Erick
Frazier
“OPEC The Cartel’s Deadly New Sting”
Business Week: April 9, 1979
When the Organization of Petroleum Exporting Countries (OPEC) announced in Geneva on Mar. 27 that its members were raising the world oil price be 9.05%, to $14.55 a bbl., the initial response around the world was actually one of relief that the increase was not larger. Prior to the announcement rumors circulated of an immediate rise from 20% to 35%. News of the comparativly modest 9% increase set off a party in the world financial markets. The dollar advanced, gold declined, and on Wall Street the Dow Jones industrial average jumped 14.5 points in a day.
This party had the potential to be very short lived however. By setting the $14.55 a bbl. as the new official price, OPEC has established a much higher floor under the price at a time when US is experiencing steep inflation. In addition, each of the 13 OPEC members have the freedom to tack on any size surcharge on top of the official price eliminating any ceiling.
Not all members were quick to tack on surcharges much to the relief of many oil consuming nations, though many of them did. Saudi Oil Minister Sheikh Ahmed Zaki Yamani warned that unless consuming nations cut their demand for oil, they will have still higher oil prices ahead in the form of greater surcharges.
In addition to OPEC lifting the ceiling on the price of oil, it means to control productions as well so that the floor remains intact even if demand eases. The Geneva meeting showed the world that OPEC is a unified organization “firmly in the saddle”. By maintaining a hold not only on price but on levels of production as well, OPEC is more than ever before acting as a classic cartel.
Had OPEC delayed the move to $14.55 a bbl until Oct. 1, the U.S. inflation rate presumably would have been on the way down. The price rise caught President Carter practically in mid-speech coming only two days before he was to reveal his new energy program. Many believed this included a call for an end to domestic oil price controls. “The higher price for oil will cut into economic growth and add to the rate of inflation in every major economy, and uncertainty about the future price of oil will further cut into what in almost every nation has been a low level of business investment.”
If Domestic oil is allowed to rise to the world price, so-called old oil, then at $5.80 a bbl and representing about 36% of U.S. output, would gradually increase to the new $14.55 floor price of OPEC oil. The inflationary impact of such a move has been of serious concern to some officials.
“Two forces dominated this session of OPEC: greed and fear” Countries such as Venezuela, Nigeria, and Algeria were out to get all they could to finance industrial development plans. Danger to political stability in the Middle East could result from the revolution in Iran and the Egyptian-Israeli peace treaty. Iran’s Khomenni is neither an Arab nor a member of the Sunni sect of Moslems yet he has “put the fear of Allah” into the hearts of Arab leaders who might otherwise me be more concerned with threats to the Western world. They are afraid his puritanical zeal will spill over Iran’s borders and are especially sensitive to the possible charge of “selling out to the West.”
While the OPEC oil ministers met in the intercontinental Hotel in Geneva, the Israeli-Egyptian pece treaty was being signed in Washington. And that treaty has locked the pro Moslem, antiwestern trend of the Gulf oil producers “on course”. Arab oil producers have two gripes about this new treaty with Israel. It is not aimed at solving the Palestinian problem, which they see as being the heart of permanent and true Mideast peace, and it does not even mention return of the Islamic holy sites of East Jerusalem.
Many would like to see the U.S. muscle Israelis into accepting the U.N. resolution 242, which calls for Israeli withdrawal substantially to pre 1967 borders and establishment of a Palestinian homeland. Many Arabs at the conference were disappointed at the lack of U.S. appreciation for the depth of their problem. The Saudis are on the receiving end of even more pressure in the Mideast from the potentially troublesome Palestinians. The Saudis fear now is looking like they are giving too much to the West. Palestinian pressure could turn hot, with guerrilla acts that aim to undermine the regime and royal family. While this puts Saudi Arabia in a tight spot, they ultimately know that the U.S. is their military protection.
Up until the meeting ing Geneva began there was a justifiable apprehension about the outllok for oil prices. Spot oil prices had been spiraling out of control, and radicals were demanding increases of as much as 23%. Many were surprised when Yamani, the oil minister of Saudi Arabia, refused to move prices beyond what had been decided on in December in Abu Dhabi, a 14.5% increase for all of 1978, with the price to reach $14.55 on Oct.1. It was at the morning session on Tuesday, Mar. 27 that the 9% price rise was finally agreed to. In compromising with other members, Saudi Arabia also had to allow some flexibility in setting prices upward. They agreed that any country could charge as much money, in the form of premiums and surcharges for their oil, as the market would bare.
“No one thinks that the world is in for the same trauma that it suffered in the latest and most significant recession since the Great Depression”, however recession in some form is more than likely. “If the Fed continues as restrictive as it has been for a few more months and the Bundesbank overdoes its turn to restraint, the slump could be very deep”. The oil price rise will increase inflation, cut purchasing power, and produce slower economic growth.