Cash Flood in the Middle East

A RECURRING hint of humor cut through conversation at last week's International Monetary Fund meeting in Washington. The waggish word was that the organization's annual meeting ten years from now will be run not by the suave, dark-suited Americans and Europeans who have always dominated the IMF but by white-robed sheiks from the Middle East. Western moneymen chuckled nervously, for they know too well that the energy shortage is critical and that the oceans of oil buried beneath the Arabian peninsula and North Africa are far larger than any yet found elsewhere. The staggering deals that Middle Eastern leaders have been extracting from Western oil companies may very well lead to significant redistribution of the world's monetary wealth. They could ultimately reverberate soundly through the social development and political life of many nations.

As recently as 1970, the eight Middle Eastern and North African members of the Organization of Petroleum Exporting Countries (OPEC)* were collecting about $5.8 billion annually in oil payments. Since then they have negotiated a jump of almost 40% in their base rate of payment, and they hold contracts that will increase the take by 10% annually through 1975. They have also canceled out the unfavorable effects of the devaluation of the dollar simply by demanding a compensatory rate hike. In addition, they have begun bargaining for part ownership in drilling operations that will probably be paid for by production increases, thereby leaving their normal revenues intact.

As a consequence of these steeply spiraling price demands, the annual oil revenues paid to the nine nations in 1975 may well rise to $15 billion--a five-year increase of 159%. In the years beyond, OPEC oil receipts will grow to nearly unbelievable sums. Continental Oil Chairman John G. McLean estimates that aggregate OPEC revenues between 1970 and 1985 could reach half a trillion dollars, or almost half the current annual U.S. gross national product. "So far the flow of money has been a tide," says Walter Levy, a top consultant to international oil firms. "Now it has become a flood."

In the past, the U.S. has been little concerned about such a deluge, since it depends on the Middle East for only 5% of its oil: by contrast, 80% of Western Europe's oil comes from there, as does 83% of Japan's. Now the relative oil isolation of the U.S. is about to dwindle. Domestic supplies, including the newly discovered reserves on Alaska's North Slope, simply cannot keep up with demand. Nor can the reserves of Venezuela, traditionally the nation's largest foreign supplier. As a result, says Allan C. Hamilton, treasurer of Standard Oil of New Jersey, "by 1980 fully 37% of the U.S. supply of oil will originate in the Eastern Hemisphere, mostly in the Middle East." In that likely event, even the threat of a petroleum shutdown in that sorely troubled part of the world could cause an oil panic in the U.S.

New Shareholders. How will the new oil billionaires spend their money? That is an increasingly vital question, since oil payments that are not returned to customer nations--say in the form of purchases of machinery and consumer products--can cause a deficit in overall trade balances. Westerners are seeing more and more of their money remain abroad: both the Iraqi government and Libya's fiery strongman Muammar Gaddafi have used some of their bountiful oil revenues to buy military hardware from the Soviet Union. Gaddafi has also become a kind of Islamic buccaneer whose bankroll helps support the Palestinian fedayeen terrorists. Such expenditures are not calculated to keep international trade > accounts in balance.

Other Arab leaders are growing increasingly sophisticated about using their wealth for productive purposes. Saudi Arabia's King Faisal is tying together his vast land with a network of roads. The Kuwait Investment Board, headquartered in London, is skilled in selecting high-yield Eurobonds and low-risk commercial paper; the proceeds support a welfare society for the emirate's 830,000 inhabitants. The Shah of Iran has undertaken a monumental program of social development based on building industries like steel, aluminum processing and tractor manufacturing. In line with that plan, Iran will probably become the first OPEC nation to buy a stock interest in the "downstream" oil operations of refining, shipping and marketing. Since the oil industry needs huge amounts of capital over the next few years to meet world demand, leaders of other OPEC nations may decide that their natural wealth is best protected by making big investments in the stock of the oil companies that at one time were regarded as their colonizers.

The West's growing dependence on Middle Eastern crude oil could ultimately be broken by finding a practical substitute source of energy. Nuclear power offers what appear to be the best possibilities, and gasoline extracted from shale or coal is also promising. Each price increase for oil makes the high cost of any feasible substitute less and less of a problem, though the environmental drawbacks remain large.

Until an economically practical, environmentally acceptable substitute is developed the U.S. and other Western countries may well be forced to make the best of their weighty reliance on oil by rethinking many of their national policies. This could include making tax and environmental laws more --not less--favorable to domestic drilling, stepping up trade with nations that are rich in natural gas, notably the Soviet Union, and revising basic foreign policy in the Middle East. Even under the best of circumstances, Western businessmen will probably be dealing more and more with Middle Easterners--as valued customers for their products, as well-oiled sources of credit and as powerful stockholders in their companies.

* The three others: Venezuela, Nigeria, and Indonesia.

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