ADAM SMITH'S MONEY WORLD

Air Date: January 19, 1986

# Is OPEC Back in the Driver's Seat And Did We Put Them There?

[Tease]

**ANNOUNCER:** Cheap oil was America's sweetheart in 1986, and no one cheered louder than Wall Street. But now that old villain OPEC is back, and oil prices are on the rise. New threats from the Iran-Iraq war could trigger further hikes. What role is the U.S. playing in all this? Is Irangate a factor? Could higher prices finally bring down the curtain on low inflation and the market rally? Find out next, on Adam Smith's Money World.

[Titles]

**ADAM SMITH:** Hello, I'm Adam Smith. This is a show about some connections that may affect you and you may not have thought about. Our topic is the price of oil, because the price of oil is not only important to us as consumers, but the psychology of that price affects our views of inflation and the stock and bond markets. So we want to take you behind the headlines.

Now the headlines are telling us about Irangate, or whatever you want to call it; does the sale of arms, the geopolitics of the Middle East, affect the oil price? Well, I have Dr. Henry Kissinger to help us with that. And what about OPEC? Is it back together and in control after a year of volatility? The headlines tell us about the Iran-Iraq war; how does that affect our own markets and our own destinities? Let's begin with OPEC.

## What's Happening with OPEC?

**ANNOUNCER:** Once upon a time, OPEC was the undisputed ruler of the oil world, and Saudi Arabia, with its vast reserves, ruled OPEC. Oil hit $34 a barrel, and consumers everywhere shuddered and paid up.

But the world quit using so much oil; non-OPEC supplies rose, and prices drifted down. The Saudis held things together for a while by acting as "swing" producer. When other OPEC countries produced too much oil for the market, the Saudis produced less, and this propped up prices.

Then OPEC began to crumble.

**Shelk AKHMED ZAKI YAMANI, Saudi oil minister:** I think a good number of you thinks that this is the end of OPEC.

**ANNOUNCER:** Members bickered and cheated on their quotas. Price hawks, like Iran, wanted expensive oil, but refused to pump less. Iran needed money to finance its war with Iraq. In the fall of 1985, the Saudis got fed up and abandoned the swing producer role. Saudi oil production was at a 20-year low, and recession at home had the royal family worried. They turned on the taps to grab a bigger piece of the petroleum pie, and no longer worried about a price war.

**JAMES AKINS, International economic and political consultant:** Nobody believed them; they thought the Saudis were bluffing, the Saudis are too small, they're too weak, they're too afraid, they will not do something as daring as to provoke an international price war. They were wrong.

**ANNOUNCER:** By early 1986, the world was awash in oil, and prices tumbled through the $20 mark. The Saudis kept on pumping. OPEC met three times, but couldn't agree on production cuts to stop the price slide. By July, oil sold for $7 to $8 a barrel, and consumers cheered the end of the OPEC era.

The cheers still echoed as a desperate OPEC returned to the bargaining table in August. The drastic drop in oil revenues was wreaking economic havoc on the 13 members, and the continuing Iran-Iraq war added to the crunch.

**WILLIAM RANDOLP, vice president, First Boston Corp.:** The Iranians suffered the most in terms of monetary loss, not only because prices fell, but because their

volume was sharply curtailed because of the tanker bombings and attacks at Kharg Island, their loading terminal, by the Iraqis. So they lost volume and price.

**ANNOUNCER:** It was Iran that turned the tide by proposing a return to 1984 quotas on a trial basis, and agreeing for the first time to exempt Iraq. The other producers quickly went along, and prices on world oil markets jumped from the single digits to the mid-teens. Was OPEC on the comeback trail?

OPEC met again in October for a record 17 stormy days, but failed to agree on new quotas. Soon after, Sheik Akhmed Zaki Yamani, the powerful Saudi oil minister for 24 years, was replaced by the country's less combative planning minister. Analysts speculated this could help chances for a new accord.

**Mr. RANDOL:** Zaki Yamani tended to be a person who, you know, negotiated tortuously, and I think was willing to sit on his hands and let the pain get greater and greater, and take as long as was necessary to force the rest of OPEC into an agreement.

**ANNOUNCER:** It was an optimistic OPEC that arrived in Geneva in December, with Iran once again leading the way and the Saudis in agreement. Members vowed to quit cheating and return to fixed prices. They would hold production to a level that would boost prices to at least $18 a barrel. Now, everyone is asking, is OPEC back, and for how long?

**Mr. AKINS:** They can sell their oil at $18 now, perhaps at $25 by the end of this year, a barrel; and they can produce at marginally less than capacity, say— say, about what they're producing today, with the new price cuts—with the new production cuts. Or, they can try to produce to capacity and they can sell their oil at $5 a barrel. The economics are irrefutable.

**Mr. RANDOL:** They do have one thing in common, which is to get oil prices up to a level that they can all sort of consider optimum. So what I would call the baptism of fire factor, I think, has made things different now than they were, say, during the months of '86 when OPEC was basically floundering.

**SMITH:** World oil markets have already placed their bets on OPEC. Now, markets are fickle, but at the moment, they're believers. Oil prices pushed past $19 last week for the first time in a year. Severe weather in the Soviet Union and Europe helped, but no one discounted the psychology from a united OPEC. Even non-OPEC producers were cooperating, and the new Saudi oil minister, Hisham Nazer, made a visit to the Soviet Union, the world's largest oil producer. It looked as if the major players were joining the Saudi team.

Of course, the wild card remains the Iran-Iraq war. It casts a long shadow over any OPEC agreement. Some feel the real stake in the price war is strategic advantage in the Gulf. Let's see.

## Influence of the Iran-Iraq War

**SMITH [voice-over]:** The Iran-Iraq war is a regional conflict, but the whole world is watching it for one reason: its impact on the price and supply of oil. The war is in its seventh year, and many feel recent fighting signals a decisive turning point may be near. Both countries have suffered heavy casualties and severe economic hardships; the price of oil has played a role. Let's look at some of the connections between oil and the politics of this war.

The Iranian advantage is manpower — its population is three times that of Iraq — and a fanatical commitment to exporting the revolution of Ayatollah Khomeini. Oil revenues pay for the war, so when prices rise, Iran can afford more arms. Last year's oil price drop came just as Iranian advances on the strategic port of Fao had tilted the war in their favor. Saudi Arabia and Kuwait, allies of Iraq, triggered the dramatic drop by raising production. Did the Saudis use oil to reassert their political clout?

**Mr. AKINS:** Practically every country that was exporting oil was facing an economic collapse. Some are—all are facing problems, and some were facing collapse and a revolution. And the Saudis accomplished their purpose by this. They showed that

they were not bluffing, they showed the consequences of a price war, and they got what they wanted to get from the very beginning, that is, cooperation from all the OPEC countries.

**SMITH [voice-over]:** Cheap oil continued to put severe pressures on Iran's war-drained economy. Revenues plummeted from $16 billion in 1985 to $6 billion last year. On top of that, oil exports have been slashed by Iraqi bombing raids on strategic oil installations. So with volume down, higher prices are even more vital to pay for weapons, which Iran has trouble buying anyway.

And now the disclosures over American arms sales to Iran. Could this tilt the balance in Iran's favor?

**GARY SICK, former National Security Council member:** They were precisely the kinds of things that Iran needs. They—the Iranians have problems dealing with the Iraqi tanks; this was anti-tank weapons that we gave them, and those are very powerful, very important weapons. They have problems dealing with the Iraqi air force; we gave them materiel to improve their air defense capabilities. That's very important as well. Will it turn the tide? I really don't know.

**Mr. AKINS:** If the arms sale is important enough to tilt the balance of the war in favor of Iran, and if, in this next coming winter offensive, Iran defeats Iraq, then our economic interests will certainly be affected. So will our political interests; we will be eliminated essentially from the Mideast, and oil prices will skyrocket.

**SMITH [voice-over]:** Iraq. Iraq's advantage is superior armor and air power — and help from friends. The government of president Saddam Hussein has received billions from the Saudis and Kuwaitis, who want to keep Iranian troops from their own borders. Iraq also needs oil revenues; exports were disrupted at first by fighting in the Gulf, but new overland pipelines have opened safer alternatives. Iraq has been exempted from OPEC quotas to make up for earlier losses. This steadier flow of oil has kept the economy more stable than that of Iran, despite the price drop.

**NIZAR HAMDOON, Iraqi ambassador to the U.S.:** We have not faced any severe problems; yes, we have some problems in the area of finance, in the area of getting some imports, but our people continue to get their essentials, and the army continue to get its ammunition.

**SMITH [voice-over]:** Last summer Iraq put the oil weapon to new use, by aiming its warplanes at Iran's economic lifeline, its oil installations.

**Amb. HAMDOON:** Now we have a very influential and powerful air force inflicting damage on lots of oil installations inside Iran, so it's up to us and to our activities to say what the Iranian exports are. And they know this.

**SMITH [voice-over]:** Iraq claims it can fend off any Iranian offensive, but it worries that the U.S. arms sale gave the enemy a psychological boost, or worse.

**Amb. HAMDOON:** These provisions are going to let Iran to be more arrogant, it will take more time that they reach a conclusion to end the war, because they are seeing that the biggest power in the world has conceded to them by providing Iran with the recognition to be hegemonic, and to be more aggressive over the Iraqis and the rest of the Arabs there. It is not going to help stabilize anything in the area, including the price of oil.

**SMITH [voice-over]:** Saudi Arabia. The Saudis have one potent weapon, vast reserves of oil. This assures them enormous clout over the price of oil, and over their Gulf neighbors who are so dependent on oil for cash. The Saudis fear Iran's power, and have wielded the oil weapon to blunt it. Their petrodollars backed Iraq's war machine, and many feel they drove prices down just when Iran needed money the most. But this is a treacherous path; low oil prices could inspire political reprisals from Iran.

**Mr. RANDOL:** If the Saudis, for example, quietly start boosting their production to keep prices dampened down below, let's say, $20 a barrel, the Iranians could get very angry about that, and you could see some sort of military reprisal against either the Saudi or Kuwaiti oil facilities. They have an air base, the Iranians do, 15 minutes' flying time across the Persian Gulf from either of those two facilities.

**SMITH:** The United States. The Reagan administration says it is officially neutral in

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the Gulf war, and that it believes in a free market approach to oil prices. But events last year raised questions about both policies. The oil debate flared up in April, when Vice President George Bush traveled to the Middle East just as oil prices neared their bottom. Critics asked whether he lobbied for higher prices to keep his Texas friends happy.

[on camera] Arms sales to Iran were even more baffling. Are we backing Iran now? To shed some light on the intricacies of Middle East politics and oil policy, we have with us in the studio a very special guest, Dr. Henry Kissinger. Dr. Kissinger, the former secretary of state, is now a consultant on international policy matters. And, Henry, welcome, very good to have you here.

**Dr. HENRY KISSINGER, former U.S. secretary of state:** Glad to be here.

**SMITH:** Does Irangate, or whatever we call this scandal, have an influence on the price of oil? It is known that the Iranians would like a much higher price of oil.

**Dr. KISSINGER:** It affected immediately in one way, and then in the long term in another. Immediately, when we sold arms to Iran, and did it through a Saudi merchant, Khashoggi, the— it is— you can take it for absolutely granted that Khashoggi called King Fahd 30 seconds after he hung up with the American who proposed this to him. King Fahd, having a particular — the mentality of the area, assumes first that the United States knows what it is doing—

**SMITH:** Was that a mistaken impression?

**Dr. KISSINGER:** Which is not necessarily true.

**SMITH:** Yes.

**Dr. KISSINGER:** And secondly, that by using a Saudi, they wanted him to know what they were doing, and that this was a subtle way of letting him know. If we sold arms to Iran, then the Saudis had to assume that we wanted Iran to win. If Iran was going to win, that means one, Iraqi oil production is reduced or eliminated, and secondly, Iran becomes the dominant country in OPEC, and Iran can then insist on low production and high prices. If that is what's going to happen, then the wise Saudi policy is to pre-empt it, and dump Yamani overboard, whom they didn't much like anyway in the royal family, and to offer to Iran what they think Iran will insist on a year from now.

So I believe that this sudden change of Saudi oil policy, from getting a big market share through low prices, to reduced production and higher prices, could well have been caused by the Iran sales.

Now, of course, if Iran wins the war against Iraq, one, we'll be blamed for it in the mind of the moderate Arab, and secondly, that will knock out the Iraqi production, at least for a while, and then the oil prices will skyrocket.

**SMITH:** How do we repair this? What would your advice be, since this seems to have gotten away from us, and we'd like to be somewhat in control of our oil destiny, at least.

**Dr. KISSINGER:** There's no quick fix. If Iran wins the war against Iraq, or scores a big success — and the definition of victory would be if they can get rid of Saddam Hussein, the president of Iraq, because then they could say they got rid of the Shah, they got rid of Carter, they got rid of Saddam Hussein, anybody who stood up to them, they got rid of, or that they took on. So if they succeed in that, then if we are going to avoid a panic in the area, Saudi Arabia needs the strongest indication of American support, both military and economic, and the only way the consequences of that could be mitigated is if the Saudis were prepared to step up their oil production, to make up for whatever cuts the Iranians impose on Iraqi production, if the price is to be stabilized.

**SMITH:** Henry, thank you very much for coming, it's been a pleasure to have you.

Middle East politics will continue to play havoc with oil prices. Analysts have been warning that despite the cheap, plentiful oil now, we'll slip back into OPEC's grip by 1990. That could mean expensive oil and inflation again. Only last summer we heard there was a glut of oil, that conservation had flattened out the demand. Well, what happened to conservation? What about the market surplus? We sopped it up?

[voice-over] The new U.S. auto fleet must average 26 miles to the gallon, but we're

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driving further. Our homes are insulated, but we're turning up the thermostat. And industry used 18% more oil last year; that adds up to almost a 3% jump in overall demand in 1986 against 1985, nearly three times what the experts had predicted before prices fell, and back to the levels of 1980.

[on camera] On the supply side, the surplus in world markets, which may have reached 250 million barrels, is dwindling as OPEC cuts take effect, and it could be gone by the first of April. To find out what all this means, and how worried we ought to be, we have a panel of experts on the Middle East and oil. Daniel Yergin is president of Cambridge Energy Research Associates in Boston; Paul Jabber is a senior fellow at the Council on Foreign Relations, where he's directing a study group on the United States and Iran; and Tom McHale is senior economist at Drexel Burnham, and was once advisor to the kingdom of Saudi Arabia. And welcome to all of you.

Paul, how do you read the Iran-Iraq War? And I notice that Ambassador Akins said if Iran should win, oil prices would skyrocket. Do you agree with that?

**PAUL JABBER, senior fellow, Council on Foreign Relations:** In the longer term, I think that may in fact come to pass. The reason being, that it—

**SMITH:** Which would come to pass, the Iranians would win, or the price would skyrocket?

**Mr. JABBER:** No, that the prices would go substantially higher several years down the road. The reason being that if this war were to end in a conclusive victory for either side, particularly for the Iranians, then that winner may become the dominant power in that strategically terribly important area, and would be able to determine the oil policies of the major oil suppliers of the peninsula. And therefore, would become the dominant force within OPEC.

**SMITH:** Dan, whatever happened to the idea that if the Iran-Iraq war ended, both countries would turn the supply on full blast and the price would plummet?

**DANIEL YERGIN, president, Cambridge Energy Research Associates:** Well, if the war does end in a— some kind of a negotiated settlement or a stalemate, Iraqi exports rise and Iranian exports rise, then indeed that would be pressure downward on oil prices. So I think part of the answer to the question you raised with Paul is, it very much matters the way in which this war ends.

**SMITH:** So it's not— if nobody wins, the price goes down, and if one power or the other wins, the price goes up, is that it?

**Mr. YERGIN:** Although there is one other theory, that relations become— if there is some kind of negotiated settlement, relations within OPEC become more manageable and perhaps the exporters would all see it in their interest to try and stabilize things. But it's partly judgment about human nature.

**THOMAS McHALE, senior economist, Drexel Burnham Lambert:** You have to look at one critical factor. Saudi Arabia is the only producer that has the flexibility on the production side. They can go from one or two million up to 10 million barrels a day. There is no other element, no other producer, within OPEC that has the leverage to make or break the oil market as the Saudis do.

**SMITH:** Yes, but we saw one of our interviews say that the Saudis would be afraid to produce more and lower the oil price, because that would get the Iranians angry. Do you not agree with that?

**Mr. McHALE:** I disagree with that.

**SMITH:** Why?

**Mr. McHALE:** I think they recognize that they do have— they're the only ones that can use oil as an effective weapon in market share.

**SMITH:** Is anybody going to go along with OPEC now?

**Mr. McHALE:** I doubt it.

**Mr. JABBER:** What the Saudis have done in the last two years is precisely using that flexibility that their ability to supply a lot of oil has provided them with; they have proven indeed that they can determine what happens to prices. They have been telling all the other supplier— producers within OPEC and outside OPEC for years that you have to exercise discipline if prices are to be maintained.

**SMITH:** Yes, well, what—

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**SMITH:** Okay, but now human nature comes in. Does everybody stick to the discipline? Everybody knows the lesson.

**Mr. YERGIN:** For a time. I mean, what happens now, because you have 20 or so people who are part of it, for a time it will go on, there will start to be cheating, they have a pricing structure that is, is rather flexible.

**SMITH:** When does the cheating start, and how bad does it get to be?

**Mr. McHALE:** It's already started probably.

**SMITH:** Does it get bad enough to depress the price again?

**Mr. YERGIN:** Well, yeah, I think that, you know, I think a reasonable expectation is that we won't necessarily see $8 or $10 a barrel oil, we'll see a several dollar a barrel drop sometime in the first half of this year. It's going to take a lot of willpower and determination to keep this thing going, and so what will happen is it'll fall apart to some degree, and then it'll maybe be put back together again.

**SMITH:** You mean, it's just going to fluctuate?

**Mr. YERGIN:** Yeah, volatility.

**SMITH:** Tom, when you've been on this show previously, you said one thing that would hold down the price of oil is that our new automobile fleet gets 26 miles to the gallon, and you don't throw those cars away; our houses are insulated, you don't un-insulate them; so the demand wouldn't rise very much. Yet the demand seems to have popped up.

**Mr. McHALE:** Well, the demand increased because oil prices went down much lower than most people anticipated. There is a response to lower prices and higher prices.

**SMITH:** Now the price has popped up, from $10 to $19, does that mean that the demand will quiet down again?

**Mr. McHALE:** I think very definitely so.

**SMITH:** You are the man who has the great record in predicting the future of oil prices on this program in the past, it is thought generally because you can get the Saudis on the phone any time you want, and vice versa. What's your call now?

**Mr. McHALE:** Well, I would assume within the next six months, we'd probably have a three to four-dollar drop in oil prices.

**SMITH:** That means back to $15.

**Mr. McHALE:** Yes.

**SMITH:** And that agrees with— you agree with that, too?

**Mr. YERGIN:** Yeah, I think that when the year is over, that oil prices will average somewhere between $14 and $16, when we look at internationally traded barrels.

**SMITH:** So this a temporary phenomenon; we're not on our way back to higher oil prices, then?

**Mr. McHALE:** Yeah, I think we should recognize that we've had a unique combination of circumstance. A tremendous call in Europe that has—

**SMITH:** Freezing weather everyplace. Okay.

**Mr. JABBER:** It's important, though, to recognize that the United States has increased its imports of oil by about 22% in 1986, which tells you that in terms of demand from OPEC, the keeping the prices within a range of— in the teens, let us say, is going to keep production in the United States down, and there is going to help OPEC to some extent maintain a level of sales that would limit the scabbing, if you wish, by—

**SMITH:** Are you saying that OPEC is not interested in seeing the prices run away, because they don't want to have American production increase?

**Mr. JABBER:** It depends— certainly the Saudi policy has aimed at that.

**SMITH:** Saudis, but what about OPEC?

**Mr. YERGIN:** Well, there is in OPEC, but I think it goes back to your earlier discussion with Paul, which is Iran, some of the other countries, want to go back to $28 a barrel, they feel that that's what it should be, but I think the more informed, and people with good understanding of the oil market recognize that if they do that, then they're back to losing market share again.

**SMITH:** So the rough consensus of this panel is that oil is going to not pop up much from here, and will slide back to $15 and wallow around for a while.

**Mr. JABBER:** Yeah, I think it's— unless, unless there is a decisive victory by Iran in this war in the near or medium term, which would lead to much higher prices some years down the road. It also could lead to much higher prices, I think, quickly, in a sort of panic reaction. You see that the oil market's becoming like the financial markets, very volatile, very emotional.

**SMITH:** Right. In summary, the price of oil will slide back down again unless the Iranians win, so—

**Mr. YERGIN:** And then they'll come up again.

**SMITH:** We know where our rooting interests are. Gentlemen, thanks very much for coming.

**Mr. JABBER:** Thank you.

**SMITH:** Last year, almost nobody thought the price of oil would drop to $8, but it did, and last year almost nobody thought the stock market would go roaring past 2000, but it did. Volatility has become the mark of our times, and this year may be no different. So next week we will be considering the great bull market: where it goes from here, and why it does what it does. I'm Adam Smith; join us then.

CREDITS

<table><tr><td>Executive Producer</td><td>ALVIN H. PERLMUTTER</td></tr><tr><td>Senior Producer</td><td>KEN WITTY</td></tr><tr><td>Producer</td><td>SUNDE SMITH</td></tr><tr><td>Directed by</td><td>TONY MARSHALL</td></tr><tr><td>Coordinating Producer</td><td>DOUGLAS P. SINSEL</td></tr><tr><td>Creative Consultant</td><td>JOHN ANDREWS</td></tr><tr><td>Associate Producers</td><td>NANCY PELZ-PAGET, DAN PRESTON</td></tr><tr><td>Researchers</td><td>ELIZABETH FISCHER, MARY SPAYNE</td></tr></table>

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Show #316

Air Date: January 19, 1987

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Adam
Smith's
MONEY
WORLD

ADAM SMITH .................................................................................. Host

Guests:

Dr. HENRY KISSINGER ................................................Former U.S. Secretary of State

THOMAS McHALE ................................. Senior Economist, Drexel Burnham Lambert

DANIEL YERGIN ....................... President, Cambridge Energy Research Associates

PAUL JABBER.................................. Senior Fellow, Council on Foreign Relations

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ADAM SMITH'S MONEY WORLD

Air Date: January 19, 1986

[Tease]

[Titles]

Then OPEC began to crumble.

**Sheik AKHMED ZAKI YAMANI, Saudi oil minister:** I think a good number of you thinks that this is the end of OPEC.

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**Mr. AKINS:** They can sell their oil at $18 now, perhaps at $25 by the end of this year, a barrel; and they can produce at marginally less than capacity, say— say, about what they're producing today, with the new price cuts— with the new production cuts. Or, they can try to produce to capacity and they can sell their oil at $5 a barrel. The economics are irrefutable.

**SMITH [voice-over]**: The Iran-Iraq war is a regional conflict, but the whole world is watching it for one reason: its impact on the price and supply of oil. The war is in its seventh year, and many feel recent fighting signals a decisive turning point may be near. Both countries have suffered heavy casualties and severe economic hardships; the price of oil has played a role. Let's look at some of the connections between oil and the politics of this war.

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[1c]

**SMITH [voice-over]**: Cheap oil continued to put severe pressures on Iran's war-drained economy. Revenues plummeted from $16 billion in 1985 to $6 billion last year. On top of that, oil exports have been slashed by Iraqi bombing raids on strategic oil installations. So with volume down, higher prices are even more vital to pay for weapons, which Iran has trouble buying anyway.

**GARY SICK**, former National Security Council member: They were precisely the kinds of things that Iran needs. They— the Iranians have problems dealing with the Iraqi tanks; this was anti-tank weapons that we gave them, and those are very powerful, very important weapons. They have problems dealing with the Iraqi air force; we gave them materiel to improve their air defense capabilities. That's very important as well. Will it turn the tide? I really don't know.

**Mr. AKINS**: If the arms sale is important enough to tilt the balance of the war in favor of Iran, and if, in this next coming winter offensive, Iran defeats Iraq, then our economic interests will certainly be affected. So will our political interests; we will be eliminated essentially from the Mideast, and oil prices will skyrocket.

**SMITH [voice-over]**: Iraq. Iraq's advantage is superior armor and air power — and help from friends. The government of president Saddam Hussein has received billions from the Saudis and Kuwaitis, who want to keep Iranian troops from their own borders. Iraq also needs oil revenues; exports were disrupted at first by fighting in the Gulf, but new overland pipelines have opened safer alternatives. Iraq has been exempted from OPEC quotas to make up for earlier losses. This steadier flow of oil has kept the economy more stable than that of Iran, despite the price drop.

**NIZAR HAMDOON**, Iraqi ambassador to the U.S.: We have not faced any severe problems; yes, we have some problems in the area of finance, in the area of getting some imports, but our people continue to get their essentials, and the army continue to get its ammunition.

**SMITH [voice-over]**: Last summer Iraq put the oil weapon to new use, by aiming its warplanes at Iran's economic lifeline, its oil installations.

**Amb. HAMDOON**: Now we have a very influential and powerful air force inflicting damage on lots of oil installations inside Iran, so it's up to us and to our activities to say what the Iranian exports are. And they know this.

**SMITH [voice-over]**: Iraq claims it can fend off any Iranian offensive, but it worries that the U.S. arms sale gave the enemy a psychological boost, or worse.

**Amb. HAMDOON**: These provisions are going to let Iran to be more arrogant, it will take more time that they reach a conclusion to end the war, because they are seeing that the biggest power in the world has conceded to them by providing Iran with the recognition to be hegemonic, and to be more aggressive over the Iraqis and the rest of the Arabs there. It is not going to help stabilize anything in the area, including the price of oil.

**SMITH [voice-over]**: Saudi Arabia. The Saudis have one potent weapon, vast reserves of oil. This assures them enormous clout over the price of oil, and over their Gulf neighbors who are so dependent on oil for cash. The Saudis fear Iran's power, and have wielded the oil weapon to blunt it. Their petrodollars backed Iraq's war machine, and many feel they drove prices down just when Iran needed money the most. But this is a treacherous path; low oil prices could inspire political reprisals from Iran.

**Mr. RANDOL**: If the Saudis, for example, quietly start boosting their production to keep prices dampened down below, let's say, $20 a barrel, the Iranians could get very angry about that, and you could see some sort of military reprisal against either the Saudi or Kuwaiti oil facilities. They have an air base, the Iranians do, 15 minutes' flying time across the Persian Gulf from either of those two facilities.

**SMITH**: The United States. The Reagan administration says it is officially neutral in

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**Dr. KISSINGER:** It affected immediately in one way, and then in the long term in another. Immediately, when we sold arms to Iran, and did it through a Saudi merchant, Khashoggi, the—it is—you can take it for absolutely granted that Khashoggi called King Fahd 30 seconds after he hung up with the American who proposed this to him. King Fahd, having a particular—the mentality of the area, assumes first that the United States knows what it is doing—

**SMITH:** Yes.

**Dr. KISSINGER:** There's no quick fix. If Iran wins the war against Iraq, or scores a big success—and the definition of victory would be if they can get rid of Saddam Hussein, the president of Iraq, because then they could say they got rid of the Shah, they got rid of Carter, they got rid of Saddam Hussein, anybody who stood up to them, they got rid of, or that they took on. So if they succeed in that, then if we are going to avoid a panic in the area, Saudi Arabia needs the strongest indication of American support, both military and economic, and the only way the consequences of that could be mitigated is if the Saudis were prepared to step up their oil production, to make up for whatever cuts the Iranians impose on Iraqi production, if the price is to be stabilized.

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**PAUL JABBER**, senior fellow, Council on Foreign Relations: In the longer term, I think that may in fact come to pass. The reason being, that it—

**DANIEL YERGIN**, president, Cambridge Energy Research Associates: Well, if the war does end in a— some kind of a negotiated settlement or a stalemate, Iraqi exports rise and Iranian exports rise, then indeed that would be pressure downward on oil prices. So I think part of the answer to the question you raised with Paul is, it very much matters the way in which this war ends.

**SMITH:** So it's not—if nobody wins, the price goes down, and if one power or the other wins, the price goes up, is that it?

**THOMAS McHALE**, senior economist, Drexel Burnham Lambert: You have to look at one critical factor. Saudi Arabia is the only producer that has the flexibility on the production side. They can go from one or two million up to 10 million barrels a day. There is no other element, no other producer, within OPEC that has the leverage to make or break the oil market as the Saudis do.

**SMITH:** Why?

**Mr. McHALE:** I doubt it.

**SMITH:** Yes, well, what—

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**Mr. JABBER:** Well, finally they did what they had threatened to do for four years.

**Mr. McHALE:** Yes.

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**Mr. JABBER:** Thank you.

CREDITS

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