Greasy Path to Rio

May 28, 1992

Yes, indeed, there is only one real superpower -- and in the oil sector its name is Saudi Arabia. It was strong before the Persian Gulf conflict, even stronger when the war was over. When Saudi Arabia wanted world oil prices low, as it did during recent years, prices stayed low. Now, suddenly, it indicates it wants prices to go up. Up they go!

Why the wealthy desert kingdom has switched tactics is a matter of intense speculation. One persuasive theory has it that Saudi Arabia wanted to show its opposition to European Community planning for a carbon-energy tax that would have amounted to a $3 levy on each barrel of oil now, and $10 by the year 2000. As chief world exporter of oil, which has been selling around $20 a barrel, Riyadh wondered why consumer governments should benefit from a projected $95 billion revenue windfall at the expense of producer governments.

The Europeans went into retreat right after the Saudi switch. They scotched the carbon tax as an EC proposal to prevent global warming at the Earth Summit in Rio next week, thus precipitating a decision by the EC environment chief to boycott a conference where, he complained, "everything, or virtually everything, has been arranged."

The other notion in oil circles is that Saudi Arabia is experiencing one of its rare cash flow problems and figures this is a good time to ease tensions with some of the price hawks in OPEC, the Organization of Petroleum Exporting Countries. So instead of increasing production to meet summer demand, its usual stance as a price dove, it opted last week to keep present ceilings where they are. The result: projected price increases of $3 a barrel, or 7 to 8 cents a gallon at the pump.

For the United States. the Saudi move could raise interest rates and inflation rates marginally and slow down economic recovery. This undoubtedly will cause some chafing, but little more. Americans will go on paying what they have to pay to keep on driving their cars, oblivious to the nation's increasing dependence on foreign sources or what the release of auto emissions is doing to the Earth's atmosphere.

For the Bush administration, the European retreat on a carbon tax was one more trophy to tack on the wall next to its success in forcing Earth Summiteers to abandon hopes for definite timetables and limits on greenhouse emissions. Now the giant Rio gathering may generate mainly hot air.

Actually, the Europeans may be on to something if a carbon/energy tax could be better targeted to produce environmental benefits than such traditional approaches as straight taxes on oil imports or gasoline at the pump. But with the U.S. economy still flabby and President Bush fighting for political survival in the November elections, the United States is blocking any move at Rio that could impede the recovery. What his administration did not anticipate is that the Saudis would prove helpful in blocking the EC carbon tax, but in ways utterly contrary to White House interests.

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