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SUPPLY: From Output Squeeze to Price Embargo

11 minute read

The gloom that has enveloped the industrialized West since the Arabs unsheathed theiroil weapon in October lightened last week. Arab nations announced an easing of theirproduction cutbacks—and around the world, there was growing suspicion that they never did slash oil output as much as they had proclaimed. Europe, heavily dependent on Middle East oil, seems surprisingly well supplied, and TIME uncoveredevidence that Arab petroleum has been leaking into the U.S., too, despite a supposedly total embargo.

None of this means that the energy crisis is anywhere near over; indeed,all indications are that it will become a more or less permanent feature of American life. The Arabs coupled their announcements of production increases with gargantuan price boosts that will fan inflation throughout the West. And supply is still pinched; in theU.S., the Nixon Administration felt compelled to announce surprisingly detailed—andquite severe —stand-by plans for gasoline rationing, even though it hopes that it will never have to put them into effect. Conservation measures are still necessary, but the crisis is looking less like a catastrophe than it did a few weeks ago.

Easing the Pinch

It seemed like a lovely Christmas present to an energy-hungry world. At a meeting in Kuwait, the Arab oil nations unwrapped a surprise package of moves that added up, at least in theory, to the first easing of their 2½-month-old oil offensive. They promised to raise production in January rather than slash it further as originally planned; output has supposedly been running 25% below September levels, but now the cut will be trimmed to 15%. The Arabs publicly maintained a total embargo on shipments to the U.S. and The Netherlands but added hard-pressed Japan and tiny Belgium to their list of friends. That means that these countries will now receive oil “according to their actual needs,” instead of only the same amounts they had purchased during the first nine months of 1973. Saudi Arabian Oil Minister Sheikh Ahmed Zaki Yamani added some conciliatory language. “We do not wish the nations of the world to suffer,” he said. “We only intended to attract world attention to the injustice that befell the Arabs.”

In fact, the Arabs appeared to be making further skillful use of their oil weapon. By announcing the 25% production cuts last fall, they had stampeded some countries into lessening political support of Israel and into swallowing price boosts of about 70%.

Now, by publicly relenting on the production front, they seem to be bidding for Western gratitude—and for the acceptance of an additional, even more astronomical, 130% price hike that was announced just before Christmas. And this is being done when evidence is mounting that at least some of the production cuts allegedly being restored existed only on paper.

How much the Arabs have reduced oil output is impossible to determine, but the quantity of oil moving in world trade seems greater than could be expected after a genuine 25% slash in Arab output. Some indications:

>Though U.S. imports of crude oil have dropped, imports of refined products in mid-December were running more than 2.9 million bbl. per day —slightly more than in late September, when the Arab wells were pumping full speed. U.S. officials have steadily reduced their estimates of the likely petroleum “shortfall” and made some fuel allocations more generous. The Federal Energy Office last week announced that airlines in 1974 will be able to buy 95% as much jet fuel as they did in 1972, up from an original allocation of 85%.

>The Economist, an authoritative British magazine, reports that tanker loadings at Persian Gulf oil terminals in late November and early December rose 23% to 43% over a year earlier.The period may have been too short to be statistically meaningful, but the Economist nevertheless concludes that “the Arabs may not have cut production by anything like the amount that they say.”

>Last November the West German government officially predicted that a 25% cut in Arab exports would result in a 15% to 20% slash in the country’s oil supplies in December. But new statistics show that crude oil imports are down only about 1.5% below daily levels anticipated before the Arab boycott began.

>The Rotterdam-Antwerp pipeline, a key conveyor of crude from the supposedly embargoed Dutch port to Belgium, has been pumping as much oil as it did before the boycott began.

>Except in Britain, which is troubled more by a coal strike than by oil shortages, Christmas throughout Europe was surprisingly normal: on the Continent, lights glittered, traffic was snarled as usual, and retailers did a booming business. Only Sweden and The Netherlands are about to begin gasoline rationing. The Dutch are rationing at least partly out of embarrassment that their supposedly embargoed country had previously instituted conservation measures less stringent than those of their unembargoed neighbors.

Welcome News. Whatever the actual level of Arab oil output, the Christmas announcement from Kuwait is still welcome news. Even if the January production goals represent no real increase from current output, their announcement at least confirms that the Arabs do not intend to squeeze supply so hard as to freeze the West and bring its industry to a halt. But there is a darker side to the Arab proclamations, too.

Since world oil supplies were tight even before the oil weapon was unsheathed, Arab production at 85% of September levels will still leave global output 2.5 million to 3 million bbl. per day short of demand. Moreover, there is always the threat that the oil offensive will go into high gear again. One Arab source told TIME Beirut Bureau Chief Karsten Prager last week that if the Middle East peace talks now taking place in Geneva do not produce results by mid-March, “don’t be surprised if the pendulum swings all the way to a 30% reduction” in petroleum output. Most important of all, the latest astonishing price boosts will disrupt the economies of even those Western nations that find Arab oil freely available. By unilaterally hiking the price of crude for the first time, the Arabs not only declared their independence from the big oil companies that have set pricing policies for the past quarter-century but also gave a sure sign of more increases to come.

Starting this week, oil companies will have to pump about $7 into the national treasuries of Middle East host countries for each barrel of crude they take from the desert sands. Once corporate profit margins and the cost of transportation are cranked in, the price of crude in world markets will nearly triple, to something like $9 per bbl. At present prices, worldwide customers shell out about $22 billion a year for the 6.2 billion bbl. of crude that the Middle East exports. When the new prices take effect, the tab will leap overnight to $55 billion or more.

At these rates, many developing countries may be forced out of the petroleum market altogether. The impact in the industrialized world will also be severe. Shah Mohammed Reza Pahlavi of Iran, a non-Arab nation that has shunned the boycott but participated in the price hikes, warned last week: “As to the industrial world, I think that they will have to realize that the era of their terrific progress and even more terrific income and wealth based on cheap oil is gone. Eventually, they will have to tighten their belts.”

Japan, for example, faces the prospect of having its oil bill leap from $7.4 billion in 1973 to about $14 billion in 1974. The cost will eat heavily into Japan’s foreign-currency reserves, already dwindling at the rate of nearly $1 billion a month, and reduce the country’s ability to pay for imported food and such vital raw materials as coal and lumber. The prospect of increased supplies of Arab oil has caused the Tokyo government to postpone until Jan. 10 a decision on conservation measures aimed at reducing Japanese energy consumption by 20%. But anticipation of having to pay heavily for the oil is keeping those plans alive.

In Europe, the new oil prices could add 3% or so to an already spiraling rate of inflation. In the U.S., the Government estimates that they will add one or two cents a gallon to the average pump price of gasoline. The higher prices will also create multimillion-dollar deficits in European trade balances, possibly upsetting the precarious currency alignments that have recently begun to bring a degree of stability to the international monetary scene. In the U.S., Europe and Japan, economic slowdowns and unemployment increases will be less drastic than they would have been if the Arabs had really made and held to a 25% cut in oil production, but they will be painful all the same.

A Big Leak to the U.S.

When the Arab states supposedly closed the valve on all oil shipments to the U.S. in October, Americans faced the prospect of a disastrous fuel drought by year’s end. As the new year begins, though, officials are hinting that the embargo has sprung a leak. Now TIME’S Atlanta Bureau Chief James Bell has turned up evidence that Arab oil is indeed flowing into island refineries that serve the U.S. and probably into mainland American ports as well.

The litmus test is provided by three refineries: Texaco Trinidad, Amerada Hess on St. Croix and Bahamas Oil Refining Co. (Borco) on Grand Bahama Island. Together they have a refining capacity of more than 1,000,000 bbl. a day, most of which is shippedto the U.S. Before the cutoff they depended on the Arabs for almost half their crude; if the embargo were fully effective, they should be cutting production drastically by now. Yet the Texaco refinery has reduced by only 60,000 bbl. a day—to 140,000 bbl.—the amount of petroleum products it ships to the U.S. Amerada Hesshas cut residual oil production a mere 10% or so.

More Crude. Borco has actually doubled its normal output of 250,000 bbl. a day, more than making up for the declines at the Trinidad and St. Croix refineries. Borco officials say that they are using more crude from Nigeria, Iran and the U.S. They adamantly denythat they are still getting ample supplies from Libya, officially a full participant in the boycott. Yet a check with brokers who manage Borco’s tanker operations indicates otherwise.

Presumably the last ships out of Libya before that country joined the embargo Oct. 19 would have completed the two-to three-week journey to the Borco refinery at Freeport by early November. Yet records at Marbrok Marine Brokers in Freeport show that between Nov. 1 and Nov. 29, no fewer than 13 tankers out of the Libyan port of Ras Lanuf discharged crude at Borco. As recently as Dec. 8, the tanker Heythrop out of Ras Lanuf unloaded 513,135 bbl. of crude at the Borco refinery, according to Robert Bunford, executive vice president of E.H. Mundy & Co. Ltd., another Freeport marine broker, which arranged the transaction. No one will talk about whether additional Libyan shipments have come in since then.

All this is good news for the U.S. Eastern Seaboard, especially New England, which reliesheavily on tropical refineries for its supply of residual oil to run electric power plants, factories and ships. The little-known New England Petroleum Corp. (Nepco), which owns 65% of Borco (Standard Oil Co. of California owns the rest), is a leading supplier of residual oil and other petroleum products to electric utilities in the Northeast, including New York City’s Con Edison. The company also owns a string of 250 gas stations in Eastern Canada, operates wells in Abu Dhabi and Texas, and claims to have posted 1972 sales of $1 billion. Nepco President Edward M. Carey founded the company 38 years ago and remains sole owner.

Cutbacks at the island refineries had been expected to reduce fuel supplies to New England by as much as 30% or 40% below demand. Now Alan Greenspan, a member ofTIME’S Board of Economists, estimates that the region’s fuel supplies for the first quarter of 1974 will be short only about 3%. He adds that the whole U.S. seems to be getting “half a million bbl. a day more than we should be getting if the [Arab] embargo were effective.”

Many oilmen privately concede that Arab oil may be coming into the mainland U.S., mostly from Libya and Iraq, which have little faith in the boycott’s effectiveness anyhow, and have urged instead wholesale nationalization of U.S. properties in the Arab world. Says Mundy’s Robert Bunford: “You can leave Libya, switch papers and arrive anywhere. The Libyans don’t care. You left Ras Lanuf headed for an unboycotted destination, and that’s all the Libyans want to know.” One independent Houston oil producer relates stories of tankers meeting and transferring crude from one ship to another on the high seas to get around the embargo against the U.S. Even Federal Energy Czar William Simon conceded last week that there is “leakage” in the embargo, and added: “I just hope it continues.”

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