Petro-Perils Proliferate

As Iran's exports edge up, other OP EC members just threaten to cut back

It was intended as a coming-out party for Iran's reborn oil industry. Unfortunately, when Hassan Nazih, the new director of the National Iranian Oil Co. (NIOC), pressed a button that was supposed to start crude oil flowing into the hold of a waiting supertanker, nothing happened. After 68 days of no petroleum exports at all, Iran had to wait another five minutes while technicians hurried to locate and repair an electrical malfunction in the pumping equipment. For the assembled crowd of government officials and oil workers, the delay was an embarrassment. For the oil-thirsty nations of the world, it merely emphasized the perils of counting on anything to go as planned in Iran these days.

The new regime tirelessly proclaims that it will never again sell the 5.5 million bbl. per day that made prerevolutionary Iran the second largest oil producer in the 13-member OPEC cartel. On the other hand, the country's strife-battered economy desperately needs the hard foreign money that petroleum brings in. Since the Khomeini government has not yet figured out what its revenue needs will be, NIOC has been unable to gauge how much oil it will have to pump. In the uncertainty, Iranian authorities have been grabbing projected export figures out o the air, with semiofficial guesstimate ranging from about 2 million bbl. per day all the way up to 4 million.

The oil squeeze will tighten no matter what Iran does. Prices are climbing not least because one OPEC country after another has either posted large unilateral increases or announced rises for later this spring. Last week Algeria and Iraq joined the list; Algeria's planned rise of 28% i by far the biggest yet.

Another frighteningly familiar threat has suddenly loomed again: the prospect of production cutbacks by other OPEC members. Libya last week announced that beginning April 1 it will reduce sched uled deliveries to oil companies by 12 to 18% for unspecified reasons. Similarly Algeria told oil company customers to reduce purchases by 10% to 15%. OPEC officials tried to link continued oil supplies to a pro-Palestinian solution to the Arab Israeli conflict, but the real reason for the cuts is to keep supplies tight and prices high even though Iran is resuming limited production.

The cartel's profit motive was much in evidence at an Arab energy conference in Abu Dhabi last week. Delegates bitterly attacked Western oil companies for trading oil back and forth among themselves at extortionate prices on the small but highly volatile spot market. Mani Said Utaiba, Oil Minister of the United Arab Emirates and president of the cartel, suggested that at its next meeting on March 26 in Geneva, OPEC should take up the idea of blacklisting offending companies and refusing to sell oil to them.

The truth is, OPEC members are themselves big-time price gougers.

Not only is Iraq raising its official price for long-term petroleum contracts, but it is also selling shipments on an individual basis at the even higher spot market prices. Nigeria has also reportedly made deliveries to Israel for as high as $23 per bbl., vs. the official OPEC price of $13.34. Oilmen say that Libya's purpose in reducing sales under long-term contracts is both to prop up the price and to have some additional tonnage of its own to gamble with.

Such tactics have caused oil executives to mutter about drawing up a blacklist of their own, perhaps to refuse to deal in the spot market with OPEC countries that will not honor their legally binding contracts. Said Clifton Garvin Jr., chairman of Exxon: "It is our belief that we should not buy oil at present high spot market prices." Others do not seem so confident. Last week Royal Dutch/Shell, a major customer of Iranian crude before the ouster of the Shah, was back in the loading queue for a new supertanker cargo at an undisclosed price.

In fact, oil companies and OPEC are both benefiting from the rapid run-up in prices. Oil industry profits for this quarter are expected to rise anywhere from 20% to 40% above last year's. Among the reasons: inventories acquired at last year's prices are becoming more valuable as OPEC pushes up the worldwide cost of crude. The largest gains will come from operations in Western Europe, where retail prices are largely uncontrolled.

A few companies seem, destined to reap an absolute embarrassment of riches. According to projections by Wall Street's Paine Webber Inc., Ashland Oil, the nation's largest independent refiner, will see first-quarter profits leap by 517% over last year's earnings; one reason is the deals that the firm has been rushing to slap together during the crisis. Last week Ashland eagerly paid an exorbitant price, about $19.50 per bbl. for 300,000 tons of Iranian crude, even though the company's inventories are all but overflowing. Ashland executives had no firm idea of what to do with the shipment, though they hinted that they might try to resell it in the coming weeks at an even higher price than they paid for it. Says Chairman Orin Atkins, who tends to get so distracted by corporate affairs of state that he forgets to remove his black homburg while being zipped about in the company jet: "What is good for Ashland Oil is good for the country."

As always, the ultimate victims are the nation's consumers, and last week they got more predictably glum news about inflation. Even though OPEC's price increases are only just starting to work themselves into the economy, wholesale prices leaped a full 1% in February and, just as it has for months, food led the advance.

At a minimum, crude-oil prices are expected to rise from the current levels to at least $16 per bbl. by year's end, although a cost of $18 or more is becoming increasingly likely. A rise that big would retard economic growth and add alarmingly to world inflation and monetary instability. Instead of declining from last year's record $28.5 billion to $20 billion or less as President Carter had hoped, the nation's trade deficit would swell to $29 billion, according to projections by Data Resources Inc. An increase to $22 per bbl. would send the trade deficit to $39 billion, and that could cause the dollar to take another plunge. No one knows whether the world monetary system would be able to survive the shocks without substantial change, but unless stability returns quickly to the oil market, people will not have to wait long to find out. In sum, a supply shortage contrived by OPEC is creating major price problems, which threaten to bring severe financial upset.

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