Saudis hope to keep oil price down

Press, 1 December 1978, Page 12

Saudis hope to keep oil price down

By

PATRICK COCKBLRN

in the ‘"Financial Tinies,” London

When the Organisation of Petroleum Exporting Countries meets to discuss an oil price rise in Abu Dhabi later this month Saudi Arabia should once again be leading the moderates. According to Shaikh Ahmed Zaki Yamani, th j Saudi Arabian Oil Minister, his country would prefer an oil price freeze, though this may well be an opening ploy to try to keep the eventual price increase to around 5 per cent. With Saudi Arabia responsible for over a quarter of O.P.E.C.’s total exports Shaikh Yamani will, as at previous conferences, clearly be in a position to call the final tune. For the more militant O.P.E.C. States, such as Iraq,

Libya and Algeria such an outcome would be a bitter blow. Iraq, the largest Arab oil exporter after Saudi Arabia, has been calling for an increase of no less than 25 per cent. All O.P.E.C. States are conscious that they have come a long way since the heady days after the 1973-74 oi' price increases. The current account surplus of its 1> members has dropped from some $65 billion in 1974 to perhaps below $2O billion this year. And among the oil exporters with large populations the capacity to absorb oil revenues has increased so much that the surpluses have been generally wiped out. Kuwait, for instance, says

that since the last oil prit; increase in December, 1976, the decline in the value of the dollar and inflation had wiped out 30 per cent of the real revenues of O.P.E.C. But Saudi Arabia has countered such justifications for an oil price increase by saying that its fellow O.P.E.C. members are looking everywhere except at the state of the world demand for oil. The real need, they argue, is for a resurgence in the economies of the industrialised States and hence an increase in demand.

Sheikh Yamani’s preference for a freeze on prices, which presumably means that an increase of nearer 5 per cent than 10 per cent is to be expected, shows that nothing has persuaded the Saudis that their old arguments were wrong.

With the Saudis’ own production recently averaging 10.1 M barrels a day they will once again be in the position of playing referee at Abu Dhabi, though inevitably constrained by a desire not to break up the cartel. Indeed, until a month ago, the run up to the O.P.E.C, conference and the vociferous arguments of hawks and doves could be viewed with a strong sense of deja vu. All the old arguments, the threats, the statistical contortions were being trotted out in the knowledge that any bluffs around were bound to be called by the Saudi Arabians. Mr Blumenthal, the United States Treasury Secretary who has been touring the Middle East oil producers, can return home satisfied that the radicals’ arguments have made little headway in Rivadh. But if the Western oil

consumers can now look forward to the Abu Dhabi meeting with greater confidence there is no long-term reason for any jubilation. The crucial change in the oil scenario over the last month has been that the continuity of oil-supplies from Iran, the second biggest oil exporter in the world, is no longer certain.

Strikers in the Iranian oilfields appear to be coming back to work and production is now up to two-thirds of normal. But the appreciation of the long-term significance of the strike has been somewhat clouded by fears of its immediate impact. More important, however, is the virtual certainty that control of the Iranian oil-

fields, and hence of that country’s almost only source of foreign exchange earnings, is now a vital weapon in the struggle between the Shah backed by his military administration and the opposition.

The demand of theoil strikers was for poltical change. There is no reason to suppose that even those who have started work again will not resume their strike over the next year. In other words the level of Iranian crude production, which was averaging 6M barrels a day in September, will in future depend on the internal politics of Iran and not on the world’s demand for oil. At Abu Dhabi, ironically,

the Shah's very weakness should strengthen the hand of the moderates. Much though the Shah needs extra revenues he made clear to Mr Blumenthal, when he was in Teheran last month, that Iran would take a back seat at Abu Dhabi. The severity of the crisis he now faces means that he needs United States and West European support even more than he needs the money.

But, at the same time, any Iranian Government is going to have a need for much more oil revenue and possibly a desire to try to defuse internal crisis by striking a militantly independent stance abroad.