"The Arabs, Their Money ... and Ours"

If oil is $22 a barrel, does that mean $2 bread and 10 cent dollars? Do oil countries care about unemployment and inflation in the West? If USC fields a winning football team, will the Saudi Arabians be nicer to us? And what are they going to do with all that wealth? These are some of the many questions Adam Smith found himself asking when he traveled to the Middle East recently with the United States Secretary of the Treasury.

There were two blue and white 707s parked at Andrews Air Force Base that morning. The lettering on them spelled "United States of rather than "U. S. Air Force." The number tail of the plane at the left was 27000. That was the President's; you could call it Air Force One, though technically Air Force One is whatever plane the President happens to be in, whether helicopter or jet.

"The other one's yours," said the Air Force Sergeant. "The other one" was 86972; "yours" meant the party of the Secretary of the Treasury, about to embark for the Middle East. Did that make 86972 Air Force Two? "It's a backup. There are a couple of backups. 26000 is a backup now, that brought President Kennedy back from Dallas. The backups are pretty much alike. Yours might as well be Two."

My interest in the Middle East came out of the dank scenario I saw whenever I tried to look five years out at the economy. As a member of the editorial board of the New York Times, I wrote some long and fearfully abstract opinions on the threats to our banking system from stretched overseas loans. "I do not see how we get out of this box," said a bank president over lunch. Even more agitated than the bank president as a highly reputed oil expert. He could see oil prices going up, ratcheting inflation up. As a boy, he had witnessed one such inflation firsthand. "My father," he said, "was one of the top lawyers in Germany. He took out an insurance policy in 1903 for one million marks. He paid the premium faithfully every month for twenty years, and when it came due, he took the proceeds and bought one loaf of bread."

There were two problems to investigate, or two aspects of a problem. Both came from the quadrupling of oil prices in 1973. To most Americans, and despite all the noise about it, the "energy crisis" faded once the lines disappeared from gas stations. President Carter may have talked about the "moral equivalent of war," but you could hardly say the energy-saving fervor looked like the Battle of Britain. A shift in international power took place but life went on. When the control of the seas passed from Spain to Britain in July 1588, the lives of the Kentish farmers and Valencia orange growers continued much the same.

The first problem was "recycling"—bringing back into American banks and corporations, as investments or expenditures, the dollars that flow out for the oil. The winter of 1974 was financially stormy; inflation in Western Europe rose to 12.8 percent, and here the prime rate hit 12 percent, the highest since the Civil War. The twentieth largest bank in the United States, Franklin National, failed. There were some doomsday scenarios floated, some of them still in the air now. The oil-producing countries with sudden surpluses deposited billions in banks, short-term, one year or less. The oil-consuming countries clamored for money, and in the United States, loan demand dropped with the recession.

American banks, some of them, loaned their money abroad. Roughly three quarters of the profits of Citicorp and Chase Manhattan were earned overseas. Why not loan the money to Zaire and Peru? The promise to repay was made by a sovereign government, and that made it a good loan. Within three years, the Middle Eastern countries with surpluses had nearly $100 billion accumulated after all their spending. The less-developed countries were in debt (to the banks and to other governments and to multinational corporations and such organizations as the International Monetary Fund) by $175 billion. What if one of the less-developed countries"—or any country"—couldn't meet the payments on its debts? The 1974 bank failures had been contained, like brush fires; what about some real defaults, especially backed by the ideological rhetoric sometimes used by the Third World? Would that trigger a domino run on the world's banks? And what if the Arab depositors suddenly yanked their deposits? I had an afternoon with Arthur Burns. Various governors of the Federal Reserve got used to my calls.

Like the lines at the gas stations, the symptoms of the recycling faded from consciousness. True, the debts of the developing countries were headed toward $200 billion, but the banks built up their liquidity and said nothing to worry about. But what about the second problem, the price of oil? Would a rising oil price provoke rampant inflation again?

That threat seemed for the moment to be in abeyance. Where the embargo had once brought the industrial world virtually to its knees now the oil industry spoke of a "glut." In the United States, right now there is a fifty-two-day supply, and elsewhere the storage tanks of the world are topped. The North Slope and the North Sea are flowing, which they were not in 1973. If there were no OPEC cartel, the price would come down, but, there is an OPEC cartel, American are still driving fifteen mph over the speed limit, the automobile population is on the rise again, and the supply from the North Sea and the North Slope is finite. When demand crosses supply again, when the supplies tighten, then the producers will be able to move the price with impunity. And if oil is $20 barrel, or $25, or $30, then we could be on our way to $7 bacon and $2 bread, if not to the kind of German hyperinflation that wiped out the oil expert's father. Did the Arabs and Iranians know their OPEC action could increase unemployment in the West, bring out the red flags in the Po Valley, and possibly bring in the communists?

Werner Michael Blumenthal, the secretary of the treasury, has a diverse and remarkable background. Two of his immediate predecessors were a Wall Street bond salesman and a Texas lawyer. Blumenthal was born in Berlin, fled during the Hitler years to China, spent his late boyhood and early adolescence in Shanghai, and arrived, penniless, in California at the age of twenty-one. He got an undergraduate degree at Berkeley and Ph.D. in economics at Princeton. After teaching for a while, he opted for business, became the assistant to the president of Crown Cork, then deputy assistant secretary of state during the Kennedy years, and trade negotiator with ambassadorial rank in the Johnson Administration. From there he moved to Bendix International, and from there to the chairmanship of Bendix, a $3 billion worldwide firm in engineering auto parts, and forest products. It was unusual for someone with an academic and international background to take over a nuts-and-bolts midwestern company. Blumenthal is casual, low-key, with an excellent sense of humor; one Washington paper was to complain, regarding his understatedness, that he began his trip with all the pomp of someone catching a commuter train.

Anthony Solomon, the undersecretary, is in his mid-fifties; he has short gray hair and a neat gray beard. He built a dehydrated soup business in Mexico, sold it too General Foods for several million dollars, and went into government service; during the Kennedy-Johnson years he was assistant secretary of state for economic affairs, where he met Blumenthal. Fred Bergsten, the assistant secretary for international monetary affairs, has built a reputation in that field very quickly. He is thirty-six, self-confident, with a resonant voice, a trim brown beard, and a movie-star smile. Originally from Missouri, he got a Ph.D. at Tufts, was a young staff member at State in the sixties, then a research associate at the Brookings Institution. 86972 also carried a legal expert, an energy expert, a speechwriter, a flight surgeon, an administrative staff, four secretaries, and fourteen Secret Service men. The Secret Service men wore .357 magnum Smith & Wessons on one hip, and small two-way radios strapped to their bodies, with the leads in their ears, so that it looked like they were wearing hearing aids.

86972, or Air Force Two as we will now call it, has all first-class sealing, but none of the paneling, gadgets, wet bars, and furniture of expensive corporate aircraft. Behind the crew's section are two bench sofas which make up into beds. In the office section are six movable seats, two at one metal table, four at the other. A small Xerox machine stands in the back of this section. In the aft cabin is another table, two seats fixed on each side of it, at which, in flight, secretaries worked at IBM Selectrics.

Walking down the aisle of Air Force Two, one could tell where the Treasury and the press left off and the Secret Service began by the reading materials in evidence. In the forward part of the cabin, the materials were briefing papers, documents, and journals; papers stamped "Classified" would be handed around the aircraft's communications section. In the aft part of the cabin were the fourteen young men in business suits and hearing aids, reading Raise the Titanic! And Semi-Tough.

The Treasury Secretary had invited four writers. He did not especially want daily newspaper reporters, for it was not the kind of trip to produce dramatic head-lines and reporters would have to justify their presence on such an expensive trip. I took an extended leave from the Times the day before the trip began. The writers"—or their organizations"—would pay the Treasury first-class airfare plus one dollar, the one so that Air Force Two would not be competing with commercial airlines.

The writers joined Blumenthal, Bergsten, and Solomon at the conference table for dinner (roast beef, baked potato, and salad: solid, if not Air France). Blumenthal wore a gray V-necked sweater and smoked a cigar Solomon wore a black pullover, with a small U.S. flag pinned to the extruding collar of his shirt. Bergsten wore a yellow sports shirt, and the leather-topped sneakers he was to wear through much of the trip.

What was the purpose of the trip? we asked. The first phrases from the Secretary had a practiced, careful, ring. "Establish close personal working relationships with the heads of state and economic coun-terparts . . . different in different countries: Egypt, economic development; Israel, economic development and aid; and Kuwait, Iran, and Saudi Arabia, the general state of the world economy in relation to energy and its price."

What could he do about the price of oil? The Secretary's words were still measured. Get each country to understand the U.S. position"—discuss inflation, unemployment, the financial markets.

It seemed to me that if the purpose of the trip was to get onto a first-name basis with the heads of oil-surplus countries, then the rest of the Middle East trip was dictated by politics. For domestic political reasons, a treasury secretary would have to balance a trip to Kuwait, Iran, and Saudi Arabia with one to Israel; and one to Israel with one to Egypt.

The dinner seminar ranged over a wide variety of subjects: Arthur Burns's term as chief of the Federal Reserve, world trade, Japanese surpluses. We stopped in Shannon to refuel at two o'clock in the morning. "Shannon was the only place we could stop quietly," Blumenthal said. "The alternate stops all wanted to send the finance minister out to the plane at two o'clock in the morning."

You will be in car number: 7, said the card on my seat. At the Cairo airport there were a few handshakes, no bands, no salutes. It certainly eases travel to leave an airport without going through passport control or customs, and to step into a car on the airport runway.

The problem with Cairo is that it is a city that is beginning not to work. Twenty years ago it had 2 million people; now it has six, or seven, or nine; no one knows. The rural poor have crowded in. Even in the more luxurious areas there is sometimes no water; the phones do not often produce a dial tone. The traffic is chaotic. "We have the worst drivers in the world," I am told, with some pride.

There was an Embassy reception. There was a dinner given by the Egyptians, with routine speeches. Mustafa Amin, a columnist for Al-Akhbar, one of the biggest Egyptian dailies, was a dinner partner. Amin is a bull of a man, huge shoulders and a huge head, balding: Nasser had jailed him for nine years. "Egypt wants peace," he said, "and now the Israelis cannot say they won't deal with a terrorist like Arafat because in Begin they have one of their own." Egypt wants peace, but do the other Arab states? "There are some dictatorships that benefit from having Israel as an enemy. Otherwise the people would ask for food and parliaments."

Blumenthal went to see Sadat. We were supposed to see him later, so in the interim I visited the economic counselor to the French Embassy, an old friend. "Three elements for world stability can come out of the Middle East," the friend said. "Peace, the supply of oil, and a stable price for oil. Why can't the U.S. cut down its consumption? You have 6 percent of the world's population and you consume a third of the energy. Western Europe is consuming less than before the embargo." He did not say Western Europe has been in more of a slump than we have since the embargo, but it surprised me to hear American energy consumption play such a primary role in the conversation.

Blumenthal, Solomon, and Bergsten faced a press conference in the hotel, with perhaps twenty-five of the local press. Blumenthal wore his business suit; Bergsten was in slacks and his leather-topped sneakers. How much aid would Egypt get? Is the IMF satisfied with the way Egypt administers its funds? Will more money come to Egypt from the other Arab states? The questions were almost all locally oriented. The answers were crisp, but careful.

There was not the slightest inkling, during that brief way-stop, of the momentous events that were to be set in motion later by Sadat's decision to visit Israel.

Wheels up for Tel Aviv at 1500, said the note under my door at the hotel.-

Yqou have flown directly from Cairo to Tel Aviv," said Simcha Ehrlich, the finance minister, at the airport. Cameras whirred and flashed. "I hope one day people will do that freely." (Only a few days later, Anwar el-Sadat was to make the same flight.) On the road to Jerusalem, each war-scarred hulk left by the side of the road was given a story. There was a lunch, toasts to friendship. The Secretary, after his appointments, went off to see a cousin on a kibbutz. I talked to Arnon Gafny, the governor of the Bank of Israel. The Likud party was about to lift many of the restrictions on the Israeli economy; for example, it dropped exchange controls and let Israelis buy and sell dollars and other currencies. A gamble on the free market; Milton Fried later wrote that this could produce an "economic miracle" like the one in postwar Germany. Friedman himself has been to Israel, to coach the free-market gamble, but there are plenty of Chicago-school economists in Israel even without Friedman. I spent several hours with Gafny. But politics override mere market mechanisms. If Israel has to continue to spend so heavily on defense, it will not prosper, no matter what the economic system. Until 1973 its inflation averaged percent a year. Since then, with quadrupled energy costs and a war budget, inflation has run 30 to 40 percent a year, though it is coming down now. "We created a functional inflation," said Gafny, "expensive imports and stable exports. Otherwise we would have been in as much trouble as Turkey."

The Israelis are learned and cooperative, but we did not discuss the underlying issues of war and energy and it seemed to me they were more important than market mechanisms. I asked for some energy people. The Israelis are supposed to have good intelligence and the effectiveness of the OPEC cartel"—and hence its future actions"—must have been evaluated by the Israeli oil-watchers.

The first visitor to my hotel suite was Zvi Dienstein the former vice minister for defense and the former energy adviser to the prime minister. What did he expect?

"Right now there is a glut. But that glut is based on the Saudis pumping 8 million barrels a day. If they cut that by a million barrels a day, there would be no glut. The surplus will last one to two years, and the mid-eighties will bring the real crisis. But the bidding for the the marginal supply will actually start before the crisis."

This is a fairly conventional scenario. What did he think the Arabs would do with their money?

"Buy weapons. Buy industries in the States. Take care of their economies, help the other Arabs, harm Israel. The goals are to keep OPEC together, to keep their own regimes in power, to have a Palestinian state with Israel at its 1967 borders, and to keep the communists at bay."

How does this petropower affect Israeli thinking?

"New weapons influence us, not oil power. The confrontation states on our borders have no oil. We don't think the U.S. would let the Saudis and the Kuwaitis give weapons to the Syrians. The way the oil comes at you is not directly. I would say we fear their growing influence in international organizations. Are you going to Saudi?"

We are going to Saudi.

"That's good. The Saudis are the key. The Venezuelans and the Nigerians need the money for development, and the Iranians are so grandiose they will spend all their money too. So the leverage is with the Saudis, who can take it or leave it. It's good they embarked on development, because that ties them to the West."

The deputy, minister for energy, Alan Loebl, followed Dienstein.

"Time is against the Israelis," he said, "but our public doesn't feel it, because there is gas at the gas pumps. If only the U.S. would cut back 3 million barrels a day, perhaps the consuming countries could regain some leverage. But you won't, or your public won't because there is no pressure on them."

Wheels up for Kuwait at 1700, said the notice.

The flying seminar met for dinner. The Secretary lit a cigar. "Did you ever read Begin's White Nights? A very interesting book"—and he's an interesting man, intense, a zealot. He told me, we can't take risks. Ten years ago they were shelling the Knesset,' He remembers General Montgomery saying, 'The Jews won't last six days.' He says, 'Who will defend us? Middle East wars use troops. American boys are in California.' The Israelis are dependent on outside aid, our outside aid, but we can only move them when they want to be moved. They are excellent at putting resources to work. Coming from Egypt, where so little works, and from Israel, where so much does work, one hopes they get over their animosity and get together. Sadat said, We need peace, but we need the Arabs who support the Palestinians. Dayan said, "The real priority is a deal with the Egyptians."

We looked ahead to Kuwait.

"The Kuwaitis will want to know our assessment of the world economy, of currency developments. We'll want to know their intentions at the next OPEC meeting. They'll want to know about our energy program."

At every stop along the way, we are asked about the energy program. Yet even if it passed Congress, there would be no immediate effect, and it would simply slow the rate of increase in consumption, not cut it back. Why is it then so important?

"Because it affects attitudes everywhere. And this energy program, this phase of it, is only a first step."

There is a smell in the air in Kuwait, a refinery smell, like the Texas gulf, or exit 13, on the New Jersey Turnpike. Kuwait could be Dallas forty years ago, with mosques. Gasoline is twelve cents a gallon. The road from the airport to town is eight lanes. Outside the hotel, there is a traffic jam six stoplights long. Miles of square brown villas, few pedestrians, already an automobile city. There are only about 400,000 native Kuwaitis. They used to sail the Persian Gulf"—or the Arabian Gulf, as it is called here"—in dhows, to Zanzibar for cloves, to Bombay for gold. On the national seal is a sailing vessel, a dhow. Kuwait's oil reserves are the second highest in the world. It is a city-state, only 70 miles by 80, with an army of 8500 nervously watching the Iraqis. The per capita income in Kuwait is $13,500. In the United States it is $6339. Medical care, schooling, telephone service are free in Kuwait. Much of the work in Kuwait is done by the Palestinians. There are nearly 300,000 of them. If we had 100 million Mexicans in the United States, would our attitude toward Mexico be different? The Kuwaitis, being something of a maritime and trading people, were in touch with the world when their oil came in. Their banking is relatively well developed; it is said that in sophistication they are a generation ahead of the other oil states of the Gulf.

The Secretary went to pay a courtesy call on Sheik Sabah al-Salim al-Sabah, whose family has ruled Kuwait since 1756. I went to see Abdul-Latif al-Hamad, who was an economics student of a friend of mine at Claremont College, in Southern California. At thirty-six, he runs the multibillion-dollar Kuwait Development Fund. The office is stone, contemporary, built around a courtyard with a fountain which provides the sound of running water everywhere. Al-Hamad wears the thaub, a white cassock, and the, kaffiyeh, a white headgear bound with the agaf, a rope of goat's hair. The thaub is as clean and white as a fresh hospital gown. Al-Hamad carries two fountain pens in the pocket, and the sleeves have cuff links. While his dress is traditional, and thus looks like what our image of "Arab" is, his speech is quick, crisp, and American. His bare feet are in sandals.

This is a phenomenon that is to recur in our visit to the oil-surplus Middle East: the young man, educated in the United States, part of a thin elite and thus quickly given great responsibility when the petrodollar flood burst. Al-Hamad's desk is clean; the burnished wood reflects the hanging overhead light. He is collecting paintings; one might call them desert abstracts. We sit on the steel and leather contemporary furniture drinking Turkish coffee from small cups.

Would he pull his holdings out of dollars?

"I wouldn't switch now; most of the damage to the dollar has been done. Your energy consumption puts a dent in your balance of payments, and the President is losing credibility. But we are tied into the West, the same boat, maybe a different deck, but if it sinks we will get as wet as you. But we would like to be accepted as trading partners, as investors. Why should we be treated differently from the Germans or the Swiss? But when we try to invest in the U.S., sometimes we hear, 'The Arabs are coming! The Arabs are coming!'"

What can he tell me about the future price of oil? Does he know of its impact in the West?

"Oil is an administered price, like diamonds. In the old days, the oil companies would tell us what to do. BP and Gulf would come and say, 'You can pump a million barrels a day, that is all we will sell.' Now that power is gone. Japan will buy its own oil directly from us.

"We are not producing at capacity. Oil in the ground is better than paper money, I don't have to tell you. We are not the saviors of the Western economies; what could we do about the trade unions in Britain or the problems of Italy? We will be good trading partners. We are still an underdeveloped country, and the oil has to last several decades. No one is going to jack up the price of oil sharply when there are 15 million unemployed in Western Europe, because if that unemployment goes to 20 million, the demand for oil will drop. But you Americans must stop wasting so much energy; the Swedes get 30 percent more value than you from the same energy.

"There is one more thing. We are a rational people, we behaved rationally as investors even before the oil went up. But for stability in the Middle East there must be a settlement, and the core of the settlement is the Palestinians. They must have a state. If I have a bad Palestinian here, and I want to expel him to somewhere, where can I send him?"

The subject of the Palestinians came up almost immediately with Abd ar-Rahman Salim al-'Atiqi, the finance minister. Al-'Atiqi is a generation older than Al-Hamad, and has the reputation for sounding tough.

"Your Mr. Blumenthal was just here (our appointments were sequential, not simultaneous). I expressed my unhappiness about the fall in the dollar. We say to you, we are trying to help the world by producing more oil, we think about the declining dollar, about investments in the U.S. The alternative is cut production, which would again raise the price. There is no alternative to the U.S. as an investment." Al-'Atiqi fingered his misbaha, his worry beads.

"The U.S. created Israel. It has poured billions into Israel for thirty years. You brought the Germans back to their own lands, why do you not bring the Israelis back? No one can expand like that. Napoleon reached Russia, Hitler reached North Africa. There is a limit. The Palestinians must have a land."

Wherever the Treasury party went in the Middle East, it heard one complaint from the sizable American community: the Tax Reform Act would eventually cost them their jobs. The British, the French, and the German engineers, for example, paid no income tax on their overseas earnings; the Americans not only paid income tax, they had to pay an income tax on benefits that were hardly luxuries in that part of the world. Tuition for private schools, for example, is a frequent company benefit since Kuwaiti or Iranian or Saudi schools may not be right for American children. Housing is frequently provided, since local housing is so expensive. But when those benefits are taxed, it makes an American engineer twice as expensive as a German engineer. If the American goes home, the German who gets the job is far more likely to order parts and equipment from a German firm, to the loss of our exports.

"They're right, we have to do something about that tax," said the Secretary, in the flying seminar (Wheel up for Tehren . . . ). "It's going to cost hundreds of millions, maybe billions. We'll have to get Ribicoff to listen."

We compared notes on our meetings.

"I heard 'Atiqi likes to be thought of as tough, so I said, 'I hear you're a very hard man.' He liked that. I told him we had to break this vicious cycle, oil goes up, inflation goes up, then the oil goes up because the oil producers have to stay even with inflation. I told him the next round of pricing was critical. They brought up our energy program, and said they would just as soon not produce so much oil. 'Atiqi said, 'Don't tell us about some action you take after you take it; let us be your partner.' He said, 'You know, the oil companies took our oil at $1 a barrel.' I said, 'What's past is past, let's go on from here.' Now I can pick up the phone anytime on a personal basis and say, 'Have you -thought about this, what are you going to do about that?"

The Secretary lit a cigar.

"When we started this trip," he said, "I had some doubts about it. But this really had great value. I think we made some friends. Iran may not be quite so easy. My predecessor [William Simon] was non grata, you know, for saying, 'The shah is a nut.' Actually, he said, 'The shah is a nut on oil if he thinks prices are made in heaven.' But it was reported as 'The shah is a nut,' and we've had no high-level officer visit Iran since."

But what would the Kuwaitis do at the OPEC meet-ing?

"My feeling is they will be neither hawks nor doves."

Tehran. Much chillier; snow on the mountainin tops facing the Hilton. A faster pace, frantic traffic. Iran is Moslem but not Arab; the five-times-a-day call to the faithful is drowned out by the din of traffic. Playboy and Playgirl are on the newsstands and there are bars in the hotels; it seems more like Eastern Europe than the Middle East.

Another state luncheon, by far the most elaborate we have had: a room out of Versailles, with an eighty-foot carpet, waiters in white gloves and swallow-tailed coats, French wines. Toasts: the President, the shahan-shah, the friendship of the United States and Iran.

"We have the worst drivers in the world," says my driver cheerfully. "Big smashups every day."

I went to see Emir 'Abbas Hoveyda, minister of the court, recently the prime minister. Hoveyda is elegantly tailored and very polished. His secretary is elegantly tailored and absolutely beautiful. His desk is an eighteenth-century antique.

"We are not so much concerned with the current price of oil, but with an economy without oil. By 1995 we must be prepared for an oil-less economy, and the price of oil then is going to be the price of alternative sources of energy. As soon as the Kuwaitis and the Saudis aren't interested in increasing production, buyers and sellers will determine the market price."

Jamshid Amouzegar, Hoveyda's successor as prime minister, had said Iran was not indifferent to unemployment in Western Europe. Did this mean they would try to hold the line on prices?

"You can't blame the price of oil for everything. We think oil should be indexed to Western prices. Why should oil stand still if the products we buy from you go up? Oil is not the only source of your inflation. Perhaps it accounts for 2 percent. Remember, there is no alternative for us to the West. We think the price of oil will rise because conservation in the West will fail. The problem is leadership, discipline. If we didn't have discipline, we couldn't have raised the per capita income from $160 fourteen years ago to $2200 today. Eventually you will need discipline to enforce conservation."

If there is a popular book read at these levels in the Middle East these days, it is Paul Erdman's The Crash of '79. Erdman, a former banker in Switzerland, a character in my own book Supermoney wrote an apocalyptic novel in which an American banker is running the Saudi billions, and in which the shah eventually conducts an atomic war to gain control of the Saudi oil. Had the minister read it?

"Oh, yes, it is amusing, but of course the conclusions are wrong; we have no territorial ambitions."

Has the shah read it?

"I believe he flipped through it, and thought it was amusing."

Much later"—after the trip, in fact"—I was talking to Blumenthal about Iran.

"The shah talks about law and order," he said. "'You need discipline,' the shah said, 'you have to be strong.' He is very self-assured, very much the boss of his country. As for the oil, the Iranians relate it strictly to their needs. The shah sees the needs as industrialization, and he pressed for arms, for F-15s and AWACS."

"The Iranian approach is hard-nosed, and based on market conditions." We were getting a briefing by the Embassy. "Twenty years ago, there was no middle class. The shah has brought land reform, women's rights, health care, a share of the profits. He has preempted revolution; he would win an election. There is a small disaffected minority, quite loud, sort of Mao-Marx, but they are not monolithic and have no clear program."

Incidental intelligence: Iran, says the petroleum attache, has 465 wells, from which they produce 6 million barrels a day. The United States has had to look deeper and more thoroughly. It has 500,000 oil wells, producing about 8 million barrels a day.

At each stop, the Secretary held a press conference. Once, before jet travel, before television news film, there were American correspondents all over the world; the foreign correspondent was a dashing, trench-coated figure.. Now newspaper mergers and television news have drastically reduced the number of correspondents resident abroad. The reporters assembled at the press conference were mostly part-time stringers, or local citizens working for an American network or wire service. Yet there were perhaps twenty or twenty-five reporters at each session.

"I enjoyed meeting Finance Minister Ansari and His Majesty the Shah," Blumenthal said at the microphone. "We discussed our visit to Egypt, Israel, and Kuwait, the state of the U.S. and the world economy, and the President's energy program." The language was the bland language of press conferences, designed not to produce headlines Q. Did you discuss oil prices with His Majesty? A. The need for close cooperation came up in the conversation. Q. What about arms? A. Nothing specific. Q. Do you expect oil prices to go up? A. That's up to OPEC. There is softness in the oil market, and much of the world is still struggling to adjust to oil prices.

Originally the Treasury party had been scheduled to fly from Tehran to Riyadh, the capital of Saudi Arabia. But the king and his ministers were coming to Jubail, near Dhahran, on the coast, to dedicate a huge petrochemical facility. So we went instead to Dhahran, which is also oil headquarters. That is where Standard Oil of California first came to Saudi in 1933, before it joined Mobil, Texaco, and Exxon to form the Arabian American Oil Company, Aramco. The Saudi government now owns 60 percent of Aramco's producing facilities; it will own all of them in the near future. When that happens, the American oil companies will be paid for their present assets and will then make whatever money they make as marketers and refiners

Dhahran is a part of Saudi Arabia, though it does not seem so, just as military bases do not seem part of the surrounding countryside. Sprinklers flick the water on the green lawns, but the houses are very much officers' quarters; in fact, in the Aramco compound the atmosphere is much like a July day in the married officers' quarters of Fort Shafter, Hawaii. Maybe quieter. Women may drive cars here; it is one of only three places (all Aramco compounds) in the Kingdom of Saudi Arabia where they may. And they may dress as they like. In the cities of Saudi Arabia, in Damman and Riyadh and Jiddah, American women are advised in an Embassy leaflet to dress "with suitable modesty, that is, in long skirts, with long sleeves. There are more foreigners in Saudi now, and more foreign women so the religious police no longer tap erring ladies on the backs of their legs with white canes if their skirts are considered immodestly short.

In a propjet, we flew—the standard tour, I think—over the biggest oil field in the world. There is very little visible; the forest of derricks, the symbol of an oil field, is not needed here. In Saudi the oil is relatively close to the surface; so easy, the oilmen say, you can dig it with a teaspoon, so pressured from its geological formation that you do not need to pump it. "Dig it with a teaspoon" is relative; -a deposit may be as deep as 4000 feet. It costs the Saudis only ten cents a barrel to pump the oil out of the ground and get it into tankers. The Saudis have oil, the biggest reserves in the world, they will have oil when the wells in the rest of world have gurgled, belched, and gone dry. But the do not have people; the harshness of the desert life kept the population down for centuries. In a country a third as large as the United States, there are only 6— or less(the census is inexact)—million people. Already there are 2 million foreigners, Yemenis, Pakistanis, Koreans working in Saudi. The Saudis will be labor-short forever, so in picking the directions for the development of their desert kingdom, they have to pick industries, such as petrochemicals, that require large investment of capital and little in the way people.

Now we are sitting in an office with Abdul Aziz a Qurayshi, the governor of the Saudi Arabian Monetary Agency, and Muhammad 'Au Aba al-Khayl, the minister of finance. Both of them are in thaubs and kaffiyehs, their loafers and ankle socks sometimes visi-ble. Al-Qurayshi, with his rich, deep British accent and his slim moustache, could be cast—without the thaub, of course—in the Jack Hawkins role in a movie: the general, the prime minister, or the governor of the central bank, if that role existed.

"What are they doing with all the money?"

"We have a five-year plan, we are working on creating an infrastructure, .schools, roads, plants, we're trying to build a country."

The world worries whether you can spend the money.

"We will spend it. We have put most of it in government securities, short-term, medium-term, three to eight years, so we can have it when we want it. We do not want to be an investor elsewhere, we want to invest here, to develop this country, and so we pick the largest and safest markets in the meanwhile." The world worries whether you have so much money that it could upset the world banking system.

"We don't share those fears. We are part of the world, part of the West. We have put up 25 percent of the money for the newest addition to the IMF's capital, and we have helped the African and Asian development banks. We are 80 percent in dollars—where else would we move the money?" This from Aba al-Khayl.

Al-Qurayshi smiles. If he should ever tire of the central bank, I could get him a job on radio, with that voice. "We have a lot of money, but if you look at the world, deposits in banks by individuals are greater than those by the surplus countries. And you know we would rather keep the oil than have the money. A barrel of oil traded for money at $10 is not a good trade.Ó

Then comes the theme we have heard all over the Middle East—even in Israel.

"All we need to pump is 3 million barrels a day. That will take care of us. Everything over 3 million barrels a day is a gift."

Right now the Saudis are pumping 8 million barrels a day, and the oil industry speaks of a "glut." If they dropped the schedule to seven, there would be no glut. At five, the industrial nations would be nervous. At three, they would be scrambling all over each other, the price would probably be at $20, and bacon would be on its way to $7.

What do the Saudis want?

"Peace. Stability. Technology, for development here. And the developing nations of the world have to be helped." Governor Al-Qurayshi smiles again. "We will never be self-sufficient in agriculture, so we will always import rice, sugar, wheat." The smile widens. "And cameIs."

"You import camels?"

"We do."

"But with an ambitious plan to industrialize, why do you import camels?"

"We eat them."

Al-Qurayshi's smile is as wide as it will go. He has played this scene before.

Saudi Arabia is one of the most intensely fasci-nating places I have ever been. Consider: Slavery was abolished in 1962. There were no public women's schools in 1962, and when the first women were admitted to their segregated schools, the National Guard had to be called out to protect the school against irate religious fathers. In 1957 Saudi Arabia was virtually bankrupt, even with the oil already flowing. Before oil, it was a desert kingdom living off goats, dates, and pilgrims on the way to Mecca—a million pilgrims a year. Luckily for the West, oil and Mecca are in the same kingdom, for that removes the godless Russians as an alternative. With Mecca and Medina, the two oldest cities in Islam, the Saudis are the Keepers of the Faith. The Russians have no use for Faith. It was lucky, too, that the Saudis were never colonized. It was even lucky that their window to the West was Aramco, for, as giant international companies go, Aramco was relatively enlightened. Less than twenty years ago, the Swiss steward of King 'Abdul 'Aziz could write of the eunuchs in the palace kitchens, and of the Friday afternoon hand-choppings for thieves in the square. ("We did that only for recidivists," said a Saudi friend. I loved the word in that context.)

In the boom-camp atmosphere of Riyadh, the capital, something is missing: the sight of women. There are a few Bedu women on the streets, moving like nuns, everything but their eyes veiled. Their eyes are made up with kohl. There are few secretaries; the secretaries must be men. In the offices, coffee—bitter cardamom coffee—is brought by retainers wearing thaubs; they will keep pouring into tiny cups until you refuse by moving your hand in a circle. Riyadh is a forest of construction cranes, with as much rubble as Berlin in 1949. "That's funny, there was a street here yesterday," says an Embassy friend, turning a corner only to meet a pile of rubble and some construction cranes. He goes another half-block. "And this street wasn't here yesterday." Riyadh—outside the original town—is designed by Constantinos Doxiadis, the city planner. Six-lane highways, arc lights; Texas architects providing government buildings with architecture that is a mixture of contemporary and classic Arabic. (There is, occasionally, the feeling that Houston is being stamped out of metal and concrete, helicoptered in, and bolted down onto a desert kingdom.) Banged and disabled automobiles are part of the roadside scene; they grow faster than the ranks of tow trucks to take them away. There is the usual brag—"We have the worst drivers in the world"—explained: "You take a boy who has been tending goats, teach him to drive, put him behind the wheel, and the accelerator falls naturally to the floor."

Where are the women? At home, practicing the arts of the extended family with children, aunts, cousins of cousins. A few have now reached the university level. How can they study with men, learn from men, in a sexually segregated society? Technology saves: closed-circuit television. The women will work in nursing, social services, perhaps in government, if the government has some all-women buildings.

Fred Bergsten and I had an invitation from a deputy minister to visit his family's ranch. We let Air Force Two take off for Rome without us. And then, at the Riyadh airport, we climbed into a ten-seat Hawker-Siddeley 125 jet with the deputy minister and three of his friends, flew forty minutes north, got picked up in two large Mercedes sedans, drove to the ranch, and, two hours from our start, were inspecting the sheep, the goats, the Bedu shepherds, and listening to a patriarch uncle tell about this well and that well, the alfalfa crop and the Bedouin. There is an addition to the traditional Bedouin scene along the highways: there are the black tents and the goats, and there is also a Datsun pickup, sometimes with a camel trussed in the back. We sat in a magnificent black tent carpeted with Persian rugs, listened to a balladeer, feasted on a mound of mutton and rice, and eventually got back into the Mercedes and into the Hawker-Siddeley jet and flew back to Riyadh.

The Saudis like Texas and California. The Southwest attracts them to school; they like the climate, and they began going there when they first asked the Aramco executives what the proper schools were. Colloquial Americanisms pour from be-thaubed Arabs. I could not believe the passion for football; video cassettes of the previous Saturday's game are traded from hand to hand. The true enthusiasts prefer not to know the outcome ahead of time.

Is the interest in football that real or is it part of the Saudi gift of trying to please the visitor? "It's real," said an Arabist at the Embassy. "They really get hooked on the motion, the pomp, and the drama of big-time football. The previous sports here were hawking and camel racing."

When the petrodollar flood began, the ranks to administer it were thin. Consequently the phenomenon of the young American-educated Arabs in the oil states administering billions.

"We have a lot to learn, but it's not so bad, because we all know each other. For example, I went to USC. I think USC is probably the most popular school for Saudis. And if I want to get something done at Planning, I know a guy who was down the hall from me at USC, the guy at Finance was my roommate at USC, and we know the ringer from Ohio State because he is married to my roommate's sister. You know, the Saudi cabinet has more American-trained Ph.D.Õs than the U.S. cabinet.

The speaker is a deputy minister. His office has Knoll furniture, stainless steel and leather, and looks as if it were very recently uncrated. In fact, the building with its Belgian elevators and its wet-smelling cement looks as if it were very recently uncrated. Perhaps it was: a leading Saudi entrepreneur is planning to build prefabricated hotel rooms in Texas, complete with furniture; fly the rooms to Saudi; and stack them into hotels.

Another deputy minister comes in. They are both in crisp white thaubs with cuff links in the sleeves and loafers. They speak in Arabic. Then they switch to English.

"Who do you play Saturday?"

"Texas."

"Texas will kill you. We will be number one."

"No chance. You still have to play Notre Dame. We will be number one."

They ask my opinion. No use. They follow the bowl contenders far more closely than I do. They follow senators too—especially senators who concern themselves with Israel and the Middle East. There they sound so moderate: "Well, we must have a settlement, we must recognize Israel, they must have a plan for the Palestinians. If the Israelis reach a settlement. They will not only have peace in the Middle East, they will make a lot of money. They have great skills in agriculture and medicine and banking."

Could anyone love his college as much as the Saudi technocrats seem to? I suppose, if you came from a big Saudi extended family, with your father and uncles running things, and your mother and your aunt and your cousins watching out for marriageable girls, then you would have a real culture shock upon landing in America. (If you landed at JFK in February in a blizzard, and got continually beaten out in the race for taxis, as happened to one of my friends, you might want to turn around and go home.) Then the American university scene would have intoxicating freedom and wild diversity, not to mention women with bare legs and bare faces. And if you work hard and go back to Saudi with your degree and get married and start working long hours in a ministry, the "bright years with pleasure rife" might really be that, you might want to hang on to some residue of that experience. And this becomes a factor in the calculus for exports, deficits, surpluses, and the price of oil.

"I'm very loyal to the U.S.," says one USC alumnus. We are building these power stations, and I would like to see the contracts go to the U.S., so I hope the situation is cleared up, because if a U.S. engineer is going to cost twice the Koreans, the Koreans will get the job, and all the equipment will be made in Korea.

The USC alumnus pencils his initials onto papers that are brought before him. He shows me some of the the projects. There is a real excitement in the building. All of the amounts are in the hundreds of millions. A new telephone system is going to go for around $3 billion. The amounts are megacosts. At Dhahran, a movie was shown to the compound. It was a thriller set in the Middle East, with a chase through the oil fields, and at some point, one of the characters whispers, in a restaurant, "This could involve one hundred million dollars!" The whole theater burst out laughing, because no amounts in Saudi are ever that small.

When the petrodollar torrent began, the salesmen of the worId descended upon Riyadh. There were no rooms in the limited hotels, so they slept in the lobby chairs and on the floors. The Saudis bought too much at first. One Embassy official says it was like 11 A.M. Christmas morning, with wrapping paper all over the floor. The ports were backed up for ninety days at a time. It cost five riyals to bring by helicopter from the harbor a bag of cement that itself cost only seven riyals. And the cost of living shot up. Even the ordinary Saudi was hit by price increases of as much as 30 percent for daily living until the government slowed down its public spending. Now the port time is down to ten days.

Statistically, everyone in Saudi is going to be rich. But since the government owns the oil, it in turn has to spend the money in order for the impact to be felt.

"The first thing we noticed was that these loads of carpetbaggers had arrived, staying anywhere, sleeping anywhere, assuming the Arabs were so ignorant and so rich they would buy anything. Now that-has faded away. Mind you, that was when an old trading firm-—only eighty years old—would be lucky to have 100,000 riyals in the bank [roughly $28,000]."

How did the wealth impact?

I'm in real estate. First, in real estate, if there was a corner that someone bought for 500 riyals, the next day he would be offered 2000, the next week, 10,000, two months later, 100,000. Now it has flattened out but it hasn't gone down."

That may account for the rents. My host for several days in Riyadh was an American corporate representative. He had a pleasant, newly built, furnished house, four or five bedrooms and baths, on perhaps three quarters of an acre. The rent was $100,000 a year—not the purchase price, the rent. ("They overpaid," I was told. "The rent on that house should only be about $70,000.") And while I was in the office of a young businessman, he got an offer for a house for which he was an agent. The offer was 14 million riyals—more than $4 million. A nice house, but no estate.

By the end of the week, I was entranced with the Saudi whiz kid technocrats. They were, personally, the bridge between the desert kingdom and the Houston of the Middle East. If there were Saudi wives, they were rarely seen. A few of the technocrats had brought home American wives. That must be one of the most difficult adjustments anywhere. I was so impressed with the articulateness of the technocrats, and their seeming moderation, that it took a Berkeley-educated Saudi businessman to bring me back to earth, and remind me how little I knew. "We want to be friends with the Americans," he said, "but there are impediments. Why do you permit yourself to be governed by the actions of the Zionist conspirators?" And he went on for quite literally two hours about the Zionist conspirators, barely pausing for breath. He sounded like the cartoon Arab we so mistakenly expect, the one against whom the young technocrats were so refreshing. But which is the real Araby?

I got impatient with my notes. I had spoken, even before the trip, to a dozen Arabists and half again as many international economists, to denizens of Harvard and Columbia and Princeton and the State Department. But there were still too many gaps; Arabists and technocrats do not determine the course of Saudi. The royal family runs Saudi, more than 4000 strong, lots of different nuances there. And the Koran runs Saudi, and a whole inner language of cultural assumptions. That made the assumptions of the international economists look almost mechanical. Politics might at any time supersede mechanics.

The Saudis prided themselves on their moderation and their rationality, appropriate virtues for a people small in numbers, with a treasure. "We have to move to a contemporary society while keeping our traditions," said one of the deputy ministers. "In our view, balancing these, goals, we have always behaved rationally. And we have nowhere to go but the West. But we cannot predict future politics, nor what will then seem rational. Was it rational for the United States to have half a million casualties in Vietnam, to start an inflation that is still going, and to end up with Saigon being cakked Ho Chi Minh City?"

Thus, rationally, the Saudis are tied to the West, and the West is mortally dependent on the Saudis. But what is meant by "rational" may not always be the same for both.

Air Force Two, 86972, went on to Rome, Berlin, Bonn, and Washington, while I stayed in Saudi. Several weeks later I had a drink in New York with the Secretary. He was embroiled in the postponement of tax reform, in steel imports, in a dozen other issues. I said—in response to a question from him—that I thought the Arab surpluses would stay in dollars; the other markets were too small to absorb them as they piled up. So the world's banking system would muddle along for a while, rolling over and rescheduling, though the margin for error would diminish as the surpluses went to $150 billion and the debts marched toward $300 billion.

Blumenthal said he thought the trip had been worthwhile, and that he had been impressed with the sophistication of the oil producers.

"What do you think will happen to the price of oil?" I asked.

"I think we have a good chance of having it stay level, for maybe a year. That would be breathing room. After a year, I can't say. I hope it works that way."

"Did you ever think," I said, "that the 8 million barrels a day come from our friendly Saudis; that if another crowd was in Riyadh, less friendly, it would be troublesome?"

"There are all sorts of scenarios. If we could get the Saudis to pump 11 million barrels a day, we might postpone the squeeze another few years. By 1990 we might have alternate forms of energy, maybe with some innovations."

"But between 1980 and 1990?"

"That's going to be interesting."

I asked the Secretary what impressed him most. He paused before answering.

"I'll tell you. When I was thirteen, we left Germany for China. I remember every stop we made on the Haruna Maru—Port Said, Suez, Aden, Bombay, Colombo, Singapore, Hong Kong, and Shanghai. And at every stop the Union Jack was flying and a British officer in knee socks, with a topee and a swagger stick, would come aboard and say, "Howjado." So now the British are gone, and now everywhere you go, at the top levels of every government, they have their eyes absolutely fixed on the United States. What is the U.S. policy going to be? What will U.S. technology be? What is the American President going to do?" We are absolutely bigger than life; their expectations of what we can do are bigger than life. Ministers come up to me—he's just met me, mind you—and say, Please tell my prime minister this or that. This is still our time."

In late November the shah announced that Iran would try to hold the price of oil at the current level. In December Saudi Arabia and the United Arab Emirates said they, too, would hold the line. All together these countries account for more than 65 percent of world production. Against such heavyweights, the OPEC price hawks, Algeria, Liby, and Iraq, could hardly prevail. OPEC's December meeting in Caracas broke up with the price of oil unchanged.

That was good news for the dollar, which had plummeted during the autumn because of our balance-of-payments deficit for oil. But no "moral equivalent of war" has yet entered the consciousness to induce the conservation of energy. Perhaps it will; perhaps we can also stimulate production and seek alternative energy sources. But the breathing room is only that: we are well into the lull of the easy years, which will, most certainly, come to an end.