OPEC's Painful Squeeze

The leaders of the free world's seven strongest industrial nations were in the process of donning formal dress for a state dinner with Emperor Hirohito of Japan when aides brought the news that all of them had awaited with dread. On the other side of the globe in Geneva, the OPEC ministers had once again jacked up the world price of oil, and the bite was fully as bad as gloomy prophets had predicted--and perhaps worse. The cartel's complex system of base quotes and surcharges works out to an average price of between $20 and $21 per bbl.--up 15% just from last week, 50% since Jan. 1, and 1,000% from the $1.80 price at the start of the '70s.

"There is no one on earth who will fail to suffer from these extraordinary increases," proclaimed Jimmy Carter, with only mild hyperbole. He and the leaders of Britain, Canada, France, Italy, Japan and West Germany issued a communique spelling out why: "Unwarranted rises in oil prices mean more worldwide inflation and less [economic] growth. That will lead to more unemployment, more balance of payments difficulty, and [will] endanger stability. We deplore the [OPEC] decision."

But there was not much that the seven could agree on to contain the damage. For the moment, at least, OPEC has the industrial world over a barrel. The summiteers decided to hold imports from the oil cartel at about their present levels, in order to limit the flow of cash from their countries and, just possibly, dissuade the OPEC leaders from piling on yet more price boosts when they meet again, in December at the latest. That done--and very little it was--the seven summiteers disbanded. Carter, after a weekend visit to the U.S. military front lines in South Korea, canceled a planned three-day vacation in Hawaii and prepared to fly back to Washington Sunday night.

There he confronts the sourest and most apprehensive national mood to hang over a Fourth of July holiday in years. For millions of citizens penned at home by exasperating gasoline shortages, the only celebration will be a backyard barbecue--if the sporadic strikes by independent truckers protesting the scarcity and soaring price of diesel fuel do not cause new shortages at the supermarkets. Gas lines in Eastern cities are getting longer, despite the spread of odd-even sales restrictions, and the Tokyo agreement to limit petroleum imports obviously will do nothing to shorten them, since it is a scarcity of imported crude to refine that caused the lines in the first place.

Ahead lie two other prospects that will be considerably worsened by the OPEC move:

Inflation. "It's a catastrophe!" exclaimed Alfred Kahn, President Carter's chief inflation fighter, commenting on the latest U.S. figures. They showed prices leaping up 1.1% for May, or at an annual rate of 13.4% in the first five months of this year. The increase was led, unsurprisingly, by gasoline, which rocketed up at a 55% pace. The new OPEC boost may doom Administration efforts to wrestle the figure down below the double-digit range this year. Directly it will kick the prices of gasoline, heating oil, diesel fuel and the myriad products made from petrochemicals yet higher; indirectly it will nudge up many other prices--apartment rents and foods, for example.

Slump. "The recession is on," says Walter Heller, a member of TIME's Board of Economists. The Government has made no official announcement of this (a recession is customarily defined as two quarters of declining production), but it unofficially estimated last week that national output of goods and services dropped at an annual rate of 2.4% from April through June. OPEC's oil boosts make this downturn immeasurably harder to reverse; they will drain perhaps $30 billion out of Americans' pockets by the end of 1980. Unemployment has been holding steady at just under 6% so far this year, but is sure to rise--perhaps to 7.5% or 8% next year, according to Heller.

In other industrial countries, the situation varies. Inflation has been speeding up throughout Europe and Japan and will be accelerated further by the oil increase. But in the other six summit countries, unlike the U.S., economic growth has been showing signs of revival this year. Now output and employment will inevitably slow as petroleum prices soar. How bad will the recession that has apparently begun in the U.S. become? That depends heavily on whether OPEC can somehow be persuaded to stop the price spiral at its present point.

The basic situation: the cartel's 13 member nations are now pumping roughly 31 million bbl. of crude out of the ground each day, 2 million bbl. more than last year, but still 2 million bbl. less than nations want to buy in order to keep their factories humming. The shortage has set off a scramble that permits OPEC to charge almost any price its members wish; some U.S. officials fear that the cartel will ram through yet another 15% increase by year's end. The only way to head it off, say government leaders around the world (including OPEC leaders), is for the oil-importing nations to cut their consumption by 2 million bbl. a day. That would bring supply and demand into balance and perhaps stop the wild rise in prices. But how can the pain of a cutback--which inevitably will mean less production and fewer jobs--be shared equitably among consuming nations with widely differing economic needs?

It was obvious that this question would dominate the Tokyo summit long before the government chiefs gathered around a 27-ft.-long mahogany table in the gilt-and-rococo Akasaka Palace for their first formal session. The summit, fifth in an annual series devoted to economics, had been scheduled before the latest oil crisis broke, and Jimmy Carter took the occasion to combine it with a state visit to Japan. For three days, while diplomats maneuvered in the back rooms, the President patiently went through the ceremonial rituals of such a visit--reviewing troops under a broiling Tokyo sun; chatting amiably with Marine Biologist Hirohito about scuba diving; attending a Kabuki play; lunching with 125 top celebrities of Japan, including Home Run King Sadaharu Oh, at the Imperial Palace. Jittery police cleared the streets of spectators for most of the President's trips around Tokyo, but Carter did journey to the port of Shimoda, where Commodore Perry's fleet called 125 years ago, for a "town meeting" with ordinary Japanese.

Backstage the Europeans were pressing for a pledge that all the industrial countries freeze oil imports through 1985 at last year's level. Unfair, protested Carter's aides. By drawing on increasing output from North Sea wells (expected to nearly double from last year to 1985), the Europeans could freeze imports from outside the Community and still burn more petroleum than ever. In the U.S., where domestic oil output has been declining (down about 700,000 bbl. a day since 1972), a freeze on imports would cause more hardship. Japan, which is totally dependent on imported oil, took the same view; Prime Minister Masayoshi Ohira reportedly dismissed the European plan as "very clever." Canada, where domestic oil production is also leveling off, joined the U.S. and Japan in urging that the summiteers set specific, country-by-country import quotas, adjusted to reflect each nation's differing circumstances.

That was what the government chiefs did--sort of. Carter announced a target of holding U.S. imports through 1985 at 8.5 million bbl. a day. That would be slightly more than the nation is importing now and considerably more than it brought in last year, when the start of shipments from Alaska temporarily held down imports. But it would be a low enough ceiling to force curtailment of some cherished petroleum-wasting habits such as lavish outdoor lighting displays, and it might extend or worsen the present prospects of recession. The Europeans accepted the principle of setting country-by-country limits, and of applying them to consumption as well as imports, but held off actually working them out until after a meeting of the nine-nation European Community later this year.

The agreement, such as it is, was not reached without tension and dispute. On the eve of the summit, Carter let it be known that he was "deeply angry" about a remark by French President Valery Giscard d'Estaing that the Americans "haven't even started" to curb wasteful use of oil. Once the sessions began, however, Carter's principal opponent was not Giscard but German Chancellor Helmut Schmidt, who conducted what the American President wearily described to aides as a filibuster in favor of the European plan; the difficult personal relations between the two had rarely been more strained. Among the newcomers to economic summitry, Japan's Ohira, the chairman of the meeting, seemed to his colleagues to be unable to control the discussions. British Prime Minister Margaret Thatcher again came across as a very tough leader, and Canadian Prime Minister Joe Clark seemed to other summiteers to be cool and precise.

In the end, the leaders agreed because they knew that in the face of the OPEC threat they could not afford to leave Tokyo without some sort of accord. But the import limits are the kind of solution that is only to be described as better than nothing. They will be difficult to enforce, and OPEC can, if it chooses, foil them by cutting production again. At best, the limitations will hold a bad situation steady while the world goes through a painful period of inflation, slowdown or recession, conservation and conversion to alternate fuels.

Little that was done in Tokyo will help to ease that process. Before the meeting started, diplomats discarded as unworkable the idea of forming a consumers' cartel to bargain with OPEC. The summit leaders did agree, however, to push production of coal and nuclear power.

Even so overwhelming a problem as energy, of course, cannot preoccupy a U.S. President to the exclusion of all else, and Carter had other matters on his mind in the Far East. In Tokyo, he announced that the U.S. would take in 14,000 Vietnamese refugees a month, double the figure now, and won agreement from his fellow summiteers to press for an international conference on the boat people's plight. In Korea, from which Carter had once pledged to withdraw U.S. troops, he had to reassess a military situation that makes withdrawal difficult.

All through his week in Asia, however, Carter was reminded of how angrily his leadership is being questioned at home, largely because of the energy crisis. Polls published while he was in Tokyo show him not only trailing Senator Edward Kennedy in popularity but losing to potential Republican challengers Ronald Reagan and Howard Baker as well. In fact, the President's overall approval rating--29%--is barely above the levels of Harry Truman and Richard Nixon at their lowest points.

Back in the U.S., the President faces a Congress eager to take some kind of action on energy, but sadly confused as to what to do, and a bewildered and increasingly frightened public. Carter will surely make another strong pitch for a standby gasoline-rationing program and his windfall-profits tax on oil companies, to accompany the decontrol of domestic oil prices that he hopes will arrest the decline in U.S. oil output. That scarcely adds up to a sweeping program. Unhappily, the only group that seems to have a clear idea of how it wants to manage the energy crisis is OPEC.

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