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                                                                              ╚January 6, 1975

Man of the Year

Faisal and Oil: Driving Toward a New World Order



   In every car and tractor, in every tank and plane -- oil.
Behind almost every lighted glass tower, giant industrial plant
or little workshop, computer and moon rocket and television
signal -- oil. Behind fertilizers, drugs, chemicals, synthetic
textiles and thousands of other products -- the same substance
that until recently was taken for granted as a seemingly
inexhaustible and obedient treasure. Few noted the considerable
historic irony that the world's most advanced civilizations
depended for this treasure on countries generally considered
weak, compliant and disunited. Now all that has changed, and the
result has been a major economic and political dislocation
throughout the world.

   The change became dramatically apparent in 1974, a pivotal
year that saw the decline of old powers, old alliances, old
philosophies -- and the rise of new ones. The West's belief in
the inevitability of human progress and material growth was
badly shaken as inflation spread oppressively across the world,
several industrial societies tumbled into recession, and famine
plagued a score of nations. There was a marked erosion in the
wealth, might and cohesiveness of North America, Europe and
Japan. In the developing world, 40 or more countries with few
natural resources fell increasingly into destitution and
dependency. Meanwhile, a handful of resource-rich nations
gravely compounded the problems and challenged the vital
interests of the rest of the world by skillfully wielding a most
potent weapon: the power of oil.

The Swiftest Transfer of Money in History

   United in history's most efficient cartel, these nations
exploited modern civilization's dependence on oil. Their power
came from the uniqueness of oil, an exhaustible and not quickly
replaceable resource that has long been shamefully wasted by
much of the world. Because oil is not usually found where it is
most consumed, and demand for it is so great, it is the most
widely traded commodity in world commerce as well as a highly
volatile element in world politics.

   Again and again, the cartel formed by the Organization of
Petroleum Exporting Countries raised the price of oil until it
reached unprecedented and numbing heights. The producing
nations' "take" from a barrel of oil, less than $1 at the start
of the decade, was lifted from $1.99 before the Arab-Israeli war
15 months ago to $3.44 at the end of 1973 to more than $10 at
the end of 1974. The result is the greatest and swiftest
transfer of wealth in all history: the 13 OPEC countries earned
$112 billion from the rest of the world last year. Because they
could not begin to spend it all, they ran up a payments surplus
of $60 billion. This sudden shift of money shook the whole
fragile structure of the international financial system,
severely weakened the already troubled economies of the
oil-importing nations and gave great new political strength to
the exporters.

   The beneficiaries of this transfer were a disparate group
of oil-possessing Africans, Asians, Latin Americans and, most
favored of all, Arabs, who provided two-thirds of the petroleum
exports and have more than three-fifths of the proven petroleum
reserves in the non-Communist world. One bleak, sparsely
populated country is by far the world's greatest seller and
reservoir of oil, and one dour, ascetic and shrewd man is its
undisputed ruler. He was a principal factor in raising oil
prices, and now holds more power than any other leader to lower
them or raise them anew. He is completing arrangements to
nationalize the vast U.S.-owned oil properties within his
country, bringing an end to an era in which the international
oil companies dominated the Persian Gulf and helped to transform
its face and fortune. Both in his own right and as a symbol of
the other newly powerful potentates of oil, Saudi Arabia's
King Faisal is the Man of the Year.

All the King's Spending and All the King's Plans

   Last year Faisal's Saudi Arabia earned $28.9 billion by
selling nearly one-fifth of all the oil consumed by non-
Communist countries. The King channeled part of these funds into
a massive development program that aims at building factories,
refineries, harbors, hospitals and schools for his 5.7 million
people. Faisal also spent about $2 billion on modern weapons for
his small but growing armed forces. He granted a large part of
the $2.35 billion that the Arab oil producers pledged at Rabat
to the "confrontation states" in the battle against Israel; last
year he was the primary outside bank-roller of the Egyptians,
Syrians, Jordanians and the Palestine Liberation Organization.
He also made $1.2 billion in multilateral loans and grants and
pledged to give some $200 million to poor countries outside the
Arab world. But all the King's spending and all the King's plans
could not come close to using up Saudi Arabia's wealth. The new
financial giant of the world, Saudi Arabia in 1974 stood to
accumulate a surplus of about $23 billion -- a potentially
unsettling force in global finance.

   Moreover, Saudi Arabia's new wealth is simply the most
spectacular symbol of the rising fortunes of the OPEC nations.
With their surplus of some $60 billion last year, they took in
$164 million more each day and $6.8 million more each hour than,
by best estimates, they can currently spend. At that rate of
accumulation, the Economist of London calculates, OPEC could buy
out all companies on the world's major stock exchanges in
15.6 years (at present quotations), all companies on the New
York Stock Exchange in 9.2 years, all central banks' gold (at
$170 an ounce) in 3.2 years, all U.S. direct investments abroad
in 1.8 years, all companies quoted on stock exchanges in
Britain, France and West Germany in 1.7 years, all IBM stock in
143 days, all Exxon stock in 79 days, the Rockefeller family's
wealth in six days and 14% of Germany's Daimler-Benz in two
days (which in fact Kuwait did in November -- though for that
little country, the purchase represented all of 15 days of oil
earnings).

   King Faisal is not merely the richest of the OPEC leaders.
He is also a spiritual leader of the world's 600 million Moslems
because his kingdom encompasses Islam's two holiest cities,
Mecca and Medina. The King, who is 68, wants to pray within his
lifetime in the third most holy city, in Jerusalem at the Dome
of the Rock, and to walk there without setting foot on Israeli-
held territory. (From which, according to Moslem legend, the
prophet Mohammed ascended into heaven astride his favorite white
steed, Buraq.) Unless and until he gets his wish, peace is
unlikely to have much future in the Middle East. Faisal hates
Zionism with a cold passion and often argues, despite the Soviet
Union's pro-Arab, anti-Israel policies, that Zionists and
Communists are allied to control the world.

   In 1974 Faisal used his political authority to aid
Secretary of State Henry Kissinger in moving toward an interim
agreement in the Middle East. He helped persuade the Syrians,
for example, to agree to the disengagement pact with the
Israelis on the Golan Heights. Acknowledging Faisal's role,
Kissinger told TIME Correspondent Strobe Talbott: "The King is
a sort of moral conscience for many Arab leaders. By having
great religious stature, he can act as a kind of pure
representative of Arab nationalism." And, Kissinger adds,
"Faisal has been able to maneuver Saudi Arabia from being a
conservative state into a political bellwether."

The New Reality of Arab Power

   One of the causes of the West's woes is that for too long
it underestimated the will and power of Faisal and other rulers
of oil-producing nations to act together. The cries for higher
prices had been rising for 15 years, first from the Venezuelans
and Iranians, then from the radical Arab leaders of Libya,
Algeria and Iraq. Faisal, a conservative and a longtime friend
of the U.S., at first resisted -- and then changed his mind
because of U.S. political and military support of Israel.

   For many frustrating months in 1973, the King, and his
spokesmen, warned the U.S. that unless it forced Israel to
withdraw from occupied Arab territories and settle the
Palestinians' grievances, he would slow down oil production. The
State Department thought that the threat was hollow; President
Nixon warned on television that the Arabs risked losing their
oil markets if they tried to act too tough.

   The Arab-Israeli war of October 1973 moved the Arabs to
impose a reduction in oil output -- and do much more. Within
ten days after the Egyptians and Syrians had attacked Israeli-
occupied territory, the Arabs and Iranians in OPEC -- long
derided in the West for their disunity -- coalesced and raised
prices from $1.99 to $3.44 per bbl. (The members of OPEC, in
order of last year's earnings are: Saudi Arabia, Iran,
Venezuela, Nigeria, Libya, Kuwait, Iraq, United Arab Emirates,
Algeria, Indonesia, Qatar, Ecuador and Gabon, which is an
associate member. The United Arab Emirates is a federation of
Abu Dhabi, Dubai, Sharjah, Ajman, Umm al Quwain, Ras
al Khaimah and Fujairah.) A few days after that, King Faisal led
an even stronger move. Angered by the U.S. military resupplying
of Israel, the Saudis and the other Arabs embargoed all oil
shipments to the U.S. and started cutting production. Very
quickly their output dropped 28%. When the West made no
response, OPEC realized its own strength and kept right on
raising prices through 1974.

   This huge success gave new pride and political power to all
the Arabs and brought King Faisal widespread respect in the
Arab world, many of whose leaders had earlier scorned him as
an unregenerate conservative. Suddenly the Arabs found
themselves avidly courted by people who for long had
condescended to them. The hotels of Riyadh, Dubai and Baghdad
overflowed with Western businessmen hawking Idaho potatoes,
cement plants, color television systems and gas-fired steel
mills. The Middle East also became a magnet for Western bankers,
each with his own creative plan for dispensing the Arabs' cash.
Elite American universities, from Stanford to Chicago to
Columbia, searched for Arab professors and added courses in
Arabic history, culture, language, religion. Western governments
vied with the Soviets over which side could sell the Arabs more
-- and more destructive -- fighter jets, tanks and missiles.

   So much foreign money washed into Arab oil-producing
countries that ordinary statistics no longer made sense.
Estimated gross national product per capita ran to $13,000 in
Kuwait, $14,000 in Qatar and more than $23,000 in Abu Dhabi.
But those figures did not reflect living standards because the
quick cash has not had time to filter down to the people.
Bureaucracies strained to figure out ways to spend at home.
Kuwait expanded one of the world's most all-encompassing welfare
states. To hold down food prices, most of the big oil producers
subsidized imports of staples. Office buildings, low-rent
apartments and supermarkets rose almost everywhere. Some
planners worried about keeping a work ethic going. Said a Saudi
government minister: "We will have to be very careful not to
spoil our citizens. Our people will have to deserve what they
earn. We will furnish them with basic requirements, but nobody
should live on charity."

   The Europeans and the Japanese, umbilically dependent on
the Middle East for respectively 70% and 80% of their oil, not
only pressed their most modern technology on the Arab states but
also granted them strong diplomatic support. Some European
political leaders called for a new Euro-Middle East alliance,
perhaps to replace the Atlantic Alliance. The French, responding
to what they call the "New Reality" of oil-based Arab power,
were especially obsequious in their attentions. The Dutch, long
outspoken defenders of Israel, fell silent in fear of Arab
wrath.

The Aim: A Redistribution of Wealth

   Indeed, the Arabs' ultimate weapon, oil, did much to change
the entire balance of their conflict with Israel. Within the
United Nations, a bloc of Arab, African, Latin American and
Communist countries banded into a new majority, pushing through
resolutions that isolated Israel and antagonized the U.S. Only
the Dominican Republic and Bolivia voted with the U.S. and
Israel when the General Assembly, by a margin of 105 to 4,
invited the P.L.O. -- with its long record of terrorism -- to
join in the debate over the Palestine issue. The U.N. welcomed
P.L.O. Leader Yasser Arafat as a conquering hero and gave his
organization permanent observer status.

   Next to Faisal, the ruler who gained most from oil last
year was not an Arab but the "Light of the Aryans," the Shah of
Iran. His country, the world's second largest oil exporter,
quadrupled its petroleum earnings, to $20.9 billion. Impatient
to industrialize and militarize, the Shah pressed the
construction of automobile and petrochemical factories, dams and
hospitals, and ordered 70 F-4 Phantom jets and 800 British
Chieftain tanks to bolster a mighty armed force. This swelling
strength raised apprehensions among some Arab governments in the
region and evoked new hostility -- but also won new respect in
Washington, where Iran is valued as an anti-Communist bulwark.
Though much poverty and illiteracy hang on in Iran, the middle
class is rapidly spreading and the gross national product is
expanding at an astounding rate of 50% a year. The Shah, who
aims to turn Iran into "the Japan of West Asia," argued for
price increases long before Faisal did, and he has been even
more vocal than the Saudi King in urging that prices stay up.

   Several other countries rose on petropower. Oil made
Nigeria not only black Africa's wealthiest nation ($9.2 billion
in earnings) but unquestionably its strongest political force.
Indonesia, though still abysmally poor, is showing the first
glimmerings of its potential as Southeast Asia's economic
leader, thanks to oil exports. Oil-endowed Venezuela at midyear
trebled its national budget, to almost $10 billion, to take
account of rising revenues. The Venezuelans are expanding their
state-owned steel industry in the Orinoco backlands, paying to
educate thousands of future leaders at U.S. universities and
gaining great influence among Central American republics by
promising them loans. Says Venezuela's President Carlos Andres
Perez: "This is our opportunity to create a new international
economic order."

   A new order is the ultimate goal of the petrocrats. Their
aim is to lead many of the Third World nations in an economic
revolution that is already bringing a radical redistribution
of the world's wealth and political power. The transfer of
riches to the oil producers has helped slow or stop the rise of
living standards in many other countries -- a development that
has potentially grave social consequences. The steep economic
growth that the industrial nations have enjoyed since World War
II tended to soften social and economic inequalities because
even the poor and deprived made visible progress year by year
and could discern a brighter future. Now, if there is slow
growth or no growth, demands for social justice will be more
urgent -- and harder to fulfill. Democratic governments will
have to find ways to redistribute the existing wealth, or else
face dissension and perhaps chaos.

   The Shah of Iran laid it on the line: "The era of terrific
progress and even more terrific income and wealth based on
cheap oil is finished." Henry Kissinger sees it another way. If
high energy prices persist, he warns, "the great achievements
of this generation in preserving our institutions and
constructing an international order will be imperiled."

Inflaming Problems and Inflating Prices

   The sudden, sharp rise in oil prices inflamed all sorts of
problems, increasing government controls, intensifying
nationalism and calling into question the future of free
economies. People were gripped with the fear that events had
overtaken their ability -- or their government's ability -- to
cope. Otherwise sober men spoke of extreme solutions:
repudiation of international debts, massive currency
devaluations, the suspension of parliamentary government, even
military intervention in the producing countries.

   It was possible to blame too much of this malaise on oil.
Many countries have long suffered from high inflation because
they were living beyond their means for years. Particularly in
the West's mass-consumer societies, the poor wanted to live like
the middle class, and the middle class wanted to live like the
rich. Demands piled up -- for more goods, fatter wages, higher
social welfare -- and prices soared. Still, by best estimates,
the rise in energy prices caused one-quarter to one-third of
the world's inflation last year. As the price of oil increased,
it kicked up the prices of countless oil-based products,
including fertilizers, petrochemicals and synthetic textiles.
To battle inflation, all Western nations clamped on restrictive
budget and credit policies, causing their economies to slow
down simultaneously for the first time since the 1930s.

   The danger of a global recession grew because, as people
spent more for oil, they had less money left over to spend on
other things. The overall decline in demand reduced production
and jobs. Because non-OPEC nations had to pay out so much for
foreign oil, they moderated their buying of other imports; that
slowed the growth of world trade, which has been a major source
of international cooperation since World War II. The U.S.'s
relations with its allies also came under strain, and the West
seemed without will or unity. For most of the year, Western
European nations and Japan refused to follow the U.S.'s call for
a united front against the oil producers, essentially because
European leaders considered the consumers' bargaining power too
feeble.

   The U.S. was a major oil exporter through the late 1950s,
but then its own demands raced so far ahead of production that
it now has to import more than one-third of its supply. The
nation's bill for foreign oil pyramided from $3.9 billion in
1972 to $24 billion last year. (For comparison, 1972 is used
because it was the last "normal" year before the embargo and the
biggest increases.) The $20 billion jump meant that Americans
either had to increase their foreign debts greatly or produce
and export $20 billion more in goods and services -- food,
steel, planes, machinery, technology -- to pay for oil imports.
Unless the oil price comes down or the country sharply reduces
its oil imports or substantially increases production, the U.S.
will have to spend that extra $20 billion or more every year.
This will drain off more of the nation's resources and build up
trade debts that future generations will have to pay. In 1974
the rippling effects of rising oil prices contributed three or
four percentage points to the U.S. inflation rate of 12%. The
oil rise, which Yale Economist Richard Cooper called "King
Faisal's tax," reduced Americans' purchasing power and
consumption of goods as much as a 10% increase in personal
income taxes would have done.

   Nations that depend even more on OPEC fared much worse than
the U.S. Japan's $18 billion bill for oil imports was the
biggest single factor in lifting its inflation rate to a
punishing 24%, causing the first real postwar decline in
economic growth. Inflation rates doubled in many Western
European nations: to 16% in France and Belgium, 18% in Britain,
25% in Italy. To meet its trade deficit, Italy has borrowed more
than $13 billion, incurring interest payments of nearly $1
billion a year.  Prime Minister Harold Wilson says that the
five-fold increase in oil prices aggravated Britain's worst
economic crisis since the 1930s, and is severely testing the
country's social and political fabric. Only West Germany, The
Netherlands and Belgium ran trade surpluses.

   For Europeans, life became a little darker, slower,
chillier. Heating-oil prices went up 60% to 100%, and
thermostats were turned down. In the midst of a French
conservation drive in October, President Valery Giscard
d'Estaing found his Elysee Palace dining room so cold that he
lunched with Premier Jacques Chirac in the library by a
crackling fire. Gasoline rose to $1.40 per gal. in West Germany,
$1.72 in Italy, $2.50 in Greece. Electrical advertising signs
were banned after 10 p.m. in France and during the daytime in
Britain. In Athens, the floodlights illuminating the
Acropolis were turned off. Throughout Western Europe, energy
costs were a cause of the slump in sales of autos, houses and
electrical appliances. Layoffs spread in those and other
industries. Unemployment hit a postwar high in France. In
Germany, foreign workers were being paid bonuses to quit and
go back home to Spain, Turkey and Yugoslavia.

   The Soviets benefited from what they accurately enough
called this "crisis of capitalism." From their oil exports,
mostly to the West but also to their East European allies, the
Soviets earned $2 billion last year. However, Russia will
rapidly scrape the limits of its self-sufficiency if it is to
meet plans to expand its petrochemical industry and treble auto
ownership (to 9 million cars) by 1980. Soon the Soviets will
have to restrict oil sales and greatly increase in preferential
prices that they charge to their Comecon partners. Last year
Poland reportedly had to buy a large amount of Libyan crude, at
$16 to $20 per bbl. Strapped for hard currency to pay for oil
from non-Communist sources, East Germany had to restrict the
expansion of its plastics and textiles industries.

   The poorest countries of Africa, Asia and Latin America
were the worst hurt victims of the oil squeeze. Indeed, the
developing countries' extra costs for oil last year totaled $10
billion, wiping out most of their foreign aid income of $11.4
billion from the industrialized world. In black Africa, only
Nigeria has any big known reserves of oil, and Gabon, the Congo
Republic and Angola possess some oil. For the other black
African countries, the petrobill came to $1.3 billion last year.
Development plans were stymied because so much money was drained
off for oil. Drought-induced hunger became worse, in part
because those countries could no longer afford as much gasoline
to run their tractors, or fertilizers to nourish their fields.
Inflation raced at rates averaging 45%.

   India suffered more than any other nation. Its oil import
costs hit $1.6 billion, up fivefold in two years, leaving it
little money to import food and fertilizer, machines and
medicine for its hungering millions. Pakistan's plight was
almost as critical; its imports of oil and fertilizer topped
$355 million. Sri Lanka's rice farmers had to pay 375% more for
fertilizer; they reduced their buying so much that the rice
harvest fell almost 40% below expectations.

   The poorest countries -- those with scant resources to
finance their needed imports -- descended into a new category,
now known as the Fourth World. The old Third World became a more
exclusive, OPEC-led grouping, limited to those nations that are
exploiting their rich mineral or agricultural resources.
Emboldened by the oil producers' success, many other Third World
countries tried to create their own price-fixing cartels for
copper, iron ore, tin, phosphates, rubber, coffee, cocoa, pepper
and bananas. The leaders talked of "one, two, many OPECs." The
grand plans generally failed because members have lacked the
cohesiveness to make them work -- so far. But the new importance
of raw materials moved some big producers to raise prices
unilaterally. Jamaica, for example, abrogated contracts with
companies and lifted the government take for the country's
bauxite by 700%.

   In sum, the world has entered an era in which natural
resources will count for much more than before, conservation
will gain a premium over consumption, and more attention will be
paid to exploiting resources than curbing pollution. All this
will bring many changes in life-styles: slower gains in real
purchasing power, stricter controls on energy use, smaller cars.
It remains to be seen to what extent the changes will be
accepted by such disparate forces as labor unions, auto
manufacturers, and consumer and environmental groups.

The Case For -- and Against -- Increases

   With passion, the oil producers defend their price
increases on the grounds that it is high time that the producers
of raw materials get a fair shake from the richer industrial
nations. Essentially, these are the oil producers' arguments:

   In the past, the industrial countries grossly exploited the
oil-producing countries. For too long, the terms of trade were
stacked against the materials producers. While they were forced
to pay ever inflating prices for their machines, medicines,
food and other goods bought from the West, the developed
countries not only imported oil at low, stable prices but also
built industrial and consumer booms on it. Now the oil producers
must build their own industries, both to get a more equitable
share of the world's income and to insure themselves against the
day when their petroleum resources run out. Furthermore, by
keeping prices high, the producers are really doing the rest of
the world a favor by forcing both energy conservation and the
search for alternative resources.

   The rise in oil prices, the producers go on, should not get
all or even most of the blame for inflation, slow growth and
balance of payments problems, which have deeper roots. Says
Kuwait Oil Minister Abdel Rahman Atiqi: "Why should we be
responsible for helping the U.S., for instance, solve its
economic problems? When our Arab lands were impoverished and our
oil was being sold at giveaway prices, what assistance did the
U.S. give us?"

   The producers are not at all defensive about acting as a
cartel. They contend that they learned all about cartels from
the large Western oil companies, which for decades acted in
concert and kept prices low. Cartels, in short, are neither
unique nor forbidden by any international law. If buyers really
want to moderate prices, say the producers, they should limit
the international oil companies' "obscene" profits or lower
their own taxes on oil products (taxes account for about 25% of
the price of gasoline in the U.S. and 54% in France).

   On one level, it is impossible to quarrel with the producers
for trying to get the most out of their resources and charging
as much as they think they can get. But the producers often go
far beyond the usual economic considerations of supply and
demand, basing much of their case on fairness of prices, profits
and shares of the world's wealth. Arguments about fairness are
tricky, of course, and cut both ways. Surely other nations would
be enraged if, for example, the U.S., Canada, Australia and
France formed an Organization of Grain Exporting Countries
(OGEC) and decreed a fivefold increase in the price of wheat, of
which they are the major world suppliers. True, U.S. wheat
prices jumped 192% in the two years up to last November, but
that was a free-market surge caused largely by disastrous crop
failures around the world during a period of rising demand. In
the same two-year period, OPEC's major imports have risen much
less: for example, cement 27%, heavy trucks, 25%.

   The OPEC nations cannot accurately argue -- either in terms
of economics or "fairness" -- that the sharp rise to $10.12 per
bbl. is needed to make up for the recent inflation in the price
of goods that they buy in world trade. John Lichtblau, a leading
U.S. oil consultant, notes: "Since 1960, the U.N. index of world
export prices of manufactured goods has risen 86% and the Saudi
government's revenue on each barrel of oil has risen 1,136%.
Since 1970, world export prices have risen 55% and the OPEC
governments' income on each barrel has gone up 955%."

   The high prices will certainly discourage oil waste, but
the producers have an exaggerated fear that they will soon run
out of what the Shah calls "this noble product." The Middle
East's proven reserves have risen every year since records were
kept and have doubled since 1959, to some 350 billion bbl. Saudi
Arabia alone has proven reserves of 132 billion bbl. -- enough
to keep producing at current rates until the year 2018 -- and
some experts reckon that the real total could be four times as
great.

   Nobody knows what would be a "fair" oil price, but logically
it should bear some relation to the cost of primary production.
That cost ranges downward from $2.50 or so per bbl. in the U.S.
to $.60 in Venezuela and $.12 in Saudi Arabia. The price should
also have some market relationship to the price of alternative
energy sources, which many authorities think would be
economically feasible when oil sells at $7 or more per bbl. But
with the latest round of oil price increases last month, the
OPEC governments will collect $10.12 on a barrel. By contrast,
the international companies earn $.20 to $.50 per bbl. in return
for all the work, risk and investment that they undertook to
find and pump that oil.

   Thus, instead of the elusive terms of fairness, the
argument is perhaps best coached in terms of ultimate self-
interest. The oil producers may well be setting a dangerous
precedent, for themselves as well as oil users. By exercising
monopoly muscle as a group of nations, the cartel may be
creating a world in which prices are neither fair nor free but
fixed by raw economic power. Considering the fact that oil is
about all they have to bargain with, that kind of world could
eventually be dangerous for OPEC's members. The oil producers
quite frankly say that they expect the living standards of
Western industrial countries to grow at a slower rate for the
immediate future, and they cannot be expected to weep over that.
But by forcing the change so suddenly, without giving the oil
importers a chance to adjust gradually, OPEC runs the risk of
wrecking the world economy -- and that, OPEC spokesmen
themselves have admitted, could only hurt them.

The Companies' Rich Past and Questionable Future

   In all this, the role of the oil companies is growing
weaker. The companies not only discovered and developed the oil
but also put up billions of dollars to build rigs, pipelines,
refineries and harbors. They have done so for more than 40
years, since long before the Saudis had much interest in oil,
let alone the means to exploit it. The first prospectors -- from
Standard Oil of California -- went to Saudi Arabia in 1933 and
brought in the first well in 1938. They and later prospectors
had a rugged frontier existence, living in tents and huts,
relying on an 11,000-mile-long logistics line from the U.S., and
coping with desert sand, burning heat and loneliness. In the
late 1930s and early 1940s, they were joined by Exxon, Texaco
and Mobil to form the Arabian American Oil Co. Oil prices were
relatively low -- $1.40 to $2 and the governments' take ranged
from $.20 to less than $1 a bbl. -- because Middle East
production costs were modest, oil was in surplus in the world,
and the producers' governments were weak and disunited. Company
earnings were huge. When supplies tightened and producers began
to get together in the late 1960s, the governments' split of
production profits rose from 50-50 to 67-33. Even before the
price rises since 1973, Middle East governments profited nicely
from oil; Saudi Arabia's take from 1965 to 1972 totaled $10
billion.

   The OPEC countries have shrewdly turned the companies into
scapegoats, blaming their high profits for the high retail
prices. Indeed, in this year's first nine months, profits of the
five biggest U.S. international oil companies jumped anywhere
from 38% to 70%. But much of this gain was due to an unusual
circumstance: OPEC's price rises triggered an automatic increase
in the value of the huge stocks of oil that the companies held
in tank farms and on tankers. The companies will not get those
one-shot "inventory profits" in the future, unless OPEC again
raises the price. As for relative earnings, the five companies'
profits rose from $5.3 billion in the twelve months before the
embargo and the big price rises, to a steep $8.2 billion in the
twelve months following; but the OPEC governments' revenues
swelled from $22.7 billion in 1973 to $112 billion last year.
The companies' earnings will probably decline this year because
their costs are going up while oil demand is going down.

The Danger of Rising Surpluses

   The companies, in fact, were among the biggest losers of
1974. The four U.S. partners in Aramco had to agree late in the
year to sell their remaining 40% ownership to Faisal's
government. It will pay the partners $2 billion for almost all
their facilities, a price that the Saudis can meet with less
than one month's oil earnings. The Saudi takeover will move
Kuwait, Qatar, Oman and the United Arab Emirates to nationalize
the last of the Western oil operations in those areas, probably
this year. The companies will become mere agents, selling
technical and marketing services to the governments for a fee.

   The major companies' future is uncertain as they will face
competition for markets from the oil countries' state-owned
companies. Some national producers want to squeeze the private
oil companies because they are viewed as competitors. Mani Said
Utaiba, Petroleum Minister of the United Arab Emirates,
complained: "These profits are being used by [the companies] to
find alternative sources for our oil. They are investing on a
huge scale in the Arctic and the North Sea. This we will not
accept."

   The oil crisis promises to shake the world for at least
another five years or longer. It will take that long for
importing countries to develop alternative energy sources and
more petroleum in nations outside OPEC. Oil will be flowing in
from Alaska by 1978, but the total -- 600,000 bbl. a day at
first, 2 millon bbl. a day by 1981 -- will not free the U.S.
from the need for foreign supplies. Britain and Norway are each
expected to be pumping 2 million bbl. a day from deep below the
North Sea by the early 1980s. But the rest of Europe, as well
as Japan and the Fourth World, will still depend on Middle East
oil, above all from the country that has the most of it: Saudi
Arabia.

   Moreover, if Faisal and his allies hold prices up, the rest
of the world could encounter such compounded problems that 1974
would be remembered as an easy year. With oil at $10 a bbl.,
OPEC would change the world another $600 billion in the next
five years. To pay the bill, the 137 nations outside the cartel
would have to deliver one-quarter of their total exports to
OPEC's elite 13 countries. It would be impossible for the oil
importers to transfer so much of their production -- or for OPEC
nations to absorb it all. The most frightening figure for the
future is that OPEC nations stand to accumulate payments
surpluses of $250 billion to $325 billion by 1980, and the rest
of the world would run up exactly that much of a deficit. (By
contrast, West Germany now has the world's highest accumulated
surplus, $36 billion. It will be surpassed this year by Saudi
Arabia. The highest surplus ever accumulated by the U.S. was $26
billion in 1949; the total for the U.S. now is $16 billion.)
For the countries that have them, surpluses create huge
purchasing -- and political -- power. Conversely, deficits
usually lead to recessions, devaluations and decline.

   Both the surpluses and the deficits will drop when the
OPEC countries expand their buying, lending and investing
abroad. In stepping up their domestic development plans, they
will have to enlarge their imports. This can be accomplished
fairly easily by several of the OPEC members: Iran, Venezuela,
Indonesia, Iraq, Nigeria, Algeria and Ecuador. They have
relatively big populations and much poverty -- hence much need
for internal development. The huge problem is that six other,
lightly populated Arab states -- Saudi Arabia, Libya, Kuwait,
Abu Dhabi, Dubai and Qatar -- are collecting far more money than
they can possibly spend. These six, embracing only 9.3 million
people, earned $54.7 billion from oil last year. For all their
industrialization and social welfare, their military and
foreign aid, they can dispose of only a fraction of that total,
leaving a combined surplus of $38 billion.

   Naturally, the Saudis are piling up the biggest surpluses.
At present prices and production levels, they will collect a
staggering $150 billion over the next five years. But they will
be unable to buy or build fast enough to use up even one-third
of their oil money on domestic development. By 1980, they stand
to have well over $100 billion in surplus -- to lend, give away
or invest in foreign countries.

The Search for Ways to Recycle

   In the chancelleries and countinghouses, everybody is
seeking ways for the OPEC countries to lend their surpluses back
to the oil importers in a massive "recycling." A hypothetical
example of recycling: Italy pays several billions of dollars
to Aramco, the marketing agent, for Saudi Arabian oil; Aramco
then pays this money to Saudi Arabia, which in turn deposits
it in Western banks; the banks then lend it back to the
government of Italy. Trouble is, the petrodollar deposits are
short-term (the oil countries want the power to pull their money
out at a moment's notice), while most loans, to be useful to a
government or business, must be for the longer term -- anywhere
from one to ten years. A further difficulty is that many of the
big borrowers are chancy credit risks, including the governments
of Italy, Denmark and the developing countries. More and more
bankers fear that their institutions will go under if the OPEC
depositors withdraw their money or the borrowers default on
their loans. Since much of the hot oil money is deposited in
U.S. banks, the U.S. Government would have to pay off to cover
the defaults.

   Prudent bankers are increasingly refusing to lend a
deficit-ridden country money that it may not pay back or to
finance imports that it cannot afford. Quite a few banks are
also turning down deposits of OPEC petrodollars or offering
lower-than-usual interest rates. According to most estimates,
big private banks in the West will be able to handle little more
than 20% of recycling requirements in the future. New
international agencies will have to be set up to do the job.

   Whoever controls these agencies will gain awesome political
powers -- and take on major financial risks. The lenders will
be able to tell the borrowing nations that, if they want money,
they must change certain economic policies, and perhaps some
military and diplomatic policies as well. But the lenders will
also carry the enormous risks of suffering loan defaults. Nobody
minds having the political powers that go with lending, but
nobody wants the risks.

   To help in recycling, Henry Kissinger has called for the
Western countries and Japan to form a pool of $25 billion this
year and perhaps another $25 billion next year. They would draw
the money from petrodollar deposits in their banks and lend it
out to industrial countries that have financial emergencies. For
example, if a big oil producer pulled all of its money out of
sterling, the British could get an immediate loan from the pool
to cover their currency loss. Some Common Market nations,
particularly West Germany, are cool to the Kissinger plan
because they and the U.S. would be left holding the bag for any
loan defaults.

   OPEC countries dislike international recycling plans that
deny them a major voice in determining who could borrow their
money. The Trilateral Commission, an influential group of North
American, European and Japanese business executives and
academicians, has proposed that the industrial countries and the
oil producers jointly open and operate a bank for recycling. The
two sides would put up equal amounts of money and decide who
could borrow it.

   While this and other plans to start a joint fund for
recycling hold much promise, one long-lasting problem is that
recycling is really a euphemism for indebtedness, and interest
payments must find their way back to the oil countries. In the
1980s some OPEC members may be earning as much from interest on
their loans and bank deposits as from oil. This added wealth
would give them more flexibility to reduce oil production if
they want to conserve their liquid gold or to punish importers
by reductions for political reasons. Meanwhile, to pay the
interest, the borrowers may have to print more and more money,
fueling inflation.

Conserving to Crack the Cartel

   Thus, even with the best of recycling, the importing
nations will be vulnerable. Says Walter Levy, the world's
leading oil consultant: "The world economy cannot survive in a
healthy or remotely healthy condition if cartel pricing and
actual or threatened supply restraints of oil continue." In many
ways, Western democracies face a wartime-like crisis, but until
lately they have reacted as they did during the 1939-40 "phony
war." Only by cooperating among themselves can the importers
counter the cartel's control over their destinies. Recently they
have begun to make tentative moves to accomplish three necessary
things: conserve energy, develop new sources and stockpile
oil in case of another embargo or cutback.

   In November, ministers from the U.S., Canada, Japan, all
members of the Common Market (except France), four other
European nations and Turkey signed an agreement to form the
International Energy Agency, which Henry Kissinger had proposed.
Provided their legislatures approve, each member would build up
a stockpile of oil equal to 90 days of imports; if any OPEC
members embargo oil or reduce shipments, the IEA nations would
reduce consumption and later share what they have with one
another. The IEA agreement will soon come up before Congress,
which would do well to approve it.

   The Western nations will have no real bargaining strength
until they show that they are taking strong measures to
conserve. By significantly reducing demand, the big buyers of
oil might force OPEC into production cuts that some cartel
members may eventually find intolerable. Cutbacks would be
particularly rough for Iran and Iraq, both of which plan
substantial production increases in the next few years to
finance their grand development programs. Rather than reduce
output, other populous countries with ambitious development
schemes -- Nigeria, Venezuela, Indonesia -- might be tempted
to buck the cartel by selling below the fixed price. Ecuador,
which badly needs development money, is already in some trouble.
High prices have cut demand for its oil by one-third since 1973.

   At very best, however, the State Department reckons that
OPEC would not break up for another two to four years -- and
probably not even then. It has not been at all damaged by a
world oil surplus of one to two million bbl. a day, which has
shown up because high prices reduced consumption last year. In
the non-Communist world, consumption fell from 48 million bbl.
a day in 1973 to 46.5 million bbl. last year; in the U.S., it
declined from 17 million bbl. to 16.2 million bbl. Partly in
response, OPEC is now producing at 20% below capacity with no
visible problems. Again, it is Saudi Arabia that holds the key.
The country has accumulated so much money that it could stop
production for two or three years and still have more than
enough cash to import food, provide free medical care and
education, finance new industry and subsidize other Arab
nations. But unless and until the industrial nations get
together, much of the non-Communist world could not long
function without Saudi Arabia's 8.5 million bbl. per day. As
Saudi Arabia's Harvard-educated Oil Minister Ahmed Zaki Yamani
told TIME Correspondent Karsten Prager: "How much can the
consumers reduce consumption? By 10%? And how much can the
producers reduce without financial pain? By at least 33% --
minimally. The people who ask for a price reduction of $2 to
$4 are simply not being realistic."

   Even so, the consumers must conserve to show OPEC that they
are serious and to hold down their payments to the cartel.
Kissinger has urged that they hold their oil imports essentially
flat over the next decade. For the U.S., that would mean a
decline in the annual rate of increase in energy from 4.3% in
the past ten years to 2% or 3% in the next decade. The
Trilateral Commission has called for limiting the annual growth
in energy use during that period to 2% in the U.S. and Canada,
3% in Western Europe and 4% in Japan. Certainly the U.S. can and
must lead the way by making the severest cuts because it wastes
so much energy. A nation that has one-twentieth of the world's
population should not expect to go on burning one-third of the
world's oil.

   Through taxes and other mandatory measures, the U.S. could
switch from profligacy to a new conservation ethic. The remedies
are well known. Much energy could be saved by increasing federal
taxes on gasoline, clamping a steeply graduated tax on heavy,
thirsty cars, pumping many more millions into mass transit, and
granting tax credits for purchases of building insulation. In
addition, the U.S. could and should expand its domestic supplies
of energy by increasing the capacity of the Alaska pipeline,
opening the Navy's petroleum reserves in California and Alaska,
encouraging offshore drilling, liberalizing controls on the
strip-mining of coal (but adding guarantees that the lands would
be reclaimed) and allowing natural gas prices to double or more.

The Perils of Military Intervention

   Beyond conserving energy and recycling OPEC's money, the
oil importers have no feasible weapons against the cartel. A
trade war against OPEC would fail. If the U.S., for example,
embargoed its shipments of food or machines to the oil
producers, the Soviet Union and other countries would be eager
and able to fill the gap.

   Military intervention could be extremely risky. There is
always the danger that the Soviets would step in on the side of
the Arabs -- or extract a high political price from the West
for staying out. Pipelines might be vulnerable to sabotage,
though captured oilfields could be fairly easily protected. In
any event, U.S. authorities condemn the wave of fantasizing
about oil wars as "highly irresponsible." Military intervention,
says a Washington policymaker, would be considered "only as
absolutely a last resort to prevent the collapse of the
industrialized world and not just to get the oil price down."

   The U.S. would be forced to use its "military option,"
however, in the case of any clear and immediate danger that
Saudi oil would fall into hostile hands. There is concern in
Washington that in several years an extremist force might try
to grab control. Faisal still has no shortage of enemies and
covetous neighbors. At some future date, he -- or his successor
-- may be motivated to relax prices in return for U.S. support
to preserve the Saudi regime against a radical threat. He has
no reason to do so now, although time and again last year Yamani
proclaimed that Saudi Arabia was struggling to reduce prices to
help the West but was blocked by Iran and other hawks within
OPEC. Yamani lost much of his credibility among U.S. and
European leaders when Saudi Arabia in August canceled an oil
auction that might have brought lower prices and in November
led the latest price rise. Says a U.S. official who has dealt
with the Saudis: "Faisal does not want to bring down prices now
and throw away his bargaining power for a settlement with
Israel."

   A settlement with Israel would not itself lead to a price
reduction. The non-Arab nations -- Iran, Venezuela, Nigeria,
Indonesia -- though not part of the conflict, still want to
maintain or increase prices. Yet marked progress toward peace
in terms acceptable to the Arabs is absolutely essential before
prices can soften; the Arabs will insist on that.

   On the other hand, if war erupts anew, the Arabs might
embargo either the U.S. or all Western nations. Says Saudi
Interior Minister Prince Fahd, 53, who is Faisal's brother and
likely successor: "We would hate to impose another embargo. But
in a war, when you feel you are in danger of dying, you may do
anything. If war breaks out again, it will be not only the Arabs
and Israelis who are damaged, but the world as a whole." If
Western Europe were embargoed now, it would draw down its
stockpiles (good for 60 days or more in each country), buy oil
from non-Arab countries and probably go to immediate rationing.
It might well hold out for six months without serious
discomfort. Quite probably, however, Europe and Japan would put
extreme pressure on the U.S. to halt military aid to Israel.
Or, if threatened by complete economic breakdown and perhaps
social upheaval, some Western nation or nations might intervene
in Middle East oil lands. In any case, there is virtual
consensus among Western policy-makers that Israel must give up
almost all of its 1967 conquests and accept a homeland for the
Palestinians. Otherwise, wars are likely to continue, and Israel
cannot win the last round against 120 million Arabs enriched and
armed by oil money.

The Only Alternative: Interdependence

   One ray of hope in the oil crisis is that the two sides at
least will begin to talk with each other in 1975. The Middle
East producers have long called for a summit meeting with the
oil importers from the West and the developing world. The French
have strongly favored a conference. Kissinger has held out for
a delay until the consumers are more firmly united, fearing that
countries that are deeply in debt and heavily dependent on oil
imports would easily bend to OPEC's bidding. At Martinique three
weeks ago, President Ford and French President Valery Giscard
d'Estaing struck a compromise calling for a series of meetings:
first a general feeling-out between OPEC and the consumers, then
a number of meetings among consumers to work out their common
position, and finally a tripartite summit, probably this autumn.

   At that summit, OPEC leaders want to discuss not only oil
but also the prices of other products. They aim to get an
"indexing" agreement under which their oil prices would go up
from the already high base as the prices of their own imports
rise. Says Kissinger: "The best thing that can happen next year
-- and in fact I think the best will happen -- would be that we
would achieve consumer solidarity and then have a conference
with the producers. That, together with energetic conservation
measures and energetic development of alternative resources, may
lead perhaps to a lowering of the oil price in return for long-
term stability of the price. And at a lower price level, we
would be prepared to consider indexing."

   A most positive step would be for oil producers and
consumers to seek common and reciprocal interest going far
beyond energy. The producers should be give greater
responsibilities and more high offices in international
councils. For example, they should get far more than the 5% of
the voting strength that they now have in the World Bank and the
International Monetary Fund. This would give them a larger voice
in setting international monetary policies, which they deserve,
and would also oblige them to put up quite a bit more than the
5% that they now give to underwrite those groups. The producers
have been increasing their foreign aid fairly rapidly, but they
probably should give much more in grants, low-interest loans and
concessionary prices to the neediest countries. Last year OPEC
members made aid commitments totaling $9.6 billion and actually
disbursed $2.6 billion in gifts, concessionary loans and other
aid -- roughly half of it to Egypt, Syria and Jordan.

   Whatever devices are created to put OPEC capital to work
in the rest of the world, the Western countries should help the
oil producers build up their own agriculture and industries.
Faisal notes, for example, that his rich country badly needs
industrialization. To help prepare the producers for the day,
however distant, when their oil runs out, the West should also
join them in developing alternative forms of energy and should
send technology and experts to OPEC countries. Fast development
is inevitable in the oil countries, and it will help work off
their surpluses by spurring their imports. For their part, OPEC
members may lend or invest some of the huge sums of capital that
oil importers will need to develop energy supplies from the
atom, from shale and sands and, probably many years from now,
from the sun and wind.

   In the difficult decade ahead, the best hope is that all
sides will realize that they are really interdependent -- for
resources, technologies, goods, capital, ideas. The old world
of Western dominance is dead, but if the oil powers try to
dominate the new world of interdependencies, the result will
be bankruptcies and deflation in the West, and even worse
poverty and hunger in the have-not developing countries.

   The oil producers, who talk a great deal about past
exploitation and their future aspirations, might consider the
implications for themselves of the havoc that their monopoly
pricing is causing the rest of humankind. The oil consumers, who
are the victims of that upheaval, would do well to ponder with
more sympathy the OPEC countries' deeply felt desire for a
larger share of the world's wealth. In this great global clash
of interests, it is time for both sides to soften their anger
and seek new ways to get along with each other. If sanity is to
prevail, the guiding policy must be not confrontation but
cooperation and conservation.