Monday, Jul. 01, 1974

Saudi Holding Action

As it demonstrated by orchestrating the Arab oil embargo, Saudi Arabia is the kingpin of world petroleum supply and prices. Last week it exercised its power once more, this time against the eleven other members of the Organization of Petroleum Exporting Countries.

At a stormy OPEC meeting of government ministers (see pictures, top and bottom this page) in Quito, Ecuador, the Saudis blocked yet another sizable increase in oil prices--though they had to settle for a tiny one.

It was essentially a holding action. The Saudis have argued that the posted price of oil, on which the taxes and royalties paid by oil companies are based, should be cut by $2 or more from its present lofty $11.65 per bbl. They fear that sky-high oil prices will create unmanageable trade deficits for their customers. The Saudis also hope that by cutting oil prices they can negotiate a better deal on the technology, goods and services that they hope to import from industrialized nations, as well as hold back the development of alternate sources of energy.

Their views are anathema within OPEC. At the Quito meeting, Venezuela, Algeria, Libya, Nigeria and Kuwait pushed hard for a 63-c- increase in posted prices to offset the effects of inflation on the prices of the goods that they buy from the U.S., Europe and Japan. Iranian Finance Minister Jamshid Amuzegar, who has accused the Saudis of hypocritically calling for price reductions while actually raising prices, favored a slightly smaller hike, "to show the industrialized nations that we are serious when we say that they must keep inflation in check." Saudi Oil Minister Ahmed Zaki Yamani reportedly threatened to force prices down by dumping millions of barrels of cut-price petroleum on the market. In order to keep the cartel together, the delegates settled on a compromise that will hold posted prices steady but raise by 2% the royalties that they collect on each barrel from the companies. That works out to a mere 5-c- per bbl., or roughly one-eighth cent on a gallon of gasoline.

How Low? The Saudis went along --for now. By the time the wrangling over oil prices resumes at an OPEC meeting scheduled to be held in Vienna on Sept. 12, they will be in an even stronger position. Last week Yamani journeyed to Washington in an attempt to persuade the U.S. to put more pressure on Iran to lower its prices.

More important, the Saudis hope to complete negotiations for full ownership of the Arabian American Oil Co. Only two weeks ago they completed an interim deal that raised their ownership from 25% to 60%--a move with ironic consequences in light of their stated desire to lower prices. Under the complicated oil pricing system, the four American oil companies (Exxon, Texaco, Standard of California and Mobil) that have part-ownership of Aramco will have to "buy back" 60% of Aramco's daily output at 93% of the posted price, raising the market price of Saudi crude by about $1 per bbl. But when the Saudis take complete control of Aramco, they will have to set directly whatever price they think suitable--and the world is waiting to see how low it will be.

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