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Business: Another Oil Price Stunner

6 minute read

Trying to regain control of the cartel, Saudi Arabia posts a 33% rise

It was a $6-per-bbl. Saudi shocker, and it could not have come at a more anxious moment. Four days before the 13 member nations of the Organization of Petroleum Exporting Countries were to sit down in Caracas for their fourth price-raising session in a year, the cartel’s biggest producer took preventive action. In a surprise announcement that whipped the money markets into a frenzy and sent gold leaping to yet another alltime high of $462 per oz., the desert kingdom of the House of Saud, long regarded as the quintessential OPEC moderate, announced one of the biggest increases in the cartel’s 19-year history.

The Saudi move amounted to a startling 33% jump from its previous price of $18 per bbl., to $24, and it means still more inflation for the world. Other so-called OPEC moderates also posted increases. Venezuela, the cartel’s fourth largest producer, moved from $20 per bbl. to $24, while Qatar and the United Arab Emirates went from approximately $21.50 to about $27.50.

In the Alice-in-Wonderland world of the oil game, some observers argued that the rises were welcome, on the theory that they might somehow manage to forestall even bigger OPEC money grabs in the days ahead. By bringing its charges up to the $24 level, where much of the rest of OPEC has been for months, Saudi Arabia is attempting to return order and stability to the cartel’s chaotic price structure as well as head off demands in Caracas for much steeper hikes by such cartel radicals as Iran, Libya and Nigeria. Said Saudi Oil Minister Ahmed Zaki Yamani: “We wanted to avoid a hot discussion in Caracas that might lead to a much higher level of prices.”

The Saudi maneuver was a last-minute gamble to regain control over a cartel that shows signs of breaking into a wild scramble for ever greater profits. In a losing struggle to impose some restraint on surging prices, the Saudis have been selling their crude far below the prices charged by nearly all other members.

The split developed this summer, when most OPEC members boosted their prices from $14.55 per bbl. to a full $23.50, but the Saudis chose to go to only $18. Soon even the $23.50 barrier was broken as members began selling single shipments of oil on the spot market for as much as $40-$45 per bbl. Several members have by now begun selling crude under long-term contracts for about $26 to $27.50 per bbl., inviting additional leapfrogging increases. By going to Caracas with their petroleum once again priced close to cartel levels, the Saudis will be able to argue that they have returned to the fold and may gain stronger bargaining power to stop or at least slow further rises.

The Saudi gambit is risky. By increasing a full $6 per bbl., the Saudi government is, like it or not, obviously tempting other cartel members to do much the same. Warns Walter Levy, an international oil economist: “This is the beginning of a further round of price increases. As long as spot prices remain substantially higher than OPEC prices, we are in an ever escalating situation.”

The impact of the Saudi action will be felt particularly in the U.S., which receives some 30% of its oil imports from the four countries that last week increased prices. In the past year the nation’s energy-import bill has risen by 80%, reported Treasury Under Secretary Anthony Solomon, and now it will go higher. If other cartel members follow the Saudi lead and push prices to, say, $30 per bbl., the U.S. next year will have to spend $90 billion on energy imports vs. this year’s estimated $62 billion. Gasoline prices, already at an average $1.04 per gal., probably will move up 2¢ or 3¢, and more than that if other OPEC members post increases as expected. Home heating-oil costs, which have soared by up to 70% since October of 1978, will also climb higher.

By cutting deeper into consumer pay checks, rising energy prices will make the recession worse. Signs of the slump are multiplying. After declining in November, unemployment now seems to be swelling. America’s industrial production fell .5% in November, after staying steady in October and actually rising by .5% in September. Auto sales slumped by 21% in November as compared with a year ago, and by 23.5% during the first ten days of this month. About 16% of the industry’s 765,400 workers have been laid off.

Every country suffers from OPEC’S increases. The oil bills of Europe’s nine Common Market nations will rise by $20 billion or $25 billion as a result of last week’s hikes. Even before they were imposed, the Organization for Economic Cooperation and Development estimated that the international financial deficits of 24 leading non-Communist industrial countries would nearly double during 1979, to some $30 billion, largely because of advancing oil prices. Said one O.E.C.D. official in Paris: “All our figures are becoming meaningless because they assume stable, real prices for oil.”

Without effective leadership on energy from the U.S., the world economy faces a future of intensifying upset. Not only the U.S. but most other nations must cut their consumption of crude, and there was at least one small sign last week that the message was beginning to sink in. In Paris the International Energy Agency agreed to hold imports for its 20 member nations, the world’s leading customers for OPEC’s crude, to a ceiling of 24.5 million bbl. daily for 1980, about the same as 1979. Walter Levy argues that these nations must go beyond mere pledges, set firm limits and severely allocate oil among themselves.

Since Americans use much more oil than anyone else, they need to cut back the most. As the Senate last week approved the outlines of a windfall-profits tax on the oil industry, Jimmy Carter was considering a steep new federal tax on retail gasoline. His economists argue passionately for it, but his political advisers worry about a backlash at the polls in November. Illinois Congressman John Anderson, a dark horse Republican presidential candidate, submitted a bill calling for a tax of 50¢ per gal., with the revenues to be used to chop Social Security taxes approximately in half. That measure would help cut consumption by moving the price of the fuel closer to the level that most of the rest of the world already pays. If Americans are unwilling to pay the price of necessary conservation, why should the cartel members, or any other nation, listen to anything the U.S. has to say about the burning issue of the 1980s: energy?

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