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November 23,1973 C om m odity Craimdhi The nation's basic materials indus tries have been operating nearer full capacity this year than at any other time since World War II. Pro duction of these materials— includ ing petroleum, steel, nonferrous metals, wood products, and textiles — reached 96.3 percent of capacity during the third quarter. Yet the worldwide demand for these commodities has been so strong that many are still in short supply. As if this were not enough, the Middle East war and the associated Arab oil embargo have now aggra vated the supply problems for a nation whose economic life is centered around the internalcombustion engine. Many respon dents to the monthly survey of the National Association of Purchasing Management no longer bother to list specific shortages, but simply report that "almost everything" is in short supply. Prices for industrial commodities have reflected these upward pres sures, although their movements in the last two months have been ob scured somewhat by sharp declines in farm-and-food prices from recent spectacular highs and by a conse quent decline in the overall whole sale price index. Industrial commodity prices rose at a 1 0 .6 percent annual rate between August and October, fully as worrisome as the 1 0 .2 -percent and 14.9-percent annual increases recorded in the first and second quarters of the year. O il shortages The August-October rise in the industrial commodity index was Digitizd®roi m te drt>y a 38.7-percent annual rate of increase in crude material prices— petroleum in particular. Further price advances in the over all index appear all but inevitable in coming months, in view of the Arab oil embargo and the sharp price increases imposed by other major oil exporting nations. These moves will affect both the price of petroleum products and the price of products which require petroleum as a basic raw material, such as chemicals, fertilizers, plastics and synthetic fibers. In addition, fuel shortages may indirectly con tribute to inflationary pressures by aggravating the shortages of other basic materials, such as steel and aluminum, that require large quan tities of fuel oil and natural gas for their production. Shortly after the Arab nations raised their crude-oil prices, other major oil exporters (such as Nigeria, Vene zuela and Indonesia) also an nounced substantial increases. Some countries raised selling prices by more than 50 percent and listed even sharper advances in "posted" prices— prices on which taxes are based. To enable domestic pro ducers and retailers to pass on these higher import costs on a dollar-for-dollar basis, the Cost of Living Council in late October lifted its price freeze on oil products and permitted the industry to boost prices accordingly once a month. The major oil companies responded by raising their prices for gasoline, heating oil and diesel fuel by as much as three cents a gallon at both wholesale and retail— the largest single increases ever recorded. (continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. Prior to the outbreak of the Mideast war, the U.S. had been importing about 6 million barrels of crude oil and refined products daily. The oil embargo and related cutbacks in Arab petroleum shipments to other nations have cut off about 2 million barrels a day, or roughly 1 0 percent of present U.S. consumption. As petroleum demand increases during the winter, the overall shortfall may approach 3-million barrels, or about 17 percent of normal demand. Fuel shortages already are having an inflationary impact on the prices of several basic materials. The short age of fuels (and glues) has sent plywood prices soaring about 40 percent since mid-October— that's not an annual rate— reversing a slide from record levels that began in May in the wake of the housing slowdown. The recent spurt oc curred after six Oregon plywood mills closed due to a shortage of natural gas and propane, triggering a wave of scare buying. Prices of nitrogen and phosphate fertilizer, which use natural gas as a raw material, jumped 30 percent after fertilizer price controls were lifted. Metals shortages Many basic materials, especially nonferrous metals, already were in very short supply even before the Mideast war broke out last month. (At that point, nonferrous metal prices were 19.9 percent higher than a year before.) This situation was aggravated by a price-control mechanism which held domestic prices well below foreign prices, thereby causing metal to be di verted to markets overseas. Earlier this year, the U.S. became a net exporter of copper, reversing a net-import position which had prevailed since 1940. The Mideast conflict, together with worldwide production problems, then triggered a wave of speculative buying, which helped widen the price differential and stimulated exports even more. By mid-November, copper on the London Metal Exchange reached $1.05 per pound, compared with the 60-cent U.S. producer price. The shortage of zinc has become very severe, mostly as a result of the diversion of supplies overseas. Several major steel producers con sequently have announced sharp reductions in production of galvan ized sheet, and Kaiser Steel is considering going out of the galvan ized sheet business altogether on the West Coast. The domestic aluminum industry has relied on government stockpile metal to meet 2 0 percent of its customers' total requirements, be cause of very strong demand and hydro-power shortages. However, producers no longer can count on that source, since all of the 1.3 mil lion tons available from the stock pile already has been purchased. The demand pressures impinging on the metals industries could ease somewhat next year, if activity should slow in key consuming sec tors such as housing and automo biles. But the Mideast conflict has introduced a new inflationary force which could help offset their im- pact. To replace war material fur nished to Israel and to build up our own defenses, the Pentagon is now submitting perhaps $5-6 billion in several supplemental budget requests. Authorization by Congress of even a portion of these expendi tures could give defense procure ment— and the aerospace industry's use of metals— a strong upward thrust. How to allocate In any event, the immediate short age of fuels now confronting the nation requires that consumption be tailored to fit available supplies. This may be achieved by imposing a system of physical allocations or by permitting the price system to do the necessary rationing— or by a combination of both approaches. In the case of the distillates— heating oils, diesel and jet fuels— the gov ernment has been utilizing the mandatory-allocation approach since November 1. The program, as later modified by the President, directs the oil companies to pare allotments to wholesalers to 85 per cent of the 1972 level— a move which is forcing the nation's airlines to cut scheduled flights 1 0 percent. In this connection, Congress has passed legislation which would ex tend the mandatory-allocation pro gram to all crude oil and refined products produced in the United States. In his message on the fuel crisis, the President also prohibited coal-using utilities from converting to oil, and ordered Federal agencies to turn down their thermostats and to reduce their auto speeds to 50 miles per hour— moves he recomDigitizIQ «fl<FRASfeR private sector follow. http://fcaser.stlouisfed.org/ Federal Reserve Bank of St. Louis In addition, the President asked Congress for stand-by authority to order a wide range of conservation measures. These include relaxing certain environmental regulations, imposing daylight-saving time on a year-round basis, and adjusting operating schedules for businesses and airlines. Finally, as a last resort, the President said that contingency plans would be developed to be used if necessary "to cut the con sumption of oil products such as gasoline by rationing or by a fair system of taxation." (These and other measures are embodied in the National Emergency Petroleum Act now before Congress.) C= 3 Interior Secretary Morton said that rationing probably would have to be imposed within the next several months. Treasury Secretary Shultz disputed this, however, and his staff reportedly is working on such pos sibilities as a stiff increase in the Federal gas tax from the present 4 cents to as high as 30 cents a gallon. Milton Friedman, in his Newsweek column, meanwhile proposed the radical solution of relying com pletely on the marketplace, by permitting fuel prices to rise as high as necessary to reduce demand. Prices would rise sharply in the short-run if the price mechanism (or taxes) were used to allocate fuel supplies, but over the long-run these price increases would stimu late increased production rather than create supply disruptions. Yvonne Levy <$2) o c=3 ucnSuiqseM • m?lf| • uo S q j o • ept’AaN • °MBPI neMBH • e iu j o ji j^ • e u o zu v • b >|s b |v © 3' •|I|B3 'O D S ID U B JJ U B $ ZSL O N U W lH d aivd 3DVlSOd *s n nvw SSV1D ISdlJ BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (D ollar amounts in millions) Selected Assets and Liabilities Large Com m ercial Banks Loans adjusted and investments* Loans adjusted— total* Securities loans Com m ercial and industrial Real estate Consum er instalment U.S. Treasury securities Other securities Deposits (less cash items)— total* Demand deposits adjusted U.S. Government deposits Tim e deposits— total* Savings Other time I.P.C. State and political subdivisions (Large negotiable CD 's) W eekly Averages of D aily Figures Member Bank Reserve Position Excess reserves Borrowings Net free ( + ) / Net borrowed (— ) Federal Funds— Seven Large Banks Interbank Federal funds transactions Net purchases ( + ) / Net sales (— ) Transactions: U.S. securities dealers Net loans ( + ) / Net borrowings (— ) Am ount Outstanding 11/7/73 Change from 10/31/73 484 48 + 141 — 60 37 + + 1 + 227 + 305 — 169 + 393 228 — 349 9 + — 181 — 131 — 15 + 75,836 57,778 1,298 19,810 17,825 8,844 5,648 12,410 73,511 22,708 455 49,050 17,494 22,553 5,748 11,167 - W eek ended 11/7/73 Change from year ago D ollar Percent + 10,339 + 9,398 0 + 2,461 + 3,139 + 1,342 — 306 + 1,247 + 8,769 + 1,682 126 + 7,109 — 827 + 5,736 + 1,043 + 4,942 W eek ended 10/31/73 + 15.79 + 19.43 0 .0 + 14.19 + 21.37 + 17.89 — 5.14 + 11.17 + 13.54 + 8.00 21.69 + 16.95 + 4.51 + 34.11 + 22.18 + 79.39 Com parable year-ago period 11 100 89 51 11 40 35 90 - 55 - -1 9 9 -3 0 3 -1 ,1 3 0 + 106 + 83 - 146 * Includes items not shown separately. Information on this and other publications can be obtained by calling or writing the Digitized for F R A S E R njstrative Services D epartm ent Federal Reserve Bank of San Francisco, P.O. Box 7702, http://fraser.stlo8ffifedF.Ar0/:isco, California 94120. Phone (415) 397-1137. Federal Reserve Bank of St. Louis
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