What increase do the oil States want?

Press, 9 December 1976, Page 20

What increase do the oil States want?

From the “Observer,” London

The world recovery from recession is already in deep pause and anxious government leaders and central bankers throughout the industrialised world are worried about the next threat to their economies — a substantial rise in oil prices.

It is still a week before the Organisation of Petroleum Exporting Countries, O.P.E.C. meets in the Gulf State of Qatar to make a decision, but the sparring has already begun.

The United States Treasury Secretary (Mr William Simon) says that the increase in crude oil prices will' have a serious effect and may plunge the world back into recession just as it has begun to climb out of the trough caused by the four-fold rise of three years ago.

But the oil-producers-seem equally determined to secure an increase. The Shah of Iran says that Western inflation has eroded his purchasing power by 40 per cent in the last two years: his negotiators will seek a 25 per cent rise as a bargaining ploy but may settle for a bit less. On the other hand Mr Frank Zarb, the United States Energy Administrator in the Ford Administration, says that he does not “believe the producers are entitled to a dime.” The issue is bound to become increasingly heated as

the Qatar meeting approaches — and the news and comments on the subject will become more and more irrational.

The Arabs, whose sense of international public relations is about as alert as the Department of the Interior in Siberia, will again bear the brunt of the criticism, much of it from politicians who prefer to attribute their own failure in controlling inflation to the oil producers. Yet the near-solid unity of O.P.E.C. in recent negotiations is not Arab collaboration, nor even Islamic solidarity. Important and reliable members of the cartel include such major non-Arab producers as Nigeria, Indonesia and. Venezuela. Such differences of opinion that exist within O.P.E.C. are between Arab States, rather than between the Arabs and the others. Even if Britain, as a rising oil producer, were to join O.P.E.C. in future, it too would follow the line.

The real problem with O.P.E.C.’s forthcoming decision is to decide how much of the West’s inflation its members can swallow before putting in hand an increase in prices that will fuel further inflation. And the trouble is that there are countries who are oil-dependent who have beaten inflation, or achieved reasonable success in doing so, while others have failed

miserably. Equally there are oil producers who have over-industrialised or squandered their money: and others which still have huge surpluses.

Figures from the Organisation for Economic Co-op-eration and Development (0.E.C.D.) show just how wide is the gulf between the major industrialised nations in fighting inflation. The average annual rate is 7| per cent. North America is below the average, helped by the continued stability of its food prices. Inside Europe there are wide disparities. Britain’s rate is 14.7 per cent although one-fifth of its oil needs are now coming from the North Sea. Another oil producer, Norway, has 82 per cent. West Germany, with no oil and gas of its own, is down to half the world average, just below 4 per cent. Two other oil-importers, Japan and France, have prices going up at 9.7 per cent. Logically, therefore, oil producers — most of whom have to import their food, machinery, manufactured products and almost everything else from the industrialised world — should be able to increase their prices by the amount of extra money they have had to lay out for imports. But that too is an oversimplification of the facts. German and Swiss inflation, for instance, has been exceptionally small, but the value of the Swiss franc and

the Deutsche Mark has risen very sharply, making German products in particular very expensive indeed. This is a special problem for Middle Eastern countries, who have been heavy importers of transport equipment, in which Germany is a market leader. And while British prices have gone up the pound sterling has been devalued so much that many United Kingdom goods are a bargain, particularly sophisticated items like radar systems, aircraft simulators and advanced electronic equipment. Then there is O.P.E.C. spending of accumulated wealth. The United Arab Emirates, the world’s eighth largest oil-producer and a nation of 650,000 people with the highest per capita income in the world, has recycled much of its oil revenues.

The three oil-producing sheikhdoms in the Emirates, Abu Dhabi, Dubai and Sharjah, netted SNZ377SM, SNZBSBM and SNZSI.SM respectively last year. Of this SNZ46BOM, 3NZIIOOM is being provided by the U.A.E. to developing Third World nations in the form of cheap loans and grants. Projects helped by U.A.E. generosity include a 75-mile highway in Somalia, a dam project in Mali, a fisheries scheme in Sri Lanka, and a natural gas development in Oman. Aid in fact is one-fifth of the U.A.E. federal budget. Much of the money spent on these projects finds its

way back to Western Europe — either for the purchase of equipment or expertise. Then there are developments in the Emirates themselves. The British consortium of Costain-Taylor Woodrow has a contract to build an extra 22 berths at the new and highly success* ful Port Rashid in Dubai. Tenders will go out soon for a new port 20 miles further north at Jebel Ali. British Smelter Construction is designing an aluminium smelter nearby. The Japanese have a profitable contract for a new electric power station.

In Abu Dhabi a gas liquifiction plant is being- built by European interests. The French Renault company is building the huge Charles de Gaulle leisure centre in Sharjah. Greek and German companies are building a port there. British architects are designing new trade centre, hotels, office blocks: British, European and American banks are establishing themselves in their hundreds.

All of this has to be paid for with petrodollars. The new-found wealth is not being buried in the sand, hidden in sacks under the bed, or used in the pursuit of pleasure. Most of the money is finding its way back to Europe and Japan, creating employment.

The losers in the deal are rich nations too far away to benefit, such as Australia, which nevertheless is now slowly beginning to realise

the potential for sales of grain and meat. The Soviets are big losers: the U.A.E. refuses even to give the Russians diplomatic recognition in Abu Dhabi, and cooperation and contact is non-existent, thus giving the lie to the popular belief in some New York circles that , the Arabs are under Soviet domination.

But even if the West does benefit from O.P.E.C. oil wealth, that in itself is not a justification for a price rise. In the end the price of oil will be determined by mar* ket forces.

Oil demand shows signs of slackening again — after picking up in recent months. In Western Europe, particularly in Britain — energy saving campaigns have been highly effective. In the United States President Ford’s efforts to curtail consumption have ali but failed — but the new vehicles from Detroit this year all consume less petrol than the ones they replace, and the automobile industry is confident it will meet the 20-miles-a-gallon standard by the end of the decade.

Irt anticipation of O.P.E.C. rises, the major oil companies have stock-piled heavily — storage tanks are full. So next month in Qatar may find that the kind of rise many of them are seeking is not one the market will stand. The guess is, however, that no-one would be too upset, either way, if it was 10 per cent.

—OF.N.S. Copyright