In the brief period since the late summer of 1970, Tripoli, Caracas, Tehran and then Tripoli again have witnessed unprecedented demands upon the international oil industry by major oil-producing countries, dramatic confrontations with threats to withhold essential oil supplies, and far- reaching "settlements." As a result, the economic terms of the world trade in oil have been radically altered. The balance among oil-producing and exporting countries and oil-consuming and importing countries, and among oil companies themselves appears, at least as of now, to have shifted decisively in favor of the producing countries.

The winds of change for the oil industry that have been stirring throughout the decades since 1950 have now risen to hurricane proportions. The aim of major oil-producing countries in this vortex is clearly to maximize their governments' "take" out of the value of their oil production and to obtain increasing control over oil operations. To achieve this, these countries- already formally joined in the Organization of the Petroleum Exporting Countries (OPEC) since 1960-have now effectively combined to wield the economic and political power of an oil monopoly.

For their part, consuming countries are faced with appreciably higher prices for their oil imports, which for most constitute by far the major part of their total energy supplies and energy costs. Foreign exchange outlays are thus mounting rapidly. And the traumatic experience of confrontation between the industry and the producing governments raises new questions as to the security of essential oil flows against interruption. Clearly, a very real challenge to the historical structure and operation of the internationally integrated oil industry is emerging-at a time when demand for oil is increasing swiftly.

The figures are dramatic. Oil consumption in the non-communist world increased from 10 million barrels daily in 1950 to 39 million in 1970, and will reach 67 million in 1980; U.S. oil consumption increased from 7 million barrels daily in 1950 to 15 million in 1970, and will reach 21 million in 1980; Europe's consumption shot up from only 1.2 million barrels daily in 1950 to 12 million in 1970, close to that of the United States, and will reach 23 million in 1980, exceeding that of the United States; while Japan's consumption zoomed from 100,000 barrels daily in 1950 to 3.7 million in 1970, and will about triple to 10 million in 1980. The hoped-for economic and social progress of developing countries will also depend upon accelerated oil consumption.

As for the supply of petroleum, world production parallels consumption. Western Hemisphere production about doubled, from 8 million barrels daily in 1950 to 18 million in 1970; whereas Eastern Hemisphere production increased about tenfold, from 2.1 million barrels daily to over 21 million. On the basis of present data, U.S. reserves have a life span of perhaps 12 years; that of the combined reserves of the Middle East and North Africa at least 60 to 70 years. The output of OPEC members was 22 million barrels daily in 1970 and their oil exports accounted for nearly 90 percent of total free world oil trade.

Despite discoveries in the North Sea, Far East and elsewhere, it is clear that the Eastern Hemisphere will continue to depend decisively on OPEC oil to meet mounting oil requirements. With its surplus productive capacity largely gone, the United States, too, will probably have to increase its oil imports. As of now, this country draws 55 percent of its total oil imports, equivalent to about 11 percent of U.S. oil consumption, from OPEC members, notably Venezuela. These figures could go up appreciably in the next ten years or so, even taking into account Alaskan production.

II

Within this context, the recent dramatic confrontations between the oil companies and the producing countries, which started in Libya last summer, assume great importance. In the short span of the 1960s, Libyan production rose from zero to almost 3.7 million barrels daily, rivaling the output of the leading Persian Gulf producing countries such as Iran and Saudi Arabia. The competitive urge among concession-holding companies to take advantage of the location and quality of their Libyan oil for European markets caused reserves to be rapidly drawn upon, as compared with major Middle East producing countries, apparently resulting in some overproduction of fields.

Europe looked upon Libyan oil as a valuable source of diversification, because of its west-of-Suez location-particularly after the 1967 closing of the Canal; and by 1970, about 30 percent of European oil requirements were being met from Libya. Whatever the tacit reservations of companies or European governments about the corruption of King Idris' administration, apparently they gave little forethought to the consequences of any radical change in the Libyan situation. And while the price had been in dispute during the period of the monarchy, the revolution, of course, profoundly affected government-industry relations. The companies' post-revolutionary offer of an adjustment of six to ten cents over time was not enough, although a somewhat more substantial offer of perhaps 15 to 25 cents probably would have been acceptable as late as the spring of 1970. During that summer various factors, including a break in the pipeline in Syria and a sharp increase in European demand for oil, abetted the attempt to coerce concessions from the companies. In addition, Libya cut back its production in the name of conservation and threatened to cut off totally companies that did not accede to its escalating demands.

Capitulation came in September 1970. The companies agreed to increase posted prices by 30 cents per barrel, with 2 cents per annum escalation through 1975, and generally greatly increased tax rates, ranging from 54 to 58 percent.

Inevitably, the very substantial price and tax increases were bound to become goals which other OPEC members not only aspired to but were compelled to emulate. What ensued was a crescendo of demands, backed by threats to withhold production from companies that did not acquiesce. In December 1970, Venezuela enacted an increase in its statutory tax rate from 52 to 60 percent, and in March 1971 substantial price increases were imposed.[i]

Against this background, an OPEC session convened in Caracas in December 1970 and set forth a broad range of demands, enjoining the oil companies to come up with an acceptable offer within a provocatively short period and threatening prompt joint action otherwise. With the scene shifting to Tehran, negotiations proceeded between OPEC and a joint industry group bargaining on behalf of all. By February 1971, the Tehran agreement was whacked out, under constant threat by OPEC of joint-government legislative enactment of its demands and stoppage of production for any company that did not conform. Roughly, the posted price for Persian Gulf production was raised by 35 cents (compared with Libya's 30 cents), and would escalate thereafter by about 11 cents per annum through 1975. The tax rate was increased from 50 to 55 percent. The governments conceded that there would be no leap-frogging of Persian Gulf demands on the basis of the next round of negotiations for Mediterranean oil, and that the agreement would hold through 1975. Withal, it was publicly asserted by spokesmen of producing countries that the higher government payments need not require higher consumer prices, in view of product price increases already in effect; and it was implied that stability of tax arrangements would thereupon depend on the future course of world market prices.

Through all this, Libya was setting out a whole new set of demands (supported by the OPEC organization only to the extent that they conformed to the December resolution, but with less qualified backing from its various members). Finally, in April, Libya obtained a further increase in posted prices of 90 cents, to $3.45, with escalation through 1975,[ii] and the Libyan tax rate was uniformly fixed at 55 percent plus some additional payments on retroactive claims.

It remains to be tested over time whether the agreements so painfully concluded will hold up.[iii] Even though integrated earnings on Eastern Hemisphere operations have been long depressed, an upturn in world market prices and substantial increases in company profits or changes in the relative value of Western currencies, especially the dollar, could trigger renewed pressure from producing countries for increased per-barrel take.

III

The most obvious effect of the recent round of oil agreements is the striking increase in producing country revenues from $7 billion in 1970 to around $18.5 billion by 1975. (Without the new terms, OPEC members' oil revenues would have increased to $10 billion in 1975.) The impact upon consuming countries will be correspondingly awesome. The cost of European oil imports amounted to around $9.5 billion in 1970; by 1975, the increased cost to Western Europe of the new OPEC settlements will be as much as $5.5 billion; for Japan the increase will be over $1.5 billion (the oil import bill was on the order of $2.5 billion last year). For the developing countries, whose oil import costs were around $2.1 billion in 1970, the cost of the OPEC advances will be about $1 billion for 1975; for these countries, the higher costs threaten to aggravate further chronic adverse balances of payment.[iv] Unlike the industrialized countries which may at least expect some increased export trade with oil-producing countries and additionally substantial inflow of financial funds through their banking system, the less-developed countries will be hard put to offset the drain on their resources.

Patently, the economic terms of the world oil trade have shifted radically. And the occasion has been marked by an equally dramatic shift in the institutional and political positions of the industry, and of producing and consuming countries. The question now arises, what should or can constitute a Western oil policy? The major concern is oil availability-on acceptable commercial terms, strategically secure and not subject to political blackmail. These require bargaining leverage and countervailing power.

Concessionary arrangements and international agreements can be depended on as long as all parties are convinced that they serve their interests, and that a breach would be more harmful to their side than to the other. For example, a producing government will be less prone to impose unreasonable demands upon oil companies or to threaten expropriation if the turmoil of a confrontation might threaten its régime; more secure governments may be less inhibited. Again, if a producing country can only afford a relatively short interruption of its oil revenues, while consuming countries can survive an oil embargo for a longer duration, the oil embargo will probably not be used as a weapon.

Despite their new position of power, the attitude of the oil-producing countries still reflects a lingering heritage of emotional resentments against former colonial administrations and concessionary circumstances.

OPEC was established in 1960 to protect the member governments' oil revenues against erosion, when declining competitive oil prices were threatening further to pull down posted prices on which taxes were calculated. OPEC did succeed in preventing further cuts in posted prices; and in 1965 it won a relatively modest improvement in tax arrangements. Interestingly, the companies then argued and OPEC accepted that the full burden of the new arrangements was more than the industry could bear all at once; a time schedule for effecting the new arrangements was agreed upon, reducing the immediate impact from about 11 cents per barrel to half of that.

Since then, however, the margins of profit of oil companies in the Eastern Hemisphere have continued to narrow, and rates of return are now barely in line with competitive rates in other industries, or with the capital requirements to meet rapidly expanding oil consumption. The producing countries now appreciate that they are no longer bargaining for a share of profits; they are now weighing in on world oil prices. By raising tax-paid costs, they leave it to the industry to look after its profitability. Although statements of producing governments made in Tehran are meant to reassure consumers that the recent settlements do not require higher prices, there can be no question but that the increased cost of oil payments to producing governments will eventually have to be reflected in consumer prices.

OPEC's agenda for the future, laid down in its Declaratory Statement of Petroleum Policy of June 1968, includes: (1) a program of relinquishment of concessionary acreage, with government role in selection; (2) tax rates and tax-reference prices to be unilaterally determined by governments; (3) participation of the producing country in existing concessions, justified by clausula rebus sic stantibus, that is, by reason of a fundamental change of circumstance.

Of these, the last-participation as a device in lieu of nationalization-is potentially the most threatening. "Participation" is a grand design not only to effect a more active and direct role in world oil trade for the producing countries, but in the thinking of the Saudi Arabian Petroleum Minister at least, to bind the interests of the oil companies with those of producing countries, to prevent competition among producing countries and companies as sellers in the open market and make it difficult for any producing country on its own to insist on an abnormal increase in production.

In any such partnership arrangement with a producing country, the oil companies would be destined to become completely subservient to their host government, as somewhat ironically is now happening to the French oil interests in Algeria. Major producing countries already have direct access to their own production, through joint ventures, etc., and the volumes will undoubtedly increase over the years ahead. There is nothing to prevent them from actively entering into world oil competition and from integrating downstream by investment in tankers, refineries and marketing. But this is precisely what many of the countries do not want-to compete. Participation is a device to achieve all these objectives without competing; or to put it bluntly, to restructure the oil trade so as to give expression to producing country interests through the good offices of the oil companies.

Even if the participation issue does not come to a head in the near future, it could become pressing by the latter 1970s. The Shah insists that the Consortium rights will terminate in 1979, ignoring company options to extend the duration. If Iranian participation in the Consortium should then be imposed, Saudi Arabia and others will surely not be far behind with their demands. Many of the large concessions in Venezuela expire in 1983-84 and here, too, alternative arrangements will have to be worked out.

IV

A major decision that the oil companies will be facing over the years ahead is to what extent and for how long they can be held hostage by their resource interests in producing countries. Will they, together with consuming countries, be able to moderate the ransom; or, alternatively, would it be better to abandon the hostage?

Meanwhile, what is important for the long run is not so much what the producing countries wrested for themselves, but how. The political effectiveness of OPEC unity, of unilateral action and of the threat of an embargo-these are the realities to which companies and consuming governments must now begin to address themselves.

The companies now find themselves in a very real bind. How far can the industry resist the pressures of producing countries? To what extent can the industry expect to recoup its higher costs in consuming countries? And since "industry" is really only a catchword-made up of an increasing number of commercial, governmental and quasi-public entities based in an increasing number of countries-how do the oil companies as a group define their self-interest and go about pursuing it?

Called to Tehran to negotiate OPEC demands, the oil companies involved tried to take a common approach. The companies posited all-embracing representation for the company side and requested simultaneous settlement with all member governments as an essential condition of negotiation. This was a complete reversal of the company position in previous OPEC negotiations in 1965, when the OPEC representative was held by the companies to speak only for his own government (Iran); the reason now, of course, was the immediately preceding experience of having been whipsawed by Libya.

In fact there could be no universality on either side. Even among American producing companies, some did not align themselves, having diverse problems in their arrangements with producing governments; Arabian Oil (Japanese), ELF-ERAP (French) and ENI (Italian) were also conspicuously absent. On the other side, it was soon clear that governments controlling Mediterranean oil would not agree to be bound by a Tehran settlement for Persian Gulf oil. Neither would Indonesia; and Venezuela had legislated her own settlement in any case.

As noted, tax settlements tend now to be reflected in market prices, but the question is always, how soon and to what extent? Competition in oil, as elsewhere, can work either way-competitively to weaken prices or competitively to strengthen prices. The latter occurs when cost increases are made to apply generally to the whole industry, hence, the natural concern of oil companies that all of them be uniformly exposed to higher tax costs.

The oil companies also have ultimately to consider that if producing countries withhold production from "recalcitrant" companies and if the resulting shortage of oil supplies becomes unduly onerous for consuming countries, the latter may in time feel compelled to accept the producing countries' invitation to come and purchase the oil, bypassing the companies entirely. In a crunch, neither oil company control over tankers nor refineries could be pivotal; these would be mustered into service if consuming governments as a matter of policy decided that a breakdown of negotiations was threatening intolerable economic consequences for their nations. And even the parent governments of the oil companies could not effectively object without jeopardy to the Western alliance.

Therefore it has to be at least considered whether the ultimate riposte of the industry-faced with "impossible" demands and backed by consuming countries-may be to turn away from their reserves and reappear as competitive buyers of crude from the producing countries. From the company standpoint, its purchasing power would derive from past investment in and current control over transport, refining and marketing facilities-the power to dispose. And they could expect that producing countries eventually would compete for export volume since captive concession-holding companies would no longer be at their behest. For established major oil companies, the crux would be the loss of control over reserves. Downstream position, historically, has been related to preëminence in resource position. If that is replaced by a bargaining situation, with all buyers haggling over crude price advantage, it is doubtful that refining and marketing shares will remain as is. While efficiency in refining and marketing could be expected to count, the companies will probably still prefer to hold on to the competitive edge of "low-cost" reserves as long as possible, no matter how high the producing governments may push up that low cost.

How to balance risks and interests in producing versus consuming countries? The refining and marketing investments of companies in oil-consuming countries tend to be regarded as much safer than their resources. In the circumstances, the oil companies may naturally be inclined to be more yielding to producing countries' demands so as not to jeopardize their irreplaceable resources.

The companies have normally been disinclined to invest in capital- intensive, low-profit, oil-related enterprises (such as petrochemicals) in producing countries; such investment does not readily achieve a competitive market position and is further tied to one unique resource base in an unstable area. Withal, the companies are increasingly pressed to commit part of their operating profits not only to these but to projects of general social or economic interest to the producing country and not directly related to the companies' business activities. There is an obvious financial risk in making the investment, but perhaps a greater risk to their concessionary position if they do not.

Then the companies must balance short-term competitive interests against longer-term appreciation of company/government relations in negotiating concessionary terms. If a company can obtain especially favorable terms it will find it difficult not to accept them-since competitors may seize the opportunities it has refused-even if the opportunity results from ignorance or corruption on the part of local officials. But taking such an advantage might prolong the heritage of ill will with which the industry has already to cope. Considering past experience with the unilateral imposition of more onerous terms in so many countries, the companies are apt to be reluctant to agree to more generous terms, except under governmental pressure or threats. This might be so even if changing circumstances make adjustments reasonable and equitable.

The companies must also try to reconcile commercial criteria with the pressures from both producing and consuming governments everywhere for them to identify with each one's national interest. Realistically, their various affiliates are often among the largest corporate entities in the countries where they operate, and of overwhelming importance for energy supplies, foreign exchange balances, budgetary revenue and industrial activity. Obviously the company's and the nation's interests cannot always be wholly reconciled; and lip service has often to be paid to the company's constructive national role. In a crisis situation, the company may then be charged with deceit as well as activity contrary to the national interest.

In the long run, however, much as the short-run interests of oil companies may seem to be allied with producing countries, it should now be recognized that their position as an internationally integrated private industry depends on a closer relationship and better understanding with consuming governments. Obviously, the consuming countries are apt to suspect the companies of being too much concerned with protecting their positions in producing countries. To establish confidence among consuming countries, these should be involved on a continuing basis with company actions relevant to them. In the past, consultations have taken place so late in the day that options are few, and the time when government policy might weigh in the balance has largely passed.

V

Despite the great efficiency and impressive results of the international oil industry's management of its affairs in the past, the present attacks on its fundamental position make a frank analysis of past actions and future prospects utterly necessary. What went wrong and why? This is not only essential to the continued effective performance of the industry, but for the security of the Western world which so intimately depends on the uninterrupted flow of oil.

Such is the challenge which the top management of the companies and the governments of the consuming and parent countries must squarely meet, indeed, cannot possibly avoid. The international oil industry functions effectively by virtue of its private competitive strength. Nevertheless, because of its massive impact on the economy, security, and foreign relations of its parent countries and the producing and consuming countries where it operates, it must also cope with the difficult challenge inherent in its involvement in and responsibility to diverse public interests. This was highlighted in the Tehran and Tripoli negotiations, when most of the oil companies with foreign oil production decided to negotiate as a group with the OPEC producing countries as a group, on matters that would vitally affect the tax-paid cost and oil supplies of about every oil-importing country of the free world.

As oil progressively replaced other energy, notably coal, in the postwar period, Western oil policy could be stated simply: to obtain as secure a supply of imported oil at as low a cost as possible. But relatively little was done to implement those objectives by many governments whose countries were most dependent on imported oil. Rather, it was left to the industry- particularly the major international oil companies-to effect. And this the industry did, over many years, by virtue of competition and diversification.

The assurance of inexpensive and secure oil supplies is now cast in doubt by recent events. But the sole responsibility can hardly be laid upon the industry; consuming countries must bear a large part of the onus for their present exposure. Remember that the initial impetus to the 1970-71 events was Libya's unilateral demands on the oil industry. And Libya's ability to impose her conditions reflected not only the unique circumstances of the time, but the progressively increasing dependence of Europe on Libyan oil- accepted without demurrer or provision for alternatives by the governments most concerned. Now consuming countries are provoked to ask what counterbalance they have to the increasingly effective posture of producing countries and what influence they really have through the oil companies in negotiations with producing countries.

The U.S.-Canadian situation is somewhat different from that of other consuming countries whose dependence on imported oil seems to be unavoidable. The United States must now be convinced that control over oil imports and support for indigenous energy resources is vital to its security and credibility as a world power. If implemented, the recommendations of the Cabinet Task Force on Oil Import Policy-to replace the present import control system by a tariff system and allow domestic crude oil prices to decline so as to take economic advantage of low-cost foreign oil-could have been a disaster.

The issue was, and is, not higher imports and lower oil prices, as so often bruited. This nation can and probably will accept higher import volumes. How domestic oil prices may work out over the long run, compared with foreign oil prices, will still depend largely on the costs of developing North American energy supplies. The issue is whether we are prepared to expose ourselves to undue dependence on insecure oil imports, or whether we will keep import volumes under restraint and foster a domestic energy environment with adequate incentives to continuing exploration and development. If we choose the latter, our import requirements during the next five to ten years should not exceed danger levels. Frontier areas such as Alaska and offshore hold out great promise. A mutually advantageous and dependable arrangement with Canada should be possible. And we can reasonably count on substantial supplies from other Western Hemisphere sources, despite recent problems and irritations in various countries.

Moreover, an accelerated atomic energy program will make a rapidly increasing contribution to our power supplies. With some governmental inducements of manageable proportions, we could develop a sizable hydrocarbon production based on the huge coal, shale and tar sand resources of North America. Within the foreseeable future, to which current planning would reasonably be directed, there thus need be no danger that the United States would become unduly dependent upon insecure sources for its oil supplies.

Other consuming countries, notably Western Europe and Japan, but also developing countries have an even more urgent need to reassess their positions. In spite of promising developments in the North Sea and expanded exploration in other areas, most consuming countries of the Eastern Hemisphere will not be able to avoid continued dependence upon imported OPEC oil for the foreseeable future. And with oil reserves so heavily concentrated in a handful of developing countries of North Africa and the Middle East, it is inevitable also that these countries will use to the utmost their control over the resources-certainly for their economic advantage, but also where possible for political purposes.

In this connection, the role of the Soviets is also of concern. Basically, the Soviets will be able to obtain the oil they need from their own sources. Nevertheless, in their present position as a world power, the Soviets will almost inevitably insist on a presence in the eastern Mediterranean, Persian Gulf and Indian Ocean. They will not, however, be able to take over the constructive role of Western oil companies in developing and marketing the production of major Middle East oil concessions; nor would the Arabs want them to. They will instead offer technical and financial assistance to willing Arab recipients, and deal for limited volumes of oil in repayment of loans, or otherwise largely in barter transactions. Their main objective thereby will be to support their overall power position, undermine Western standing in the area and fortify nationalistic groups hostile to the West. Their physical or political ability to interfere significantly with the actual flow of oil will depend on the broad balance of power between the United States and the Soviet Union, but any interference that would really jeopardize Western oil security might risk a big-power confrontation that all parties, on the evidence, are trying to avoid.

A more effective relationship with the industry is essential to the longer- run interests of all consuming countries. Their governments have already indicated that they intend to involve themselves with many aspects of company operations within their countries, including the relationship among the industry's costs, taxes, prices and profits. An example is the new Common Market policy to obtain information regularly on the oil industry's supply and investment programs.

From the standpoint of security, there is a range of policies that will be considered or reconsidered. It is questionable whether the industry alone can provide security through its diversification of oil sources or whether policy guidelines may not have to be laid down by the countries most concerned in order to prevent risky over-dependence on any one or few particular sources of supply. A proposal is already pending before the Common Market which would give it the right to exercise surveillance over proper diversification of supplies.

As a practical matter, probably the most persuasive undertaking of consuming countries to protect their interests would be increased mandatory stockpiling. During the 1970 crisis, Europe had only some 60 to 65 days supply at hand (which has now been raised to a target of 90 days); Japan and the developing countries had even less. Realistically even a 90-day stockpile begins to lose its assurance after 20 to 30 days of withdrawal have taken place. More ample stockpiles will probably be required if they are to have any real security value in improving the bargaining position of both countries and companies. The cost of such stocks would be very high indeed, but experience has shown that the cost of exposure could be even greater.

Costs of storage facilities, beyond normal commercial requirements, might properly be charged to the country concerned. On the other hand, it would not seem unreasonable for the industry, which would also benefit from stockpiling, to supply storage at cost and to forgo any profit margin unless and until the oil supplies enter into consumption.

Similarly, the countries should investigate the adequacy of tanker tonnage available to them, under abnormal as well as ordinary supply conditions. One approach, possibly more appealing in terms of national control than meaningful in security of supply, would be for operating affiliates to own or charter their tankers-not necessarily under their own flag. The tanker situation may well go through full cycle over the five odd years ahead. Major new pipelines and expansions are projected from the Persian Gulf to the eastern Mediterranean, notably by the U.A.R., Israel and Iran. The added pipeline capacity would ease tightness of tanker tonnage commensurably. But in due course, oil companies will have to align their tonnage to their reduced transportation requirements to maintain competitive efficiency; and thereafter, if the pipelines are disrupted, tightness in tankers could again cause a crisis in oil delivery. The challenge for the industry and for consuming countries will be to prevent dissipation of tanker tonnage and to conserve sufficient transport capacity against another future emergency.

Meanwhile, consuming countries should again consider the importance- economically and strategically-of indigenous energy sources. The exploration and development of oil resources in "safe" areas such as the North Sea will be pushed to the utmost. Nuclear power will look better; so will even neglected coal. And while no single energy source by itself is likely to alter dependence on imported oil, taken together they may somewhat reduce the degree of dependence and the margin of risk. So long as oil flows are threatened by unstable terms of trade or political interruptions, consuming countries are likely to evaluate these various alternatives on a new cost-benefit basis, where the costs may now appear less onerous and the benefits more imperative than heretofore.

Some consuming countries may also be tempted to embark on an independent course that would bypass the "uncertain" role of the internationally integrated industry: on the one hand, by stepping up protection of their national oil companies in internal refining and marketing; on the other, by increasingly supporting and subsidizing their own companies in foreign exploration and development. Neither has been notably effective where attempted. The difficulty with government sponsorship, protection and subsidy is that they sap the competitive thrust; once government-supported undertakings have been embarked on, there is a tendency to impose the consequences upon the country's economy rather than to write off unattractive ventures, as a commercial enterprise would be forced to do.

Further, various consuming countries may be enticed into attempting direct oil negotiations with producing countries. OPEC and the Organization of Arab Petroleum Exporting Countries (OAPEC), its wholly Arab offshoot, have put out this siren's lure. And the attraction is reflected in a recent statement by a Spanish government official. He complained that consumer countries were not represented in the Tehran negotiations and warned that Spain would try to get more oil through official agreements with Middle East and North African governments-thus bypassing the companies-and pay with increased exports to those countries. However, it must be appreciated- emotional responses to 1970-71 notwithstanding-that direct negotiations between consuming and producing governments have not been attractive either as to terms of trade or security of supply, as witness the experience of France with Algeria. Further, there would always be the danger in such negotiations for otherwise commercial differences to devolve into political confrontations between governments-which could be doubly disruptive to the vitally important oil trade.

For the industrialized oil-consuming countries, there is, however, the possibility of developing closer overall economic ties and thereby a hopefully stabilizing community of interest with producing countries through acts of association, as contemplated by the Common Market. The rapidly increasing oil revenues and accumulating financial reserves of major producing countries already vest them with an interest in the stability of international trading and financial arrangements. To the extent that industrialized countries may step up investment in the economic development of oil-producing countries, relations between the two groups may be conducive to a better balance in the negotiating position of the industry; and producing governments may become less prone directly to confront industry and indirectly to put to consuming countries take-it-or- leave-it demands.

The French, of course, have not had a happy experience in their economic association with Algeria; however, special circumstances there have been operative. And it would be ironic if industrialized countries were to direct a substantially increased proportion of investment for development to those countries that are already best off owing to their oil resources. None the less, a strengthening of two-way economic ties between industrialized oil-consuming countries and developing oil-producing countries may be a positive factor in the future direction of international oil trade relations.

In the final analysis, it would appear that despite repeated crises and uncertainties the internationally integrated oil industry will continue to play a pivotal role: in linking relatively distant producing centers with widely dispersed consuming areas; in linking the present with the future through technology and risky exploration efforts in many areas, as well as through huge worldwide investments in facilities; and by providing a firm basis of commercial decision-making in the politically fraught world of oil. The shape of the industry will surely be changing with the advent of more companies and with a broadening of national origins in both consuming and producing countries. Most importantly, industry will be dealing with a much greater degree of involvement on the part of consuming (as well as producing) countries in oil operations that affect their economy and security.

The challenge of today's stark realities is whether, at a time when producing governments are weighing in so heavily to further their own interests, the oil policies of Western governments can help restore a more viable balance among all factors, thus providing the consuming countries with reasonable assurance of security of supply on manageable terms.

[i] It should be noted that the value of Venezuelan oil had in fact risen owing both to the advantage in location as tanker rates increased and to accelerated demand and price increases for heavy fuel oil in the U.S. market, especially in the latter half of 1970-which for one reason or another had scarcely, and then only belatedly, been reflected in Venezuelan f.o.b. prices and tax revenues.

[ii] Of the increase, 25 cents was linked to the Suez closing and the tanker rates; that amount presumably may be rescinded in the course of time.

[iii] Settlements with Iraq and Saudi Arabia over eastern Mediterranean exports are still outstanding at time of writing, with a sticky and potentially even unsettling issue of quality valuation raised by Iraq and also now posed by the OPEC Secretary General as applicable elsewhere in the Persian Gulf.

[iv] In this respect, it is noteworthy that the agreed escalation of posted prices through 1975 was related to OPEC complaints that the international purchasing power of their oil revenues was eroded by persistent inflation in the prices of industrial goods which they have to import. Now oil- importing developing countries face the prospect both of higher prices for manufactured imports and for oil imports-a depressing outlook for the poor developing countries as compared with the oil-rich "developing" countries.

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