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February 1,1974

The specter of a global energy
shortage, long feared by the
industrialized world, suddenly
seemed closer late last year as sup­
plies ran short of the oil and natural
gas needed to fuel the world's
expanding industrial economies.
The crucial blow, of course, was the
November announcement by Per­
sian Gulf producers of a 25-percent
initial production cutback and pro­
gressive 5-percent monthly reduc­
tions until satisfactory conclusion of
the war with Israel. Subsequently,
the scheduled January reduction
was rescinded in favor of a 10-per­
cent increase for that month, after
vigorous peace-making efforts
began to bear fruit.
Although the severity of the current
energy situation is still obscured by
inadequacies of available data, the
production cutbacks by Arab pro­
ducers and the series of price in­
creases by these and other produc­
ing countries apparently have
confronted the industrial world
with an emergency approaching
crisis proportions. These develop­
ments have raised not only the
threat of worldwide recession, but
also the prospect of severe balanceof-payments dislocations and asso­
ciated currency problems. The
picture may be overdrawn, but the
damage already created by these
developments suggests to some
pessimistic observers that the im­
mensely productive economies of
the Western world have feet of clay.
Arabs and the world

The magnitude of the present prob­
lem can be judged by the fact that

six Persian Gulf states (Iran, Iraq,
Kuwait, Saudi Arabia, Qatar and
Abu Dhabi) were the pre-crisis
source of over 40 percent of the
Western world's petroleum. The
complexity of the problem can be
seen from the varied dependence
of the major industrial user nations
on this form of energy. Japan, which
relies on imported oil for over
three-fourths of its total energy sup­
ply, normally obtains about 42 per­
cent of its oil from Arab countries.
Western Europe is also vulnerable,
being relatively less dependent on
oil for its total energy needs but
relatively more dependent on Arab
oil. In contrast, the U.S. has been
importing only a third of its oil
requirements, with roughly a third
of those imports of crude and
refined products coming from Arab
To minimize the adverse impact of
the oil shortage on output and em­
ployment, user nations have taken a
number of steps to conserve energy
and to allocate fuels to productive
uses. This country has taken a num­
ber of well-publicized steps to shift
energy use away from non-essential
activities. Elsewhere, non-essential
uses have been restricted even more
severely. Sweden (temporarily) and
the Netherlands established
gasoline rationing programs. Japan
has banned the sale of gasoline and
the use of private autos on Sundays
and holidays, and has also cut back
industrial-power consumption. The
United Kingdom is on a three-day
work week, but the oil shortage has
been overshadowed there by the
crippling effects of labor disputes
(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.

involving coal miners and railroad
Paying the bill

The impact of reduced Arab oil
supplies, coming as it did at a time
of emerging longer-term energy
maladjustments, has now been
exacerbated by the recent price up­
surge. October's 70-percent rise to
$5.11 per barrel in the posted price
of Persian Gulf crude was followed
by a doubling of the price to $11.65
per barrel late in December. (The
posted price is an accounting base
for calculating royalties and taxes
due producing countries.) Actual
export prices, though lower, rose
proportionately. Thus the new
posted price corresponds to an
actual export price of $7.60 per
barrel f.o.b. the Persian Gulf. Landed
in Western Europe, this oil com­
mands a c.i.f. price of some $9 per
barrel— slightly higher in the U.S.
and slightly lower in Japan.
If prices remain at the new level—
as they may well do, at least in the
immediate future— oil import pay­
ments stand to rise enormously.
Estimates vary widely, but at the new
prices, the added cost of oil imports
this year could be in the range of
$50 billion.
For the U.S., net imports may rise to
some $14 billion from last year's
level of around $61 billion. Japan's
oil payments might rise by a similar
amount, while Western European
countries also face huge increases.
Oil imports of the developing coun­
tries could rise by more than $6
Diga ized for FRASER

Oil import payments of this size
would have far-reaching effects on
world trade and payments. Large
trade deficits are in store for nearly
every oil-importing country. Among
industrial countries, only Germany
had a trade surplus last year large
enough to offset the expected in­
creased costs of its oil imports. The
less-developed countries will be
particularly hard hit. A recent World
Bank study indicates that oil pay­
ments of 41 such countries this year
will more than offset all the foreign
aid they are scheduled to receive. If
these countries are not to be
unduly hurt, increased aid will be
necessary, either directly from the
oil-exporting countries and the
industrial countries or indirectly
through international financial
Handling the windfall

In these circumstances it is not
clear how a balanced pattern of
international payments can be
achieved. The use of oil revenues for
economic development in the oil­
exporting countries or in other
developing areas would benefit the
exports of industrial countries and
help close their oil-import gap.
Development is a long-term process,
however, and, in the case of the oil­
exporting countries, it would prob­
ably be limited by the comparatively
small size of their populations.
Most of these countries are not in a
position to increase their imports
from the industrial countries sub­
stantially, or at least to do so quickly.
Nor can the balance of payments of
oil-importing countries be restored

through trade adjustments with each
other, given the magnitude of the
adjustments involved. Attempts to
do so through “ beggar my neigh­
bor" policies, including competitive
currency adjustments, would almost
certainly fail.
Nor are the monetary reserves of
oil-importing countries adequate to
finance oil imports for any consider­
able period at presently prevailing
prices. If payment were made in
dollars, dollar reserves of a great
many countries would soon be
depleted. If payment were made in
other major currencies, reserve
pressures would be eased only to
the extent that oil-exporting coun­
tries retained these currencies in
their reserves.

The most immediate need is to re­
cycle these funds. Although some
increase in spending by the oil­
exporting countries is to be ex­
pected as their exchange earnings
mount, most of these earnings prob­
ably will be placed for the time
being in liquid earning assets, pend­
ing decisions concerning longerterm investment. How the oil
exporters will invest these funds is
a matter of conjecture. But the fact
is inescapable— the structure of
payments has changed, and oil­
exporting countries have suddenly
become major potential capital ex­
porters, capable of large-scale in­
vestment in industrial as well as
developing countries.
Readily accessible channels for
these funds are the Eurocurrency

market and the national money mar­
kets in various financial centers, in­
cluding New York. Funds deposited
in banks in Arab countries (report­
edly an objective of some oil-ex­
porting states) would in turn have to
be invested in large financial centers
where they could be placed with
Meanwhile, the International Mone­
tary Fund has stressed the impor­
tance of avoiding competitive cur­
rency devaluations and an escalation
of restrictions on trade and pay­
ments. The Fund is also considering
a plan for recycling oil-export earn­
ings, whereby the Fund would
borrow these sums from the oil­
exporting countries and relend
them to countries with oil crisisinduced balance-of-payments
deficits. The plan has been criticized
on the ground that the Fund is
equipped to make short- to inter­
mediate-term loans, whereas the
balance-of-payments problem,
which the plan is intended to miti­
gate, is long-term in nature.
The currencies which the oil-ex­
porting countries will be receiving
constitute a pool of funds upon
which the industrial countries
potentially can draw to finance
their deficits, perhaps by some form
of joint sharing of the deficits now in
view. The forthcoming (February 11)
meeting of oil-importing countries
in Washington, D.C. will provide an
opportunity for devising not only a
program of concerted action, but
also some form of mutual support
for financing their deficits.
Ernest Olson

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(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks
Loans adjusted and investments*
Loans adjusted— total*
Securities loans
Commercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
O t h e r s e c u r it ie s

Deposits (less cash items)— total*
Demand deposits adjusted
U.S. Government deposits
Time deposits—-total*
Other time I.P.C.
State and political subdivisions
(Large negotiable CD's)
Weekly Averages
of Daily Figures
Member Bank Reserve Position
Excess reserves
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 (— )


Change from
year ago




+ 9,861
+ 9,660
- 142
+ 3,092
+ 3,155
+ 1,237
+ 1,318
+ 7,354
+ 908
+ 140
+ 6,027
- 660
+ 5,657
+ 566
+ 4,113

— 104
— 607
+ 340
+ 332
— 39
+ 152

Week ended

Week ended

+ 14.22
+ 19.09
+ 17.34
+ 20.73
+ 15.66
- 15.16
+ 11.58
+ 10.85
+ 4.26
+ 20.59
+ 13.50
+ 32.50
+ 8.50
+ 61.78
year-ago period


-1 9 9

+ 1,580

+ 1,755

+ 223



+ 150






■"Includes items not shown separately.
Information on this and other publications can be obtained by calling or writing the
Administrative Services Department, Federal Reserve Bank of San Francisco, P.O. Box 7702,
Digitized for FR& $ERranc*sco, California 94120. Phone (415) 397-1137.

Federal Reserve Bank of St. Louis


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