The Price of Stormy Petrol

Tighter supplies, rising costs and the prospect of some controls

Like fast-approaching storm clouds, the consequences of the political turmoil that shut down Iran's oil fields became clearer last week, presaging a period of trouble and uncertainty for Western nations. Higher fuel prices and some scarcities are inevitable in the U.S. President Carter warned that though the situation created by the Iranian cutoff is "not critical" yet, it "certainly could get worse." He said that the difficulties might be manageable if Americans "honor the 55-m.p.h. speed limit, set thermostats no higher than 65DEG and limit discretionary driving." Otherwise, the President added, "more strenuous action" would be needed to curb fuel use.

Energy Secretary James Schlesinger told a congressional subcommittee that there is no assurance that Iran's new leaders can persuade the Marxist-led oilfield workers to start the wells pumping soon again, even though Ayatullah Khomeini has ordered them back to work. At best, production would rise slowly to a maximum of about 3 million bbl. per day within six months. Increasing the flow to the normal 5.8 million bbl. would require the return of foreign technicians, an unlikely possibility. Yet, said Schlesinger, unless Iran begins substantial production soon, frequent shortages of gasoline will show up this summer, and the U.S. will not be able to rebuild its stocks to avoid a scarcity of heating oil next winter.

A pinch is already being felt. Exxon and Texaco notified customers that they are reducing deliveries of oil, gasoline and various refined products by as much as 10%. Other oil companies are expected to follow. The companies are also increasing their oil prices by up to 200 per bbl. Shortages of jet fuel have forced American, TWA and other airlines to juggle supplies to keep operating, and last week National reported that fuel shortages forced cancellation of its lightly traveled New York-Amsterdam flights. At the same time a sudden and unexpected lack of bunker fuel delayed ships sailing from some Far Eastern ports.

Schlesinger's office is preparing a packet of mild stand-by controls, some to be sent to Congress next week. Among the proposals: allocate crude and refined products to spread the shortages among distributors and retailers and ban gasoline sales during most hours on weekends.

Exploiting the shortage, Abu Dhabi and Qatar last week added a 7% surcharge to the 1.8 million bbl. per day that they produce. The increase is on top of the 5% OPEC rise that took effect last month and lifted the basic price to $13.34 per bbl. The cartel had scheduled a raise in steps to $14.55 by October. But at the present rate of increase, oil from Abu Dhabi and Qatar then would be selling at $16.32 per bbl. Other oil producers, notably such anti-Western militants as Libya and Iraq, are expected to make similar increases. Says one top U.S. oil company official: "I guess now the sky's the limit."

Panic buying has given producing nations tantalizing inducement to raise their long-term contract prices. On the open or "spot" market, where the small percentage of oil not sold under contract is available, frenzied demand has sent prices up to more than $23 per bbl. Further whetting OPEC greed, Britain has boosted its price for North Sea oil by 2% above the cartel level.

Even without adding in last week's increases, the average U.S. price of gasoline is scheduled to rise from 69-c- per gal. now to 84-c- by the end of 1980 under the Government's control program. In high-cost areas such as New York City and some remote areas of New England the price probably will go to at least 90-c- and possibly $1. Already, gas, heating oil and other fuels are becoming more expensive.

Little relief is in sight on the supply side. Of the 5.8 million bbl. of Iranian oil lay lost to the world, about 900 000 bbl normally come to the U.S. and provide 5% of its daily demand for 19.4 million bbl. Extra production by Arab countries has cut the oil deficit to 2 million bbl. per day globally and 500,000 bbl in the U.S. Saudi Arabia, for example, which is committed to pumping 8.5 milion bbl. per day, is now producing 9.5 million bbl. But the Saudis are tacking a 9% premium on that extra 1 million bbl.

Mexico could become a major U S supplier -over the long term. Last week President Carter came to an agreement with Mexican President Jose Lopez Portillo to begin negotiations between the two governments for American purchases of Mexican natural gas o avert social and economic disruptions Lopez Portillo has vowed to follow a go-slow production policy and not permit Mexico's wells to pump more than 2.3 million bbl. of oil and gas a day (up from 1.5 million bbl. now) for the rest of his term, which ends in 1982. Thus Mexico will not be able to do much to help the U.S. out of its present energy bind.

Higher oil costs are bound to filter into Consumer Price Index and complicate the Administration's tough task of slowing inflation. The Government's efforts to moderate consumer spending without bringing on a recession are showing mixed results. January housing starts fell 20% from the previous month to 1 6 million units, in part because of bitter winter weather in much of the country. On the other hand, major retailers such as J.C. Penney and Sears reported double-digit sales gains in January, and auto sales in the first ten days of February were 15% higher than a year ago. The consumer buying spree, the inflationary rises in the price of energy, the gloomy prospects of higher import costs and pressure on the balance of payments -all these will move Federal Reserve Board to keep credit tight and interest rates high. Thus the nation will need great luck to avoid recession amid inflation. qed

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