OPEC's New Pincer Ploy

As production declines, increasing petropower for the cartel

Following last year's 125% hike in the cost of crude oil, the OPEC cartel is now moving on a new tack in its offensive to win control over the world petroleum market. It is seeking to dominate global energy by reducing production in order to keep prices artificially propped up and to diminish the power of the so-called Seven Sisters, the major oil companies like Exxon and Shell that controlled world oil for half a century. These actions could result in a tense escalation of global petropolitics.

At first glance, the world oil scene looks brighter. Just as economists predicted, sharply rising oil prices and the slowing world economy have at long last begun to put a pinch in petroleum demand. Consumption in the non-Communist world is down by about 3% from 1979 levels, and in the U.S., oil consumption was by last week a full 10.3% lower than a year ago. This slump in demand has resulted in a softening of spot-market oil prices. Petroleum that was selling for $40 per bbl. in late December now goes for about $33. World oil stocks are now also very high, with supplies running about 1 million bbl. per day above world demand.

OPEC, though, is now moving to keep up those wobbly world prices by taking less oil out of the ground. Reductions in output would all but guarantee that long-term prices will remain firm, and even nudge up. The latest to institute the price-propping cuts are Kuwait and Libya, which last week reduced their production by 25% and 17%, respectively, bringing the overall drop in OPEC'S output to 2 million bbl. per day below the autumn 1979 level of 31 million bbl. daily. Some price hikes continue nonetheless. Algeria has put a $3-per-bbl. surcharge on its crude, euphemistically calling it a "down payment against future explorations."

The cartel's pincer ploy on prices and production is especially galling for the once mighty international oil firms, which for decades controlled both the price and the quantities of oil that moved in world markets. Instead of dictating terms to their suppliers, the companies now find themselves reduced almost to the role of bystanders. The turn-around in oil trade began shortly after the 1973-74 oil embargo. The Europeans and Japanese, growing uneasy about leaving their energy supplies dependent upon the Seven Sisters, began scouring the world for government-to-government oil deals. These permitted their national petroleum companies to buy directly from the producing countries rather than through Exxon or Texaco, for example. France now buys about half of its oil under long-term contracts with such countries as Iraq, Saudi Arabia and Mexico.

OPEC, for its own reasons, also wanted to remove the major companies from the oil game. Dealing on a firsthand basis with Western governments increases the producers' profits and gives them some political leverage over their customers. In the early 1970s the seven leading companies controlled some 80% of world oil trade, but they now have their hands on only about 40%. Says one U.S. energy official: "The shared objective of OPEC is clearto eliminate the middlemen."

Typical of the new trend was Kuwait's announcement two weeks ago that it is cutting the amount of crude sold to British Petroleum from 450,000 bbl. per day to 150,000 bbl. Earlier, Kuwait had agreed to increase sales to the two largely state-owned French oil companies by 85,000 bbl. daily. Said Kuwait's Oil Minister Ali Khalifa Al Sabah after the decision: "If the oil companies don't like it, they may buy their oil elsewhere."

American Administrations have always opposed creation of a federal agency that could wind up monopolizing oil imports, but some congressional leaders, like Ohio Democrat Charles Vanik, now call for setting one up. Vanik argues that a national buying agent could help lower OPEC prices, although there is no evidence that European deals have had that effect.

Direct contracts are beginning to cause problems for the big oil companies. The crude-squeezed majors have found themselves increasingly unable to renew delivery agreements with other smaller companies and refiners. Exxon has announced the cancellation of contracts with nonaffiliated customers around the world because it lacks sufficient crude to service them. Complains a Shell Oil executive in Europe: "The majors are becoming the beggars of the oil market, jilted by governments on both sides."

Though oil companies are the world's favorite whipping boys, some energy and foreign policy experts worry about the implications of cutting them out of the petroleum business and having most trade done on a government-to-government basis. Such deals give the producers enormous potential clout over consuming nations. Explains a top energy official in Washington: "A small refiner, or even a small country, could find itself reliant on a single country for perhaps as much as half its oil deliveries. But the amount might equal no more than a tiny fraction of the producing nation's total exports." European Community officials warn that France and other governments risk "political blackmail" by OPEC members, who may demand payoffs like recognition of the Palestine Liberation Organization as well as top dollar for oil. With their citizens freezing or deprived of gasoline during some future energy crisis, governments would doubtless be under extreme pressure to make concessions in Middle East politics. Warns one top oil expert in New York: "Some day consumers may look back and regret they got rid of the political insulation that the majors provided."

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