'THE WORLD ECONOMY: A BAD YEAR FOR THE RICH COUNTRIES,' BY LAWRENCE A. MAYER, FORTUNE, AUGUST 1974. 'RISING COST OF CRUDE,' THE PETROLEUM ECONOMIST, SEPTEMEBR 1974

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-01194A000100530001-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 11
• Document Creation Date: November 11, 2016
• Document Release Date: August 6, 1998
• Sequence Number: 1
• Publication Date: September 12, 1974
• Content Type: REPORT

25X1C10b
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 Approved For Release 1999/09/02: CIA-RDP79-01194A0001005300017 YRGHT
Fortune's Wheel
A review of this issue
?ee, A~guSf, 1974, Vol. XC, No. 2. Issued monthly
,,Ti.?ne In--. 541 North Fairbanks Court, Chicago,
. s E 5' t. Second-ciass postage paid at Chicago,
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Business Roundup
Why the Prospect Is Suddenly Darker
85. Businessmen in the News.
Mockler of Gillette-and others
99 On Your Own Time
. Tired Feet and Soaring Souls
113
121
Personal Investing
It Can Pay to Send Money Abroad .
133 Editor's Desk
135 Editorials
What'Ails the Economy Is Politics
Truth and Consequences on Frontiers of Science
138 Suddenly It's Mariana in Latin America by Richard Armstrong
145 Betting $20 Billion in the Tanker Game by Lewis Beman
150 For Scrapmen, These. Are "Tinsel Days" by Marilyn Wellemeyer
1t4 -The Camera's Eye at the Scrapyard (A Portfolio)
158 The World Economy- A Bad Year for the Rich Countries
by Lawrence A. Mayer
164 How the Union Beat Willie Farah by Deborah De Witt Malley
169 The Lady Gets. a New Flame
170 A Gas Man from Idaho Wins the Southern Cross
by Arthur M. Louis
The Fortune Directory of:
174 The 300 Largest Industrial Corporations Outside the U.S.
182 The Fifty Largest Commercial-banking Companies Outside the U.S.
184 The Fifty Largest Industrial Companies in the World
186 Index of the 300 Industrials and Fifty Banks
192 To Russia With. Pepsi (A Portfolio)
197 A Polo-playing Lord Who Scores Goals in Business
by Robert Sall
1
by Charles D. Ellis
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 CPYRGHT
Thew&?81V1LQ8X81M
CP'(RGHT
e services).
's Ar E
R:~TrIE
R I H
COUNTR]ES
by Lawrence A. Mayer
in terms o real economic growth,
1973-
was one of the best years on record for
the industrialized nations 'of the world.
Their, ecnnnmies grew by more than 6
percent overall, because production hit
.high levels in a good many of these na
tions at the same time. The year's re-
rriarkable economic growth was accom-
panied, however, by ac.-elerating infla-
tion, fast-climbing interest rates, and
international monetary strains. And, of
course, toward the end of the year came
the damaging effects of oppressive in-
creases in the price of crude oil.
As a result, 1974 is proving to be an
exceptionally unpleasant year for the
richer nations of the world. We have the
problems of 1973, and others besides,
without the consolations of vigorous
growth. It now appears that the overall
growth rate for the developed world will
not even reach 2 percent this year, the
lowest in sixteen years. And 1975 may
not be much better.
Signs of financial distress, public as
well as private, are already evident. The
city of Rome has suspended interest
payments on its massive debts, and the
creditworthiness of the Italian national
government has been questioned. With
interest rates high and stock prices low
throughout the world, a great many
companies are finding it ewreedingly pensive to raise capital-in some cases,
prohibitively so.
A number of individual banks have
run into trouble. They include Franklin
National in the U.S. and Herstatt in
Germany, as well as lesser institutions
in Italy, Britain, and elsewhere. In an
the international banking system, the Primarily because of the immense. in.-
central bankers of major countries have crease in payments for il,imports, the
let word be spread that within their own combined deficit of the advanced nations
countries they will assist banks threat- may. run to $40 billion.
erred by the general liquidity squeeze.
Sign of a-cloudy outlook
Not surprisingly, the piling up of so
many economic troubles has brought
more than the usual number of gloomy
predictions about things to come. Vari-
ous voices warn of catastrophicinflation
or worldwide depression ahead-and
sometimes both, the one followed by the
other. Even some sober and hardheaded
The beggar-my-neighbor erit
The immensity of that deficit reflects
the fact that the oil-pro
oil revenues to buy an equ
of goods and services fro?
lucing nations
se their added
valent amount
i the developed
countries. Most of the oil-exporting
countries are too small or too under-
developed to be customer on that kind
of scale. MeanEvhile, poorer countries
observers find the prospects deeply dis- that have no oil are having to cut back
Curbing. It is a sign of a very cloudy on less essential imports in order to af-
_ ornic ouCCoon tnat so acute a finan- , ford rim film' `anti tcr4 '
cier as Britain's Jim Slater lids been... These circumstances place severe con-
many of ;,:,e asset, of his straints on the ability of he industrial-
corn any, Slater, Walker Securities, and
putt ng the funds into. short-term paper.
T e cheerful view (comparatively
chee ful, that is) foresees a marked re
duct on in the rate of inflation later this
yea -and a Rr4Vr paiiyiltg retreat in
inte est rates-without deep reductions
in o tput and employment. On this view,
the great surge in inflation starting last
year resulted from an extraordinary con-
cate atiti of circumstances, including
the n-up of food prices after poor har-
ves in 1972-73,. the worldwide boom
that pushed up the prices of raw ma-
teri s, and the radically' transformed
situation in oil. This line of argument
imp! es that the inflation will be largely
self- orrecting as more normal condi-
tions begin to prevail.
If elf-correction doesn't come about,
how ver, a large dose of distasteful med-
icine may be needed to stop inflation.
The ld orthodoxy dictates deflation to
slow he rise. in prices and put credit on.
a fir..er footing. But that course would
brie on a lot of unemployment, and
cans many companies-to fail. In a time
mar d by widespread political and so-
cial nstability, governments are even
more reluctant than -usual to impose
such severe measures.
Be ides intensifying inflation around
the - orld, the quadrupling of oil prices
has created grave problems in interr.a-
tiona trade and finance. Most advanced
natio is will be running deficits this year
on th it current accounts (mainly inter-
ized. nations to deal with their current-
. account deficits. Efforts
to improve its individu
p"
Ushing.?xports or restr
y one country
1 position by
sting imports
will serve to worsen the position of other
countries. The name of this game is
"beggar-my-neighbor." That phrase,
frequently used in discussions of inter-
national economic relations these days,
is the name of an old card ame in which
you try to capture all the-cards.) Playing
it could lead to economic d wnturns that
would spread from country to country.
The developed countrie have agreed
not to take measures that vould damage
their trading partners. But before that
agreement was formally signed, Italy,
Denmark, and France had already taken
actions that their neighbo s did not like.
And Britain's Labor government has
decided to strive for "expo t-led growth"
-although it is not clear who will take
those additional exports, e pecially since
the volume of world trad is expected
to increase only about 5 percent this
year, compared to 13 perc nt last year.
When trade deficits are o nearly uni-
:ersa:amontg advanced countries, bor-
ro-vincg to cover a shortfall does less"
cn U; e tc, international commerce than
do drives to expand exports. But heavy
borrc;wing will bring its o problems.
Most of the funds would have to come
-from the recycling of money paid to
oil-ing countries, and th s process in
-:elves some special financ al complica-
-ions (sae "Oil, Trade, and the Dollar,"
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FORTUNE, June, 1974). Oil-rich coun-
tries have wanted to lend at very short
term. -while governments of oil-import-
ing countries need to borrow at medium
or long term. This disparity has caused
some big international banks to turn
down short-term deposits from oil-ex-
porting countries, or to lower interest
rates on them.
The'oil countries are putting addition-
al. strain on the system by. depositing
most of their funds in the twenty or so
'argent banks around the world; under
-
stm...rdably, they are seeking safety. At
the same time, the loans requested by
money-short countries tend to be enor-
mous, T..,enders, of cdvrsc. like to diver-
sify their risks, so they are forming
consortia to get the money together.
About 100 institutions participated in a
31.2-billion loan to Italy last spring (the
loan brought the total borrowed abroad
by Italy in the last two years to $10.5
billion). As Arab money gets concen-
!' ated in a few big banks, these banks
will have fewer other lenders to call on
for funds in their effort to spread the
frisks or ery large loans.
A road to depression
To help Italy and other national gov-
ernments increase their borrowing ca-
pacity..the Group of Ten (the major fi-
nancial powers) has agreed to let nations
increase the value of their gold holdings,
v. hen used as collateral for loans. The
c?rT vial gold price remains at $42.22 an
ounce, but gold can now be offered as
collateral at a "market related"-i.e.,
-ego?iated-price, perhaps $100 to $125
an ounce. Even with the higher valua-
cn. however, few nations have enough
-,Id to cover their oil deficits for more
- aan a ye t or two.
Some economists are concerned about
the cumulative effects of heavy national
borrowing over a span of years. William
A. P. MIanser, economic adviser to a
London investment bank, has reached
some dramatic conclusions about the
possible consequences of piling up debt
to buy oil. Assuming that oil-consuming
nations get the loans they need, then at
the end of five years they will have bor-
rowed something like S250 billion. Man-
ser calculates that it would take $25
billion a year just to service these debts.
the growing burden, Manser predicts,
they will curb imports, push exports,
and start down the' every-nation-for-it-
self road that cat lead to a world de-
pression. Like the American oil consul-
tant Walter J. Levy, Manser believes the
oil-consuming nations must somehow
convince the oil producers that the only
way to avert worldwide economic dis-
tress is toy reduce the price of crude.
The industrialized world, then, must
engage. in a perilous balancing act- It
must try to bring down the rate of infla-
tion, and still hold down unemployment.
It must pay its oil bills, and still prevent
an international trade war. How these
conflicting aims can be reconciled is not
at all clear-nor is it clear that the gov-
ernments involved, oil rich or oil poor,
fully perceive the gravity of the dan-
gers they all face.
The diffusion of power
The cartel set up by the Organization
of Petroleum Exporting Countries has
generated a massive shift in economic
power. And the sudden improvement in
.the fortunes of O.P.E.C.'s members has
certainly had more traumatic effects on
other countries than did, for example,
the gradual postwar emergence of Japan
as an industrial power, or the economic
growth in such "third world" nations as
Brazil, Iran, Taiwan, and South Korea.
Producers of other raw materials,
moreover, have noted the success of
O.P.E.C.'s tactics. Jamaica has lifted
export taxes on bauxite enough to yield
it about $'LUU million this year, instead of
$25 million. Among exporters of phos-
phate for fertilizers, Morocco, the larg-
est, has already raised the price from
$14 to $63 per ton.
In addition, producers of raw ma-
terials are having to seek price increases
to counter the higher cost of the oil they
use. This is one reason Chile and Peru
are looking for a way to lift world cop-
per prices. Malaysia has persuaded the
International Tin Council, which repre-
sents both producing and consuming
nations, to raise the guaranteed floor
and ceiling prices of tin. As a result of
Al this, the world is witnessing a re-
markable diffusion of economic power.
The various attempts by producers to
get more control over pricing will con-
-but some of the attempts may not
succeed for long. Among other things,
artificially puffed-up prices discourage
demand and encourage the use of sub-
stitute materials.
Prices of some commodities have al-
ready fallen quite a bit from recent lofty
heights. From the end of 1971 to the
peak reached early last May, total com-
modity prices tripled, as measured by.
the Economist's index. But by mid-July
they had dropped 12 percent. It seems
very likely that some buyers who com-
mitted themselves for commodities in ex-
cess of real needs are now trying to un-
load. Such a development, coupled with
improved food harvests this year, would
mean that the broad-based commodity
boom is over-for a while, at least. And
that, of course, would be a big help in
the fight against inflation.
Traveling downward
Virtually every line of business has
been affected by this year's combination
of slowdown and inflation. This looks like
a lean year even for international tour-
ism, which for a long time seemed to be
perpetually e>;nanding. And the $28 bil-
lion or so that tourism now generates
around the wr.'d is vital to the econ-
omies of a great many countries. The
number of L.S. visitors to Europe this
summer is down by at least 15 percent.
The countries being hit the worst are
among Europe's poorest-Portugal,
n? ^- ? -
.,i.w...,i7ltci.C, :.ntri it,aiy.
For automobile manufacturers, gen-
eral inflation and high gasoline prices
are. making 1974 a year of recession.
Sales and production are down substan-
tially for every major carmaker in the
world.- Both home-market and export
sales are declining from the extremely
nigh levels of 1973, Volkswagen, expect-
ing its first loss since World War II, is-
turloughing some workers, while pay-
ing others',11 substantial bonus to quit.
for good. Even the Japanese auto indus-
try, which more than doubled its, output
t?Oni 1968 to 1973 to become the second-
' e'ge_t producer in the world, is selling
'z:trer cars than last year both at home
-nd abroad.
11e-zpite the downturn in autos, the
1 industry has been doing surpris-
ct!r well. Tnt;tl world production may
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i
r
t
._ed by automakers has been picked up
~v appliance . manufacturers, who are
.zing it to replace plastics in their
prod- (There is a general -shortage of
lastics, and prices of those made from
etroleum are up sharply.)
Energy producers will be supplying a
trong base for the steel business for
tome time to. come. Steel is going into
oal mines, pipelines, supertankers, and
iuclear power plants. In particular, im-
ense quantities will be required for
he oil and gas pipelines that are being
wilt in the North Sea.
"I'd rather look back"
If governments could moderate infla-
tion without putting economic activity
into a sharp downturn, a great new boom
in capital investment might ensue-the
result chiefly of the demand for energy
and raw materials. But that prospect lies
beyond the perplexities of 1974, a year
that a lot of people would like to be clone
with.. As one prominent European econ-
omist recently observed: "I would rath-
er not look ahead at how 1974 will turn
out-I'd rather look back on it."
If 1974 is a rather grim year for the
developed world in general, things are.
a lot worse in some countries than in
others. Here is how the situation looks
in leading countries outside the U.S.:
X ITALY'S economy. .is fragile. During
most of the 190's :t? ..: ih -fate -.,
enviably robust, but beginning with a
wave of strikes in late 1969, -Italy frit-
tered away a chance to become a first-
rank economy. Over the years, weak and
unstable governments became a drag on
economic progress. They created a class
of "golden bureaucrats".-civil servants
with high pensions-and allowed an
enormous number of other people to feed
at the public trough.
The country was especially hard hit
by the higher costs of oil and other com-
modities, since to a large extent its econ-
omy is based on the transformation of
imported raw materials into manufac-
tured goods for export. By last spring
Italy was in such a state that Guido
Carle, the forceful governor of its. cen-
tral bank, issued a stern warning: "To-
day's problem is not that of the quality
of life in the factory, but that of the con-
In llay, the country moved to curb im-
ports of consumer goods, including the
expensive beef that Italians-to the hor-
ror of some economists-had grown very
fond of. Stringent limits were also put
on bank credit, and the country borrowed
heavily abroad to help meet its external
det:cit.'But all of this added up to just
a stopgap program. And it didn't stop"
,he gap very effectively=for example,
the French were able to keep their beef
:lowing into Italy by supplying credit to
Italian importers.
Last month, after much internal dis-
sensioh, the political parties, trade
unions, and, big corporations got to-
gether, more or less, on an ambitious
program to put Italy on the path to Sol-
vency. Taril`fs were raised sharply. Taxes
were increased on luxury goods, and ef-
forts to tighten up the inefficient tax-
collection process were promised. These
and other measures should serve to re-
duce the budget deficit and cut excess
imports. Capital strshed abroad is al-
ready on its way home-a cheering bit
of news. There has been some relaxa-' '
lion of limits on bank credit for small
enterprises, -both to help them survive
and to maintain employment.
Bruno Brovedani, chief economist of
the Eanca. - azionale del Lavoro, thinks
that Italy's G.N.P. will increase about
4.5 percent in real terms for the year
as a whole. Btit he expects the new pro-
gram to cool off the economy toward the
end of this year and into 1975.
The labor unions are already sponsor-
ing sporadic strikes to protest some of
t%:e tough new policies, but those pol-
icies please Italian businessmen, by and
large. Says Umberto Agnelli, the man-
aging director of Fiat: "For the short
term I'm pessimistic, for the medium
and 'on:%,term, I'm optimistic." In spite
of Italy's problems, he believes that his
country has "a very great strength."
^ BRITAIN began the year with a coal
stri :e, which made it necessary to put
ind=try on a three-day week. The new
LcJ:r government, believing that inven-
tc rigs were severely drawn down during
the strike. expected a mini-boom while
re.~. 'ekin- took place. The budget pre-
=eraed in March, therefore, was de-
g
_
o e near y neu ra i economic
effect, and the money supply was kept
under tight rein. It turned out, however,
that output during the stri -e had ex-
ceeded expectations, and o did the
amounts of inventory left in he economy
when the miners went back to work. Ac-
cordingly, the automatic recovery in
production has been considerably weak-
er than was forecast.
stimulation, rather than budget neutral-
ity, seems to be required. And in fact,
last month, Chancellor of the Exchequer
Denis Healey proposed a number of
mildly reflationary measures, including
reductions in some taxes and an increase
in the rate at which companies can raise
their dividends.
Output held up surprisingly well dur-
ing the three-day-week episode, in large
part because of an unusual d gree of co-
operation between labor and manage-
ment. Both sides made sacri ces to keep
factories in operation. The whole epi-
sode suggests that the British economy
has hidden reserves of productivity that
are not normally brought i to play.
Wage controls have just been lifted,.
but price restrictions remain in effect.
In place of wage controls, the Labor
government is trying to promote some-
thing it calls a "social contract," which
it hopes will lead unions to a k for wage
increases only as large as those justified
by inflation. For its part, he govern-
ment has already made eons derable ef-
fort to win union cooperat on-it has
increased old-age pensions, imposed stif-
fer taxes on unearned income ' provided
subsidies on essential food , and can-
celed a rise in rents.
Business confidence has b en low for
some time, and isn't being helped by a
Labor suggestion that tract unions be
given a share in the managerr. ent of com-
panies. In 1973 there was hope of break-
ing out of the long years of emistagna-
tion, and indeed, the G.N.P. grew by 5.8
percent. But 1974 threatens to be a year
of skimpy-perhaps negative-growth.
The longer-term outlook is clouded, in
part by fears among businessmen of
what the Labor party may be cooking up.
Britain's exports are loin relatively
well now but not nearly well enough to
offset the increased costs of oil. Conse-
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quen y the country is again in difficulty
on its trade balance. One promising
note for the balance of payments is that
a goocl.deal of oil money has been flowing
into London-partly because Britain
has traditionally been a banker to Mid-
dle Eastern countries.
pensit;- of states to interfere in trade."
a WEST GERMANY' remains the strong-
est economy in Europe. With the Conti-
i:ent's stiffest monetary and fiscal pol-
icles, it has held the inflation rate'to
Exactly how West Germany e~.ploits its
coal reserves will depend to a consider-
able degree on what energy-sharing pol-
icies emerge in the European Commu-
nity-and what happens to oil prices.
about 7 percent-even. though wage in- * CANADA "is incredibly lucky," sacs
~reaSes have been running to 12 and . Fred H. Me 'Neil, president of the Bank
^ FRANCE is making a fresh attack on ever 14 percent. As a consequence, profit of Montreal. "We are almost alone in the
some long-standing problems under the niargins have been squeezed. Western world in having no b:dance-of-
leadership of its. new President, Valery Restrictive governmental policies payments problems due to oil. We have
Giscard d'Estaing. An economic expert, .... Tllo..T,. ~"-_?.
West Germany Cartel Office Drops Charges
337 Tankers Japan's Modern Fleet
Arabs Order Another ULCC
333 Peru "Plan Inca" Worries Industry
United Kingdom-' Policy on Platform Construction
.Morocco Searches Flopelully
33?
Refining Prospects Now
341
Companies in the News
346
Oil and Energy Notebook
345
347
348
349
350.
351
For the Record
338
Books Received
341
News in Brief
351
Company Information
356
Volume XL1 Number 9
September 1974
Although Morocco has so far failed to justify its earlier reputation as a promisjn North
African oil producer, the search for oil and gas continues on land and offshore with
moderate optimism.
The uncertain demand position and the danger of excess refining capacity have made
forward planning hazardous in Europe, but expansion is going ahead in North America
and Japan. Export refineries are now widely favoured by host governments in the
Middle East.
Natomas Coinoany
US Oil Companies Prices Boost Profits in First Half
United Kingdom Should Coal be Boosted?
Offshore Opportunities
Indonesia Rising Expectations
India Fund to Finance Oil Development
Australia Natural Gas Prices Up
Tankers Dry Docks for the Giants
France Oil Production Down, Prices. Up
New Zealand State Participation
Malaysia Plans for State Oil Company
Offshore Cost of Seabed Oil Wells
Exploration and Production International Forurn Established
Record Profits of KNPC
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Corrections 351
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'I HE impression that of prices have reached their peak Si to S13 a barrel to retain its custo`meis, and Tun '-ia
and are now likely to decline seems to have been followed suit.
gaining ground in recent weeks. It stems from the In recent weeks various other reports have cop-
knowled ;e that bids for crude oil supplies offered at firmed the disappearance of the- fantastic prices hat
state auctions have failed to meet the - expectations- of`~` -etc quoted for iriarginal' sales earlier"tliis`y a' n
rapacious governments; that INIr Yamani of Saudi this sense it is true that the free market has teen
Arabia still. appears to .. believe.. that posted prices ? - showing a downward- trend: It is relevant to point
are too high, and that, with storage tanks full, there., ' out, howe'v'er; that the quantity of oil that changed
is much talk of an oil surplus. Surely: the forces of the hands at these exceptional prices was very sina& ^ in
market. will now. operate to. bring cheaper-oil to- hard- .. relation to world demand: - and- that theeffec of
pressed consumers? "This is certainly, what the con these dramatic falls on the average cost of crud is
summer would like to believe.. Unfortunately, a more , correspondingly limited. Far, more.important.are the
i'#'abstic ' 4 ctatio^. .mac ?31>t -rude en' costs are iidcva'Tl..i cti!] -coct5 to International companies of the bulk sttpriieS
rising and- that they are .unlikely,, without a change of - --that pass, through, their integrated systerns:to em rge
policy by host governments, to, decline -in -coming: as finished products in consuming countries.
But what exactly is meant by crude oil costs? A
fruitful source-of contusion in any current discussion Equity Crude
of price trends is the fact 'that crude oil ?is than
'
These costs are,
of course, related to posted pri es.
hands at an extraordinarily wide`range of prices
The raising of posted prices by some 70L-per cent ast
Cheapest of all" is the equity crude or "cost-crude"
'October and by a further 130 per cent on 1st January,,
to which oil companies are still entitled under con
meant aourold increase (or more) in tax-paid costs
cession agreements: in the Persian Gulf
for instance
,
; nf~ of equity crude to: :something like $7.11 for Ara 'an
the taw-?aid cost of these supplies i
f the`
rii
s o
o
ei
- J' "it' S, .. f;,r Kuwait, ,~.1;; for ;igerian
$7.10--7.90 a barrel Then there; are the buy-back
prices paid by oil companies for supplies' purchased ... $10.00 for Libyan. At its Vienna meeting last IM1 ch
range- `::and again at Quito in June, OPEC decided to leave
artici
from governments under "
ation" a
p
p
r
to - S11 or Posted prices unchanged, with Venezuela reserving
-menus: in the Persian Gulf these ran
e u
g
p
so-called free- the right to go its own way. At Quito, however, the
more a barrel
Finally there are the
.
.
- majority of the governments - not Saudi Arabia or
market
rices charged b
state entities or oil
p
y
com
ss " Venezuela agreed to s q ueeze the buyer a H
to for o
crude oil sold to c
nsumer
overnments
o
g
further by adding 2
or to percentage points to their roy
other :companies;
these can: fluctuate within
.
xates, raising these from 12I to l4-- per cent of po
wide limits in s short nPrinrl of tuna
Market Price
sty
ted
prices.. Where applied, this decision. raises the tax- aid
cost of equity crude by just over 10 cents a barre in
the Persian- Gulf and by 13 cents in Nigeria. This is
the only direct inerease.in the. cost. o?.-equity c de
Free market prices have in some cases fallen a long made in the Middle-East and. Africa this year, tho gh
way from the dizzy heights reached at the time of the there is, of course, no guarantee that further in-
Arab production cuts last winter. In, -those anxious creases may not follow OPEC's conference in
days, panicky buyers paid up to $20 a barrel for - September. -
much-sought-after non-embargoed oil. But, - with ? Venezuela, which has- a 163 per cent royalty an
production restrictions removed, and 'with. con- "complicated tax-reference system including a b;
sumption checked by steep increases in products
prices; panic buyers are no longer in the market.
As long ago as last March, the Kuwait government
failed to line up purchasers for 462 000 b/d of royalty
oil at its hoped-for prices. Offers ranged from $8.50
to $10 a barrel, and when the government insisted
on the posted price ($11.545) as the minimum it sold
only some 100 000 bld. Similar failures have been
reported from Iran, Abu Dhabi, Tunisia and else-
where. Algeria recently lowered its asking price by
sic
.ht
he
he
an
a
price, a percentage surcharge, a variable frei
element. and sulphur premiums, did not follow
OPEC-recommended course. Effective 1st July.
government raised its tax-reference prices by
average of 35 cents to an, average-of some S14.4
barrel; bigger increases were applied to the lig
than to the heavier crudes. The government is e
threatening to increase the present tax rate (58
cent for most companies, though nominally 60
cent) by a considerable margin - which would
ter
per
of,
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100530001-7
 CPYRGHT
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100530001-7
eaur~e, further: increase the cost of these expensi5e
crudes.
The. cost. of the cheapest supplies available to
international companies has thus been creeping up
in recent months, .and there seems to be no immediate
prospect of relief. It is true -that i`vlr- Yamani,'. Saudi
Arabia's Oil Minister, has. several` times expressed
the opinion that the current lever of prices is too
high; and it was thought that he might have justified
this view by auctioning a large quantity of oil last
month .and allowing-the price to find its.own. level.
But his belief ,(if it.really is. his belief). is strongly
opposed by his OPEC colleagues, notably by the
Iranians, some of whom have threatened to cut back
production if Saudi'Arabia tries to engineer a price
decli.ne.; In the light-of this opposition, it i& significant
that the long-heralded August auction. of Saudi
Arabian oil did not. take place.
While the cost.r=of equity crude is rising, the
quantity available. to.-the companies. is being sharply'
reduced. (See our March issue, p 84). Apart from-
the outright .nationalizations that. have taken. place
in Algeria,.- Libya, Iraq and Iran, governments. have
been forcing."participation".agreements on. reluctant
Effect of Participation
Under the 1473. - participation .. agreements, in
Persian Gulf countries,. governments took 25 per
cent of the equity:- in Nigeria.. 35 percent ?- and
-ranted relatively- favourable buy-back prices; only
20 to 60 cents above-tax-paid costs. The position is
very different now.. By an agreement finally. ratified
by the .N ationaI Assembly on. 14th May; the Kuwait
government raised its stake in Kuwait Oil (Gulf and
BP) from 25 to 60 per cent, effective 1st January.
The Qatar government signed a similar agreement
with the Qatar Petroleum Co. (IPC group) and Sheri
of Qatar in mid-April. As an interim measure,
pending the finalising-of longer-tent artancements,.
the Saudi Government>took a 6G-per cent interest-in
Aramco, backdated to the beginning of the year,
while desultory negotiations for a similar arrange-
ment have been going on in Abu Dhabi. .: y
After prolonged discussions, about buy-back prices
in Kuwait, Gulf Oil agreed in July to pay $10.95 a
barrel, equivalent to about 95 per cent of the. posted
price, for oil purchased from end-June: to- end-
September; and 13P followed. suit. This price,. which
is subject to quarterly review, is almost 83.80 above
the cost of equity crude, but the companies' buying
commitment is restricted to a_ maximum of 350 000
b/d each. .
In Nigeria, effective 1st April, the.government took
a 55 per. cent participation.. Here the companies have
the right to buy back half the government's share at
S13 a barrel (which is over 88 per cent of the posted
price of $14.691) and half the remainder at $13.25 -
prices which look inereasi illy unrealistic: For'" the
time being. therefore, - they' have access to' 8625 per
cent.. of total production; this. percentage.-will, how-
ever, be reduced to a maximum of 69.75. Per cent for.
1975, after which they will have no further.buy-back
.entitlement: they will. have merely their-.45 per cent
share of the e[luity, -
In-Libya the position is that, the government has
expropriated a number of companies:.with:. a. total
1973 production of the o-der..of 500 000 b/d and has
taken. a.51 per cent share i., the remainder.. (See-our
April issue p 127 and May p 173.). This gives it (on
the basis of 1973 production statistics; approximately
two-thirds of the total output, which has lately been
declining.. Its. buy-back, prices range from.$12.75. to
$1.3.40 a barrel, according to grade, - gainst a tax-paid
cost for?equity crude of around. $10 a. barrel. . --,. -
This continued rise in. the: average cost -of oil in the
Middle-.East and Africa is reflected also in-Indonesia.
Here the.state_entity; Pertamina, fixes its own selling
prices which also serve as tax reference prices for oil
companies. with production-sharing agreements. The
price (now. uniform for all grades) was raised from
$10.80 to $11.70 a barrel on 1st April and again to
S12.60 on 1st July.. Buyers in Japan - the main
market - may reflect ruefully that.. the highly prized.
sulphur-free,_ Minas crude-v a& selling last year for
'_$2.96a barrel;
Which Way Note? . ,
T l:e sting of these agreements is the high buy-back Consumers looking, hopefully for cheaper oil were
prices that have to be paid by the oil companies for disappointed at the stiff buy-back price'. agreed by
the state-owned crude. Saudi Arabia set the pattern Gulf and BP for Kuwait crude - as a percentage of
earlier this. year by. insisting on a price equivalent to posting, the highest so far 'accepted. The-reason for
93 per cent of the posted price, which means approxi- the companies' acquiescence is clear enough: there
niately 510.80 for Arabian light against a cost of is always the threat that if the government's share
about 8 7.12 for equity crude - a gap of 83.68. The remains unsold total production will fall and the
Qatar agreement gave the companies the right to available supply of cost crude will shrink correspond-
purchase during the first half of this year at. least ingly. The companies in Nigeria were threatened last
60 per cent of the state's share (i.e. 36 per cent-of the 'month with a production cutback, following Shell-
tot