The Political Power of Mideast Oil

In terms of international economics and politics, Middle Eastern oil is the world's balance wheel.

--John Emerson, Chase Manhattan Bank Economist

EACH time a new crisis flares in the Middle East, Western oilmen are beset by a thousand and one Arabian nightmares. That has never been more the case than now, when the unstable elements of conflict in the post-Nasser Arab world could bring trouble at any time. Will the Arabs turn off the oil taps? Might Russia grab control of the world's richest reserves? And how badly would an interruption hurt the U.S.?

Those nightmares are not likely to come true, if only because it is in the Arabs'--and the Russians'--interests to keep the oil flowing. The U.S. itself is relatively immune to oil blackmail because only 3% of its supplies come from the area. Middle Eastern oil is, however, vital to U.S. interests and strategy in a broader sense. The economic well-being of NATO countries and of Japan depends upon it.

Seven Sisters. The Middle East and North Africa have 70.4% of the earth's proven reserves, amounting to 371 billion barrels, and last year provided 39% of international needs. Europe gets 58% of its oil from the Middle East and has only 60 days' supplies on hand at any time. Japan relies on the Persian Gulf for 90% of its oil.

The U.S.'s interest in keeping that oil flowing is not only strategic. The Middle East reserves are controlled by seven companies, known to oilmen as "the Seven Sisters." Five of them are American-owned: Jersey Standard, Mobil, Texaco, Gulf and Standard of California. (The other two are British Petroleum and Shell.) U.S. companies produce 100% of Saudi Arabia's oil, 75% of Libya's, 50% of Kuwait's, 40% of Iran's and 25% of Iraq's. The companies' investments are calculated to be $2.2 billion in book value alone. A more realistic assessment of their potential worth over the next ten years amounts to $20 billion.

This stake is important to the U.S. balance of payments. The companies earned about $1.3 billion in 1968, reinvested $263 million in the region and repatriated the rest. At the same time, the producing countries used their oil income to buy $500 million in U.S. goods. Net benefit to the U.S.: roughly $1.5 billion.

Matter of Markets. U.S. companies have so far survived war, revolution, guerrilla attacks and every Arab attempt to exert leverage on Washington. The Suez Canal has been closed since the Six-Day War in 1967, but American-owned companies have continued to pump oil. The most serious disruption occurred last May, when a bulldozer accidentally severed the Trans-Arabian Pipeline (Tapline) in Syria, cutting off 480,000 bbl. a day. Syria has refused to allow repairs, presumably in order to embarrass the conservative regime in Saudi Arabia, which is losing $100,000 each day that the pipeline remains closed. Now tankers must carry the bulk of oil produced in the Arabian Gulf around the Cape of Good Hope to Europe. The consequent shortage of ships has caused a tripling of charter rates, making it much more expensive to transport heating oil to the U.S. In parts of Europe, fuel-oil prices have more than doubled in the past year.

The wells of the Middle East have continued to work through crisis after crisis--and will likely continue to do so--because the Arabs need oil money. North African and Middle Eastern countries, including Iran, collect a total of $4.8 billion annually in oil revenues. As Kuwait's Oil Minister Abdul Rahman Attiiqi has said, "Any oil stoppage could cause more harm to Arab than to American interests." Oil provides 76.5% of Saudi Arabia's revenue, 94% of Kuwait's, 79% of Libya's and 56% of Iraq's. The international markets are controlled by the Western oil companies, and any country that tried to shut them out would have a hard time selling its "hot oil" at a profit.

Communists and Commerce. The growing Soviet influence in the area has not yet upset the oil deals. The Iraqis have invited the Russians to help develop their newest field, for instance, but U.S. companies are still operating the country's older wells. There is always the worry that the Soviets might persuade the Arabs to halt the flow of oil to the West in the event of a war. But the Arabs would hate to do so in peacetime unless Russia were willing to pay massive compensation for the oil revenues that they would lose. Nor are the Soviets likely to take over U.S. concessions when American contracts with the Arab governments run out toward the end of the century. The Arabs are training their own people to do the job. The Russians' immediate interest in Middle East oil is to satisfy their own future fuel needs--and those of their Eastern European satellites--which cannot be economically filled from remote Siberian fields.

The Arabs themselves, however, are not above using a little oil blackmail to raise prices, as Libya recently did. Libya is one country that enjoys a seller's market, situated as it is close to Europe, where its low-sulfur oil is much in demand. Over the past six years, Europeans have come to depend on Libya for 30% of their oil. Playing on that, the revolutionary government of Colonel Muammar Gaddafi has pressured the companies to raise their posted price by 13.4% and pay the government a 5% tax surcharge. Most of the independent companies operating in Libya have agreed, and as of last week only a handful of the major international companies were still holding out. "It may well be a watershed for international oil," says Walter J. Levy, dean of oil consultants. "The temptation of Persian Gulf countries to follow at least to some extent the Libyan example and methods will be very strong, if not irresistible." Estimated additional cost to Europe if the Libyan precedent spreads to all producing countries: $1 billion a year.

Such an increase would also bring the price of Middle East oil closer to that of oil produced in the U.S., where the domestic market is protected by import quotas. At the present rate of rise in demand, the U.S. will need to import an estimated 50% of its oil by 1980. The only visible source for imports on such a scale is the Middle East. By best estimates, Alaska's North Slope holds no more than 10% as much as the reserves of the Arab countries and Iran, and there is little hope that Indonesia's offshore fields will prove rich enough even to fill Japan's needs. Simply paying for large amounts of imports will precipitate a huge balance of payments drain unless American companies profit proportionately from the growing world demand for oil. For the foreseeable future, the oil-thirsty world will depend heavily on the bountiful reserves of the Middle East, for which the consuming countries will have to pay an increasingly steep price.

This file is automatically generated by a robot program, so reader's discretion is required.