Oil: The Blackmail Market

OPEC's customers get an on-the-spot petro-mugging

In response to the hostage trauma in Iran, the price of oil is poised for yet more damaging leaps upward.

The focus of the trouble is the jumpy and uncontrolled spot market, that loose network of brokers and hustlers who buy and sell available crude wherever they can for whatever the market will bear. OPEC sells most of its oil under contracts that can run from a month to a year or more, but cartel leaders watch the day-to-day spot market closely; when spot quotes climb, insatiable oil producers begin demanding more for their shipments.

Early last week typical spot prices for Persian Gulf crude stood at $37 to $38 per bbl., vs. OPEC's official maximum of $23.50. After the seizure of the U.S. embassy in Tehran, rumors swirled that anti-American fanatics were shutting the tap on exports. Spot traders began desperately scrambling to buy spare cargoes. In Rotterdam, prices ticked up almost by the hour. In New York City, some sellers were demanding an astronomical $47 to $48 per bbl. Though heating oil is retailing in New York at about 850 per gal., spot market imports of the fuel were going for $1.10 per gal., while gasoline imports were trading at $ 1.20 to $ 1.25 per gal.

The confusion was an invitation for price gouging. The National Iranian Oil Co. (NIOC) demanded $50 per bbl. for some oil it put on the spot market and threatened that if its regular customers did not pay the price, NIOC would refuse to renew its supply contracts when they expire in December. Exxon, Shell and British Petroleum got telex notification from NIOC that their anticipated deliveries for the last three months of 1979 were being cut by approximately 5%. NIOC blamed "operational difficulties," but many oilmen suspected that the missing petroleum would soon enough turn up for sale on the spot market. Meanwhile, Saudi Arabia was hinting strongly that early next year it will cut as much as 1 million bbl. a day from its production of 9.5 million bbl., and Kuwait and Nigeria were also considering reductions. These moves will keep supplies scarce and prices high.

The spot market chaos will fuel demands for a big new surge in official OPEC prices when the cartel meets in Caracas on Dec. 17. Already Algeria and Libya have pushed their prices beyond the ceilings set by OPEC in June, and last week Nigeria jumped to $26.27 per bbl. Oil executives now gloomily forecast that the official OPEC ceiling could soon reach $28 to $30 per bbl., raising the U.S. energy import bill from some $65 billion this year to as much as $90 billion next year.

There is no way to reduce the crushing costs except to burn much more coal, continue with nuclear power, speed the development of synthetics and solar, move to mandatory conservation, and, of course, drill for more domestic oil. Last week, overriding objections of environmentalists, the U.S. Supreme Court refused to halt an Interior Department auction of leases to explore for oil on the Georges Bank off Massachusetts. Environmentalists fear that a spill or blowout could harm the rich fishing waters, but the court decision was yet another sign that the U.S. will have to make difficult compromises to secure energy.

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