled, which led some U.S. cynics to accuse the Saudis of double-dealing.

While Yamani was talking of lower prices, they note, his government increased its ownership of Aramco from 25% to 60%, and is now negotiating with Aramco's four American partners (Exxon, Texaco, Mobil and California Standard) for the remaining 40%. The 60% takeover has had the effect of increasing prices because the Saudis, like other oil producers, charge the oil companies more (currently about an additional $3.75 per bbl.) to "buy back" government-owned oil than to pump the companies' share out of the ground. The oil companies then pass on the added costs. Government-owned Saudi light crude sells for $10.85 a bbl.

More likely, the Saudis had misjudged the political situation. Their auction plans drew loud protests from other oil producers. Tiny Abu Dhabi and Qatar would have followed Faisal if he had tried to cut prices, but no other country would have. Iran and Kuwait both threatened to slash production to any level necessary to maintain prices, whatever the Saudis did. In the end, Faisal's government decided that it must not smash the O.P.E.C. cartel, which it had helped to found, and that Arab unity, at a time when the Arabs still face difficult peace negotiations with Israel, meant more to it than the prosperity of Western oil buyers. "It's a political situation geared to a settlement in the Middle East," says one Ford Administration oil expert, "and it always has been."

Some other Western illusions also seem likely to perish. Once it was thought that when their wells in the Middle East and other producing countries were nationalized, the major oil companies would bargain hard for the lowest possible price on crude oil that they would then have to buy. Instead, they contend that they have to go along with any price that the host governments set--both in order to improve their prospects of negotiating reasonable terms for the buy-out of their remaining properties, and to assure continued supplies of crude for their intensive refining and marketing operations. "We can reason, we can cajole," says Gulf Oil Spokesman William King, "but in the last analysis the governments can say: 'Take it or leave it.' " Little Leverage. With no price relief in sight, consuming nations must consider their own options. The U.S. has been working hard to broaden its new friendship with the Arabs. Last week Navy Secretary J. William Middendorf visited Saudi Arabia to discuss increases in U.S. military sales, including ships and naval-base construction for the Saudis. Essentially, though, the U.S. has little leverage to force Croesus-rich oil nations to reduce prices or raise output.

Taking to heart the lesson of last winter's oil embargo, the U.S. and eleven other industrialized nations are forming a kind of consumer O.P.E.C. They will jointly monitor fuel supplies, work out emergency conservation programs, and if necessary decide to share oil imports among themselves. Such steps are needed, but supply is not now the problem. The U.S. expects no oil shortage this winter. The trouble is prices--and for now the consuming nations have no alternative except to try to burn less oil and pay through the nose for what they do buy.

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