Oil Stays Up

By the law of supply and demand, the sky-high oil prices that are disrupting Western economies should be falling right now. Oil supplies are exceeding demand on world markets by 3% to 5%, creating the classic condition for a price drop. Saudi Arabia continues in its outspoken position as the one producing country whose officials have consistently argued that it is unrealistic for Middle East states to maintain posted prices for oil that are four tunes as high as they were last fall. Richer in petroleum reserves than any other nation, Saudi Arabia announced last month that in early August it would auction off some crude without setting a minimum price. Its plans aroused high hopes, especially in the U.S., that this month would see the beginning of the long-awaited price fall. But it is now clear that those hopes must be postponed. The auction is off.

Why? The Saudi government has not said. Indeed, it has not officially canceled the auction, but neither has it ever sent out invitations to Western oil companies to bid. Possibly the Saudis are waiting for some indication from the new Ford Administration of just how much the U.S. values Arab cooperation. But most oil analysts suggest a different reason: however sincere the Saudis may be in their desire to cut oil prices, they are reluctant to disrupt the powerful cartel formed by the twelve members of the Organization of Petroleum Exporting Countries. King Faisal's government apparently feels that it cannot move unless it gets the support of at least one or two other O.P.E.C. countries.

That it has signally failed to win. In fact, after plans for the Saudi auction were announced, government ministers from other Persian Gulf oil-producing nations hurriedly declared their readiness to cut back petroleum production, if necessary, to keep world prices from dropping. Abdel Rahman Al-Atiqi, Kuwait's Minister of Finance and Oil, warned: "If there is any attempt to undermine oil prices by any party through reducing them in an unnatural way, O.P.E.C. has a specific plan in hand to counter any such attempt. And when I say O.P.E.C., I mean all the member states without exception." His statement was an obvious exaggeration, since Saudi Arabia is a leading member of O.P.E.C., but it nonetheless made a point.

To some Europeans, who have never shared the U.S. optimism that oil prices would soon drop, the affair proved once again that oil prices are not determined by economics alone. "The fact of the surplus means nothing at all," says Paul Frankel, a London oil consultant. A high official of the European Common Market adds: "Prices will continue to be determined by political, not economic factors."

If oil prices do eventually drop, it probably will not be as a result of the next O.P.E.C. meeting in Vienna in September. At the latest meeting in Ecuador in June, Saudi Arabian Petroleum Minister Ahmed Zaki Yamani pressed for a cut of $2 per bbl. in the posted price of $11.65 per bbl. for light crude. (The posted price is a theoretical figure, but it helps to determine the actual price because it is the number on which taxes and royalties levied against the oil companies are based.) Yamani had all he could do, however, to keep the other O.P.E.C. members from raising prices still higher. The Saudis are not likely to fare better in Vienna. It seems that consumers in oil-burning countries would be well advised not to hold their breath.

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