First Shots in the "Energy War"

Across a global front, the battle was joined last week. On one side stood the U.S., determined to drive down the high price of oil; on the other was OPEC (Organization of Petroleum Exporting Countries),* equally dedicated to maintaining its enormously profitable marketing policies, which have quadrupled the cost of oil in the past year. So far, nothing more lethal than verbal salvos has been fired. Looming in the distance, however, are more dangerous weapons: political and economic pressures and possibly--as a desperate last resort --military intervention.

The first round in what some commentators are already calling "the energy war" was fired by President Gerald Ford in a Sept. 23 speech to the ninth annual World Energy Conference in Detroit. Amplifying his "straight talk" to the U.N. General Assembly the previous week (TIME, Sept. 30), Ford deplored "the pulverizing impact of energy price increases on every aspect of the world economy." He warned: "Sovereign nations cannot allow their policies to be dictated or their fate decided by artificial rigging and distortion of world commodity markets ... Exorbitant prices can only distort the world economy, run the risk of worldwide depression, and threaten the breakdown of world order and safety."

The President acknowledged that in a nuclear age "war brings unacceptable risks for all mankind." But in a menacing aside, he reminded his audience that "throughout history, nations have gone to war over natural advantages such as water or food or convenient passages on land or sea."

Speaking before the U.N. that same day, Secretary of State Henry Kissinger echoed Ford. "The world cannot sustain even the present level of [oil] prices, much less continuing increases," declared Kissinger. The cost of oil has soared, he said, because of "deliberate decisions to restrict production and maintain an artificial price level."

Some Rethinking. By their tough talk, Ford and Kissinger intended to stress that the high price of oil was not primarily an economic problem but rather a political issue of the highest magnitude. Some industrial nations could be seriously weakened and the world economy destroyed if the cost of energy did not come down. Washington hoped that by focusing attention on these problems, the oil consumers would be spurred to greater cooperation on energy matters. The exporters might also be more careful about raising prices again. As one U.S. official explained, referring to OPEC's need for the technology and goods the industrial nations provide, "When the oil producers realize they're bound to bring down the temple on their heads as well as on everyone else's, there will be some rethinking."

Nonetheless, the oil exporters' response to the Ford and Kissinger speeches was instantaneous outrage. The Shah of Iran, who was in Australia on a state visit, declared that "no one can dictate to us. No one can wave a finger at us because we will wave a finger back." Abdel Rahman Atiqi, Kuwait's Finance and Oil Minister, denounced the Ford and Kissinger statements as "American blundering" and declared that OPEC may be pushed into dealing with customers in a manner "which would be harmful to some countries" --an unmistakable allusion to a new oil embargo. From Chicago, where he was addressing the Rotary Club, Saudi Arabia's Oil Minister, Sheikh Ahmed Zaki Yamani, warned that the U.S. had better not start practicing "economic imperialism."

In their speeches, Ford and Kissinger carefully avoided naming names. The Arabs reacted as if they had been especially singled out as the villains responsible for much of the world's current economic woes. AMERICA DECLARES WAR AGAINST OIL-RICH ARABS proclaimed Beirut's moderate newspaper an Nahar in banner headlines. In the U.S., a number of editorials and columnists assumed that the Arabs were the intended targets of the tough line.

According to an aide, Kissinger had no intention of stirring up an Arab backlash by the hard new U.S. stance. Although the Secretary did not say so in his speech, he is aware that some of the most prominent Arab oil exporters are among those least guilty of fostering high prices. Saudi Arabia, the world's largest oil exporter, has continually tried to persuade its OPEC colleagues to reduce the price of petroleum. This effort has been blocked by non-Arab Nigeria, Venezuela, Indonesia and Iran (supposedly America's most reliable Persian Gulf ally) as well as by Arab Libya and Kuwait.

The oil exporters, moreover, feel unjustly accused when the U.S. points to the high price of petroleum. OPEC members cite the soaring costs of the food and machinery that their countries must import. "If the world prices go down, we will go down with oil prices," said the Shah. "But if they go up, why should we pay the bill?" For example, the posted price of petroleum rose from $2.28 per bbl. in late 1971 to $11.65 last week, but wheat jumped proportionately almost as much in the same period, going from $1.05 per bu. to about $4.40.

Significant Shifts. Washington concedes that nations possessing oil reserves have been underpaid in the past, but it maintains that they are being overpaid now because the price of manufactured goods has not increased nearly as much as the cost of commodities and energy. Moreover, the U.S. insists that there is no essential link between the costs of food and oil. The cost of pumping oil is relatively little once the initial investment in the wells has been made. The production of food, on the other hand, requires a constant, expensive investment in equipment, education, labor and chemicals. Even when nations try to regulate their agriculture output, as the U.S. did for many years, the yield (and therefore the price of the crop) is dependent on many factors beyond human control such as weather and plant disease.

Last week's tough talk by the U.S. marks a significant shift in its handling of the oil exporters. After the big jump in petroleum prices nearly one year ago, Washington maintained a "hands off' policy, hoping that the OPEC countries would reduce their prices when they realized that the international economy would be disrupted. In the past few months it became apparent that this policy was failing. The high cost of oil clearly was a major factor in the economic problems of France, Britain, Japan, Italy and the U.S. (which suffered a $1.1 billion balance of payments deficit in August, the largest ever). The enormous reserves of OPEC members--now $60 billion, with $650 billion forecast by the World Bank by 1980--already hang like a Damoclean sword over the international monetary system, threatening to swamp some economies through massive investment while depriving others of liquidity. Yet the oil exporters not only refused to roll back prices, but, at OPEC's September meeting, linked future hikes in oil prices to an index of world inflation, thus guaranteeing ever-mounting energy costs.

If the strategy of tough talk fails and oil prices do not come down, the U.S. may well be in a political dilemma of its own making. To retain credibility, it will have to match tough talk with tough action. Yet there is a broad consensus in Washington that the U.S. has little if any clout. There is almost nothing the U.S. sells to the oil exporters that they cannot buy elsewhere.

Scare Talk. If the U.S. set a ceiling on what it is prepared to pay for oil, the petroleum exporters could easily stop shipments to the U.S. and still survive.

If, in an act of desperation, the U.S. seized the billions of dollars of deposits and investments the oil exporters have in America, the move would be counterproductive; Washington's international financial responsibility would be seriously eroded. Even if the U.S. tried to curry favor with the Arabs by abandoning its support of Israel, it would win no points among the cartel's non-Arab members. Perhaps America's most effective unilateral action would be a stringent program of fuel conservation.

As the lack of Yankee muscle became apparent last week, scare talk mounted that the U.S. might be tempted to use its military option. The talk grew so loud that Secretary of Defense James Schlesinger had to emphasize to reporters that he expects the problem with the oil exporters to be solved "through negotiations and amicable discussion," and that "it is not expected that there is going to be any military conflict." A State Department spokesman, using the usual whipping boy, denounced press speculation about military action as "completely irresponsible." In reality, that statement itself was irresponsible and unjustified, since the Administration had needlessly fueled the alarmist rumblings. President Ford mentioned "war" in his Detroit speech, and Administration officials were privately saying that some form of military action could not be excluded.

Concerted Action. In recent weeks there have been encouraging signs that the oil-importing nations have taken the first steps toward the kind of concerted action that could make economic sanctions against the OPEC members effective. In mid-September, the twelve-nation Energy Coordinating Group (composed of almost all the major non-Communist industrial nations except France) agreed to share energy supplies in the event of another oil embargo.

Last weekend the foreign and finance ministers of Japan, Britain, France and West Germany huddled with their American counterparts at Camp David, the President's Maryland retreat. There they planned to discuss means by which energy costs could be reduced. Significantly, France agreed to participate in the talks.

The emergence of a united bloc of oil consumers might convince the cartel of exporters that the time has arrived to negotiate the price of petroleum. If, however, mutual suspicion and mistrust prevent the West from unifying its position or if the oil-producing states refuse to respond, the prospects of more radical action may appear more real. As Gerald Ford put it in his Detroit speech, "It is difficult to discuss the energy problem without lapsing into doomsday language. The danger is clear. It is severe."

*Algeria, Ecuador, Gabon, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

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