U.S. Is Key to Soviet Oil Output

Suddenly, and surprisingly, oil prices are going up--sharply. The price hit $23.79 a barrel Tuesday, up $2.50 in this month alone. And prices are expected to stay high through the fall and winter, meaning that gasoline, heating oil and jet fuel will go up too.

The reason simply is supply and demand. World oil consumption is rising while supply is constrained by war damage to Kuwait’s oil fields and the shutdown of Iraq’s--plus the decline of production in the Soviet Union, which is still the world’s largest oil producer.

That the Soviets are affecting the world oil markets is new--and interesting. It could present a great opportunity for U.S. industry and a solution to Soviet economic troubles in the next few years.

But in the short term, Soviet oil poses a problem. Formerly, the Soviet Union sold its oil at special prices to the East European countries and exported 2 million barrels a day to the West to earn hard currency. But now there are no more special prices, Eastern Europe is adding to demand on world markets, and Soviet production has fallen more than 20% in the last two years to below 10 million barrels a day.

That has made the situation tighter. “World oil demand at 67.5 million barrels a day equals supply at this point; there is no spare capacity,” explains analyst Paul Mlotok of Morgan Stanley & Co., the investment firm.

Oil prices may go higher, but not to panic. The current rise will add about 20 cents a gallon to gasoline and heating oil prices. But the supply situation will ease as Kuwait recovers--it’s now producing at 16% of its old capacity--and Iraq is allowed to pump oil to buy food and medicine. Long term, with growing reserves in Saudi Arabia, Iraq and the Soviet Union, there is no shortage of oil in the world.

The Soviet reserves, in particular, offer not only the prospect of greater oil production. It also means business.

U.S. oil service firms are standing in line to work on Soviet oil fields that have been damaged through faulty operation or lack of modern equipment. “The Soviet Union could mean business as big as the U.S. market itself,” says an official of Baker Hughes Inc., a maker of drilling equipment.

Right now, the Soviets have no money to pay for U.S. help. The International Monetary Fund, meeting in Bangkok, Thailand, has just agreed reluctantly to extend emergency financing rather than see the Soviets default on $75 billion in debt. But major Western nations have no wish to be more generous.

Still, ways may be found to finance oil development because it pays for itself. Essentially it’s banking on proven deposits of oil in the ground--in fields no longer producing because they’ve been worked to meet a commissar’s political agenda or because Soviet engineers lack up-to-date equipment.

American companies can restore production to such fields. They know what they’re looking for because modern geophysical equipment, developed by Western Atlas--a joint venture of Dresser Industries and Litton Industries--produces three-dimensional computer pictures of subsurface deposits.

The drill bits they send down are computerized, using software developed by Baker Hughes, and are able to seek out and produce from several holes at once. The sophisticated materials that Halliburton uses to line drill holes allows hot oil to come to the surface without melting the Siberian permafrost.

Whether it’s gas compressors from Cooper Industries or oil-well measurement from Schlumberger, the Soviets will turn to the U.S. oil services industry because it leads the world. The business developed in the United States alongside the oil and gas production industry. Lately, growth has been overseas, where last year oil service companies took in almost half their roughly $40 billion in total revenue. But headquarters and the base for the industry’s technical development remain in Texas, Louisiana, Oklahoma and California.

To be sure, the Soviet Union is in political turmoil. But under an economic agreement scheduled to be signed this Friday, each republic will control and be able to earn hard currency from its natural resources. Halliburton has already signed joint venture agreements with Kazakhstan and the Russian Republic.

Finally, don’t forget that one cause of today’s higher oil prices is that global consumption is rising--despite the U.S. recession and economic sluggishness in western Europe and Japan. The message clearly is that a world of growing living standards will use more oil. And that makes the Soviet Union--with more than double the oil reserves of the United States--an attractive counterpoint to dependence on the Middle East. Chances are it will get the financing it needs.