ROLE OF OIL TSARS IN WORLD ENERGY CRISIS EXAMINED

Press, Volume CXIII, Issue 33189, 31 March 1973, Page 11

ROLE OF OIL TSARS IN WORLD ENERGY CRISIS EXAMINED

By

A. J. MEYER)

Whether we like it or not, the United States seems hooked—for the next decade at least—on oil and gas imported in ever greater quantity from the Middle East and North Africa.

Like Europeans and Japanese before us, we Americans now face the awesome task of paying for these imports, adjusting our international political arrangements to minimise chances of supply interruption and to cushion, in various ways, the longterm impact of this new relationship with Eastern Hemisphere nations. The economic implications of these changing circumstances are staggeringly complex.

. The United States probably will increase its imports of Eastern Hemisphere crude oil by a million daily barrels each year for at least the next decade, perhaps longer. By then half our oil, and perhaps a third of our total energy, could come from Eastern Hemisphere sources. Much of this oil will be very cheap to produce (6 cents to 25 cents a barrel), yet will be increasingly expensive ($1.50 to $3.50 a barrel, perhaps more) at loading terminals in producing countries. Revenues of member countries of the Organisation of Petroleum Exporting Countries (0.P.E.C.) will soar from $9-$lO billion yearly now to $2O-$25 billion yearly by 1975 and to perhaps twice that by the early 1980 s. Up will go also the balance-of-payments deficits of oil-importing industrial nations. Flow of funds The Chase Manhattan Bank forecasts $2O billion deficits for the United States alone within the decade. Levels of investments of all kinds will be huge, as most certainly will the flows of reserve f • from oilexporting ns back to those won pita! markets wide and deep enough to accommodate them. Saudi Arabia alone, under highly. probable circumstances, might well control, 10 years hence, financial reserves greater than those backing the United States dollar and the Japanese yen together. These are big numbers indeed. Our national organisations and university scholars concerned with foreign policy are understandably preoccupied with the resulting problems. Among these are the Foreign Policy Association and Professor Morris Adelman of the Massachusetts Institute of Technology, a distinguished authority on energy. Since we are good (and old) friends, I take the liberty of disagreeing strongly with him on many of his positions taken in a paper in the winter, 1972-73, issue of Foreign Policy and condensed in a recent edition of the “Wall Street Journal.” Disruption doubted First, 1 disagree strongly that “much of that wealth (i.e. payments to Middle Eastern oil-producing governments), will be available to disrupt the world monetary system and promote armed conflict.” To date the only two Middle Eastern countries with enormous foreign reserves are Kuwait and Libya. Neither, when confronted in years past with chances to move assets away from dollars or sterling, chose to do so. On two occasions at least, such decisions cost both nations dearly. Saudi Arabia, the next candidate to control massive foreign holdings, has for 25 years been distinguished by a preference for United States banks, by an ultraconservative investment policy, and by an unwillingness to stray even into the speculative quicksands of Triple A bonds. To expect that these nations will overnight become international money market “gunslingers” seems most unrealistic. Individual Middle Easterners — like Americans and Europeans — will of course move private funds about in an occasionally volatile manner. As for Saudi Arabia, the very enormity of its public foreign holdings will make quick shifts difficult, if not impossible to manage. Anus spending Neither do I share the view that these huge sums will necessarily “promote armed conflict.” The really big sums spent on arms in the Middle East since World War II have originated in the United States and have gone to Turkey, Iran, and Israel — in the latter instance financed by public and private gifts. Outlays by Egypt in the past decade have been huge, but most of the arms have come from Russia, involve little payment, and have not been financed by gifts to Egypt from oil-rich countries. Across the board, Middle Eastern nations for Israel and Egypt), put very modest percentages of gross national product into military outlays, have contented themselves with defensive weaponry, and have not — with the possible exception of Israel — opted to introduce truly obliterative weaponry into the area. Maybe they will change, but I doubt

it. Meanwhile of course, many will continue to direct ferocious noises toward their neighbours. I also disagree with the statement: “The most important player in the game is the American State Department. This agency is deplorably poorly informed in mineral resource economics, the oil industry, the history of oil crises, and the participation therein of the Arabs with whom it is obsessed.” Producers important The important players have been, and continue to be, the producing governments and the oil companies, not the United States State Department. As in other areas, the State Department’s role under President Nixon has waned markedly, and its alleged “obsession with the Arabs” does not seem to have altered United States policy perceptibly. The decision to accept O.P.E.C.’s demands (which led to recent leapfrogging) was made by the companies, not by the United States State Department. Professor Adelman further says, “The world 'energy crisis’ or ‘energy shortage’ is a fiction.” He goes on to say “there is no more basis for fears of acute oil scarcity in the next 15 years than there was 15 years ago. I disagree strongly.

Free-world oil consumption rises about two million barrels a day. and no change in the profligate end use is yet evident. The United States and Venezuela are peaking out as oil producers (from traditional source). Canada is moving to limit exports of oil to the United States. And flat-out programmes in coal liquefaction and shale-oil and tar-sands extractions are yet to be mounted. The North Sea and Nigeria offer hopes for only modest annual increases. Algeria and Libya at the moment offer even less hope. North Slope oil from Alaska seems predictably far off, for well-known reasons. Which leaves Saudi Arabia, Iran, and Iraq (and probably the Soviet Union) as the several big oil producers of the coming decade. For a multitude of reasons, I forecast that none of these will push output up anywhere near as feverishly as have Iran and Saudi Arabia during the past three years. Neither certainly will Kuwait. Wise thinking My reasons for the above statement are several. First, Western academic folklore to the contrary, some very sophisticated thinking now goes on in many Eastern Hemisphere oil-exporting countries about the wisdom of leaving oil in the ground

or pumping it out at maximum rates. Most such experts concur that Iran alone (among the oil “haves") today has the absorptive capacity to invest enormously higher sums in its development effort without massive waste and leakage. Saudi Arabia. Kuwait, and Iraq at the moment have well-defined limits on sums they can invest at home intelligently. and policymakers in all three countries know it. They also wrestle daily with the question of foreign financial reserves and how best to handle these. Many, curiously enough, have visited the gold-rush ghost towns in California’s Placer County with rather more than the usual tourist’s curiosity about the lessons implicit in them. No rapid changes My second reason for not expecting wild output increases derives from belief that internal political developments and philosophies will continue, in several oil-producing countries — as they have in the past —to prevent rapid production increases. In short, I do not expect that Libya, Iraq, and Algeria will change their ways dramatically and overnight again become (as all once were) leaders in oil exporting. Soviet oil will also take time to develop.

My third reason for not expecting oil output to soar flows from the foregoing. Only two nations, Saudi Arabia and Iran, seem to me candidates to increase output dramatically. Increases of a million barrels a day from each for several years probably are possible— at least

for Saudi Arabia. Experts differ on Iran. And much investment will be required in each country to muke large increases possible Companire* role Now a word about the oil companies. Professor Adelman obviously is right and perceptive when he accents their role (first pointed to by the managing director of British Petroleum! as “tax collectors" and as downstream agents for 0.P.E.C." He also is correct in saying that so far the companies hate passed on slightly more to the consumer than they hav given up. and at the moment they are about S cents to 1" cents a barrel ahead of the game. But his proposal that con-sumer-governments legislate to get the companies out of the Middle East and his implication that something better would evolve quickly it) their place seems well intentioned. but slightly naive. For the record, oilcompany returns on investment remain up with recent price increases. At the moment, tn short. I see no alternative to oil companies—despite their disartay (in recent negotiations with Middle Eeastem and North African producers), their frequently unlovable behaviour, and their past, which tats been immortalised in fact and fiction. Until a substitute for them is found, we have to live with them. And like many marriages, the relationship will endure for want of a better alternative.—From the "Christian Science Monitor.” Reprinted by arrangement .

A. J. Meyer is professor in Middle Eastern studies and lecturer in economics at Harvard. The following article is an edited version of a recent address he delivered to the World Affairs Council in San Francisco. In it he sought to put into perspective some misconceptions (as he sees them) about what role the major oil-producing nations of the Middle East may play in the current world energy crisis.