SUPPLY: From Output Squeeze to Price Embargo

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Starting this week, oil companies will have to pump about $7 into the national treasuries of Middle East host countries for each barrel of crude they take from the desert sands. Once corporate profit margins and the cost of transportation are cranked in, the price of crude in world markets will nearly triple, to something like $9 per bbl. At present prices, worldwide customers shell out about $22 billion a year for the 6.2 billion bbl. of crude that the Middle East exports. When the new prices take effect, the tab will leap overnight to $55 billion or more.

At these rates, many developing countries may be forced out of the petroleum market altogether. The impact in the industrialized world will also be severe. Shah Mohammed Reza Pahlavi of Iran, a non-Arab nation that has shunned the boycott but participated in the price hikes, warned last week: "As to the industrial world, I think that they will have to realize that the era of their terrific progress and even more terrific income and wealth based on cheap oil is gone. Eventually, they will have to tighten their belts."

Japan, for example, faces the prospect of having its oil bill leap from $7.4 billion in 1973 to about $14 billion in 1974. The cost will eat heavily into Japan's foreign-currency reserves, already dwindling at the rate of nearly $1 billion a month, and reduce the country's ability to pay for imported food and such vital raw materials as coal and lumber. The prospect of increased supplies of Arab oil has caused the Tokyo government to postpone until Jan. 10 a decision on conservation measures aimed at reducing Japanese energy consumption by 20%. But anticipation of having to pay heavily for the oil is keeping those plans alive.

In Europe, the new oil prices could add 3% or so to an already spiraling rate of inflation. In the U.S., the Government estimates that they will add one or two cents a gallon to the average pump price of gasoline. The higher prices will also create multimillion-dollar deficits in European trade balances, possibly upsetting the precarious currency alignments that have recently begun to bring a degree of stability to the international monetary scene. In the U.S., Europe and Japan, economic slowdowns and unemployment increases will be less drastic than they would have been if the Arabs had really made and held to a 25% cut in oil production, but they will be painful all the same.

A Big Leak to the U.S.

When the Arab states supposedly closed the valve on all oil shipments to the U.S. in October, Americans faced the prospect of a disastrous fuel drought by year's end. As the new year begins, though, officials are hinting that the embargo has sprung a leak. Now TIME'S Atlanta Bureau Chief James Bell has turned up evidence that Arab oil is indeed flowing into island refineries that serve the U.S. and probably into mainland American ports as well.

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