FAISAL AND OIL Driving Toward a New World Order
In every car and tractor, in every tank and plane--oil. Behind almost every lighted glass tower, giant industrial plant or little workshop, computer and moon rocket and television signal--oil. Behind fertilizers, drugs, chemicals, synthetic textiles and thousands of other products--the same substance that until recently was taken for granted as a seemingly inexhaustible and obedient treasure. Few noted the considerable historic irony that the world's most advanced civilizations depended for this treasure on countries generally considered weak, compliant and disunited. Now all that has changed, and the result has been a major economic and political dislocation throughout the world.
The change became dramatically apparent in 1974, a pivotal year that saw the decline of old powers, old alliances, old philosophies--and the rise of new ones. The West's belief in the inevitability of human progress and material growth was badly shaken as inflation spread oppressively across the world, several industrial societies tumbled into recession, and famine plagued a score of nations. There was a marked erosion in the wealth, might and cohesiveness of North America, Europe and Japan. In the developing world, 40 or more countries with few natural resources fell increasingly into destitution and dependency. Meanwhile, a handful of resource-rich nations gravely compounded the problems and challenged the vital interests of the rest of the world by skillfully wielding a most potent weapon: the power of oil.
The Swiftest Transfer of Money in History
United in history's most efficient cartel, these nations exploited modern civilization's dependence on oil. Their power came from the uniqueness of oil, an exhaustible and not quickly replaceable resource that has long been shamefully wasted by much of the world. Because oil is not usually found where it is most consumed, and demand for it is so great, it is the most widely traded commodity in world commerce as well as a highly volatile element in world politics.
Again and again, the cartel formed by the Organization of Petroleum Exporting Countries raised the price of oil until it reached unprecedented and numbing heights. The producing nations' "take" from a barrel of oil, less than $1 at the start of the decade, was lifted from $1.99 before the Arab-Israeli war 15 months ago to $3.44 at the end of 1973 to more than $10 at the end of 1974. The result is the greatest and swiftest transfer of wealth in all history: the 13 OPEC countries earned $112 billion from the rest of the world last year. Because they could not begin to spend it all, they ran up a payments surplus of $60 billion. This sudden shift of money shook the whole fragile structure of the international financial system, severely weakened the already troubled economies of the oil-importing nations and gave great new political strength to the exporters.
The beneficiaries of this transfer were a disparate group of oil-possessing Africans, Asians, Latin Americans and, most favored of all, Arabs, who provided two-thirds of the petroleum exports and have more than three-fifths of the proven petroleum reserves in the non-Communist world. One bleak, sparsely populated country is by far the world's greatest seller and reservoir of oil, and one dour, ascetic and shrewd man is its undisputed ruler. He was a principal factor in raising oil prices, and now holds more power than any other leader to lower them or raise them anew. He is completing arrangements to nationalize the vast U.S.-owned oil properties within his country, bringing an end to an era in which the international oil companies dominated the Persian Gulf and helped to transform its face and fortune. Both in his own right and as a symbol of the other newly powerful potentates of oil, Saudi Arabia's King Faisal is the Man of the Year.
All the King's Spending and All the King's Plans
Last year Faisal's Saudi Arabia earned $28.9 billion by selling nearly one-fifth of all the oil consumed by non-Communist countries. The King channeled part of these funds into a massive development program that aims at building factories, refineries, harbors, hospitals and schools for his 5.7 million people. Faisal also spent about $2 billion on modern weapons for his small but growing armed forces. He granted a large part of the $2.35 billion that the Arab oil producers pledged at Rabat to the "confrontation states" in the battle against Israel; last year he was the primary outside bankroller of the Egyptians, Syrians, Jordanians and the Palestine Liberation Organization. He also made $1.2 billion in multilateral loans and grants and pledged to give some $200 million to poor countries outside the Arab world. But all the King's spending and all the King's plans could not come close to using up Saudi Arabia's wealth. The new financial giant of the world, Saudi Arabia in 1974 stood to accumulate a surplus of about $23 billion--a potentially unsettling force in global finance.
Moreover, Saudi Arabia's new wealth is simply the most spectacular symbol of the rising fortunes of the OPEC nations. With their surplus of some $60 billion last year, they took in $164 million more each day and $6.8 million more each hour than, by best estimates, they can currently spend. At that rate of accumulation, the Economist of London calculates, OPEC could buy out all companies on the world's major stock exchanges in 15.6 years (at present quotations), all companies on the New York Stock Exchange in 9.2 years, all central banks' gold (at $170 an ounce) in 3.2 years, all U.S. direct investments abroad in 1.8 years, all companies quoted on stock exchanges in Britain, France and West Germany in 1.7 years, all IBM stock in 143 days, all Exxon stock in 79 days, the Rockefeller family's wealth in six days and 14% of Germany's Daimler-Benz in two days (which in fact Kuwait did in November--though for that little country, the purchase represented all of 15 days of oil earnings).
King Faisal is not merely the richest of the OPEC leaders. He is also a spiritual leader of the world's 600 million Moslems because his kingdom encompasses Islam's two holiest cities, Mecca and Medina. The King, who is 68, wants to pray within his lifetime in the third most holy city, in Jerusalem at the Dome of the Rock,** and to walk there without setting foot on Israeli-held territory. Unless and until he gets his wish, peace is unlikely to have much future in the Middle East. Faisal hates Zionism with a cold passion and often argues, despite the Soviet Union's pro-Arab, anti-Israel policies, that Zionists and Communists are allied to control the world.
In 1974 Faisal used his political authority to aid Secretary of State Henry Kissinger in moving toward an interim agreement in the Middle East. He helped persuade the Syrians, for example, to agree to the disengagement pact with the Israelis on the Golan Heights. Acknowledging Faisal's role, Kissinger told TIME Correspondent Strobe Talbott: "The King is a sort of moral conscience for many Arab leaders. By having great religious stature, he can act as a kind of pure representative of Arab nationalism." And, Kissinger adds, "Faisal has been able to maneuver Saudi Arabia from being a conservative state into a political bellwether."
The New Reality of Arab Power
One of the causes of the West's woes is that for too long it underestimated the will and power of Faisal and other rulers of oil-producing nations to act together. The cries for higher prices had been rising for 15 years, first from the Venezuelans and Iranians, then from the radical Arab leaders of Libya, Algeria and Iraq. Faisal, a conservative and a longtime friend of the U.S., at first resisted--and then changed his mind because of U.S. political and military support of Israel.
For many frustrating months in 1973, the King, and his spokesmen, warned the U.S. that unless it forced Israel to withdraw from occupied Arab territories and settle the Palestinians' grievances, he would slow down oil production. The State Department thought that the threat was hollow; President Nixon warned on television that the Arabs risked losing their oil markets if they tried to act too tough.
The Arab-Israeli war of October 1973 moved the Arabs to impose a reduction in oil output--and do much more. Within ten days after the Egyptians and Syrians had attacked Israeli-occupied territory, the Arabs and Iranians in OPEC/- --long derided in the West for their disunity--coalesced and raised prices from $1.99 to $3.44 per bbl. A few days after that, King Faisal led an even stronger move. Angered by the U.S. military resupplying of Israel, the Saudis and the other Arabs embargoed all oil shipments to the U.S. and started cutting production. Very quickly their output dropped 28%. When the West made no response, OPEC realized its own strength and kept right on raising prices through 1974.
This huge success gave new pride and political power to all the Arabs and brought King Faisal widespread respect in the Arab world, many of whose leaders had earlier scorned him as an unregenerate conservative. Suddenly the Arabs found themselves avidly courted by people who for long had condescended to them. The hotels of Riyadh, Dubai and Baghdad overflowed with Western businessmen hawking Idaho potatoes, cement plants, color television systems and gas-fired steel mills. The Middle East also became a magnet for Western bankers, each with his own creative plan for dispensing the Arabs' cash. Elite American universities, from Stanford to Chicago to Columbia, searched for Arab professors and added courses in Arabic history, culture, language, religion. Western governments vied with the Soviets over which side could sell the Arabs more--and more destructive--fighter jets, tanks and missiles.
So much foreign money washed into Arab oil-producing countries that ordinary statistics no longer made sense. Estimated gross national product per capita ran to $13,000 in Kuwait, $14,000 in Qatar and more than $23,000 in Abu Dhabi. But those figures did not reflect living standards because the quick cash has not had time to filter down to the people. Bureaucracies strained to figure out ways to spend at home. Kuwait expanded one of the world's most all-encompassing welfare states. To hold down food prices, most of the big oil producers subsidized imports of staples. Office buildings, low-rent apartments and supermarkets rose almost everywhere. Some planners worried about keeping a work ethic going. Said a Saudi government minister: "We will have to be very careful not to spoil our citizens. Our people will have to deserve what they earn. We will furnish them with basic requirements, but nobody should live on charity."
The Europeans and the Japanese, umbilically dependent on the Middle East for respectively 70% and 80% of their oil, not only pressed their most modern technology on the Arab states but also granted them strong diplomatic support. Some European political leaders called for a new Euro-Middle East alliance, perhaps to replace the Atlantic Alliance. The French, responding to what they call the "New Reality" of oil-based Arab power, were especially obsequious in their attentions. The Dutch, long outspoken defenders of Israel, fell silent in fear of Arab wrath.
The Aim: A Redistribution of Wealth
Indeed, the Arabs' ultimate weapon, oil, did much to change the entire balance of their conflict with Israel. Within the United Nations, a bloc of Arab, African, Latin American and Communist countries banded into a new majority, pushing through resolutions that isolated Israel and antagonized the U.S. Only the Dominican Republic and Bolivia voted with the U.S. and Israel when the General Assembly, by a margin of 105 to 4, invited the P.L.O.--with its long record of terrorism--to join in the debate over the Palestine issue. The U.N. welcomed P.L.O. Leader Yasser Arafat as a conquering hero and gave his organization permanent observer status.
Next to Faisal, the ruler who gained most from oil last year was not an Arab but the "Light of the Aryans," the Shah of Iran. His country, the world's second largest oil exporter, quadrupled its petroleum earnings, to $20.9 billion. Impatient to industrialize and militarize, the Shah pressed the construction of automobile and petrochemical factories, dams and hospitals, and ordered 70 F-4 Phantom jets and 800 British Chieftain tanks to bolster a mighty armed force. This swelling strength raised apprehensions among some Arab governments in the region and evoked new hostility--but also won new respect in Washington, where Iran is valued as an anti-Communist bulwark. Though much poverty and illiteracy hang on in Iran, the middle class is rapidly spreading and the gross national product is expanding at an astounding rate of 50% a year. The Shah, who aims to turn Iran into "the Japan of West Asia," argued for price increases long before Faisal did, and he has been even more vocal than the Saudi King in urging that prices stay up.
Several other countries rose on petropower. Oil made Nigeria not only black Africa's wealthiest nation ($9.2 billion in earnings) but unquestionably its strongest political force. Indonesia, though still abysmally poor, is showing the first glimmerings of its potential as Southeast Asia's economic leader, thanks to oil exports. Oil-endowed Venezuela at midyear trebled its national budget, to almost $10 billion, to take account of rising revenues. The Venezuelans are expanding their state-owned steel industry in the Orinoco backlands, paying to educate thousands of future leaders at U.S. universities and gaining great influence among Central American republics by promising them loans. Says Venezuela's President Carlos Andres Perez: "This is our opportunity to create a new international economic order."
A new order is the ultimate goal of the petrocrats. Their aim is to lead many of the Third World nations in an economic revolution that is already bringing a radical redistribution of the world's wealth and political power. The transfer of riches to the oil producers has helped slow or stop the rise of living standards in many other countries--a development that has potentially grave social consequences. The steep economic growth that the industrial nations have enjoyed since World War II tended to soften social and economic inequalities because even the poor and deprived made visible progress year by year and could discern a brighter future. Now, if there is slow growth or no growth, demands for social justice will be more urgent--and harder to fulfill. Democratic governments will have to find ways to redistribute the existing wealth, or else face dissension and perhaps chaos.
The Shah of Iran laid it on the line: "The era of terrific progress and even more terrific income and wealth based on cheap oil is finished." Henry Kissinger sees it another way. If high energy prices persist, he warns, "the great achievements of this generation in preserving our institutions and constructing an international order will be imperiled."
Inflaming Problems and Inflating Prices
The sudden, sharp rise in oil prices inflamed all sorts of problems, increasing government controls, intensifying nationalism and calling into question the future of free economies. People were gripped with the fear that events had overtaken their ability--or their government's ability--to cope. Otherwise sober men spoke of extreme solutions: repudiation of international debts, massive currency devaluations, the suspension of parliamentary government, even military intervention in the producing countries.
It was possible to blame too much of this malaise on oil. Many countries have long suffered from high inflation because they were living beyond their means for years. Particularly in the West's mass-consumer societies, the poor wanted to live like the middle class, and the middle class wanted to live like the rich. Demands piled up--for more goods, fatter wages, higher social welfare--and prices soared. Still, by best estimates, the rise in energy prices caused one-quarter to one-third of the world's inflation last year. As the price of oil increased, it kicked up the prices of countless oil-based products, including fertilizers, petrochemicals and synthetic textiles. To battle inflation, all Western nations clamped on restrictive budget and credit policies, causing their economies to slow down simultaneously for the first time since the 1930s.
The danger of a global recession grew because, as people spent more for oil, they had less money left over to spend on other things. The overall decline in demand reduced production and jobs. Because non-OPEC nations had to pay out so much for foreign oil, they moderated their buying of other imports; that slowed the growth of world trade, which has been a major source of international cooperation since World War II. The U.S.'s relations with its allies also came under strain, and the West seemed without will or unity. For most of the year, Western European nations and Japan refused to follow the U.S.'s call for a united front against the oil producers, essentially because European leaders considered the consumers' bargaining power too feeble.
The U.S. was a major oil exporter through the late 1950s, but then its own demands raced so far ahead of production that it now has to import more than one-third of its supply. The nation's bill for foreign oil pyramided from $3.9 billion in 1972* to $24 billion last year. The $20 billion jump meant that Americans either had to increase their foreign debts greatly or produce and export $20 billion more in goods and services--food, steel, planes, machinery, technology--to pay for oil imports. Unless the oil price comes down or the country sharply reduces its oil imports or substantially increases production, the U.S. will have to spend that extra $20 billion or more every year. This will drain off more of the nation's resources and build up trade debts that future generations will have to pay. In 1974 the rippling effects of rising oil prices contributed three or four percentage points to the U.S. inflation rate of 12%. The oil rise, which Yale Economist Richard Cooper called "King Faisal's tax," reduced Americans' purchasing power and consumption of goods as much as a 10% increase in personal income taxes would have done.
Nations that depend even more on OPEC fared much worse than the U.S. Japan's $18 billion bill for oil imports was the biggest single factor in lifting its inflation rate to a punishing 24%, causing the first real postwar decline in economic growth. Inflation rates doubled in many Western European nations: to 16% in France and Belgium, 18% in Britain, 25% in Italy. To meet its trade deficit, Italy has borrowed more than $13 billion, incurring interest payments of nearly $1 billion a year. Prime Minister Harold Wilson says that the fivefold increase in oil prices aggravated Britain's worst economic crisis since the 1930s, and is severely testing the country's social and political fabric. Only West Germany, The Netherlands and Belgium ran trade surpluses.
For Europeans, life became a little darker, slower, chillier. Heating-oil prices went up 60% to 100%, and thermostats were turned down. In the midst of a French conservation drive in October, President Valery Discard d'Estaing found his Elysee Palace dining room so cold that he lunched with Premier Jacques Chirac in the library by a crackling fire. Gasoline rose to $1.40 per gal. in West Germany, $1.72 in Italy, $2.50 in Greece. Electrical advertising signs were banned after 10 p.m. in France and during the daytime in Britain. In Athens, the floodlights illuminating the Acropolis were turned off. Throughout Western Europe, energy costs were a cause of the slump in sales of autos, houses and electrical appliances. Layoffs spread in those and other industries. Unemployment hit a postwar high in France. In Germany, foreign workers were being paid bonuses to quit and go back home to Spain, Turkey and Yugoslavia.
The Soviets benefited from what they accurately enough called this "crisis of capitalism." From their oil exports, mostly to the West but also to their East European allies, the Soviets earned $2 billion last year. However, Russia will rapidly scrape the limits of its self-sufficiency if it is to meet plans to expand its petrochemical industry and treble auto ownership (to 9 million cars) by 1980. Soon the Soviets will have to restrict oil sales and greatly increase the preferential prices that they charge to their Comecon partners. Last year Poland reportedly had to buy a large amount of Libyan crude, at $16 to $20 per bbl. Strapped for hard currency to pay for oil from non-Communist sources, East Germany had to restrict the expansion of its plastics and textiles industries.
The poorest countries of Africa, Asia and Latin America were the worst hurt victims of the oil squeeze. Indeed, the developing countries' extra costs for oil last year totaled $10 billion, wiping out most of their foreign aid income of $11.4 billion from the industrialized world. In black Africa, only Nigeria has any big known reserves of oil, and Gabon, the Congo Republic and Angola possess some oil. For the other black African countries, the petrobill came to $1.3 billion last year. Development plans were stymied because so much money was drained off for oil. Drought-induced hunger became worse, in part because those countries could no longer afford as much gasoline to run their tractors, or fertilizers to nourish their fields. Inflation raced at rates averaging 45%.
India suffered more than any other nation. Its oil import costs hit $1.6 billion, up fivefold in two years, leaving it little money to import food and fertilizer, machines and medicine for its hungering millions. Pakistan's plight was almost as critical; its imports of oil and fertilizer topped $355 million. Sri Lanka's rice farmers had to pay 375% more for fertilizer; they reduced their buying so much that the rice harvest fell almost 40% below expectations.
The poorest countries--those with scant resources to finance their needed imports--descended into a new category, now known as the Fourth World. The old Third World became a more exclusive, OPEC-led grouping, limited to those nations that are exploiting their rich mineral or agricultural resources. Emboldened by the oil producers' success, many other Third World countries tried to create their own price-fixing cartels for copper, iron ore, tin, phosphates, rubber, coffee, cocoa, pepper and bananas. Their leaders talked of "one, two, many OPECs." The grand plans generally failed because members have lacked the cohesiveness to make them work --so far. But the new importance of raw materials moved some big producers to raise prices unilaterally. Jamaica, for example, abrogated contracts with companies and lifted the government take for the country's bauxite by 700%.
In sum, the world has entered an era in which natural resources will count for much more than before, conservation will gain a premium over consumption, and more attention will be paid to exploiting resources than curbing pollution. All this will bring many changes in lifestyles: slower gains in real purchasing power, stricter controls on energy use, smaller cars. It remains to be seen to what extent the changes will be accepted by such disparate forces as labor unions, auto manufacturers, and consumer and environmental groups.
The Case For--and Against--Increases
With passion, the oil producers defend their price increases on the ground that it is high time that the producers of raw materials get a fair shake from the richer industrial nations. Essentially, these are the oil producers' arguments:
In the past, the industrial countries grossly exploited the oil-producing countries. For too long, the terms of trade were stacked against the materials producers. While they were forced to pay ever inflating prices for their machines, medicines, food and other goods bought from the West, the developed countries not only imported oil at low, stable prices but also built industrial and consumer booms on it. Now the oil producers must build their own industries, both to get a more equitable share of the world's income and to insure themselves against the day when their petroleum resources run out. Furthermore, by keeping prices high, the producers are really doing the rest of the world a favor by forcing both energy conservation and the search for alternative resources.
The rise in oil prices, the producers go on, should not get all or even most of the blame for inflation, slow growth and balance of payments problems, which have deeper roots. Says Kuwait Oil Minister Abdel Rahman Atiqi: "Why should we be responsible for helping the U.S., for instance, solve its economic problems? When our Arab lands were impoverished and our oil was being sold at giveaway prices, what assistance did the U.S. give us?"
The producers are not at all defensive about acting as a cartel. They contend that they learned all about cartels from the large Western oil companies, which for decades acted in concert and kept prices low. Cartels, in short, are neither unique nor forbidden by any international law. If buyers really want to moderate prices, say the producers, they should limit the international oil companies' "obscene" profits or lower their own taxes on oil products (taxes account for about 25% of the price of gasoline in the U.S. and 54% in France).
On one level, it is impossible to quarrel with the producers for trying to get the most out of their resources and charging as much as they think they can get. But the producers often go far beyond the usual economic considerations of supply and demand, basing much of their case on fairness of prices, profits and shares of the world's wealth. Arguments about fairness are tricky, of course, and cut both ways. Surely other nations would be enraged if, for example, the U.S., Canada, Australia and France formed an Organization of Grain Exporting Countries (OGEC) and decreed a fivefold increase in the price of wheat, of which they are the major world suppliers. True, U.S. wheat prices jumped 192% in the two years up to last November, but that was a free-market surge caused largely by disastrous crop failures around the world during a period of rising demand. In the same two-year period, OPEC's major imports have risen much less: for example, cement, 27%, heavy trucks, 25%.
The OPEC nations cannot accurately argue--either in terms of economics or "fairness"--that the sharp rise to $10.12 per bbl. is needed to make up for the recent inflation in the price of goods that they buy in world trade. John Lichtblau, a leading U.S. oil consultant, notes: "Since 1960, the U.N. index of world export prices of manufactured goods has risen 86% and the Saudi government's revenue on each barrel of oil has risen 1,136%. Since 1970, world export prices have risen 55% and the OPEC governments' income on each barrel has gone up 955%."
The high prices will certainly discourage oil waste, but the producers have an exaggerated fear that they will soon run out of what the Shah calls "this noble product." The Middle East's proven reserves have risen every year since records were kept and have doubled since 1959, to some 350 billion bbl. Saudi Arabia alone has proven reserves of 132 billion bbl. --enough to keep producing at current rates until the year 2018--and some experts reckon that the real total could be four times as great.
Nobody knows what would be a "fair" oil price, but logically it should bear some relation to the cost of primary production. That cost ranges downward from $2.50 or so per bbl. in the U.S. to 60-c- in Venezuela and 12-c- in Saudi Arabia. The price should also have some market relationship to the price of alternative energy sources, which many authorities think would be economically feasible when oil sells at $7 or more per bbl. But with the latest round of oil price increases last month, the OPEC governments will collect $10.12 on a barrel. By contrast, the international companies earn 20-c- to 50-c- per bbl. in return for all the work, risk and investment that they undertook to find and pump that oil.
Thus, instead of the elusive terms of fairness, the argument is perhaps best couched in terms of ultimate self-interest. The oil producers may well be setting a dangerous precedent, for themselves as well as oil users. By exercising monopoly muscle as a group of nations, the cartel may be creating a world in which prices are neither fair nor free but fixed by raw economic power. Considering the fact that oil is about all they have to bargain with, that kind of world could eventually be dangerous for OPEC'S members. The oil producers quite frankly say that they expect the living standards of Western industrial countries to grow at a slower rate for the immediate future, and they cannot be expected to weep over that. But by forcing the change so suddenly, without giving the oil importers a chance to adjust gradually, OPEC runs the risk of wrecking the world economy--and that, OPEC spokesmen themselves have admitted, could only hurt them.
The Companies' Rich Past and Questionable Future
In all this, the role of the oil companies is growing weaker. The companies not only discovered and developed the oil but also put up billions of dollars to build rigs, pipelines, refineries and harbors. They have done so for more than 40 years, since long before the Saudis had much interest in oil, let alone the means to exploit it. The first prospectors--from Standard Oil of California--went to Saudi Arabia in 1933 and brought in the first well in 1938. They and later prospectors had a rugged frontier existence, living in tents and huts, relying on an 11,000-mile-long logistics line from the U.S., and coping with desert sand, burning heat and loneliness. In the late 1930s and early 1940s, they were joined by Exxon, Texaco and Mobil to form the Arabian American Oil Co. Oil prices were relatively low--$1.40 to $2 and the governments' take ranged from 20-c- to less than $1 a bbl.--because Middle East production costs were modest, oil was in surplus in the world, and the producers' governments were weak and disunited. Company earnings were huge. When supplies tightened and producers began to get together in the late 1960s, the governments' split of production profits rose from 50-50 to 67-33. Even before the price rises since 1973, Middle East governments profited nicely from oil; Saudi Arabia's take from 1965 to 1972 totaled $10 billion.
The OPEC countries have shrewdly turned the companies into scapegoats, blaming their high profits for the high retail prices. Indeed, in this year's first nine months, profits of the five biggest U.S. international oil companies jumped anywhere from 38% to 70%. But much of this gain was due to an unusual circumstance: OPEC's price rises triggered an automatic increase in the value of the huge stocks of oil that the companies held in tank farms and on tankers. The companies will not get those one-shot "inventory profits" in the future, unless OPEC again raises the price. As for relative earnings, the five companies' profits rose from $5.3 billion in the twelve months before the embargo and big price rises, to a steep $8.2 billion in the twelve months following; but the OPEC governments' revenues swelled from $22.7 billion in 1973 to $112 billion last year. The companies' earnings will probably decline this year because their costs are going up while oil demand is going down.
The Danger of Rising Surpluses
The companies, in fact, were among the biggest losers of 1974. The four U.S. partners in Aramco had to agree late in the year to sell their remaining 40% ownership to Faisal's government. It will pay the partners $2 billion for almost all their facilities, a price that the Saudis can meet with less than one month's oil earnings. The Saudi takeover will move Kuwait, Qatar, Oman and the United Arab Emirates to nationalize the last of the Western oil operations in those areas, probably this year. The companies will become mere agents, selling technical and marketing services to the governments for a fee.
The major companies' future is uncertain as they will face competition for markets from the oil countries' state-owned companies. Some national producers want to squeeze the private oil companies because they are viewed as competitors. Mani Said Utaiba, Petroleum Minister of the United Arab Emirates, complained: "These profits are being used by [the companies] to find alternative sources for our oil. They are investing on a huge scale in the Arctic and the North Sea. This we will not accept."
The oil crisis promises to shake the world for at least another five years or longer. It will take that long for importing countries to develop alternative energy sources and more petroleum in nations outside OPEC. Oil will be flowing in from Alaska by 1978, but the total--600,000 bbl. a day at first, 2 million bbl. a day by 1981--will not free the U.S. from the need for foreign supplies. Britain and Norway are each expected to be pumping 2 million bbl. a day from deep below the North Sea by the early 1980s. But the rest of Europe, as well as Japan and the Fourth World, will still depend on Middle East oil, above all from the country that has most of it: Saudi Arabia.
Moreover, if Faisal and his allies hold prices up, the rest of the world could encounter such compounded problems that 1974 would be remembered as an easy year. With oil at $10 a bbl., OPEC would charge the world an other $600 billion in the next five years. To pay the bill, the 137 nations outside the cartel would have to deliver one-quarter of their total exports to OPEC's elite 13 countries. It would be impossible for the oil importers to transfer so much of their production--or for OPEC nations to absorb it all. The most frightening figure for the future is that OPEC nations stand to accumulate payments surpluses of $250 billion to $325 billion by 1980, and the rest of the world would run up exactly that much of a deficit.* For the countries that have them, surpluses create huge purchasing--and political--power. Conversely, deficits usually lead to recessions, devaluations and decline.
Both the surpluses and the deficits will drop when the OPEC countries expand their buying, lending and investing abroad. In stepping up their domestic development plans, they will have to enlarge their imports. This can be accomplished fairly easily by seven of the OPEC members: Iran, Venezuela, Indonesia, Iraq, Nigeria, Algeria and Ecuador. They have relatively big populations and much poverty--hence much need for internal development. The huge problem is that six other, lightly populated Arab states--Saudi Arabia, Libya, Kuwait, Abu Dhabi, Dubai and Qatar--are collecting far more money than they can possibly spend. These six, embracing only 9.3 million people, earned $54.7 billion from oil last year. For all their industrialization and social welfare, their military and foreign aid, they can dispose of only a fraction of that total, leaving a combined surplus of $38 billion.
Naturally, the Saudis are piling up the biggest surpluses. At present prices and production levels, they will collect a staggering $150 billion over the next five years. But they will be unable to buy or build fast enough to use up even one-third of their oil money on domestic development. By 1980, they stand to have well over $100 billion in surplus--to lend, give away or invest in foreign countries.
The Search for Ways to Recycle
In the chancelleries and countinghouses, everybody is seeking ways for the OPEC countries to lend their surpluses back to the oil importers in a massive "recycling." A hypothetical example of recycling: Italy pays several billions of dollars to Aramco, the marketing agent, for Saudi Arabian oil; Aramco then pays this money to Saudi Arabia, which in turn deposits it in Western banks; the banks then lend it back to the government of Italy. Trouble is, the petrodollar deposits are short-term (the oil countries want the power to pull their money out at a moment's notice), while most loans, to be useful to a government or business, must be for the longer term--anywhere from one to ten years. A further difficulty is that many of the big borrowers are chancy credit risks, including the governments of Italy, Denmark and the developing countries. More and more bankers fear that their institutions will go under if the OPEC depositors withdraw their money or the borrowers default on their loans. Since much of the hot oil money is deposited in U.S. banks, the U.S. Government would have to pay off to cover the defaults.
Prudent bankers are increasingly refusing to lend a deficit-ridden country money that it may not pay back or to finance imports that it cannot afford. Quite a few banks are also turning down deposits of OPEC petrodollars or offering lower-than-usual interest rates. According to most estimates, big private banks in the West will be able to handle little more than 20% of recycling requirements in the future. New international agencies will have to be set up to do the job.
Whoever controls these agencies will gain awesome political powers--and take on major financial risks. The lenders will be able to tell the borrowing nations that, if they want money, they must change certain economic policies, and perhaps some military and diplomatic policies as well. But the lenders will also carry the enormous risks of suffering loan defaults. Nobody minds having the political powers that go with lending, but nobody wants the risks.
To help in recycling, Henry Kissinger has called for the Western countries and Japan to form a pool of $25 billion this year and perhaps another $25 billion next year. They would draw the money from petrodollar deposits in their banks and lend it out to industrial countries that have financial emergencies. For example, if a big oil producer pulled all of its money out of sterling, the British could get an immediate loan from the pool to cover their currency loss. Some Common Market nations, particularly West Germany, are cool to the Kissinger plan because they and the U.S. would be left holding the bag for any loan defaults.
OPEC countries dislike international recycling plans that deny them a major voice in determining who could borrow their money. The Trilateral Commission, an influential group of North American, European and Japanese business executives and academicians, has proposed that the industrial countries and the oil producers jointly open and operate a bank for recycling. The two sides would put up equal amounts of money and decide who could borrow it.
While this and other plans to start a joint fund for recycling hold much promise, one long-lasting problem is that recycling is really a euphemism for indebtedness, and interest payments must find their way back to the oil countries. In the 1980s some OPEC members may be earning as much from interest on their loans and bank deposits as from oil. This added wealth would give them more flexibility to reduce oil production if they want to conserve their liquid gold or to punish importers by reductions for political reasons. Meanwhile, to pay the interest, the borrowers may have to print more and more money, fueling inflation.
Conserving to Crack the Cartel
Thus, even with the best of recycling, the importing nations will be vulnerable. Says Walter Levy, the world's leading oil consultant: "The world economy cannot survive in a healthy or remotely healthy condition if cartel pricing and actual or threatened supply restraints of oil continue." In many ways, Western democracies face a wartime-like crisis, but until'lately they have reacted as they did during the 1939-40 "phony war." Only by cooperating among themselves can the importers counter the cartel's control over their destinies. Recently they have begun to make tentative moves to accomplish three necessary things: conserve energy, develop new sources and stockpile oil in case of another embargo or cutback.
In November, ministers from the U.S., Canada, Japan, all members of the Common Market (except France), four other European nations and Turkey signed an agreement to form the International Energy Agency, which Henry Kissinger had proposed. Provided their legislatures approve, each member would build up a stockpile of oil equal to 90 days of imports; if any OPEC members embargo oil or reduce shipments, the IEA nations would reduce consumption and later share what they have with one another. The IEA agreement will soon come up before Congress, which would do well to approve it.
The Western nations will have no real bargaining strength until they show that they are taking strong measures to conserve. By significantly reducing demand, the big buyers of oil might force OPEC into production cuts that some cartel members may eventually find intolerable. Cutbacks would be particularly rough for Iran and Iraq, both of which plan substantial production increases hi the next few years to finance their grand development programs. Rather than reduce output, other populous countries with ambitious development schemes--Nigeria, Venezuela, Indonesia--might be tempted to buck the cartel by selling below the fixed price. Ecuador, which badly needs development money, is already in some trouble. High prices have cut demand for its oil by one-third since 1973.
At very best, however, the State Department reckons that OPEC would not break up for another two to four years--and probably not even then. It has not been at all damaged by a world oil surplus of one to two million bbl. a day, which has shown up because high prices reduced consumption last year. In the non-Communist world, consumption fell from 48 million bbl. a day in 1973 to 46.5 million bbl. last year; in the U.S., it declined from 17 million bbl. to 16.2 million bbl. Partly hi response, OPEC is now producing at 20% below capacity with no visible problems. Again, it is Saudi Arabia that holds the key. The country has accumulated so much money that it could stop production for two or three years and still have more than enough cash to import food, provide free medical care and education, finance new industry and subsidize other Arab nations. But unless and until the industrial nations get together, much of the non-Communist world could not long function without Saudi Arabia's 8.5 million bbl. per day. As Saudi Arabia's Harvard-educated Oil Minister Ahmed Zaki Yamani told TIME Correspondent Karsten Prager: "How much can the consumers reduce consumption? By 10%? And how much can the producers reduce without financial pain? By at least 33%--minimally. The people who ask for a price reduction of $2 to $4 are simply not being realistic."
Even so, the consumers must conserve to show OPEC that they are serious and to hold down their payments to the cartel. Kissinger has urged that they hold their oil imports essentially flat over the next decade. For the U.S., that would mean a decline in the annual rate of increase in energy from 4.3% in the past ten years to 2% or 3% in the next decade. The Trilateral Commission has called for limiting the annual growth in energy use during that period to 2% in the U.S. and Canada, 3% in Western Europe and 4% in Japan. Certainly the U.S. can and must lead the way by making the severest cuts because it wastes so much energy. A nation that has one-twentieth of the world's population should not expect to go on burning one-third of the world's oil.
Through taxes and other mandatory measures, the U.S. could switch from profligacy to a new conservation ethic. The remedies are well known. Much energy could be saved by increasing federal taxes on gasoline, clamping a steeply graduated tax on heavy, thirsty cars, pumping many more millions into mass transit, and granting tax credits for purchases of building insulation. In addition, the U.S. could and should expand its domestic supplies of energy by increasing the capacity of the Alaska pipeline, opening the Navy's petroleum reserves in California and Alaska, encouraging offshore drilling, liberalizing controls on the strip-mining of coal (but adding guarantees that the lands would be reclaimed) and allowing natural gas prices to double or more.
The Perils of Military Intervention
Beyond conserving energy and recycling OPEC's money, the oil importers have no feasible weapons against the cartel. A trade war against OPEC would fail. If the U.S., for example, embargoed its shipments of food or machines to the oil producers, the Soviet Union and other countries would be eager and able to fill the gap.
Military intervention could be extremely risky. There is always the danger that the Soviets would step in on the side of the Arabs--or extract a high political price from the West fojr staying out. Pipelines might be vulnerable to sabotage, though captured oilfields could be fairly easily protected. In any event, U.S. authorities condemn the wave of fantasizing about oil wars as "highly irresponsible." Military intervention, says a Washington policymaker, would be considered "only as absolutely a last resort to prevent the collapse of the industrialized world and not just to get the oil price down."
The U.S. would be forced to use its "military option," however, in the case of any clear and immediate danger that Saudi oil would fall into hostile hands. There is concern in Washington that in several years an extremist force might try to grab control (see box page 24). Faisal still has no shortage of enemies and covetous neighbors. At some future date, he --or his successor--may be motivated to relax prices in return for U.S. support to preserve the Saudi regime against a radical threat. He has no reason to do so now, although time and again last year Yamani proclaimed that Saudi Arabia was struggling to reduce prices to help the West but was blocked by Iran and other hawks within OPEC. Yamani lost much of his credibility among U.S. and European leaders when Saudi Arabia in August canceled an oil auction that might have brought lower prices and in November led the latest price rise. Says a U.S. official who has dealt with the Saudis: "Faisal does not want to bring down prices now and throw away his bargaining power for a settlement with Israel."
A settlement with Israel would not itself lead to a price reduction. The non-Arab nations--Iran, Venezuela, Nigeria, Indonesia--though not part of the conflict, still want to maintain or increase prices. Yet marked progress toward peace on terms acceptable to the Arabs is absolutely essential before prices can soften; the Arabs will insist on that.
On the other hand, if war erupts anew, the Arabs might embargo either the U.S. or all Western nations. Says Saudi Interior Minister Prince Fahd, 53, who is Faisal's brother and likely successor: "We would hate to impose another embargo. But in a war, when you feel you are in danger of dying, you may do anything. If war breaks out again, it will be not only the Arabs and Israelis who are damaged, but the world as a whole." If Western Europe were embargoed now, it would draw down its stockpiles (good for 60 days or more in each country), buy oil from non-Arab countries and probably go to immediate rationing. It might well hold out for six months without serious discomfort. Quite probably, however, Europe and Japan would put extreme pressure on the U.S. to halt military aid to Israel. Or, if threatened by complete economic breakdown and perhaps social upheaval, some Western nation or nations might intervene in Middle East oil lands. In any case, there is virtual consensus among Western policymakers that Israel must give up almost all of its 1967 conquests and accept a homeland for the Palestinians. Otherwise, wars are likely to continue, and Israel cannot win the last round against 120 million Arabs enriched and armed by oil money.
The Only Alternative: Interdependence
One ray of hope in the oil crisis is that the two sides at least will begin to talk with each other in 1975. The Middle East producers have long called for a summit meeting with the oil importers from the West and the developing world. The French have strongly favored a conference. Kissinger has held out for a delay until the consumers are more firmly united, fearing that countries that are deeply in debt and heavily dependent on oil imports would easily bend to OPEC's bidding. At Martinique three weeks ago, President Ford and French President Valery Giscard d'Estaing struck a compromise calling for a series of meetings: first a general feeling-out between OPEC and the consumers, then a number of meetings among consumers to work out their common position, and finally a tripartite summit, probably this autumn.
At that summit, OPEC leaders want to discuss not only oil but also the prices of other products. They aim to get an "indexing" agreement under which their oil prices would go up from the already high base as the prices of their own imports rise. Says Kissinger: "The best thing that can happen next year --and in fact I think the best will happen--would be that we would achieve consumer solidarity and then have a conference with the producers. That, together with energetic conservation measures and energetic development of alternative resources, may lead perhaps to a lowering of the oil price in return for long-term stability of the price. And at a lower price level, we would be prepared to consider indexing."
A most positive step would be for oil producers and consumers to seek common and reciprocal interests going far beyond energy. The producers should be given greater responsibilities and more high offices in international councils. For example, they should get far more than the 5% of the voting strength that they now have in the World Bank and the International Monetary Fund. This would give them a larger voice in setting international monetary policies, which they deserve, and would also oblige them to put up quite a bit more than the 5% that they now give to underwrite those groups. The producers have been increasing their foreign aid fairly rapidly, but they probably should give much more in grants, low-interest loans and concessionary prices to the neediest countries. Last year OPEC members made aid commitments totaling $9.6 billion and actually disbursed $2.6 billion in gifts, concessionary loans and other aid--roughly half of it to Egypt, Syria and Jordan.
Whatever devices are created to put OPEC capital to work in the rest of the world, the Western countries should help the oil producers build up their own agriculture and industries Faisal notes, for example, that his rich country badly needs industrialization. To help prepare the producers for the day, however distant, when their oil runs out, the West should also join them in developing alternative forms of en ergy and should send technology and experts to OPEC countries. Fast development is inevitable in the oil countries, and it will help work off their surpluses by spurring their imports. For their part, OPEC members may lend or invest some of the huge sums of capital that oil importers will need to develop energy supplies from the atom, from shale and sands and, probably many years from now, from the sun and wind.
In the difficult decade ahead, the best hope is that all sides will realize that they are really interdependent--for resources, technologies, goods, capital, ideas. The old world of Western dominance is dead, but if the oil powers try to dominate the new world of interdependencies, the result will be bankruptcies and deflation in the West, and even worse poverty and hunger in the have-not developing countries.
The oil producers, who talk a great deal about past exploitation and their future aspirations, might consider the implications for themselves of the havoc that their monopoly pricing is causing the rest of humankind. The oil consumers, who are the victims of that upheaval, would do well to ponder with more sympathy the OPEC countries' deeply felt desire for a larger share of the world's wealth. In this great global clash of interests, it is time for both sides to soften their anger and seek new ways to get along with each other. If sanity is to prevail, the guiding policy must be not confrontation but cooperation and conservation.
* From which, according to Moslem legend, the prophet Mohammed as cended into heaven astride his favorite white steed, Buraq.
/-(The members of OPEC, in order of last year's earnings are: Saudi Arabia, Iran, Venezuela, Nigeria, Libya, Kuwait, Iraq, United Arab Emirates, Al geria, Indonesia, Qatar, Ecuador and Gabon, which is an associate member. The United Arab Emirates is a federation of Abu Dhabi, Dubai, Sharjah, Ajman, Umm al Quwain, Ras al Khaimah and Fujairah.
* For comparison, 1972 is used because it was the last "normal" year before the embargo and the biggest increases.
* By contrast, West Germany now has the world's highest accumulated surplus, $36 billion. It will be surpassed this year by Saudi Arabia. The highest surplus ever accumulated by the U.S. was $26 billion in 1949; the total for the U.S. now is $16 billion.
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