THE CARTEL THAT NEVER WAS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83B00851R000400080012-2
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 11
• Document Creation Date: December 21, 2016
• Document Release Date: December 17, 2007
• Sequence Number: 12
• Publication Date: March 1, 1983
• Content Type: OPEN SOURCE

Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
 Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
THE. ATLANTIC MONTHLY MARCH 1983
Saudi Arabia,finds in the perceived unity and power
of OPEC a convenient illusion
THE CARTEL THAT NEVER WAS
BY EDWARD JAY EPSTEIN
0 PEC, WHICH STANDS FOR THE ORGANIZATION OF PE-
troleum Exporting Countries, is a four-letter word
synonymous with prodigious wealth, arbitrary
power, and fear. The wealth is from the combined oil sales
of its thirteen member nations, which exceeded $240 bil-
lion in 1981-a sum greater than half of the entire M-1
money supply in the United States; the power from the
fact that its members control nearly two thirds of the free
world's oil reserves; and the fear from the threat that
OPEC might cut off this lifeline of energy, paralyzing the
world's economy Sixteen industrial nations, led by the
United States, banded together in 1974 to create an orga-
nization known as the International Energy Agency
which, in the event of a dreaded OPEC cutoff, would ra=
tion the remaining supply of oil among the industrialized
nations. OPEC was taken so seriously that in 1979 Presi-
dent Jimmy Carter specifically blamed OPEC for both the
recession and inflation, and there were even hints from
Henry Kissinger of American military actions against
OPEC. Indeed, no other organization, with the possible
exception of the first Communist Internationale, has ex-
cited such fears on a global scale.
The continued preoccupation with the potential threat of
OPEC, however, distracted attention from the actual
flesh-and-blood organization that inspired it. Despite a
booming voice that has reverberated through the world's
media for the past decade, it turns out that OPEC is an
astoundingly small organization. Its headquarters, in Vi-
enna, is its only office: there are no branches or represen-
tatives elsewhere. Except for the alert squad of Austrian
"Cobra" commandos with submachine guns guarding the
entranceway; the four-story building at Donaustrasse 93 in
downtown Vienna resembles any other modern office
building in Europe. It is built of gray marble and glass,
with a small parking lot in front, and almost identical
buildings on either side, housing IBM and an Austrian
bank. In 1982, twenty-two years after it was founded,
OPEC employed only thirty-nine persons-all men-on
its executive staff. Not counting a few dozen Austrian sec-
retaries and clerks and a handful of employees of OPEC's
Fund for International Development (which awards grants
and other largesse to countries in the Third World), this
Edward Jay Epstein, author most recently of The Rise and Fall of
Diamonds, is at work on a book about international deception.
staff of thirty-nine men constituted the entire worldwide
employment of OPEC. It included everyone from the sec-
retary general to the press officers.
Last September, I was taken through the headquarters.
The most prominent part of OPEC is the huge press audi-
torium on the ground floor, which is more than twice the
size of its counterpart in the White House. It is surround-
ed by state-of-the-art communications facilities for the
press, on which no expense has been spared: a fully
equipped color-television studio for taping interviews with
OPEC spokesmen, telephones and Telexes for reporters'
use in dispatching stories, a multilith printing press for
churning out press releases, and a library of energy publi-
cations. There is even an in-house wire service, called
OPECNA, which feeds announcements and other news re-
leases to subscribing newspapers and radio stations. Aside
from these services to reporters, OPEC edits a number of
glossy publications-including a monthly OPEC bulletin,
the annual report, and illustrated briefing books.
Behind the auditorium, through a locked door, is the
computer room, which contains the institutional memory
of OPEC. The computer itself is a medium-size IBM 4341,
installed in 1980 and programmed by a group of American
consultants from the University of Southern California in
Los Angeles. The air-conditioned room is crammed with
metallic cabinets storing the hard disks of computer mem-
ory In the center is a control console manned by a Vien-
nese operator. When he initially attempted to demonstrate
to me the computer's graphic abilities, the screen, after an
embarrassingly long hesitation, came up blank. "This is of
course not the top-of-the-line IBM," he said apologetically,
re-entering the instructions on the keyboard. This time,
the computer drew out a multicolored graph of prices
for different grades of crude oil. The data was eight days
old.
The operator explained that the computer has no direct
telecommunication links to the oil markets and loading fa-
cilities. Instead, the data on prices comes by mail from
Platt's Oilgram Price Report, an oil-industry newsletter
published in Houston and New York. Each day; the prices
published in Platt's have to be entered into the OPEC com-
puter. Since there are only two programmers at OPEC,
the information in the computer is often outdated.
When it came to displaying oil production from individ-
ual OPEC countries, the computer was out of date by
Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
 Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
THE ATLANTIC MONTHLY
months. "The problem is political," the operator explained:
the OPEC countries refuse to provide the Vienna head-
quarters with data on how much oil they are producing and
shipping. While some members, such as Indonesia, Ven-
ezuela, and Saudi Arabia, do furnish some data-after a
delay of from two to six months-other members, such as
Libya, Iran, and Nigeria, refuse to supply any figures at
all on production and oil shipments. The result is that
OPEC relies for much of its information about oil produc-
tion on the International Energy Agency. in Paris-the or-
ganization created to combat OPEC-and the IEA, in
turn, relies mainly on the data of the United States De-
partment of Energy, which, to complete the circle, draws
PAGE 69
its data from the reporting of the major oil companies. The
picture of the oil market whirled out in four colors by the
OPEC computer is thus not the product of the daily reality
of oil loadings in the Persian Gulf or other ports of OPEC
countries but the product of outdated statistics from oil
companies which have been filtered through government
bureaucracies.
When we left the computer room, Dr. Edward Omotoso.
a former journalist from Nigeria who is now OPEC's head
of communications, wistfully acknowledged that the data
base was "not perfect." He explained, "OPEC is not the
CIA. We do not have satellites in the skies to count every
oil tanker. We are not really that sort of an organization."
Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
 Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
He added, "We are not even a wealthy organization."
The annual budget for OPEC, like the size of the staff,
seems far more appropriate for a small business than for
what the press has often called the "most powerful group
on earth." In 1981, the allocated budget was about $13.4
million (not all of it spent), most of which went for the cost
of publishing OPEC's bulletin, books, and annual report.
Saudi Arabia s share, for example (equal to that of the oth-
er members), was $906,250 in 1981-equivalent to the rev-
enue it earned in about four minutes from its oil fields.
"NVe have to watch even the cost of our long-distance tele-
phone calls," an Iranian finance officer in OPEC said, re-
ferring to the infrequent communications with the oil-pro-
ducing centers.
No one considers the OPEC assignment a plum," an
OPEC executive explained. Although some employees see
in OPEC a chance to escape authoritarian regimes and
seek opportunities in the West, a job at OPEC is usually a
detour from the path of advancement at a national oil com-
pan}: And as it turns out, many OPEC technocrats do not
return to jobs in their home countries; they frequently go
on to be oil consultants in Geneva or Paris. A number of
OPEC executives were openly dissatisfied with the chaotic
and unpredictable working conditions. "There are a num-
ber of vacancies on the staff," Dr. Omotoso said, as he re-
viewed the roster.
The position of secretary general, which rotates among
the thirteen member nations every two years, is currently
held by Dr. Marc Nan Nguema, a Gabonese civil servant.
Dr. Nguema spends a considerable part of his time repre-
senting OPEC at energy seminars, conferences, and other
ceremonial occasions. His Office of the Secretary consists
of an assistant and a speech writer. (In December, the
OPEC ministers voted against extending the term of Dr.
Nguema after he was severely criticized by Saudi Arabia,
Kuwait, and the United Arab Emirates for exceeding his
expense account and travel allowance.) The de facto head
of OPEC is the deputy secretary general, Dr. Fadhil J. Al-
Chalabi, a fifty-three-year-old Iraqi lawyer and former
minister who before joining OPEC, in 1978, ran OAPEC, a
completely different group composed entirely of Arab oil
producers. Directly under Dr. A1-Chalabi is the Division of
Research, headed by another Iraqi, which employs more
than half the staff. Its job is to gather and analyze data
about the international oil trade. The other major job of
OPEC, also under Chalabi's control, is image-making. The
products of its international PR machine, according to
OPEC's last annual report, include the commissioning of a
book on the history of OPEC, entitled OPEC: An Instru-
ment of Change; films with titles such as For the Benefit of
All and Sweet and Sour (two types of crude oil); subsidized
OPEC Workshops for Journalists of the Third Al de-
signed to "counteract misinterpretations and distortions in
the media of OPEC's aims"; a commemorative OPEC post-
age stamp: and the daily release of "news" through the
OPEC wire service. These activities aim at reversing the
"virulent calumnies" and "brainwashing" of the media in
the West.
Aside from research and public relations, the OPEC
staff takes care of the more mundane housekeeping chores
of the organization, including hotel and airplane reserva-
tions; security arrangements; payroll, bookkeeping, and
the hiring and firing of local clerks and secretaries. None
of these tasks involves any control of the oil market.
"OPEC is merely a service organization for thirteen sov-
ereign oil-producing nations," explained Bahman Karbas-
sioun, an Iranian who has been associated with OPEC for
nearly ten years. "We provide background data, such as
the amount of OPEC oil that can be sold at a given price, to
the ministers when they meet," he added. "All decisions
are up to them."
The thirteen oil ministers of the member nations meet at
conferences that, according to the OPEC charter, "are the
supreme authority of the Organization." These confer-
ences are convened semi-annually, and additionally when-
ever a majority of members requests an extraordinary ses-
sion. (In OPEC's twenty-two-year history, it has held an
average of about three conferences a year.) At these con-
ferences, it is required that all decisions be made unani-
mously. Then decisions must be ratified by the thirteen
governments before taking effect. No member, not even if
it is in a minority of one, can be forced to abide by a deci-
sion to which it did not explicitly agree. There is, there-
fore, no need for a mechanism in OPEC for implementing,
verifying, or even monitoring agreements. Compliance is
completely voluntary, Most OPEC decisions concern the
base price for crude oil. Members can easily evade such
price decisions through the simple expedient of altering
terms-such as quality or transportation differentials-
thereby giving discounts or premiums.
Technically, it would be relatively easy for OPEC to en-
force price decisions, by keeping track of the crude-oil
sales: most oil is loaded onto tankers from only a dozen or
so terminals. But members won't allow OPEC to measure
the actual flow of oil from their terminals, for good reason:
despite the appearance of unity, they are all competitors
for shares of the world market. (Some members, such as
Iran and Iraq, are not just rivals for power but actually at
war.) Current oil sales are considered by many OPEC
states to be the equivalent of state secrets. Saudi Arabia
declared in 1980: "We refuse on principle to even discuss
the subject of production, which concerns us alone. Our
decisions on production derive from market conditions and
Saudi Arabia's international commitments."
When the oil ministers meet at OPEC conferences, they
therefore have no choice but to depend on their own na-
tional data. Moreover, some ministers are more equal than
others. Sheikh Ahmed Zaki Yamani, the Harvard-trained
oil-and-resource minister of Saudi Arabia, often plays the
lead role at these conferences. "Yamani's in charge of long-
term strategy," one Iranian technocrat explained, and add-
ed, "It is no coincidence that the benchmark price for
Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
fug
ofi
w
c
w
s
iz
oil
w'
tc
U
fi:
w
la
es
e;
e.
p
 Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
THE ATLANTIC MONTHLY
Saudi crude oil is the official OPEC price." From his per-
spective, Saudi,Arabia attempts to use OPEC to force the
twelve other producing countries to support its standard
oil price.
OPEC, with its minuscule staff and tiny budget, clearly
is not the sort of cartel that has captured the public's
imagination. A cartel, by definition, has one indispensable
characteristic: it must be able to restrict the supply of the
commodity reaching the marketplace. Yet, although indi-
vidual OPEC members can cut back on the amount of oil
that they supply, OPEC itself is powerless to interfere in
such decisions. As Sheikh Vamani said at the last OPEC
meeting in Vienna, in December, "Production decisions are
made in Riyadh, not Vienna." OPEC not only lacks power
to impose its will on recalcitrant members, it lacks the ba-
sic information needed to operate a cartel. At best, it is
only a shadow of the former international cartel of oil com-
panies that previously controlled almost the entire oil
trade. This group, known as "the Seven Sisters," was a
real cartel, with thousands of employees and unlimited
funds. It is useful to compare the operations of a real cartel
with those of OPEC.
HE INTERNATIONAL OIL CARTEL TRACES BACK TO
I a grouse shoot at Achnacarry Castle, in Inverness,
Scotland, in September of 1928, which was attended
by the heads of the three most powerful oil combines in the
world-Sir Henri Deterding, the chairman of Royal Dutch
Shell; Walter Teagle, of Standard Oil of New Jersey (now
Exxon); and Sir John Cadman, chairman of Anglo-Persian
Oil (now BP). Under the pretext of engaging in sport,
these three men conspired to eliminate competition in de-
veloping new oil resources for the world. The mechanism
was the "as is" principle, under which all agreed to divide
future markets among themselves according to the shares
of the market they held in 1928. This meant that there
would be no advantage in "destructive competition," as the
companies put it, among themselves for new oil fields:
whatever advantage one company received would be
shared proportionally by the others. In a separate "pool-
ing" accord, the three companies also agreed to share their
oil tankers, refineries, pipelines, and marketing facilities
with each other. As the membership of the cartel expanded
to include the other major companies, it became known as
the Seven Sisters. The cartel controlled oil production, re-
fining, transportation, and sales in almost all areas of the
world except the United States, which had strict antitrust
laws.
The cartel's principal instrument of control was local
consortiums set up to manage and develop oil fields in the
Middle East, Venezuela, and wherever else oil was discov-
ered. Each consortium was owned by members of the Sev-
en Sisters in a ratio determined by the "as is" principle;
each operated as an essentially nonprofit service entity,
producing only enough oil to meet the requirements of its
owners. To assure that supply never exceeded the demand
for oil, the partners submitted "programs" specifying the
oil they needed for five years, and the consortium set its
exploration and development programs according to these
requisites. If less oil was required by the oil companies,
the consortiums would close down wells; or, if required by
the country's law to drill for oil (as in Iraq), would drill in
areas they knew would not yield any. The system proved
so successful that by 1970 more than 90 percent of the
world's exportable oil was being produced by consortiums
in Iran, Iraq, Saudi Arabia, Kuwait, the United Arab
Emirates, and almost every other oil-rich area.
From its refineries, tankers, and loading platforms, the
Seven Sisters cartel had complete knowledge of all facets
of the oil market. It also had the power to shut down entire
nations that interfered with its concessions: when Mo-
hammed Mossadegh, the prime minister of Iran, national-
ized the country's oil industry, in 1951, the cartel denied
Iran use of its refineries and tankers for two years, nearly
bankrupting the country. Through its network of consor-
tiums, the cartel had absolute control over how much oil
was produced and shipped.
The strains that led to the breakup of the Seven Sisters
cartel proceeded from a single issue: the division of profits
between the international oil companies and the countries
from whose territory the oil gushed. Until 1971, the car-
tel's consortiums gave the countries a set percentage-50
percent in most cases-of an arbitrary price, called the
"posted price," that the oil companies paid for each barrel.
If an independent oil company attempted to buy oil, it
would have to pay a much higher, "third-party" price. It
was, of course, in the interest of the oil cartel to keep its
posted price as low as possible, and make its profits selling
refined oil. In 1970, for example, the posted price was
$1.80, as it had been, with minor fluctuations, for twenty
years; consumers in Western Europe paid the equivalent
of $11 to $13 a barrel for refined oil.
The delicate balance that the cartel had maintained in
the world export market for a half-century was irrevers-
ibly upset in the late 1960s by the unexpected decline in oil
production in the Western Hemisphere. The United
States, which had been almost self-sufficient in oil, became
a significant importer of Middle Eastern oil. As the scram-
ble for the available supply intensified, it became evident
that prices would be forced inexorably upward. With
prices for gasoline, heating oil, jet fuel, and other refined
products rising in Europe, the countries that produced
oil-notably Saudi Arabia, Iraq, Iran, and Libya-were
not content with their share of the fixed posted prices; in-
stead, they demanded at least part of the coming windfall.
The first cracks in the cartel's control came in 1970 in
Libya-the one major exporter that had granted conces-
sions to independent companies outside the purview of the
consortiums. Under the revolutionary leadership of Colo-
nel Qaddafi, Libya threatened to nationalize the indepen-
dent companies unless they increased Libya's share. Even-
Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
 Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
THE ATLANTIC MONTHLY MARCH 19S3
tually, the largest independent producer, Occidental
Petroleum, acquiesced to Qaddafi's demands. Then Saudi
Arabia, Iraq, Iran, and other producers in the Persian Gulf
demanded that the consortiums grant them the same
terms Libya had obtained. When the cartel acceded to
these demands, Libya put pressure again on the oil compa-
nies, and the cartel found itself caught in a ratchet be-
tween Libya and the Persian Gulf producers, both de-
manding more favorable terms. To solve this problem, the
oil companies devised a strategy to force the oil-producing
countries to negotiate as a single bloc. Because some of the
principal producers were bitter rivals who refused to bar-
gain together, the cartel sought a multinational organiza-
tion under whose auspices they could assemble for negotia-
tions with the oil companies. In January of 1971, the cartel
chose a small Vienna-based group, with a staff of nine,
whose very existence it had ignored for the past eleven
years-OPEC. A letter signed by the oil companies in the
cartel began: "We wish to place before OPEC and its mem-
ber countries the following proposal...."
OPEC had originally been established in Baghdad on
September 10, 1960, as an intergovernmental group to
study posted oil prices. Its five founding members were
Saudi Arabia, Venezuela, Iran, Kuwait, and Iraq. During
its first six years, which went virtually unnoticed in the
press, OPEC based itself in Geneva and opened an "infor-
mation office," which commissioned occasional studies on
crude prices. It also admitted three new members-Qatar,
Indonesia, and Libya. After its headquarters moved to Vi-
enna (where the organization was offered diplomatic status
for its staff), in 1966, OPEC's main activity became issuing
proclamations declaring "solidarity" with the escalating
demands of the more rebellious oil producers-notably
Libya and Algeria, which joined in 1969. The proposal to
serve as a negotiating umbrella for the oil-producing coun-
tries was accepted by OPEC, as Henry Kissinger notes in
his memoirs, "with a vengeance."
In OPEC, the oil companies found not only a convenient
device to bring together feuding states but also a highly
visible foe they could blame for the impending rise in oil
prices. To negotiate as a single force with this new mono-
lith, the oil companies obtained an antitrust exemption for
themselves from the Justice Department. It was not with-
out some irony that OPEC was finally pressed into service
by the cartel in Tehran in 1971-a service it had waited
eleven years to perform.
Initially; the oil companies' OPEC strategy seemed suc-
cessful. It produced the Tehran Agreement, in which the
producing states, in return for a modest rise in the posted
price to $2. 18 a barrel and some favorable revisions in the
concession terms, accepted a five-year accord that would
freeze oil prices. This OPEC agreement lasted only a few
months. Each country, ignoring the agreement, insisted
that it had sovereignty over its oil concession. The "five-
year" Tehran Agreement disintegrated into a free-for-all,
and, one by one, the consortiums were nationalized.
W HATEVER HOPES THE INTERNATIONAL OIL COM-
panies had of reasserting control over the oil-
producing nations ehded on Yom Kippur of 1973,
with the Egyptian invasion of the Sinai. The renewed war
in the Middle East caused an oil-buying frenzy in Europe
and Japan, as nations fought to build up their reserves of
crude oil. Saudi Arabia and other oil producers adapted a
policy of charging whatever the freight would bear. Within
weeks, the posted price for crude had more than doubled,
to $5.60 a barrel. No OPEC control was involved: it was a
force nwjeure that permitted individual nations to raise
their prices.
Another price explosion followed the announcement by
Saudi Arabia and other Arab states, in October of 1973,
that they were cutting back on their oil production and em-
bargoing shipments of oil to the United States and other
supporters of Israel. This cutback did not result from any
OPEC decision, either. Indeed, many OPEC states-in-
cluding Iran, Indonesia, Venezuela, Ecuador, and Gabon-
actually increased production (and even a few Arab states
in OPEC, notably Iraq and Algeria, did not reduce their
production). It was almost exclusively an initiative of
Saudi Arabia, which was backed vocally, if not materially,
by its Arab allies. Moreover, the Saudi decision to shut
down 10 percent of the country's oil production was not
based entirely on considerations of the plight of the Arabs.
The Senate Subcommittee on Multinational Corporations
ascertained from testimony of American engineers who
were responsible for operating the Saudi fields in 1973 that
a 40 percent cutback in the giant Ghawar field-the larg-
est in the world-was required for the installation of wa-
ter-injection equipment. If it had not made these cutbacks,
the entire reservoir of oil would have been jeopardized.
Jerome Levinson, the general counsel of the committee,
writing under the name Peter Achnacarry, stated: ".. .
the embargo saved Saudi Arabia and Aramco [the operat-
ing consortium] from the embarrassment of having to ex-
plain supply shortages resulting from technical problems."
By cloaking the cutback in a political purpose, the Saudis
were able to induce other Arab producers, both inside and
outside of OPEC, to join them.
In the wild price spiral that followed the Saudi shut-
down, the official OPEC price was completely disregarded
by other members. Iran and Qatar held auctions to deter-
mine how high they could raise prices. At its subsequent
meetings, OPEC could do no more than ratify the prices
that had already been established by a panicked market.
Conversely, when oil prices began to decline in 1975, be-
cause of the world recession, OPEC found itself powerless
to stop its members from undercutting each other and
competing for sales. Despite OPEC's price declarations,
the real price of oil declined by more than 25 percent be-
tween 1975 and 1978. The decline was reversed, not by any
actions of OPEC but by another series of events in the
Persian Gulf: the revolt against the Shah in Iran; a brief
rebellion in Saudi Arabia; Iraq's invasion of Iran. In a mat-
Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
 Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
MARCH 19&3 THE ATLANTIC MONTHLY
ter of months, some 5 or 6 million barrels a day of Persian
Gulf oil vanished from the export market. In 1979, import-
ers feverishly bid up the remaining supply for their strate-
gic reserves until prices reached $35 a barrel.
Throughout this roller coaster of falling and soaring
prices, OPEC demonstrated little ability to affect or even
moderate the actions of its members. Price agreements
were totally ignored, and the idea of regulating oil produc-
tion was pre-emptively rejected. In a comprehensive study
of OPEC prices, N alter J. Mead, an economist at the Uni-
versity of California. found that "price and output policies
[of members] appear to be determined independently of
OPEC policy" He concluded that OPEC could not be con-
sidered a cartel in the light of this data, because "the es-
sential ingredient to an effective cartel, coordinated con-
trol over output, is totally lacking." OPEC merely took
credit for the results of current events.
Whereas OPEC may have proved to be no more than a
paper cartel, one nation-Saudi Arabia-succeeded in al-
tering the market by dramatically varying the output from
its fields. After all, it was Saudi Arabia, not OPEC, that
shut off oil during the Yom Kippur War. It was also Saudi
Arabia that, without even consulting OPEC. arbitrarily
reduced production in the midst of the Iranian revolt. And
it was Saudi Arabia that later flooded the market for the
stated purpose of forcing other OPEC members to conform
to its pricing policies. Yet, even though Saudi Arabia was
the real manager of the world oil supply, statesmen around
the world preferred to blame an almost nonexistent orga-
nization-OPEC.
In July of 1979, President Jimmy Carter received a
memorandum from his chief domestic adviser, Stuart Ei-
zenstat, suggesting that public attention be focused on
OPEC. Specifically, it counseled that "with strong steps
we can mobilize the nation around a real crisis and with a
clear enemy-OPEC." Whether Carter and his advisers
were cynical in their search for a scapegoat or ill-informed
about the determining role Saudi Arabia played in manipu-
lating the supply of oil, they adopted the general strategy
of blaming OPEC for the world's ills. Carter said, "I don't
see how the rest of the world can sit back in a quiescent
state and accept unrestrained and unwarranted increases
in OPEC oil prices." Then, after castigating OPEC in a
nationwide address, he read from his notebook a chilling
assessment: "Our neck is stretched over the fence and
OPEC has the knife." Carter gave this enemy a quality of
omnipotence several months later, when he said that
OPEC "has now become such an institutionalized structure
that it would be very doubtful that anyone could break it
down." OPEC was turned into an undefeatable foe.
OPEC made an especially convenient "clear enemy" pre-
cisely because it hardly existed. If a real country were cho-
sen for this role, there would be real consequences. Con-
sider. for example, what would have happened if Carter
had substituted "Saudi Arabia" for "OPEC" in his denunci-
ations. He would have to have depicted Saudi Arabia hold-
Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
 Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
PAGE 74
THE ATLANTIC MONTHLY MARCH 1483
ing a knife to America's outstretched neck-an image
hardly consistent with continued military and technical aid
to that country. OPEC, on the other hand, with which the
United States had neither trade nor foreign relations, pro-
vided an ideal diversion from reality. It also yielded a four-
letter word for the press to use in headlines. Oil companies
could put the blame for gas lines and soaring prices on
OPEC, with which they had no commercial relations, with-
out offending the countries on which they depended for
supplies.
OPEC served an even more important purpose for the
oil-exporting nations. It gave powerless nations, which
had the means neither to operate their oil fields nor to de-
fend themselves, a dazzling mask. Specifically, for Saudi
Arabia, which produces almost half of OPEC's oil, it pro-
vided international camouflage for its oil policy. Just as the
United States used the OAS as a mask for the embargo on
goods shipped to Cuba in the 1960s, and the Soviet Union
used the Warsaw Pact as a mask for intervention in
Czechoslovakia in 1968, Saudi Arabia used OPEC to ob-
scure its manipulation of the oil market. Such diversionary
tactics were especially important to Saudi Arabia, since in
? 1973 its oil fields were almost entirely in the hands of
American technicians and engineers, and its army, fewer
than 3,000 men located at bases 1,000 miles away from the
oil fields, was hardly in a position to defend the fields.
Finally, OPEC, with its 300-seat press auditorium and
television studio, provided a theater in which member
countries could play the roles they preferred-hawk,
dove, or moderate-for public consumption without con-
straining their actions in the marketplace. Libya and Iran,
for example, chose to play the role of price hawk in the
1982 season; in fact, both countries relentlessly cut prices
and gave secret discounts. Saudi Arabia, on the other
hand, chose to play the role of a moderate and friend of the
West. In 1977, for example, it approved an average pro-
duction increase of 2 million barrels a day over a six-month
period. The promised oil, however, never materialized;
Saudi Arabia perfunctorily explained that a seven-week
storm in the Persian Gulf had prevented oil loadings. The
U.S. Weather Bureau was unable, with all its electronic
wizardry to find any meteorological evidence of this puta-
tive act of God.
U 1\'TIL 1982, OPEC SET PRICES FOR OIL VERY MUCH
the way the king in Le Petit Prince, to impress his
? subjects, commanded the sun to set each day-
after consulting a timetable. As long as the wars and chaos
in the Middle East drove prices up. OPEC could continue
with due pomp to make its announcements of price rises.
This game could not be played, however, in the face of fall-
ing prices. By March of 1982, world demand for oil had so
diminished that refineries were closing throughout Europe
and stocks were being dumped onto the market at an
alarming rate.
The competition within OPEC for shares of the oil mar-
ket has been greatly exacerbated in recent years by the
loss of nearly one third of the world mark@t to interlopers
such as Mexico, Great Britain, Norway, Malaysia, Russia,
and Egypt. In 1973, when OPEC began its thundering rise
to eminence, its members produced almost all the export-
able oil in the world. In 1983, according to a recent Exxon
projection, non-OPEC nations (not including the United
States) will produce about 13 million barrels a day, equiv-
alent to nearly two thirds of OPEC's total. Mexico, which
will produce 2.9 million barrels a day, will export more oil
than any OPEC country except Saudi Arabia; and Great
Britain and Norway will produce 2.7 million barrels a day
from North Sea fields. As the available portion of the mar-
ket shrinks, OPEC nations, many of whom are desperate
for revenues, can compete only by lowering prices. As
prices last year continued to slip day by day, it became
clear to all concerned that OPEC could no longer even pre-
tend to command prices to rise with any effect.
On March 6, Saudi Arabia called a strategy meeting in
advance of the scheduled Vienna meeting in the tiny city of
Doha, on the Persian Gulf. It was attended by only nine
OPEC members, who confronted the vexing problem of
how OPEC could lower its official price to a competitive
level without undermining its image of exerting control
over the market. Saudi Arabia proposed shrouding the
necessary price reduction in a semantic fog in which the
"official OPEC price" would remain at $34 a barrel but the
premiums charged for "differentials" in quality and trans-
portation would be "adjusted." This would effectively
reduce the price. The plan was ultimately rejected, be-
cause, as Petroleum Intelligence Weekly, a trade paper,
observed, "The 'differential umbrella' is not large
enough ... to mask the market's perception of the price
reductions required." The only answer, it was decided in
Doha, was for Saudi Arabia to cut its production
substantially.
Two weeks later, at the regular OPEC ministerial con-
ference in Vienna, Sheikh Yamani told a press conference
that the OPEC countries had decided to cut their oil pro-
duction from 20 million to 17.5 million barrels a day. He
further explained that they would allocate production quo-
tas among themselves. The idea of rationing production
was first broached in 1965, when the Seven Sisters still
controlled the oil fields. The plan, called "the transitional
production program," was rejected by both Saudi Arabia
and Libya, and abandoned by an OPEC resolution in June
of 1966-the only resolution OPEC ever passed on the
subject of production cutbacks. In 1978, Venezuela secret-
ly suggested to Saudi Arabia a program for production cut-
backs, but the plan was never agreed upon by all OPEC
members. Even after the March meeting, Yamani ex-
plained, "Saudi Arabia, as usual, disassociates itself from
any production program. So, on an official level, we are not
part of the decision."
Nevertheless, the Vienna announcement was hailed as
Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
 F'AGE 76
Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
THE ATLANTIC MONTHLY MARCH 14,C3
confirmation that OPEC was a true cartel-a cartel capa-
ble of cutting back production to maintain prices in times
of weak demand. In fact, however, no such OPEC decision
was ever made at Vienna. To begin with. Iran had never
agreed to the plan; it remained merely a pronouncement by
Saudi Arabia. Moreover, the "allocations" assigned to the
twelve other members were nothing more than the projec-
tions each had made of its planned production. At best, the
announcement served to camouflage the reality that the
cut came almost entirely from Saudi Arabia-not from a
united OPEC. In the next four months, Saudi Arabia shut
down about one third of its oil fields, and production
dropped from some 7.5 million to barely 5 million barrels a
day-a feat that cost Saudi Arabia up to $85 million a day
in lost revenues. During this same period, most of the
twelve other producers in OPEC, including Iran, Nigeria,
Algeria, Libya, Venezuela, and Indonesia, actually disre-
garded the so-called allocations, and increased production.
What was involved was not "cheating"-the allocations
were never agreed upon-but the exposure of a thin dis-
guise. For behind the announcement of OPEC joint action
was a solitary actor, Saudi Arabia, which was attempting
? to hold up world prices. Unlike a real cartel. OPEC cannot
promulgate actual production cuts among its members be-
cause of a simple reality: most OPEC members desperate-
ly need the money from oil to remain solvent.
DESPITE THE MYTH THAT OPEC STATES DO NOT
need the oil revenues they receive, a secret 1982
CIA analysis showed that they would have a mini-
mum balance-of-trade deficit of $17 billion last year and
$25 billion this year. When the economic situation of the
individual members is considered, it emerges that only a
few have any real room to reduce production without caus-
ing financial calamity for themselves.
The members of OPEC fall into two distinct groups. The
first is the nine most populous countries, who desperately
need every dollar of oil income they can get. For example,
Venezuela requires all the revenue from its present pro-
duction of 2.3 million barrels a day just to pay the multi-
billion-dollar interest on its foreign debt. Ecuador, which is
in even worse financial straits, at full capacity cannot pay
its debt charges this year and has been forced into virtual
bankruptcy Nigeria, which imports more than $1 billion
worth of goods each month, cannot further reduce oil pro-
duction without depriving its population of food and other
necessities. Gabon, the other Black African member of
OPEC. is in a similar financial bind. Algeria, which has a
$17.5 billion foreign debt, and Indonesia, which has a $26
billion foreign debt, are almost entirely dependent on oil
revenues to avoid defaults. Libya, once a cash-rich nation,
recently announced that it will have to continue to produce
at least twice its "quota" in order to avoid bankruptcy Fi-
nally, Iran and Iraq, locked in an expensive war, need their
oil revenues to pay for arms and ammunition.
In the second group are the three small sheikhdoms on
the Persian Gulf-Qatar, the United Arab Emirates, and
Kuwait-and Saudi Arabia, which are much less populous
and financially stronger. Qatar, however, is at present pro-
ducing only 400,000 barrels a day, and has very little room
to cut back without abandoning a multibillion-dollar proj-
ect to build a port. The United Arab Emirates now spends
almost its entire revenue on social programs and military
forces, both designed to quell complaints in the poorer
emirates, and it could cut back on oil production only at the
risk of inciting unrest. Kuwait, the richest of the sheikh-
doms, can afford to reduce oil production to assist OPEC,
but it is now producing less than a million barrels a day
and requires the gas from this production to maintain an
air-conditioned society and operate its desalinization
machinery
When the mask of OPEC unity is stripped away, Saudi
Arabia is left as the only state capable of substantially
manipulating oil prices, with perhaps a modicum of assis-
tance from Kuwait and the other Gulf sheikhdoms. But
how long can even Saudi Arabia afford to keep up oil
prices? To be sure, Saudi Arabia's revenues from oil have
been immense. But so have its expenditures. By 1980, it
was conservatively estimated that Saudi Arabia's project-
ed five-year plan for development would cost $380 billion-
or $50,000 per person. For the coming fiscal year, Saudi
expenditures are estimated to be about $93 billion, not in-
cluding the billions of dollars it lends to Iraq for its war. A
secret CIA report estimates that 1982 Saudi oil revenues
totaled only $68.6 billion-a decrease of $44 billion from
1981. This sum, together with about $12 billion the country
earns from interest on its reserves, and $3 billion from in-
ternal revenues, would leave Saudi Arabia with a shortfall
in its budget of $9.4 billion. And the deficit would grow by
about $12.5 billion for each million barrels a day by which
it reduced its production. In 1981, Saudi Arabia had a bal-
ance-of-payments surplus of $43 billion; this year, if oil
prices remain weak, it may have a deficit as high as $20
billion-the first substantial deficit in more than a decade.
At this rate, not even Saudi Arabia can afford to cut back
drastically for a prolonged period without depleting its re-
serves. For example, Saudi reserves, estimated to be $150
billion, would last only about three years if the country cut
oil production back by 3 million barrels a day
Last fall, Saudi Arabia was having increasing difficulty
meeting its bills on time, according to the cable traffic be-
tween the U.S. Embassy in Riyadh and the State Depart-
ment in Washington. While Saudi Arabia could possibly
reduce its expenditures for social and military programs
the better to afford a huge cut in its oil production, such a
course would involve political consequences. For example,
last fall, when the interior minister ordered a reduction in
the government subsidy given Saudis for electricity, King
Fahd, according to an American Embassy report, abruptly
countermanded the order, apparently because of his con-
cern that it might lead to political unrest. In October, U.S.
Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
 f
MARCH 19?V,
Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
Embassy cables reported that Saudi pressure was being
applied to commercial banks to prevent them from trans-
ferring private deposits to international accounts, which
might precipitate a flight of capital.
When Sheikh Yamani demanded last December that
OPEC nations defend the "OPEC" price of $34 a barrel, he
was in reality insisting that these nations defend the Saudi
price, under the implicit threat of a price war. For Saudi
Arabia had neither the resources nor the will to continue
its single-handed manipulation of oil prices. The insoluble
problem is that the other producers-with the possible ex-
ception of Kuwait-cannot afford to shut down their oil
production. OPEC, the cartel that never really was, can
offer little relief.
At the Vienna conference, Sheikh Yamani warned
that the collapse of OPEC would cause a world financial
crisis that would drive many debtor nations, such as Mexi-
co, into bankruptcy. This new line, which echoed through
both the financial press and government deliberations, ar-
gued against any effective actions of the industrialized
world-such as releasing government-controlled oil re-
serves or imposing new taxes on oil consumption-that
would undermine the OPEC price. In early January, how-
l _ ver, a secret CIA report circulated in the highest councils
of the government arrived at very different conclusions.
The report, called "Global Implications Q Declining
ices," says that whereas the balance of payments of oil-
bxporting nations, such as Mexico.. Nigeria, and the Soviet
Union, would be severely damaged by a sharp decline in oil
Jprices, oil-consuming nations, such as Brazil, South Korea,
and India, would correspondingly benefit from the price
decrease. This might cause temporary problems for the
world banking system, but the losses and gains would
eventually cancel out. The CIA study estimates that Saudi
Arabia has lost nearly $1 billion a week since last March
because of cutbacks made in support of the price of $34 a
barrel. If, however, Saudi Arabia lets the price fall, the
CIA's econometric model suggests that the world economy
IToula greatrv oenent. ti crop In on prices w a.:u it uarrei,
according to the report, would increase the GNPs of twen-
ty-six industrial nations, including the United States, Ja-
pan, and most countries in Europe, by On average of 2 per-
cent-an increment sufficient to pull most Western nations
out of the current recession. A special section of the re-
port, called "The Soviet Connection," estimates that the
same drop in price would mean a loss of $8 billion in hard
currency for Russia, because of a drop in both oil sales and
sales of arms to Libya, Iraq, and Iran.
For nearly a decade, the OPEC mask has permitted
Saudi Arabia to set prices for the world without having to
take direct responsibility for its actions. As prices continue
to fall, however, the facade no longer hides the bitter rival-
ries and squabbles among members. Simply because
OPEC's members have a common interest in the oil mar-
ket does not guarantee that they can resolve their rivalry.
The paradoxical question "What are we fighting about.
since we want the same thing':" applies to their dilemma.
The answer is that they are fighting precisely because
each wants a larger share of the world oil market. If, how-
ever, any one member succeeds in enlarging its share, it
will be at the expense of another member. The OPEC
members are, and will always be, competitors-not allies.
While they may try to hide their fighting from outsiders by
means of unenforceable paper agreements, it will persist
until it is resolved by a price war.
Oil prices have risen twentyfold over the past decade.
Part of this dramatic increase has been the result of the
free market's attempt to reconcile dwindling production in
America and elsewhere with expanding demand. Another
part was the result of the fears generated by wars and
upheavals in the Persian Gulf, which in turn led to frantic
efforts to hoard oil in anticipation of an uncertain future.
And part was the result of the manipulations of a few coun-
tries-notably Saudi Arabia and Libya-that cut back pro-
duction at moments of world crisis. OPEC was undeniably
important during this period, but not as a production-fix-
ing cartel. It was a convenient diversion that distracted
public attention from the real causes of the oil crisis.
Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
 Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2
Iq
Next 9 Page(s) In Document Denied
STAT
Approved For Release 2007/12/17: CIA-RDP83B00851 R000400080012-2