The OPEC Supercartel in Splitsville

For the past three years, the Organization of Petroleum Exporting Countries has reigned as the world's most successful cartel ever, seemingly able to disregard both world public opinion and market forces. Between late 1973 and 1975, OPEC quintupled global oil prices, helping cause the industrialized world's most severe recession since the 1930s, and managed to make its inflated prices stick even through a worldwide glut of petroleum. Officials in the U.S. and other oil-importing countries kept wishfully thinking that OPEC would somehow split apart, but their hopes were always foiled -until last week. Then, at a price-setting meeting in the tiny desert emirate of Qatar, the first fissure in OPEC's united front finally came, unexpectedly, openly and dramatically.

Cocky Sheik. The instigator of the rupture was Saudi Arabia, whose sands and offshore waters contain by far the world's largest proven oil reserves. Eleven of OPEC's 13 members* voted to raise prices another 10.4% on Jan. 1 and yet a further 5% next July 1. But the Saudis, backed by the United Arab Emirates, announced that they would post only a 5% increase for the whole year. Moreover, Saudi Oil Minister Ahmed Zaki Yamani declared that Saudi Arabia would lift its self-imposed production limit of 8.5 million bbl. a day and pump out as much oil as the world market would take (the country can now produce 11.8 million bbl. daily). That was a clear attempt to undermine the higher prices decreed by its OPEC partners, and the cocky Sheik Yamani told Western newsmen, "I don't believe the 10% increase will hold in the market."

The suddenness and openness of the break astonished Western and Japanese oil-company experts and government officials, who at first refused to believe that OPEC had split into a two-tiered pricing system. Some experts hailed the news as a sign of OPEC'S breakup. Said Noboyuki Nakahara, a senior executive of one of Japan's largest oil refineries: "If true, [the split] could mean a virtual collapse of the OPEC price structure." Others more cautiously warned that OPEC could eventually get its act together again by agreeing on the Saudi price, the price of the majority eleven countries, or some level in between. In the opinion of New York Oil Economist Walter Levy, the stage was set for "a test of strength" between Saudi Arabia and its erstwhile OPEC allies.

That it is. Beginning Jan. 1, OPEC oil will be available at two prices: $12.08 a bbl. for Saudi or Emirate crude, $12.70 a bbl. for petroleum from the other OPEC countries. The immediate result will probably be chaos in the world oil trade as the big oil companies and consuming nations jockey to buy at the lowest price. But the Saudi action will at least hold the average world oil price below levels that could have precipitated a new global recession.

Politically, the implications are also great. Yamani's move is something of a victory for U.S. economic diplomacy. TIME learned that President Ford called Saudi Ambassador Ali Abdallah Alireza to the White House for a private talk. Cyrus Vance, who is Jimmy Carter's choice to be Secretary of State, met separately with the ambassador, and after the split in Qatar, Vance praised the Saudis' "courageous and statesmanlike" action. Yamani, for his part, declared, "We expect the West, especially the United States, to show appreciation for what we have done." The U.S., he said, could indicate gratitude by working toward "settlement of the Arab-Israeli conflict," presumably by leaning on Israel to make concessions.

Small World. For all that, there was no sign of an outright U.S.Saudi deal. Rather, the price split reflected economic and political strains that have been present in OPEC all along but until now have been papered over in a fac,ade of unity. Having more oil to sell than anyone else. Saudi Arabia wants to keep volume high, which it recognizes can be done only by holding the price down. As OPEC's volume producers, moreover, the Saudis have developed a more sophisticated understanding of customer markets than other OPEC members. In addition, the Saudis want to improve their image in the eyes of the West and to protect the huge investments they have made there. Yamani fruitlessly warned his fellow oil ministers that the slowdown in Western economies made oil-burning nations simply unable to take a big OPEC price increase. "We live in a small world," he explained later. "If the rest of it suffers economically, we also suffer, no matter how high we raise the price of oil."

By contrast, many of the other OPEC members, notably Algeria and Libya, are already running low on reserves. They want to get as much money as possible from every remaining barrel. Iran is especially hard-pressed. The Shah badly overcommitted his oil income on ambitious development projects for his relatively large population, and now needs more money to make ends meet.

Political conflicts heighten the tension within OPEC. Higher oil revenues enable Iran to buy more guns and tanks with which to frighten its neighbors across the Persian Gulf -an escalation that Saudi Arabia, one of those neighbors, decidedly does not wish to encourage. The archconservative Saudis are also at odds with the radical Arab states of Algeria, Iraq and Libya, whose hand would be strengthened by a big oil-price jump. The Iraqi oil minister, Tayeh Abdul-Karim, blasted the Saudis for trying to force OPEC to "succumb to pressures from the oil monopolies and imperialist forces."

Star of Riyadh. Despite the strains, OPEC had so successfully fostered a one-for-all front that as the Qatar conference began last week, no one could have foreseen its drastic outcome. Bedecked in flowing Saudi robes and headdress, Yamani, who has a Kissinger-style flair for personal diplomacy, arrived at the very last minute. As he entered the plush Gulf Hotel in the Qatar capital of Doha, which had been completely taken over for the conference and placed under heavy security, Yamani gave a swift aside to reporters: "We are for a six-month [price] freeze."

Behind the closed steel shutters in the Gulfs giant banquet hall, which served as conference room, almost no one really took him seriously. "We listened respectfully to Yamani's proposals though we did not accept them," said one oil minister. When the other OPEC chieftains failed to buy his reasoning, Yamani dramatically rose from the conference table and strode out of the hall. He flew to Riyadh for talks with King Khalid ibn Abdul Aziz. The other oil ministers pretended to be unimpressed by Yamani's theatrics. Said Iraq's oil minister, Karim: "It is a big game that he always plays." When word came that Yamani was returning to the conference. Qatar's minister of finance and petroleum, Abdul-Aziz Bin Khalifa Al -Thani, went to the airport to accord him a proper protocol. "I am going to meet the big star," he smilingly told reporters.

Upon his return, Yamani clearly had the King's O.K. to accept no more than a 5% increase. That, Yamani explained, would effectively freeze present market prices, which have crept above OPEC's "marker" prices as oil companies stockpiled supplies in anticipation of a big oil-price increase. The real bargaining sessions switched from the formal banquet hall to half-a-dozen or so smoke-filled suites where the various oil ministers were trying to strike deals and line up support. At 2 a.m. on Friday, Valentin Hernandes, the amiable Venezuelan oil minister, telephoned waiting reporters to inform them that OPEC had agreed to disagree.

Caustic Remarks. Yamani did not even bother to attend the final session in the conference hall. Instead, smiling and gracious, he invited TIME Correspondent Wilton Wynn and a handful of other reporters to his tenth-floor suite. There, in equable tones, he delivered some surprisingly caustic remarks about his OPEC colleagues. How did he feel about breaking ranks? "Is it fair for all OPEC to get together to decide the price of Saudi crude? Is it fair for others to decide against our will?" What about OPEC arguments that a big oil hike is justified by inflation in the prices of Western goods that oil producers buy? "The OPEC figure of a 26% rise in prices of goods we import from the West is not correct. If you take the [International Monetary Fund] index, the rate of such inflation is less than 5%."

The task for economists throughout the industrialized world now is to reckon the effects and costs of the two-tier pricing system. The new prices are expected to add $10 billion to the world's fuel bill. Among the major importers, the U.S. seemed likely to be hurt least. It still produces 60% of the oil that it burns, and a large share of its imports come from Saudi Arabia. The average price of crude available in the U.S. will go up no more than 3%, and that will push up the Wholesale Price Index a negligiblen .1%.

Western Europe, which imports most of its oil and draws a large share from the OPEC countries that are raising prices 10%, will be harder hit. According to preliminary figures, the nine members of the European Economic Community will have to pay an extra $4 billion a year in fuel costs and will see their composite rate of growth in production shrink from 4% to 3.25%. The Japanese, who draw 37.4% of their oil from Saudi Arabia, were relieved. They believe their recovering economy can absorb the increase without suffering any serious cutback.

Few oil experts think the two-tier system can last. They foresee two possible outcomes:

1) More likely, petroleum importers throw their orders to the lowest-priced producers. Saudi Arabia and the United Arab Emirates. Higher-priced OPEC countries lose enough sales to cause panic. Most endangered would be cash-strapped Iran and Indonesia, which urgently needs money to pay off overdue foreign debts. Eventually the rest of

OPEC comes down to the Saudi price.

2) Importers flood Saudi Arabia and the Emirates with more orders than they can fill. The other OPEC producers maintain their high prices and carry through the extra 5% scheduled for July. Eventually the Saudis go up.

Meanwhile, company size rankings in the oil business could change. Four American companies -Exxon, Texaco. Mobil and Chevron -that import heavily from Saudi Arabia will be able to undersell such other producers as Shell, British Petroleum and Compagnie Franc,aise des Petroles, which rely more heavily on the higher-priced OPEC states. All in all. Yamani seems to have touched off a classic capitalist price war. That is scarcely what cartels are supposed to do. and OPEC least of all; its increases were once heralded as the start of a "new economic order." But that was before Qatar turned out to be Splitsville.

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

This file is automatically generated by a robot program, so viewer discretion is required.