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WPEA Section/H.B.J m z
December 1, 1973

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%otes of Effects of Oil Supply Cutbacks
°n Industrial Countries' Output and Trade

The first approximation of the effect of an average 20 percent

i cutback in world supplies to Europe, Japan and Canada from those Arab
countries that participated in the boycott, shows a shortfall in
; industrial output for .these countries combined of 4 percent' below what

otherwise would have been in the first half of 1974 (see Table 1).
These estimates are based on the following set of rather simplified
, (a)

The flow of oil from Arab countries will again equal
September, 1973 levels by June, 1974 for all countries
other than the United States and The Netherlands;


Oil shortages will produce mainly! supply problems and
adequate levels of aggregate demand will be maintained;


Inventories of petroleum and petroleum products will not

be drawn down below current levels, nor will inventories

of finished goods;



No bottlenecks, aggravating the general situation, will
appear on the supply side;


Assumption (a) implying a relatively short duration of
the cutbacks also implies that there will be no switching
to alternative sources of energy except to those that can
be effected very quickly.



Under these assumptions it was possible, on the basis of the data of
oil utilization for industrial purposes, shown in Table 2, and of
certain additional assumptions about by how much oil consumption of

households and for industrial and commercial heating purposes could
be cut, to calculate approximate effects of oil shortages on industrial

The calculation of shortfall in output was then related to

import requirements of industrial materials.

This yielded an estimated

decline in*imports of such materials from the United States of $3/4 »
billion for 1974.

Because of the assumption that final demand would not

fall beyond the amounts directly related to the shortfall in industrial
output, demand for finished goods (both for domestic consumption and
for exports) would outrun supply capabilities to an estimated amount
of $1-3/4 billion for the period of the boycott.

At the same time,

U.S. import demand for goods from the industrial countries was estimated
to fall by about $1/2 billion for the year !as a whole, reducing pressure
on supply capabilities somewhat.


It is clear that these a*s|um^t ions are essentially very

It is likely that the uncertainties caused by the current

situation will affect the investment climate in the industrial countries.
It would appear reasonable to assume that those investment projects that
can be postponed would at least be put off until the situation becomes

This is particularly so because already appropriated funds

can currently be employed at relatively high rates of return.



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Also, the assumption that no bottlenecks would appear
tending to reduce output further than the general effects.of the oil
shortages would indicate, is not realistic.

Finally, the differential

effect on various sectors of the economy, notably effects on the auto­
mobile industry, travel and hotel business, implies at least some
fall off in demand.

But, so far, the governments in the countries

concerned seem to feel that they are still faced with a situation of
supply shortages, exacerbated by shortfalls of energy, rather than

by shortfalls of demand.
Taking all these considerations together, one would conclude
that the estimates cited above probably represent the most optimistic
constellation of facts.

A more realistic set of assumptions would

imply greater declines in output and a greater shrinkage in world trade.

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