OIL AND IRAN

Reagan was not the only one to seek better relations with Iran's present or post-Khomeini regime. Last August, the USSR took an unusual step: it agreed to Iran's request to reduce oil shipments to Western Europe by 100,000 barrels a day, thus supporting Iran's initiative to raise oil prices by cutting production.

This is unusual because the USSR desperately needs the hard currency it is getting for its off, the more so since oil prices have declined. Similar requests by Algeria and Kuwait only a few months earlier were rejected out of hand.

Iran's success greatly strengthened its influence in OPEC, and the Ayatollah rewarded the Soviets with resuming natural gas shipments, which had been stopped immediately after Carter in effect deposed the Shah in 1979. Khomeini then claimed the gas was underpriced and sold to the Soviets as part of a political deal with which the Shah had hoped to appease the Soviets. Apart from them, Iran hopes better relations will lead to diminished Soviet support for Iraq, and increased arms supplies to Iran. According to the British Intelligence Digest, the Soviets have been shipping arms to both sides in the war.

Meanwhile Saudi Arabia has definitely abandoned its price war tactics. Once again I must recall Prof. Fred Singer's predictions of falling oil prices in 1981, far ahead of conventional opinion. He then also said that Sheik Yamani would be lecturing at the Harvard Business School. Well, not quite yet, but King Fahd did fire him, so he may soon be looking for the job. His successor wants to drive up the price of oil to $18/barrel, yet also increase Saudi Arabia's output, from which I take it he will not be offered a job by Harvard.

It is very doubtful that he will succeed in raising the price to $18/bbl even in the short-term fluctuations, and he cannot avoid a long-term slide. According to the DoE's latest figures, petroleum stocks are well above what they were at the 1973 embargo; the US is at some 155% of that level, and most OECD (Western industrialized) countries are well above 100%, except Britain, which now has its own oil, and France, which has drastically reduced the use of oil by nuclear energy. On the other hand, all OECD countries except perhaps West Germany are now below the 1973 oil consumption level, in spite of the advance of their economies and, in many cases such as the US, in spite of an increased population. This was brought about partly by energy conservation enforced by higher prices (not by coercive legislation), but the decisive factor was the switch of Western utilities to coal and nuclear.

King Fahd will therefore have to think up some very special tricks to defeat the inevitable decline of oil. Whether in this connection or not, he let it be known in November that he no longer wishes to be addressed as "Your Majesty." Should you wish to talk to this "moderate Arab" and "friend of America," for example about his subjects being flogged and stoned to death in public, please address him as "Custodian of the Two Holy Places" [Mecca and Medina].