A step up from pumping oil to turning out chemicals

The puffs of smoke and buzz of activity around the plant complex of the Saudi Methanol Company in this new industrial city are a visible sign of what Saudi Arabia will be doing much more of in the next two years: cranking out petrochemicals at the cheapest prices in the world.

In so doing, Saudi Arabia is rapidly diversifying its export portfolio. By mid-decade, the kingdom will be known not simply as a crude-oil giant, but as a world petrochemical powerhouse as well.

Using new technology, eight large-scale chemical factories will be coming on line by 1985 - mostly at the new cities of Al Jubayl, on the Gulf coast, and Yanbu, on the Red Sea, which were both carved from the desert for just this purpose. At Jubayl the Saudi Methanol plant began preliminary operation March 7. It will eventually produce 600,000 tons of methanol annually. On the same day the Jubayl Fertilizer Company began operation of a unit capable of processing 500,000 tons of urea and 330,000 tons of ammonia a year.

Barring new tariff barriers in rival countries, Saudi Petrochemical is virtually certain to control an initial 4 to 5 percent of the world market.

Saudi natural gas, a byproduct of crude oil production, which previously had been flared off uselessly, is now being gathered to run the factories. The gas is the most inexpensive in the world: 50 cents per million Btu, half the cost of the cheapest American natural gas. As a result, Saudi petrochemicals will be the cheapest in the world, even after one takes into account the transportation differential from the Gulf.

At a time of oversaturation in the international petrochemical market, the advent of Saudi ''downstream'' products has concerned producers in other regions , especially in Western Europe, where there are numerous aging, inefficient chemical plants.

Each plant is a joint venture between Saudi Basic Industries Corporation (Sabic), a government holding company, and established petrochemical manufacturers and marketers such as Mobil, Exxon, and Celanese. Besides technical expertise, these companies are charged with marketing the new products: methanol, ethylene, high- and low-density polyethylene, etc. They also are entitled to buy allotments of Saudi crude in proportion to their participation in the ventures.

There is some concern among these companies, however, that the world market will not absorb these new Saudi chemicals. And certainly the oil allotments may be of questionable value with today's surplus. Because of such qualms, Dow Chemical recently backed out of a venture with Sabic.

Nevertheless, Sabic figures that with the $11 billion it has invested to date in its chemical plants, these will soon be responsible for 3 percent of the Saudi gross domestic product.

''Saudi Arabia's exports could not come at a more difficult time for the world market,'' a recent US State Department economic assessment observes. But given the relatively cheap prices of the new Saudi products, it seems likely Saudi chemicals will have the market's greatest staying power. Japanese and European products may suffer instead. Sabic reckons 90 percent of its output will be exported, 36 percent going to Japan, 18 to the United States, 13 to Europe, and the rest elsewhere in the world.

Already there has been some protectionist talk concerning Saudi chemical exports. But such talk, the US report says, ''meets with extreme hostility'' in the kingdom. Its $20 billion in imports from the West will probably be incentive enough for other countries to stay on good trading terms with the Saudis. But if there is trade discrimination, the Saudis are hinting they will consider linking petrochemical market penetration to oil sales, to imports, or to the granting of contracts to foreign companies.

The US study concluded that these new Saudi exports ''will have only a slight impact on the US market, but could cut deeply into sales in third markets. Low-priced Saudi basic petrochemicals will be an advantage, however, to firms and factories in the US which process them into secondary products for reexport and domestic use.'' American companies, moreover, dominate the joint-venture field in the kingdom and are heavily involved in plant construction.

''On balance,'' the study says, ''Saudi petrochemical development could be a significant plus for American interests.''

How will this new Saudi industry be affected by declining world oil prices? An American diplomat in Riyadh says the answer is that ''if oil prices fall, then petrochemical prices initially might fall. But as world economic activity picks up, the industry as a whole may benefit.''

How will dwindling oil revenues affect further development downstream? An American connected with the Jubayl project answers: ''Before he became king, Fahd was chairman of the Royal Commission for Jubayl and Yanbu. Diversification and development are his projects - and he is king!''