An Arab's perspective on OPEC price increases
Abdul Aziz al-Quraishi, governor of the Saudi Arabian Monetary Agency, was shopping in a department store in New York last Saturday when he overheard an elderly man tell a salesman that the United States was paying $120 billion "for nothing" for imported oil, primarily from OPEC nations.Skip to next paragraph
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"WE should go to war," the man said.
Mr. Quraishi, a sophisticated central banker highly familiar with the West, recognized the remark as an extreme view. Nonetheless, he does believe that there is a great lack of understanding in the US of the Saudi Arabian and OPEC arguments justifying the large price increases of 1973- 74 and 1979-80.
In talks at the International Monetary Conference here attended by the chief executives of the world's largest commercial banks and some top central bankers of the industrial nations, Mr. Quraishi outlined these arguments:
1. In "real" terms, after the removal of inflation, the price of crude oil has not risen nearly as dramatically as in nominal prices.
The average posted price of Arabian light oil at Ras tanura in 1950 was $1.71 a barrel. The price in April of this year -- in 1950 dollars adjusted for the rise in prices in industrial countries -- was $10.14. That's slightly under six times as expensive.
By 1970 the price of oil gradually declined to 98 cents a barrel, in 1950 dollars. When the nominal price was quadrupled in 1973-74, it rose to $3.95 in 1950 dollars. Then its real value declined once more in 1975 and exceeded the 1974 level again only in 1977.
Western officials usually speak of the price of oil in inflated dollars. US Treasury Secretary G. William Miller, for instance, told the conference of how the price of oil had increased 16-fold from the start of the 1970s to the start of the 1980s.
2. Because petroleum is a depleting resource and becoming short in supply, price increases "to levels more accurately reflecting underlying market forces" were "both desirable and inevitable," Mr. Quraishi said.
The decline in the real price of oil between 1950 and 1970, he said, was "a mistake." It led industry and consumers to turn increasingly to energy-intensive processes, products, and life styles. Between 1965 and 1973, the economies and total energy requirements of the noncommunist world were growing at annual rates of 5 percent and 5.4 percent, respectively. But the consumption of petroleum by these nations rose at an annual rate of 7.7 percent.
By 1973, petroleum contributed over half of the noncommunist world's energy requirements and OPEC in turn accounted for nearly two-thirds of this area's petroleum supplies.
3. By 1973, Mr. Quraishi noted, "The members of OPEC were becoming painfully aware that the rapid growth in petroleum production, at declining real prices, was accelerating the depletion of their nonrenewable resources without producing a corresponding increase in their real wealth."
The OPEC nations began to wonder more intently what their people would do for a living once their oil was depleted.
The way of life of the Saudis has changed dramatically, Mr. Quraishi noted. "It is impossible to go back to our desert life."
Yet present known reserves of Saudi Arabia, at today's rate of exploitation, will last 49 years. Of course, he knows that more oil will be found and that the rate of pumping may someday be lowered. Nevertheless, the life of the oil fields is limited.
For other OPEC nations, the life of known reserves at current production ranges from about 15 years of Algeria to 76 for Kuwait. Iran's oil reserves would have lasted 33 years at the rate of production in 1978; 52 years at the 1979 rate; and much longer at today's rate of under 1 million barrels daily. Contrariwise, Iraq stepped up its production rate, so that its oil reserves would have lasted 36 years in 1978 and 25 years in 1979.
Saudi Arabia's plan, Mr. Quraishi said, is to build up the human skills and education and the industrial base that will provide its people a living once its oil is gone. "We've have limited choice," he added.
4. Most OPEC nations, despite the rise in the price of oil, remain much poorer on a per capita basis than the industrial nations, the central banker said.
The average annual per capita income in OPEC nations was $1,150 in 1978, about one-eighth that in the US. OPEC per capita income would be modestly higher today. Saudis' per capita income was about $8,000 in 1978; Indonesians', 1,100, and so on.
5. Yet, he said, by keeping the price of its crude oil $2 under that of other OPEC nations, Saudi Arabia has been providing more "foreign aid" to the industrial nations than to the developing countries. That $2 differential is equivalent of $7 billion a year, of which 85 percent goes to the rich nations.
Saudi Arabia tried to close that gap recently by raising its oil price $2. But other OPEC nations and non-OPEC producers followed suit, restoring the Saudi price differential.
Even now, Mr. Quraishi noted, Perrier water costs more than crude oil. Moreover, the Perrier water supply renews itself. Oil does not. "We are selling part of our assets," he said.
6. By producing more oil than required to meet its financial needs, Saudi Arabia supports the economy of the West, but at some financial loss to itself. The proceeds of a barrel of Saudi oil sold in 1974 and invested in US Treasury notes would have yielded about $18 by this year. If kept in the ground, the barrel of oil would today bring $28.
Mr. Quraishi apparently suffers no pangs of conscience on OPEC oil prices.