Looking for a Fair Sheik

As long as the oil supplies of the Middle East seemed almost inexhaustible, consuming countries usually enjoyed a buyers' market. And Western oil companies kept prices low by playing one oil-producing nation off against another. Lately, an upsurge in demand, the closing of the Suez Canal and a rupture in the Trans-Arabian Pipeline have all but turned the market upside down. Today the sellers have more power than ever before. Oil prices are sure to rise, and negotiations began in Teheran last week to determine how high they will go.

Bargaining Muscle. For the first time, a score of oil companies operating in the Middle East and North Africa are negotiating as a group* --a precedent made possible when the Justice Department agreed to waive the antitrust laws for U.S. participants. The companies are confronting representatives of the main oil-producing nations: Iran, Iraq, Kuwait, Libya, Abu Dhabi, Qatar, Algeria, Saudi Arabia, Indonesia and Venezuela. In their quest for money the producing countries can bargain with muscle because they can always threaten to cut off shipments to Europe, which gets 85% of its oil from them, and to Japan, which depends on the Middle East for 91% of its supplies. They also have an intriguing if not altogether logical argument for higher prices: for every gallon of oil, they collect just a few cents in royalties and taxes--far less than consuming countries collect after tacking on their own gasoline taxes.

The U.S. is only indirectly involved; 3% of its oil comes from the Middle East. But most of the companies in the talks are American-owned, and their investment runs to billions of dollars. Last week President Nixon sent Under Secretary of State John N. Irwin II on an unusual swing through the region to try to persuade the more moderate governments to agree to the oil companies' chief request: a firm agreement setting prices for the next five years.

Libyan Leapfrog. The current quarrel started last summer when the revolutionary Libyan regime of Colonel Muammar Gaddafi set out to pump better terms out of the producing companies. Libya has a strong bargaining position. Its chief port of Tripoli is located only 600 miles from Rome. Most other Middle East oil must be shipped over a long and costly route to Europe. Libya demanded a 30-c- increase in the posted price of its oil--the price used to calculate the tax paid by companies. That would bring it to $2.53 a barrel. Gaddafi also insisted that the traditional 50-50 split on profits between the host country and producing companies be changed to 55-45 in Libya's favor. Led by Los Angeles-based Occidental, which depends on Libyan wells for a large part of its supplies, the three dozen companies that operate in Libya all caved in. Other oil-rich countries immediately insisted on a similar rise in their prices. Libya tried to leapfrog over them, demanding still another rise.

Determined to stop the Libyan leapfrog, the oil companies negotiating in Teheran set as their goal a worldwide agreement that would stabilize their payments for oil into the mid-1970s. They offered higher payments, including--for the first time--an annual increase to take account of worldwide inflation. For their part, the oil-producing nations insisted on separate agreements for each region--which the companies fear would open up the prospect of leapfrogging prices once again. As with cverything else in the volatile Middle East, the eventual outcome is unpredictable. The only certainty is that consumers in Europe and Japan will soon be paying more for oil and gasoline.

*They include Jersey Standard, Standard of California, Mobil, Texaco, Gulf, British Petroleum, Shell, Compagnie Franchise des Petroles and a dozen smaller firms.

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