Facing a Powerful Cartel

ONLY seven months ago, the world's 23 largest oil companies signed the last of a series of agreements that will give the chief oil-exporting nations an extra $25 billion over the next five years. In return for that staggering raise, officials of the producing nations promised not to demand any more money during the life of the contracts, raising hopes that the world's basic fuel would maintain fairly stable prices for the next half-decade. Yet last week both sides went back to the bargaining table. Although they disbanded temporarily without reaching any new agreement, the nearly inevitable result of their meetings in Geneva over the coming weeks will be new price increases. The raises will hit consumers in Europe, Japan and the U.S. in the form of higher bills for gasoline, heating fuel and other products. They will also give much more economic power, and more international political clout, to the oil-exporting countries, most of which are in the Middle East.

These nations forced the companies into negotiations by displaying a rare unity. As recently as the mid-1960s, the oil companies could play the exporting countries off against one another, often driving down demands from one government by threatening to buy more oil from others. But in negotiations beginning in 1969, the eleven members of the Organization of Petroleum Exporting Countries (OPEC)* overcame their vast political and social differences. For the first time, they formed an oil suppliers' cartel, which now provides more than 85% of Europe's oil and 90% of Japan's. The U.S. imports 23% of its oil, mostly from Venezuela, and by some industry estimates will have to get 60% of its oil from abroad by 1980.

Drastic Action. One of OPEC's latest demands is for a price rise to make up for the 8.6% devaluation of the dollar, the currency in which oil payments are calculated. The oil countries called for a compensating increase of 8.6%, thereby setting a sort of black-gold standard paralleling the monetary one. In addition, the exporting nations are asking for " participation," meaning some form of ownership, in the companies' production operations.

For their part, oil-company negotiators point out that the contracts already provide for 2.5% annual increases, which will help make up for currency fluctuations. As for the participation demand, the companies are understandably wary of transferring part ownership under decree, even if OPEC governments pay for their share, as they have promised.

The producing nations seem certain to win concessions on both points. Seized by the spell of economic nationalism, more and more of them are threatening to take drastic action. The Iraqis have demanded a 20% share in the production facilities of Iraq Petroleum Co., which is owned by five international oil firms, including Jersey Standard. The ownership plan bogged down in the face of the company's compensation claims growing out of a government seizure ten years ago. To speed things up, Iraqi officials announced ominously that they were "scrutinizing closely" current financial records. In Venezuela, under a recently passed Petroleum Reversion Act, the government got authority to direct company exploration projects and start preparing for a total takeover in 1983, when oil leases held by foreign firms start to expire.

The most serious example of oil arrogance is in Libya. Last month its revolutionary government, headed by hot-tempered Muammar Gaddafi, who is 31, nationalized the local assets of British Petroleum, which is 49% owned by the British government. The ostensible reason was London's "collusion" in the recent Iranian seizure of three tiny Persian Gulf islands that Libya regards as Arab territory. BP's officers have threatened to sue any buyer of oil from its Libyan wells and have already won court detention of a tanker that was unloading Libyan crude in Sicily.

Heads of some OPEC nations are far from happy over Gaddafi's recklessness. The moderate regimes of Iran and Nigeria, for example, need a stable inflow of revenue from oil to finance large development projects, and would rather not run the risk of holding the oil companies for ransom. Yet in many poor OPEC nations, Gaddafi's militance is viewed as an exciting victory. As a top British oil executive told TIME Correspondent Roger Beardwood: "Many of these regimes have to impress on their people that they have done as well as the Libyans have."

The Libyans have done very well indeed: over the past decade, Libya has raised its per-barrel revenues by almost 200%, to $1.80. Since the Six-Day War in 1967, when the Suez Canal was blocked, Libya has enjoyed a special advantage because it is the only major producer that can supply oil to Europe without sending tankers around the entire African continent. Largely as a result, the Libyans have accumulated a nest egg of more than $2 billion in foreign reserves--enough to keep the country running for more than a year even if it should shut down all its operations. But in the long run, Gaddafi is playing a risky game with his nation's future. As Sir Eric Drake, chairman of British Petroleum, points out: "Anything that raises doubts in the minds of those who make new investments in oil would in the long run be contrary to the best interests of a producing country."

Financial Energy. Such investments will undoubtedly be huge. In the rest of this decade alone, estimates the Chase Manhattan Bank, the oil industry will need to sink some $360 billion into new exploration, equipment and plants to keep up with the fast-rising demand. Part of that money will be used to exploit recently discovered reserves in the North Sea, Canada and Alaska, all of which, fortunately, are in politically stable areas. Beyond that, the industry has a huge stake in finding an out-and-out alternative to conventional petroleum, since proven reserves are becoming harder and costlier to find and develop. Though none are yet economically feasible, possible substitutes include oil made from shale, tar sands or coal--and nuclear energy. Says John McLean, president of Continental Oil: "In the future there will be no oil companies, only energy companies."

At present, however, the oil industry is notably low on financial energy. Because of rising costs, especially payments to producing countries and higher exploration costs, the average return of the seven largest international oil companies on the net worth of their Eastern hemisphere facilities fell from 14.1% in 1960 to 11.2% in 1970. The squeeze is so severe that the cash-hungry companies may urge the cash-heavy countries to invest in refineries, pipelines and tanker terminals in Europe.

Such shifts in the balance of power between oil possessors and oil users were very much on the minds of negotiators in Geneva. Both sides were bargaining for advantage, but neither seemed to know precisely where the best position lay. Said Gerrit A. Wagner, a senior managing director of Royal Dutch/Shell, the largest non-U.S. industrial business: "There is great concern in most OPEC countries that they will go too far and kill the goose that lays the golden eggs. They know that there is a point beyond which they should not raise the price. But they do not yet know where that point is, and neither do we."

* Iran, Iraq, Saudi Arabia, Kuwait, Abu Dhabi, Qatar, Libya, Algeria, Nigeria, Venezuela and Indonesia.

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