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INTERNATIONAL PETRODOLLAR CRISIS

HEARINGS
BEFORE T H E

SUBCOMMITTEE ON INTERNATIONAL FINANCE
OF T H E

COMMITTEE ON BANKING AND CURRENCY
HOUSE OE REPRESENTATIVES
NINETY-THIRD

CONGRESS

SECOND SESSION

JULY 9, AND AUGUST 13, 1974

Printed for the use of the
Committee on Banking and Currency

U.S. GOVERNMENT PRINTING OFFICE
37-211 O




WASHINGTON : 1974

C O M M I T T E E

O N

B A N K I N G

A N D

C U R R E N C Y

W R I G H T PATMAN, Texas, Chairman
W I L L I A M B. WIDNALL, New Jersey
W I L L I A M A. BARRETT, Pennsylvania
ALBERT W. JOHNSON, Pennsylvania
LEONORK. (MRS. J O H N S . ) SULLIVAN,
J. W I L L I A M STANTON, Ohio
Missouri
BEN B. BLACKBURN, Georgia
HENRY S. REUSS, Wisconsin
GARRY BROWN, Michigan
THOMAS L. ASHLEY, Ohio
LAWRENCE G. W I L L I A M S , Pennsylvania
W I L L I A M S. MOORHEAD, Pennsylvania
CHALMERS P. WYLIE, Ohio
ROBERT G. STEPHENS, JR., Georgia
FERNAND J. ST GERMAIN, Rhode Island MARGARET M. HECKLER, Massachusetts
P H I L I P M. CRANE, Illinois
HENRY B. GONZALEZ, Texas
JOHN H. ROUSSELOT, California
JOSEPH G. M I N I S H , New Jersey
STEWART B. McKINNEY, Connecticut
RICHARD T. HANNA, California
B I L L FRENZEL, Minnesota
TOM S. GETTYS, South Carolina
ANGELO D. RONCALLO, New York
FRANK ANNUNZIO, Illinois
JOHN B. CONLAN, Arizona
THOMAS M. REES, California
CLAIR W. BURGENER, California
JAMES M. HANLEY, New York
M A T T H E W J. RINALDO, New Jersey
FRANK J. BRASCO, New York
EDWARD I. KOCH, New York
W I L L I A M R. COTTER, Connecticut
PARREN J. MITCHELL, Maryland
WALTER EL FAUNTROY,
District of Columbia
ANDREW YOUNG, Georgia
JOHN JOSEPH MOAKLEY, Massachusetts
FORTNEY H. (PETE) STARK, Jr.,
California
L I N D Y (MRS. H A L E ) BOGGS, Louisiana
P A U L N E L S O N , Clerk and Staff
Director
C U R T I S A . P R I N S , Chief
Investigator
BENET D . GELLMAN,
Counsel
J O S E P H C . L E W I S , Professional
Staff
Member
D A V I S COUCH,
Counsel
O R M A N S. F I N K , Minority
Staff
Director

SUBCOMMITTEE

ON

INTERNATIONAL

FINANCE

HENRY B. GONZALEZ, Texas, Chairman
ALBERT W. JOHNSON, Pennsylvania
HENRY S. REUSS, Wisconsin
J. W I L L I A M STANTON, Ohio
W I L L I A M S. MOORHEAD, Pennsylvania
P H I L I P M. CRANE, Illinois
THOMAS M. REES, California
B I L L FRENZEL, Minnesota
R I C H A R D T. HANNA, California
JOHN B. CONLAN, Arizona
WALTER E. FAUNTROY,
CLAIR W. BURGENER, California
District of Columbia
ANDREW YOUNG, Georgia
FORTNEY H. (PETE) STARK, JR.,
California
ROBERT G. STEPHENS, JR., Georgia




(II)

CONTENTS
Hearings held on—
July 9, 1974
August 13,1974
Background material on the "International Petrodollar Crisis" prepared
by the staff of the Subcommittee on International Finance

Page

1
75
123

Statements

Bennett, Hon. Jack F., Under Secretary of the Treasury
Grant, James P., president, Overseas Development Council
Kurtz, Victor, E lvie Import Corp., New York, N.Y
Wallich, Hon. Henry C., member, Board of Governors of the Federal Reserve System
Additional

Information

Submitted for

the

77

Record

Board of Governors of the Federal Reserve System, statement presented
by Hon. Henry C. Wallich, member of the Board
Gonzalez, Hon. Henry B., excerpts from articles appearing in:
Foreign Affairs, July edition, by Walter Levy
Washington Post
Grant, James P., prepared statement
Kurtz, Victor:
"Controls Put On Currency Mart Trade," article from the Journal of
Commerce of July 11, 1974
"Foreign Exchange Abuses by Some Banks Alleged at Convention,
Spurring Debate," article from the Wall Street Journal of
April 11,1974
Letters from:
Chairman Wright Patman, dated August 16, 1969
Hon. William Proxmire, U.S. Senator from the State of Wisconsin,
dated:
May 5, 1971
October 4, 1971
Joseph A. Califano, Jr., former Special Assistant to President
Lyndon B. Johnson, dated February 5, 1968
"Pricing Impact Called Global," article from the New York Times of
January 17, 1974
Overseas Development Council, statement presented by James P. Grant,
president
Treasury Department, statement presented by Hon. Jack F. Bennett,
Under Secretary of the Treasury
Wallich, Hon. Henry C., prepared statement
(in)




5
12
62

77
76
76
20
70
69
72
72
73
72
68
12
5
83

INTERNATIONAL PETRODOLLAR CRISIS
T U E S D A Y , J U L Y 9, 1974
H O U S E OF
SUBCOMMITTEE
OF T H E

REPRESENTATIVES,

ON I N T E R N A T I O N A L

COMMITTEE

ON B A N K I N G

FINANCE,

AND

CURRENCY,

Washington,
D.C.
The subcommittee met, pursuant to notice, at 10:10 a.m., i n room
2128, R a y b u r n House Office B u i l d i n g , the Honorable H e n r y B. Gonzalez [chairman of the subcommittee] presiding.
Present: Representatives Gonzalez, Rees, Hanna, Young, Johnson,
Crane, Frenzel, and Burgener.
M r . G O N Z A L E Z . T h e subcommittee w i l l come to order. I am going to
announce f r o m the outset that unfortunately many of the members of
this subcommittee are also members of the Housing Subcommittee, of
which I am also a member, and today the conferees on the housing
b i l l are meeting to see i f they can reconcile their views. I am sure t h a t
we w i l l be getting additional members as they leave the conference.
B u t under the rules, the subcommittee is permitted t o proceed. I
believe t h a t the first t h i n g we should mention is i t is a very happy
occasion because Secretary Bennett w i l l be f o r m a l l y inaugurated at
noon, he tells me, to replace our f r i e n d P a u l Volcker as the Under
Secretary f o r Monetary Affairs, and so this is really an auspicious
occasion i n more ways than one.
I t h i n k we ought t o explain t h a t one of the i m p e l l i n g reasons f o r
this projected series of meetings goes back to what some of us have
f e l t very keenly f r o m the beginning, and t h a t is t h a t i n this area or
sphere o f action, the Congress sits sort o f as a reacting body. The
President makes an announcement, and subsequent to t h a t we are
asked t o consider intricate monetary matters i n v o l v i n g monetary
legislation, the question of our continuing obligations w i t h respect t o
the international financial institutions, the consequent impact on the
domestic matters, and so this has relegated to this subcommittee a new
area o f responsibility. I was a member of this subcommittee f r o m the
first pionth t h a t I came to the Congress i n 1962, and t o give you an
idea of how the emphasis has changed, between January 1962 and
1971, this subcommittee met f o u r times. B u t between 1971 and today
we have met almost 20 times. So we have a relatively obscure and inactive subcommittee now confronted w i t h some pretty heavy responsibilities i n a very intricate and complex area, and one i n which the
Congress does not have the primacy o f i n i t i a t i n g policy, and yet we
feel very keenly t h a t we have a d u t y and a responsibility t o discharge.
A t this particular time we are very much concerned w i t h what has
developed since the o i l crisis and the very heavy outflow of our moneys
because of the tremendous increase i n the price of the oil t h a t we must
import.
(l)




2
I n these hearings we w o u l d like t o cover the f o l l o w i n g topics, specifically: (1) what oil-producing countries w i l l do w i t h t h e i r new
f o u n d wealth as i t would have an impact on our international policies,
and consequently domestic policies: (2) the potential damage t o the
I n t e r n a t i o n a l Monetary System and t o the w o r l d economy as a result
o f a petrodollar g l u t ; (3) the v i a b i l i t y of the proposals f o r recycling
petrodollars. W e pick up the newspaper and we find t h a t we have f o r eign news stating t h a t the President i n his recent trij> t o the M i d d l e
East either made o r i m p l i e d some commitments i n this respect. I f i t
is possible, the Congress w o u l d like t o know at this t i m e the details of
any commitments so t h a t we can provide at least a sympathetic background, i f such becomes necessary, instead o f w a i t i n g u n t i l i t develops
into a crisis, and then we would have knockdown and d r a g out legislative fights similar t o the ones we had recently w i t h I D A .
I m i g h t mention by way of parentheses here t h a t the f u l l committee
has created an ad hoc subcommittee chaired by the Honorable T o m
Rees f r o m C a l i f o r n i a t h a t w i l l go specifically into the o i l deficit problems o f the developing w o r l d .
F o u r t h , w h a t the U n i t e d States should be doing about the petrodollar problem and its l i k e l y detrimental effects.
A s background, I w o u l d like to f o r the record cite a few facts and
opinions t h a t contribute, at least i n part, t o the c a l l i n g o f these hearings. H o b a r t Rowen, i n the Washington Post, says, and I quote :
Everything done so far in the wake of the oil crisis—for the industrial or the
developing countries—including the steps taken at the C-20—the group of 20
countries—is inadequate or spineless. Untold hazards lie ahead unless there is
some alteration in the vast shift of funds demanded by the oil producing and
exporting nations. That requires lower oil prices.

D r . A r t h u r Burns, Chairman of the Federal Reserve Board, who
w i l l appear before t h i s subcommittee early next month, i n a recent
letter t o me said " f o r the longer run, I see no viable alternative t o a
reduction i n the price o f petroleum."
W o r l d renowned o i l economist W a l t e r J . L e v y , w r i t i n g i n F o r e i g n
A f f a i r s , warns t h a t we are witnessing an erosion of the world's o i l
supply and financial systems, comparable i n its potential f o r economic
and p o l i t i c a l disaster t o the Great Depression or the 1930's.
T h e respected Economist magazine said, a n d I quote:
The world's rich countries are digging the foundations for a major world depression. The rich are almost doing everything possible to insure a trade war
and a slump.

I n M a y , the M a n a g i n g Director o f the I n t e r n a t i o n a l Monetary
F u n d said:
I t is no exaggeration to say that the world presently faces the most difficult
combination of economic policy decisions since the reconstruction period following World War I I .

P r o f . M . A . A d e l m a n o f Massachusetts I n s t i t u t e of Technology, i n
a speech before the National Press C l u b said:
My opinion is that what's bad for the cartel is good for the United States. The
burden for paying for oil imports has been exaggerated but is still very great.
For most of the underdeveloped countries, it is ruinous. There is no way they
can pay, and we will need to bail them out. We are embroiled with our friends
and trading partners in attempts to shove the burden of higher prices on each
other. Our Government denounces bilateral deals of armaments or other goods




3
for oil, while we, ourselves, negotiate one of the biggest bilateral deals of all.
The cartel is making the world a much more dangerous place. A vast arms
buildup is just beginning in the Persian Gulf.

What do the oil prices and their increases mean to the less developed
countries? These countries face an additional import bill approaching
$10 billion, a figure roughly equivalent to their total official development assistance. For the industrialized world, Italy is reported to be
nearly bankrupt and France and Great Britain may not be far
behind.
The oil producing nations will, this year, run up a trade surplus of
$65 billion, compared with $7 billion last year. Bankers have expressed
fears that this petrodollar glut will wreck the Eurodollar markets and
cause havoc in the foreign exchange markets.
The fact is that the oil producing and exporting countries form a
group that consists, and in reality is. an international oil monopoly
which has quadrupled prices i n a period of less than a year and
threatens to do something in the way of an increase every 3 months
as regular as a clock. I n the Mideast, the oil prices are 70 times the cost
of production. By no stretch of the English language can this be described as anything but price gouging.
I have read about the plans for recycling the oil producers' revenues
through the I M F and other institutions and I feel that such plans at
least are certainly necessary to be formulated, but more importantly,
I have watched as we scurry about trying to find ways to channel some
of this oil money back to the less developed countries. How long can
the world tolerate such a situation in which we must beg the extortionist to aid his victims. I cannot see any other way to describe the
poor countries but as victims. None of the proposed aid programs can
even make a dent in the increased burden on the less developed
countries.
Where is there a country today which would permit within its
boundaries the operation of a monopoly which cruelly manipulates
supply and gradruples prices ? Even the most laissez-faire government
in the world would have to try to cope with such a monopoly. Yet
OPEC and the Secretary General threaten us when we talk about
getting together with other consuming nations. The Arab oil producers
make no pretense about their continuing willingness to use their oil
and new found wealth as political blackmail.
OPEC points out that the prices of wheat and other goods have
risen substantially, and therefore, i t is all right for oil prices to go up.
But the United States, Canada, and the other wheat exporters have
not colluded to raise the price of wheat to a price 70 times its cost.
By exercising monopoly power over a vital commodity—power
which we have never thought to be morally right—a small group of
people may control by 1980, 70 percent of the world's total monetary
reserves.
Here is clearly the new generation of robber barons. I feel that the
oil producers are engaged in economic warfare no less serious to the
continued peace and prosperity of the world than armed warfare.
The staff of this subcommittee has prepared background material
which has been placed before each member. I wish to place this material in the record at this time with unanimous consent.




4
[ T h e background material referred to appears at the end o f the
hearing, and may be f o u n d on page 123.]
M r . G O N Z A L E Z . W e can proceed w i t h witnesses, t o whom I wish to
express a profound note of thanks f o r their willingness to take time
t o be w i t h us, and also, as I said to those who were absent at the time,
today coincides w i t h M r . Bennett's swearing i n as the replacement and
our new U n d e r Secretary f o r Monetary Affairs.
I t h i n k i t is a happy occasion and we wish you complete success and
assure you o f our cooperative interest and willingness t o do w h a t we
can on our level and f o r our pant t o w o r k w i t h you.
M r . Bennett, would you proceed, unless a member of this subcommittee wishes t o make some p r e l i m i n a r y remarks a t this time. M r . Hanna.
M r . H A N N A . M r . Chairman, since I have t o go t o the H o u s i n g Subcommittee meeting, I would appreciate i t i f I m i g h t put on the record
about 5 minutes of observations.
M r . G O N Z A L E Z . W i t h unanimous consent, and there being no objections, so be it.
M r . H A N N A . I apologize to M r . Bennett f o r t a k i n g this time, but I
would like t o summarize f o r the record of this subcommittee m y own
extraction of i n f o r m a t i o n f r o m m y visits to the finance ministries
of both Saudi A r a b i a and K u w a i t . I t h i n k t h a t at the outset one sees
the history of the investment of the A r a b oil countries as h a v i n g t w o
prime principles: One, l i q u i d i t y , and the other, anonymity.
T h e Arabs have sought this over the years. I n this new f o u n d
wealth they realize t h a t they have to go beyond that, and they indicated t o me that they had three basic desires f o r the use of t h a t money.
The first was t o invest i n the extension of petrochemical and other
related industrial activities w i t h i n their own lands and f o r the betterment of their own people on the basic community facilities level.
T h e second t h i n g they wanted to do was invest i t i n other A r a b
countries who d i d not produce oil, t o make investments i n industrialization activities, agricultural activities, and i n the general improvement i n housing, education, and so f o r t h .
The t h i r d t h i n g they wanted to do w i t h t h e i r money was to invest
i t i n the M u s l i m countries of A f r i c a , and they had i n m i n d some k i n d
of an A r a b f u n d f o r underdeveloped M u s l i m countries. They indicated
to me that they were w i l l i n g t o include underdeveloped countries who
were not M u s l i m so that they would not preclude some of the countries
who are suffering because of the h i g h price of oil.
T h e other t h i n g they t o l d me was their attitude t o w a r d the price of
oil. They said they were p r i c i n g oil on this basis, first, to discourage
the h i g h use of i t i n industrialized countries, which they f e l t was to
some degree wasteful; second, to find a competitive price to any alternative to o i l and consider that as one of the hallmarks of pricing.
The other t h i n g that they were looking at was the problem of converti n g oil i n the ground to some other k i n d of asset t h a t would be equal
i n value and i n safety to the o i l i n the ground.
They indicated to me that the transfer of oil i n the ground t o the
currencies t h a t they saw around the w o r l d d i d not look too attractive
because those currencies were subject to float. I was there r i g h t after
the French had floated down 5 percent and they had just sold a large
cargo of oil to the French and they could not understand w h y they




5
should take the 5 percent rap by h a v i n g picked up the French currency. So they said as long as currencies are subject t o these kinds of
float and unless there were some k i n d of quick investments i n the
Western W o r l d or preferably they would like to see their oil, i n terms
of the Western W o r l d , coming back as the needed materials, technologies, manpower, machines, t h a t would do the three jobs t h a t they
sought i n terms of industrializing t h e i r own country, i m p r o v i n g the
non-oil-producing A r a b countries, and i n doing the w o r k they hope
t o be able to do i n the underdeveloped countries.
I t seems to me t h a t the U n i t e d States has been somewhat derelict i n
not finding where the A r a b m i n d is i n these matters, and i n t r y i n g to
w o r k out a cooperative program. The most promising t h i n g , as you
have indicated, M r . Chairman, that I have seen is the willingness on
the p a r t of the Arabs to use the I M F and the W o r l d B a n k and some
of the others f o r the purposes t h a t they have described, and particul a r l y i n the underdeveloped countries. I t r i e d to point out to them
that i t is not easy t o get into -the business of investment i n improvement, that you have t o have a developed expertise i n the f u n d t h a t is
going to hold the money and you have to have a developed expertise
i n the borrowers who are going t o use the money. T h a t has not been
demonstrated yet i n any of the places i n which they have talked about
doing their investments. B u t I personally feel very strongly, M r .
Chairman, that you are doing a great service to this Congress and to
the country by these hearings, and I want to j o i n you i n welcoming
M r . Bennett to his new post and assure h i m t h a t this subcommittee
w i l l take an interest i n his position and h i m personally, as we have his
predecessor. I thank you, M r . Chairman. I thank the subcommittee.
M r . G O N Z A L E Z . T h a n k you, M r . Hanna. W e deeply appreciate your
keen interest and your strong support and membership on this subcommittee. I t h i n k the members of the subcommittee have had a sense of
frustration when events happen and then we have to come i n after the
event, and we like to feel t h a t the Members of the Congress w i l l have
some direct i n p u t and some immediate responsibility w i t h respect to
some of these issues.
M r . Bennett, you may proceed as you wish. I thank you once again.
I f you have a prepared statement, you can use your option of either
reading i t or summarizing i t . A g a i n , I say t h a t we are very grateful
f o r you t a k i n g time out, especially r i g h t before you are about to be
sworn in.
STATEMENT

OF HON.

JACK
OF T H E

F. B E N N E T T ,

UNDER

SECRETARY

TREASURY

M r . B E N N E T T . M r . Chairman and members of the subcommittee, I
appreciate your k i n d words of welcome. A s you note, these hearings
are particularly opportune f o r me. A t any time i t would be a challengi n g assignment to succeed Paul Volcker. B u t i t has not escaped m y attention any more than i t has escaped yours t h a t conditions i n the foreign exchange and financial markets and i n rates of g r o w t h of prices
and production are not entirely satisfactory around the w o r l d today.
So i t seems p a r t i c u l a r l y fitting t h a t I be subjected to some cross-examination as I enter i n t o these new duties. B u t I am p a i n f u l l y aware




6

t h a t the oath w h i c h Secretary Simon w i l l administer to me today w i l l
not make me an instant expert i n a l l aspects of economics.
I n t r y i n g t o understand our present difficulties, I could perhaps
make m y position clear. I tend to t h i n k t h a t p r i m a r y attention should
be given t o t w o m a j o r developments over the recent years:
F i r s t , the shortfalls and cutbacks i n previously anticipated levels of
production of i m p o r t a n t basic raw materials, most i m p o r t a n t l y oil.
Second, a widespread tendency f o r governments t o p r i n t more
money and more government I O U ' s than were appropriate i n such
conditions of supply stringency around the world.
I n m y prepared statement this m o r n i n g I propose to concentrate on
the first of these developments, and p a r t i c u l a r l y on the impact o f the
reduction i n the anticipated levels of o i l production. T h a t impact continues to be large, and our difficulties are exacerbated by the uncert a i n t y as to just how large the cutback w i l l be i n the future.
Last September, before the outbreak of f i g h t i n g i n the M i d d l e East,
the production o f o i l i n the non-Communist w o r l d was just short of
48 m i l l i o n barrels a day. B y November, certain governments i n the
Mideast and A f r i c a had cut production back by about 5 m i l l i o n barrels
a day, and this large cutback was n a t u r a l l y followed by a large increase i n prices on new short-term o i l sales. Even now, some of those
producing countries are continuing to cut back production f a r below
the levels o f last September.
B u t elsewhere production has grown, so the total w o r l d production
is probably now about at least September's l e v e l — w i t h i n 200,000 or
300,000 barrels a day one way or another. B u t i t is i m p o r t a n t to note
t h a t the level o f actual production today s t i l l reflects restraints b y cert a i n governments w h i c h are h o l d i n g total production roughly at 4 m i l l i o n barrels a day below the level which could be produced efficiently
w i t h existing capacity i n place.
New contract o i l sale prices have fallen f r o m the temporary peaks
of early t h i s year, b u t some producers are s t i l l attempting t o charge
e x t r a o r d i n a r i l y h i g h prices. I n view o f these h i g h prices, consumers
both i n the U n i t e d States and abroad have continued to h o l d t h e i r
consumption well below the levels predicted earlier, and i n fact, below
the levels o f a year ago. O n a worldwide basis consumption has been
less t h a n production f o r some time. Inventories have been b u i l d i n g u p
and are now approaching the spillover point.
U n d e r these circumstances, o i l prices today are clearly under strong
pressure t o decline f u r t h e r on international markets, though not on the
b u l k o f U.S. production, which remains under severe price control.
Y e t there are those i n the producing countries who are u r g i n g their
governments to make sharp new cutbacks i n production i n order t o t r y
t o m a i n t a i n today's h i g h o i l prices, or even to t r v t o increase them
again. T h e producing governments are being urged to raise prices on
t h a t p o r t i o n of the o i l production being sold directly b y the governments and to renege on long-term contracts t o make some o i l available
on the basis o f agreed specified payments o f royalties and taxes t o the
governments.
I n m y view, any new cutbacks i n o i l production b y anv government
at this time should clearly be regarded by the U n i t e d States and b y
a l l other consuming countries, both more developed and less developed,




7
as a counterproductive measure. Moreover, even apart f r o m the p o l i t i cal and security implications f o r the producers, I am convinced t h a t
any such cutbacks w o u l d t u r n out to be economically h a r m f u l t o the
producers f o r t w o reasons. I n the first place, the price effects o f such
cutbacks w o u l d inevitably lead to such f u r t h e r intensification o f research and investment relating t o alternative sources of energy and
to alternatives t o energy use that the effect would be to reduce the total
value w h i c h the exporters would receive f o r their o i l over the l i f e of
their producing fields. Cutbacks m i g h t b r i n g a higher price f o r a short
period, but they w o u l d b r i n g a more t h a n offsetting reduction i n revenues f o r a long t i m e thereafter—in view of the importers' increased
commitment t o alternatives.
I n the second place, maintenance o f present costs o f export o i l —
even w i t h no increases—would threaten severe economic and i n some
cases political damage to a large number of consuming countries t o an
extent which could not help but cause damaging backlash t o the producers as well.
T h e damage to consuming countries i n the first instance w o u l d be
simple but real—the result of an increase i n the costs o f t h e i r o i l imports f a r greater t h a n the increase i n the prices of t h e i r exports. I n
this regard, I realize t h a t some officials of oil-producing countries have
attempted t o j u s t i f y f u r t h e r o i l price increases by reference t o increases i n the prices of goods imported into those countries. P r o v i d i n g
the producers w i t h this argument has undoubtedly been one additional
damage we i n the developed nations have inflicted on ourselves by our
miserable performance i n relation t o inflation. B u t we should not lose
our sense of proportion.
Since 1970, f o r example, the new contract F O B export dollar price
of Saudi A r a b i a n l i g h t crude has increased approximately 730 percent,
whereas the average cost o f imported goods and services i n t o the producing countries has increased only about 70 percent over the same period. Clearly, the increase i n o i l prices has been about 10 times as large.
O n a similar calculation, the oil price increase has been about seven
times as large f r o m 1960 to the present.
T h i s large and sudden adverse change i n their terms of trade finds
different nations w i t h widely v a r y i n g capabilities t o adapt. F o r most
i m p o r t i n g nations, including the U n i t e d States, the impact is reducing
our standard o f l i v i n g and is reducing our rate of economic growth,
but our lives and our institutions are not seriously threatened. I n a
number of other nations, however, nations whose standards o f l i v i n g
were already at the literal m a r g i n and whose hopes f o r economic advancement were f r a g i l e i n any case, the sudden increase i n the cost of
oil and consequently of fertilizer as well could be catastrophic unless
there is emergency assistance. Even i n some countries whose standards
of l i v i n g are f a r above the subsistence level the new prices could, i n
the absence o f farsighted international cooperation, threaten the collapse of existing institutions.
Such severe damage to the consuming countries would create a backlash on the producers—apart f r o m political dangers—through underm i n i n g the economies t o which the o i l producers must export i f they
are t o derive the m a x i m u m value f r o m their l i m i t e d resources; and
t h r o u g h undermining the economies i n which the o i l producers must




8

temporarily invest i f they are to sell their o i l at the most r e w a r d i n g
time and spend the proceeds on equipment and services f o r t h e i r own
diversified development at the optimal, nonwasteful pace.
M r . Chairman, you w i l l observe that, i n discussing these implications o f actual ancl potential o i l production cutbacks, I have stressed
the u n d e r l y i n g and real economic effects. I do this because I t h i n k they
are serious, because I t h i n k the w o r l d should be aware of the contrast
between the deliberate cutbacks by some o i l producers on the one hand,
and the determined efforts being made, on the other hand, by the
U n i t e d States and other nations t o increase t o the m a x i m u m t h e i r
production o f agricultural and other commodities to supply w o r l d
markets.
W h i l e I stress these basic effects, I do not wish t o ignore the impacts
of the o i l cutbacks on the financial institutions and arrangements of
the free w o r l d . The indirect effects have been serious and well publicized f o r a small number of banks, f o r example. Yet, i n m y judgment,
our financial institutions and international monetary arrangements
are not l i k e l y t o be basically threatened by these developments i n the
commodity field. Current problems are real f o r some individuals, f o r
{>articular companies, and f o r entire countries, b u t they are the probems o f reduced supply o f goods; they are not l i k e l y to be intensified
by f a i l u r e of our instruments o f financial cooperation.
Neither do I feel t h a t current developments pose a serious threat of
w o r l d depression. Those who concentrate their w o r r y i n g today on the
possibility o f w o r l d depression have brought t o my m i n d the picture
of a m a n immobilized i n the face of a charging b u l l by the fear t h a t
i f he t r i e d t o escape the animal by j u m p i n g sideways he m i g h t possibly
brush u p against an unseen rattlesnake. Certainly, rattlesnakes—and
also inadequate demand f o r our economic production—are always conceivable dangers; but, r i g h t now, the clear and present danger before
us is not inadequate demand, but f a r too much monetary demand faci n g existing capacity t o produce. E f f o r t s t o d r a w a parallel between
today's circumstances and the early 1930's seem to me farfetched. The
problem then was too l i t t l e demand facing large amounts of unused
capacity.
T h e developments i n the commodity markets have resulted i n large
changes i n previous patterns o f financial flows. Consumers a n d consuming nations are choosing to borrow a l o t more t h a n before i n order
t o ease t h e i r t r a n s i t i o n t o a w o r l d of higher cost energy. Some of the
o i l producers are choosing t o export a large p a r t of t h e i r o i l i n exchange f o r I O U ' s f r o m the consuming countries.
There have been various estimates t h a t the oil-producing countries
i n combination w i l l increase t h e i r investments abroad by $50 b i l l i o n to
$60 b i l l i o n d u r i n g this year. I do not place confidence i n any precise
estimate, f o r i t is now unclear, not only what the price of o i l w i l l be
d u r i n g the rest of this year, b u t even what i t was f o r the first h a l f of
this year, since various negotiations on this subject are s t i l l underway.
Furthermore, at any particular price, i t is unclear how much o i l any
particular i n d i v i d u a l consuming country w i l l choose t o buy, t o what
extent i t w i l l choose t o r u n current account deficits by l i g h t e n i n g its
current economic burdens t h r o u g h b o r r o w i n g and burdening its f u t u r e
w i t h repayment obligations. I t a l y and France, f o r example, have re-




9
cently taken forceful domestic measures t o reduce t h e i r o i l consumpt i o n and their reliance on o i l imports, and many other nations w i l l
probably take steps i n the same direction.
Forecasts of the rate o f f u r t h e r accumulation o f foreign investments
by the oil-producing countries i n f u t u r e years are even more tenuous.
M y o w n expectation, however, is t h a t the rate w i l l decline each year,
not only because o f the lower o i l prices w h i c h I anticipate, but also
because over t i m e the development plans o f the producers w i l l have
progressed so t h a t they are using u p increasing proportions of current
revenues. I t has been estimated t h a t this year o i l exporters w i l l be
spending around 40 percent o f t h e i r receipts f o r current i m p o r t s ; I
would expect this percentage to be much larger i n f u t u r e years—and
ultimately, i t w i l l exceed 100 percent.
Meanwhile, however, the o i l producers have been accumulating
what, by any standards, are large investments. B y now, they quite
probably exceed $30 b i l l i o n ; and m the early months o f this year the
accretions were being largely placed i n short-term bank deposits concentrated i n the foreign branches and foreign currency accounts which
comprise the so-called Euromarket. This concentration had begun to
raise questions about capital adequacy i n the banks and about their
vulnerability t o sudden large withdrawals. More recently, strong
counterpressures have begun to exert themselves. T h e banks have begun to reject additional short-term deposits and t o insist on terms
more i n line w i t h the relending opportunities available t o them. The
oil-producing countries, themselves, and other depositors, have become
more careful to insure they were not r i s k i n g their funds i n institutions
w i t h an adequate capital base. There has accordingly been increased
interest i n investing i n U.S. Treasury securities and i n other longer
term securities, i n c l u d i n g U.S. corporate equities. Secretary Simon
and I hope t o discuss these possibilities f u r t h e r d u r i n g our t r i p to the
Mideast starting Thursday. I suspect the time may also be coming
when there w i l l be increased interest both by foreign and b y domestic
investors i n offering new equity f o r selected private banks. W i t h the
expanded b a n k i n g business t o be had, there w i l l be those who wish to
take advantage of the profitable investment opportunities which
should exist. Obviously, new equity is the answer i f banks have more
business t h a n they can handle w i t h their existing equity base.
Secretary Simon, i n his recent speech to the International Monetary
Conference i n W i l l i a m s b u r g , also recognized a governmental responsibility i n this area. W h i l e n o t i n g t h a t :
Governmental regulation and emergency facilities can never substitute for
prudent financial management,

he nonetheless emphasized t h a t :
I n the United States, it is clear that the authorities do have a responsibility
to supervise U.S. banks in both their domestic and international operations, and
a major part of that responsibility is to insure that they are in a sound position
to meet their total liabilities.

A l l of this recent attention to possible massive w i t h d r a w a l of funds
should not lead anyone to conclude t h a t the oil-producing countries
have been s h i f t i n g t h e i r funds about i n a volatile manner. I n fact,
their officials have shown themselves to be very conservative investment managers, well aware of the loss i n the value of t h e i r investments




10
w h i c h would result f r o m any sudden effort t o unload a large amount
of t h e i r securities on a capital market or to transfer a large amount
of t h e i r funds f r o m one currency t o another.
M r . H a n n a described, I thought, quite clearly the current trends of
t h e i r t h i n k i n g i n this respect.
I n relation t o the foreign exchange markets, the situation must be
monitored carefully, b u t i t should be recognized t h a t any instability
w h i c h may be caused by the large holdings of the o i l producers are
l i k e l y t o nave arisen not f r o m sudden shifts o f these funds f r o m one
investment t o another but rather f r o m swings i n market expectations
as t o where t h e i r new accretions o f funds would ultimately be invested.
I n view of the uncertainty on this subject, i t is fortunate t h a t before
the question arose there had already been so much progress t o w a r d
greater flexibility i n our international monetary arrangements. I n this
period o f change i n trade and investment patterns, and i n the presence
of widely d i f f e r i n g rates of inflation i n different countries, an attempt
to m a i n t a i n a framework of r i g i d exchange rates w o u l d probably have
led, i n practice, to explosive instability. There would have been substantial changes i n exchange rates since the u p w a r d spurt of o i l prices
began last October. Y e t , these have been handled w i t h o u t serious int e r r u p t i o n to the world's trade and investment transactions. A small
number o f banks d i d get i n t o trouble i n their foreign exchange deali n g d u r i n g t h i s period, b u t t h e i r difficulties seem to have been focused
i n f a u l t y internal procedures and i n involvement i n foreign exchange
speculation out of p r o p o r t i o n to the size o f the institutions. Regrettable as t h e i r experience was, i t probably has had the salutary effect
of b r i n g i n g other institutions t o examine their foreign exchange practices more carefully. The recent Lochouse-Herstatt
case i n Germany,
i n particular, is leading banks t o consider whether changes are desirable i n interbank clearing procedures to reduce unintended r i s k exposure i n what were intended to be essentially riskless simultaneous
exchange transactions.
I n recent weeks, the U n i t e d States and other governments have also
given consideration t o the possibility o f setting u p a new intergovernmental agency w h i c h w o u l d be designed t o borrow large amounts of
money f r o m the o i l producers on commercial terms and then to relend
those funds i n other countries again on commercial terms. T h a t type
of agency remains a possibility, i f i t should be needed, but at the
moment the consensus—which I t h i n k is wise—is t h a t i t w o u l d be
better t o rely basically on the many different channels provided b y
existing institutions f o r h a n d l i n g the large, new investment flows
among nations.
Governments, nonetheless, have an i m p o r t a n t supportive role. I n the
U n i t e d States, we recognized t h a t earlier this year by removing the
controls on the outflow o f capital f r o m the bilateral swap agreements
b y w h i c h governments stand ready t o help each other i n case of shortr u n exchange market disturbances. W e and other governments recognized i t b y a wide range o f cooperative international initiatives. A t
the recent final meeting of the " C - 2 0 " M i n i s t e r i a l Committee, there
was a renewed dedication t o international monetary cooperation and
agreement on a new pledge t o avoid restrictive trade measures f o r balance o f payments purposes. A new f a c i l i t y was created i n the I M F t o




11
provide 4- to 7-year credit assistance t o a i d nations i n adjusting to
higher o i l prices, and there was agreement t h a t i n some cases—
t h r o u g h a so-called extended F u n d f a c i l i t y — t h e I M F should be able
i n special cases t o provide credit o f longer m a t u r i t y to less-developed
countries undergoing major structural changes. There is also an understanding t h a t governments i n need may sell some p o r t i o n of their gold
holdings i n t o private markets or use t h e i r gold as collateral f o r
borrowing.
A l l these actions were constructive responses w h i c h have strengthened our international monetary system. B u t we must recognize that
f o r a small number o f particularly h a r d h i t countries these measures
are not l i k e l y t o be enough. I am sure t h a t J i m G r a n t w i l l later this
m o r n i n g be f a r more eloquent t h a t I can be on the prospective p l i g h t
o f those countries whose standards of l i f e were already abysmally low
and now have the distinction of being the "most seriously affected" by
the new o i l prices. These are among the countries w h i c h have reason
to be g r a t e f u l to you on this subcommittee f o r securing passage o f the
I D A authorization a few days ago. Yet, those funds were intentionally
clearly earmarked to be used on specific long-range development p r o j ects t o raise t h e i r people f r o m the sink o f poverty. Those I D A iunds
w i l l not be, and should not be, available to help pay any o f the tremendous increase i n the costs of o i l and fertilizer f o r the immediate
use of t h e i r s t r u g g l i n g economies. F o r this purpose, these^ countries
w i l l be pleading, before this year is over, f o r some nonproject funds
on a concessional basis. There is no likelihood, however, t h a t such
funds could be repaid w i t h i n a few years; they w i l l have to be on a
long-term, low-interest basis. I n most cases, the lack o f these funds
is probably not a matter of l i f e and death this week, but that time is
probably not many months away. The total sums i n question f o r this
year are not immense. I doubt t h a t i t w i l l ultimately be decided t h a t a
large amount is appropriate i n this calendar year f r o m a l l sources
i n new forms of aid above those t r a d i t i o n a l forms of aid already
scheduled.
S t i l l , there is an organizational urgency i n reaching a consensus on
some analysis o f the factual situation i n these countries and i n insuring
t h a t there is an adequate response f r o m those countries of the w o r l d
who are i n a more-favored position.
Some of the oil-producing countries have begun t o respond w i t h
isolated bilateral arrangements. There have also been appeals f o r
funds b y the U , N . and there have been discussions of various possible
j o i n t initiatives by some of the o i l exporters, as M r . H a n n a mentioned,
but l i t t l e has actually been committed at this time specifically to alleviate the near-term distress of the "most seriously affected."
The oil producers have agreed to purchase additional amounts of
W o r l d B a n k bonds and to lend about $3 b i l l i o n t o the I M F , but these
investments are at approximately market terms and they are effect i v e l y guaranteed as to repayment b y the major developed nations, inc l u d i n g the U n i t e d States. They do not represent provision o f the concessional funds appropriate f o r the "most seriously affected."
F o r them, the rescue operation, i n large p a r t , remains to be organized. F o r this purpose, i t may well be t h a t no new financial institut i o n is needed; but there must be a group which is charged w i t h being




12
sure the job gets done. F o r t h i s purpose, I am placing great hope on
the new ministerial development council t o be set u p along the C-20
lines, i n accordance w i t h a decision taken by the ministers when they
were i n Washington last month f o r the final C-20 meeting. I certainly
hope t h a t this new g r o u p representing o i l producers and o i l consumers, both developed and less developed, w i l l be small enough to
f u n c t i o n effectively and w i l l have the competence and the conscience
f o r the job.
T h e problems which t h a t new council w i l l face and the problems
w h i c h a l l of us face w i t h the new o i l prices are real. T h e appropriate
remedy is t o lower those prices. Meanwhile, we must cooperate internationally t o mitigate the real problems as much as we can. I f we
continue t h a t cooperation, i f we stay alert, those real problems w i l l
not be made worse b y any freezing u p of the world's financial
mechanisms.
T h a n k you, M r . Chairman.
M r . G O N Z A L E Z . T h a n k you, M r . Bennett, very much.
I f i t is O K w i t h the members of the subcommittee, I w o u l d suggest
t h a t we proceed to hear M r . G r a n t , and then we can direct questions
to both gentlemen at the time we reach the questioning period. I f
there is no objection, we w i l l proceed t h a t way.
M r . Grant, thank you very much f o r being w i t h us this morning,
and w i t h o u t any f u r t h e r ado I recognize you t o proceed as you see
best. I notice you have circulated your prepared text. I f you wish t o
read i t t h a t is fine. I f you wish to summarize i t , t h a t is fine, too.

STATEMENT OF JAMES P. GRANT, PRESIDENT, OVERSEAS
DEVELOPMENT COUNCIL
M r . G R A N T . M r . Chairman, i t is a great privilege to be w i t h you here
today and w i t h the members o f this subcommittee, and I w i l l take you
u p on y o u r offer o f inserting the f u l l statement i n the record i f I may
and then proceed to summarize i t .
M r . G O N Z A L E Z . W i t h o u t objection, we w i l l enter y o u r prepared
statement i n t o the record.
M r . G R A N T . A S we consider today the impact of the petrodollar crisis
on the w o r l d and p a r t i c u l a r l y on developing countries and our policies
t o w a r d them, i t is i m p o r t a n t t h a t we recognize t h a t this crisis is occurr i n g i n a much broader context of a newly emerging international
economic and political order. T h e crisis is a result of the very r a p i d
g r o w t h of the past 25 years. T h i s is a s h i f t t h a t was symbolized w e l l
before the o i l crisis by the soaring food prices t h a t we saw i n early
1973. A s you may remember this led t o a soybean embargo by the
U n i t e d States and led to a fertilizer embargo on new export sales i n
October t h a t has been i n effect u n t i l very recently. O i l prices soared
f o u r f o l d resulting i n the embargo, and a series of other shortages—
fertilizer, cotton, and rubber. T h i s basic set of scarcities results f r o m
t w o factors. O n the one hand are short term and cyclical factors—the
unprecedented, simultaneous boom of a l l o f the i n d u s t r i a l countries o f
the early 1970's; the unprecedented drought t h a t went t h r o u g h Russia,
I n d i a , Sahelian A f r i c a , and other parts of the w o r l d i n 1972 and 1973;
the war i n the M i d d l e E a s t ; and the inadequate use of w o r l d i n f orma-




13
tion systems, w i t h the result t h a t we paid nearly $2 b i l l i o n to our f a r m ers not t o produce food i n fiscal year 1973 at a time when the Russians
were depleting the w o r l d global food stocks.
B u t even more fundamental i n our opinion are some long t e r m
secular trends which indicate that this is not just another peaking of
prices as we saw after W o r l d W a r I I — t h i s really is the tremendous
increase i n demand. The gross global product of the w o r l d i n the late
1940's was about $1 t r i l l i o n . This year i t w i l l be about $4 t r i l l i o n .
I n constant dollars i t is roughly a threefold increase i n global demand
i n 25 years. W h e n we began t o move into the t h i r d t r i l l i o n of demand,
we began to see system overloads emerging at every corner i n the late
1960's. W e could see i t ecologically when there was the problem of
pollution i n the cities, and i t began t o reach unmanageable proportions ; the problem of purification of the lakes; and i n the last 2 or 3
years we have seen the overharvesting of the w o r l d fish catch, which
after t r i p l i n g i n 25 years has declined the last three.
W e have seen i t i n the ever-tightening food situation. Despite the
world's largest crops i n history last year, w o r l d food reserves actually
went down again. The w o r l d food system is h a v i n g trouble staying
up w i t h an increasing demand, which is double that of 20 years
ago. W e have seen i t i n the s h i f t f r o m buyers' t o sellers' markets
f o r goods t h a t are not i n physically scarce supply but have become sufficiently t i g h t t h a t the sellers have become dominant—oil, coffee, and
other commodities.
T h a t this is p a r t of a long term trend was brought out by the
fact t h a t the W o r l d B a n k was estimating that the o i l prices o f $8 a
barrel we saw last f a l l and winter, would come i n due course i n
the 1980's. They were brought u p much sharper as a result o f these
short term cyclical trends.
Basically this increase f r o m demand results f r o m t w o long-term
circumstances t h a t w i l l probably be w i t h us f o r some time. One is the
population increase which is double what i t was 20 years ago, an increase of 2 percent a year. Second, affluence around the w o r l d has increased about 3 percent a year f o r the last 7 or 8 years. T h i s is double
the rate of increase of affluence that we had 20 years ago. These two
forces together have been the basic surge behind increasing demand.
F o r some commodities, such as food, 70 percent o f the increase i n demand comes f r o m population increase, only 30 percent f r o m increase
i n affluence. F o r other goods l i k e oil the soaring increase i n demand
has come p r i m a r i l y f r o m affluence and only secondarily f r o m populat i o n increase.
A s we move closer to the $10 t r i l l i o n gross global product that is
projected f o r the end of this century, w i t h each t r i l l i o n coming i n
ever-shorter time periods, I t h i n k we can predict a series of consequences f r o m t h i s :
Competition f o r l i m i t e d resources w i l l become considerably more
intense, and there w i l l be more and more of a linkage effect when there
is a shortage i n one area. As we have seen recently, the shortage of
energy leads to a shortage of f e r t i l i z e r ; the shortage of fertilizer leads
t o a shortage of food. The "quick f i x " and product substitution w i l l be
much more difficult i n the next 25 years than i n the last 25 years. A n d
finally, as we w i l l see, there w i l l be a sis^iificant s h i f t i n economic as

37-211 O - 74 - 2




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well as political power to the raw material suppliers of the w o r l d away
f r o m the processors. W h a t this means as we consider the petrodollar
crisis and what to do about the current issues, is t h a t we need t o look
at this crisis i n the broad framework and t h a t we need a whole new set
of rules, institutions and approaches t o our problems i n the next 25
years.
I t is clear, f o r example, t h a t the whole issue o f access t o supplies w i l l
become as important i n the next 25 years as the key issue o f access
to markets was i n the last 25. I n other words, i n the last 25 years the
things t h a t concerned the G A T T , the U N C T A D , the T r a d e R e f o r m
A c t of 1973, the Kennedy Round of negotiations, were a l l access t o
markets, and now we have a new set of problems, access t o supplies—
oil, fertilizer, food.
Second, i t is very clear t h a t there w i l l need to be increased global
efforts and machinery t o increase production of goods t h a t become i n
t i g h t supply, whether i n oil, as was indicated by M r . Bennett, where
we need t o somehow cope w i t h the restraints more effectively, or i n
food, where there is need f o r a global effort to increase the supply.
F i n a l l y , i t is clear t h a t we need t o begin t o t h i n k o f ways of reducing
demand i n certain areas. W e have seen i t most notably i n the area
of the use of energy i n t h i s country. B u t clearly, there is a global
shortage of fertilizer l y i n g ahead. G r a i n farmers i n many parts of the
w o r l d cannot get even h a l f of the fertilizer they got last year, w h i l e
other parts of the w o r l d are s t i l l using indiscriminate amounts f o r
lawns and other purposes.
A l l o f these trends t o w a r d a new w o r l d o f t i g h t supply were w e l l
along when the energy shock came i n the f a l l , and were f a r t h e r
along when the second shock came on December 22d w i t h the additional sudden doubling of prices. T h i s has dramatized these trends
very sharply and has accelerated f o u r m a j o r trends w h i c h I w o u l d
l i k e t o discuss:
One is the energy price shock on developing countries; second,
the worsening w o r l d food problem; t h i r d , its aggravation of the global
recession; and f o u r t h , its acceleration of the power s h i f t away
f r o m some o f the major manufacturing, i n d u s t r i a l countries, l i k e the
E E C and Japan and the populous countries l i k e I n d i a , t o w a r d the
O P E C countries and the N o r t h American raw material-rich as well as
i n d u s t r i a l powers.
T u r n i n g first to the energy shock dislocations f o r the developing
countries, as the chairman mentioned i n his introductory comments,
the f o u r f o l d o i l price increase added $10 b i l l i o n to the i m p o r t b i l l of
these countries. The aggravation of these increases was compounded
as a result of the fact t h a t i n the preceding year the prices o f other
goods t h a t these developing countries had t o i m p o r t f r o m the indust r i a l countries had already risen substantially. They already faced a
$5 b i l l i o n increase i n their i m p o r t bills f o r food and fertilizers before
this $10 b i l l i o n overload was added, f o r a total of about $15 billion.
O n t o p o f this increased i m p o r t b i l l they faced the dangers o f an
economic slowdown i n the West, which has already affected very substantially the tourism earnings of countries. I n the Caribbean and the
Mediterranean, the flow of workers f r o m many developing countries




15
to the European countries, and the prices of some but not many raw
materials. T h e impact of these price rises has varied very greatly on
the developing countries.
Obviously, the O P E C countries have benefited greatly, and, while
we t h i n k normally of the A r a b nations as the O P E C countries, there
are 260 m i l l i o n people i n this aggregation of O P E C countries.
A m o n g the n o n - O P E C countries, there are a group of developing
countries t h a t are net beneficiaries of the changes of the last 2
years. These are those countries which are minor o i l exporters, like
Tunisia and Bolivia. There are other countries such as Malaysia that
w i l l be beneficiaries of major price rises i n the products they sell
and they are largely self-sufficient i n oil. There is a whole group of
countries, i n c l u d i n g most of those i n L a t i n America, which are not too
badly h u r t i n a fundamental sense by the changes of the last couple of
years. They should be able t o ride out the difficulties assuming there is
no major global recession, continuation of the I M F o i l f a c i l i t y over a
several year period, continued access t o Eurodollar markets—this is a
new feature f o r many developing countries, the access to the Eurodollar markets—and finally, continued access to supplier credits. There
is no question but that a suspension of activities by the E x p o r t - I m p o r t
B a n k would create a whole new set of crises f o r the Brazils, the
Mexicos, the Colombias, this category of developing countries.
A n d finally, this assumes an expansion o f W o r l d B a n k lending t o
these countries on its regular terms.
There is another category of countries which fits somewhat this same
category. T h i s category includes the industrial developing countries—
Korea, Taiwan, H o n g K o n g , and Singapore. These countries have a
tremendous immediate adverse impact. Korea, f o r example, has to pay
an extra b i l l i o n dollars f o r o i l and food. B u t these are
flow-through
economies t h a t can pass on the prices i n the goods they export, so there
again, i f they can have a short term f a c i l i t y , i t should tide them over.
T h i s leads us t o the hardest h i t countries, w h i c h Secretary Bennett
was describing as the most severely affected. W e at the Overseas Development Council call them the newly emerging f o u r t h w o r l d of
some 30 to 40 of the poorest, slowest moving countries. These countries
have been h i t b y both very large rises i n the price they have t o pay f o r
o i l and f o r food, while getting no comparable offsetting increases i n
the price o f the goods they sell.
F o r these countries, as Jack Bennett brought out, there is need f o r a
substantial amount of emergency assistance to tide them over the short
run, t o keep them f r o m going under d u r i n g the next 3 to 4 years.
They w i l l need some $3 b i l l i o n a year t o keep f r o m going under over
the next several years, a n d these are countries t h a t really cannot have
access to the Eurodollar market. The I M F special f a c i l i t y rates are
too h i g h f o r them t o borrow any large continued amounts. The suppliers' credits are not available to them since the Eximbanks of the
w o r l d do not lend to these countries.
These countries, however, need more than the short t e r m emergency
assistance o f $3 b i l l i o n a year. They also need additional assistance t o
get their economies back on sufficient keel so t h a t they are not so dependent upon food and energy imports f r o m the outside, and this w i l l
require another b i l l i o n to $2 b i l l i o n a year.




16
The prospects of these countries are not at a l l hopeless. I f one
takes I n d i a , f o r example, i t has a great potential f o r increasing
food production at low cost. L i k e the U n i t e d States, i t has great reserves of coal. B u t these countries have a particular capital problem
which is t h a t they pay out additional money f o r o i l and f o r food, and
the O P E C countries which have a money surplus have no incentive t o
lend i t back t o them at the current time. Whereas i n the U n i t e d States
we pay out increased amounts f o r o i l and the O P E C countries take the
capital surpluses and reinvest them i n the Western countries. W e have
a problem between us, but the capital comes back to the West. T h i s is
not t r u e f o r the poorest developing countries.
T h i s immediate o i l crisis is coming i n conjunction w i t h a very serious
worsening w o r l d food situation. I t has been apparent f o r some t i m e
t h a t there is a basic change i n the w o r l d food situation f r o m the surplus state of the 1950's and the 1960's t o an era of t i g h t demand.
W o r l d food reserves have gone down f r o m a supply of some 69 days
i n 1970 t o 36 days a year ago, and 26 days now, and this is despite the
world's largest g r a i n yields i n history. I n effect, we are i n a very perilous situation, and, as I said earlier, this is due to the r i s i n g demand
f r o m population and f r o m affluence. The increase i n w o r l d demand f o r
food 60 years ago was 3 or 4 m i l l i o n tons a year. Then i n the mid-1950's,
i t went up to 15 m i l l i o n tons a year. Now i t is over 30 m i l l i o n tons a
year.
T h i s increase is coming at a time when the response capacity o f the
w o r l d to increase food is slowing. I d l e land is no longer available,
water is scarcer, and the benefits f r o m the use o f fertilizer are declining.
W h e n the first 40 pounds of fertilizer is put on an acre of corn, the
increased y i e l d is something like 27 pounds per acre. B y the time you
get t o the t h i r d 40 pounds i t is down to 8 or 9 pounds of increased y i e l d
per acre.
W e have seen an overharvesting of the world's fish catch, and
there has been no technological breakthrough i n either the production of soybeans or beef. So t h a t w h i l e the w o r l d food situation
has been tightening, along comes the petrodollar crisis. T h i s has
greatly aggravated the problems o f the poorest developing countries,
first because of the fact t h a t faced w i t h serious dollar shortages they
have cut back on o i l imports, and on imports of spare parts, so
their whole^ economies are w o r k i n g more poorly. Second, there is a
w o r l d fertilizer shortage o f 2 or 3 m i l l i o n tons a year t h a t w i l l continue
t h r o u g h at least the next 3 o r 4 years, and the way the w o r l d system is
w o r k i n g the developing countries are b y f a r the worst h i t f r o m this.
Japan and Western Europe have both cut back on t h e i r f e r t i l i z e r
exports. So has the U n i t e d States. W e have had an embargo on new
export sales f r o m October through June 30, and the F E O now estimates t h a t the developing countries w i l l have a s h o r t f a l l o f about 2
m i l l i o n tons o f fertilizer nutrients i n the coming crop year. T h i s
means t h a t they w i l l lose the production o f 16 t o 20 m i l l i o n tons o f
food, food w h i c h w i l l now cost them some $4 b i l l i o n t o i m p o r t i n place
of producing themselves.
W e can see the impact of this on I n d i a , f o r example. C u r r e n t l y , I n d i a
is r o u g h l y a m i l l i o n tons short on fertilizer over what she was prepared
to b u y and was unable t o get because o f contract cancellations, slow




17
supply f r o m the U n i t e d States and elsewhere. T h e I n d i a n wheat crop
harvested this M a y , o r i g i n a l l y estimated to be at 30 m i l l i o n tons, was
finally harvested at 22 m i l l i o n tons.
The main reason f o r the shortfall was the shortage of fertilizer, b u t
also contributing was the shortage of oil, which i n one province alone
led t o a shortfall, according t o the U S D A , of about a m i l l i o n tons.
W h i l e we were w a i t i n g i n our cars f o r an hour at gas stations t o get
gasoline i n February and March, Norman Barlaug, the Nobel Peace
Prize winner i n the food area, was reporting t h a t i n the Punjab, f o r
example, people had been w a i t i n g f o r 2 days at r u r a l gas stations, l i t t l e
farmers w i t h their 5-gallon tins w a i t i n g to get o i l to r u n their i r r i g a tion pumps w i t h o u t which they could not grow their wheat. The impact of the o i l shortage was much worse, i t seems to me, on those countries than here.
So, i t is quite clear now t h a t at best the g r a i n crop i n Asia this year
w i l l be m i d d l i n g ; t h a t Asia w i l l need to i m p o r t more g r a i n i n the
year ahead t h a n any region i n the w o r l d has ever imported i n its hist o r y and that the prospects of disaster are s t i l l very close.
Last year China imported as much g r a i n as I n d i a d i d at the height
of the famine. The i n i t i a l reports are that weather i n China is poor
again this year. F o r I n d i a , as I have t o l d you, the wheat crop is way
down this spring. T h e main crops, however, come this f a l l , dependent
on the monsoon. A s of the weather reports a week ago, the monsoon
was several weeks late i n h i t t i n g most of I n d i a .
So, there is a significant prospect of tremendous demand f r o m these
countries, f o r food next year. T h i s is coming at a time when I t h i n k
we can say t h a t the U n i t e d States no longer has even a semblance of a
global food policy other than to maximize the profits resulting f r o m
the export of food.
Secretary Kissinger has taken a commendable i n i t i a t i v e i n u r g i n g
a W o r l d Food Conference, but specific action is now needed. U.S. food
aid i n fiscal year 1974, just past, dropped t o 40 percent of fiscal year
1972—a year i n which we earned an extra $7 b i l l i o n f r o m our food
exports, i n c l u d i n g more than $6 b i l l i o n f r o m the higher prices received
f o r g r a i n we sold. Fiscal year 1974 has also been characterized by the
fact t h a t f o r most of that year, the U.S. Government had an embargo
on fertilizer sales, which p r i m a r i l y affected the developing countries.
I t is very clear that a new food policy is needed, not only t o affect the
lives of millions of people i n these F o u r t h W o r l d countries t h a t are so
badly h i t by the petrodollar and food crisis, but also, i f we are ever t o
cope w i t h the 2-digit inflation t h a t we have. I n the next 10 years the
w o r l d w i l l have to grow or increase its food production by some 400
m i l l i o n tons, f r o m the present level of 1.2 billion, t o 1.6 billion.
I f we have t o increase most of this production i n the developed
countries, i t can only be done by going t o much higher priced land,
and much higher priced use of inputs because of declining yields f r o m
more and more fertilizer, and f r o m a higher cost of water. The p r i n cipal source of low cost production f o r the w o r l d i n the next 10 years
is i n the developing countries. A responsible expert has estimated t h a t
the amount of fertilizer needed t o get the next 100 m i l l i o n tons of food
out of the developed countries would be 24 m i l l i o n tons of fertilizer.
O n the other hand, to get 100 m i l l i o n tons of increased production i n




18
developing countries, w o u l d take only 10 m i l l i o n tons of fertilizer. I n
other words, the comparative advantage is very clearly i n terms o f
increasing production i n developing countries. B u t meanwhile, what
has happened is t h a t the Japanese and the U n i t e d States have restricted
fertilizer exports, so they would be p r i m a r i l y used on the least efficient sources i n the developed countries as a whole. A t the same time,
there has been no appeal to the American people t o cut back on the use
of fertilizer f o r n o n f a r m uses. A t a t i m e when the developing countries face a 2 m i l l i o n t o n fertilizer shortage t h a t is really critical, the
U n i t e d States w i l l use some 3 m i l l i o n tons on lawns, cemeteries, and
g o l f courses—fertilizer which is desperately needed by American
farmers t o produce food at a time of w o r l d food shortage.
A s I mentioned earlier, the o i l crisis has also greatly accelerated the
power s h i f t . O n the one hand, i t has given the O P E C countries a much
larger capital surplus, <and the issue o f what they do w i t h t h e i r capital
surplus is now much more acute t h a n the slow accumulation we saw
6 months ago. T h i s creates a real problem w i t h the o i l countries, one
I t h i n k warrants the attention of this subcommittee. There really has
not been i n m y judgment, an effective dialog on this w i t h the O P E C
countries. The focus o f the U.S. Government has been on the commendable objective o f t r y i n g t o reduce the price of o i l ; but the focus
has been so heavy on this, t h a t u n t i l really only very recently, has there
been serious attention i n a sustained major way by the U.S. Government to how one gets more contributions out of the o i l countries to
meet, shall we call i t , damage control requirements. T h i s raises issues
which really have not been discussed yet. W h a t is a f a i r share f r o m the
O P E C countries? The U n i t e d Nations has a standard f o r assistance of
.7 percent Q I G N P .
I f we f o l l p w the .7 percent of G N P formula, the U n i t e d States is
roughly one-h^lf of that. I t is clear t h a t t h i s would b r i n g out of the
O P E C countries less than a b i l l i o n dollars—far less than is needed f o r
damage control purposes.
O n the other hand, i f , because o f their l i q u i d i t y , they should properly p u t u p a larger amount, the issue then is what is the larger amount
and f o r how long. T h i s whole question of really what our f a i r share is,
is very much at issue.
F i n a l l y , I would say, looking at the elements of a solution, first and
foremost is the need t o avoid a global recession. A s I indicate i n m y
statement, we are considerably more worried about this, I t h i n k , t h a n
Secretary Bennett's statements w o u l d indicate. A s p a r t of this, i t is
clear t h a t an o i l price rollback w o u l d be valuable; b u t i n m y j u d g ment, the prospects o f a really m a j o r o i l price rollback are sufficiently
slight t h a t we should not allow i t t o completely preoccupy our attent i o n at the expense of other damage control measures.
O n the establishment o f recycling facilities, quite clearly^ as I i n d i cated earlier, f o r the advanced developing countries there is the need
f o r an expansion o f the present special o i l f a c i l i t y , b u t also a very
i m p o r t a n t need t o keep existing channels open—the E u r o d o l l a r , the
supplier credit, the W o r l d B a n k channels.
F o r the F o u r t h W o r l d , first and foremost, there is the need t o supplement I M F and W o r l d B a n k channels w i t h an emergency assistance
of at least $3 b i l l i o n f o r the year t h a t lies ahead.




19
A s y o u know, the U n i t e d Nations Secretary-General has appealed
f o r a special emergency fund, and has asked D r . R a u l Prebisch to be
his agent i n r o u n d i n g this up. T h e European Economic Community
has now volunteered a contribution of $500 m i l l i o n t o w a r d this f u n d i f
the t o t a l reached is $3 b i l l i o n and i f the O P E C countries w i l l p u t u p
h a l f , or $1.5 billion, of the amount. Canada has indicated a willingness
to provide $100 m i l l i o n ; the Netherlands, $30 m i l l i o n . Reports are t h a t
Venezuela and I r a n are prepared to provide $100 m i l l i o n each f o r this
purpose. The Secretary-General of O P E C has stated, but without any
substantiating detail, t h a t the O P E C countries as a whole w i l l provide
1 percent of G N P f o r assistance. A t this moment of time, the U n i t e d
States has stated i t w i l l participate i n the f u n d ; but unlike the European Community, the Canadians and the Japanese, we have not indicated yet at what scale we m i g h t participate—at $100 m i l l i o n or a
b i l l i o n or $1.4 billion. T h i s is badly overdue.
M r . G O N Z A L E Z . M r . Grant, pardon me. I very reluctantly interject at
this point the fact that Secretary Bennett is going t o have to leave us
soon because he is going t o get sworn i n at about 12:30. I f i t is a l l r i g h t
w i t h you, we w i l l insert at this point i n the record y o u r complete prepared statement, and we w i l l recognize members of the subcommittee
f o r some brief questions.
[ M r . Grant's prepared statement f o l l o w s : ]




20
Statement of James P . Grant*
President, Overseas Development Council
Submitted to the Subcommittee of the
House Banking and Currency Committee on International Finance
July 9, 1974
The International Petrodollar Crisis
and the Developing Countries

.

M r . Chairman and Members of the Committee:
I welcome this opportunity to testify at your Invitation before the
House Banking and Currency Subcommittee on International Finance on the
consequences and Implications of the International petrodollar crisis that
the world recently has been experiencing and on its implications for the
developing countries and for U.S. policies.

My comments might be sum-

marized briefly as follows:
F i r s t , any meaningful assessments must take Into account the fact
that although the oil and petrodollar crises took place earlier than anticipated
as a result of major short-term factors such as drought and w a r , they
nevertheless are primarily a consequence of the unparalleled economic
growth of the past quarter century within the constraints of a largely finite
physical system and of relatively inflexible political and economic structures.
This long-term trend is shifting economic and political power toward commodity suppliers and creating a new International economic and political
order; It requires the development of new International systems, structures,
and rules.

•The views expressed In this statement are those of the Individual, and do
not necessarily represent those of the Overseas Development Council, or of
its directors, officers, or staff.




21
- 2 -

Second, better means must be found for recycling funds in adequate
amounts from the foreign exchange surplus nations (notably the OPEC
countries, the United States, Canada, Germany) to the most seriously injured industrial and developing nations.
a.

For those currently able to pay commercial rates, such

as Italy and Korea, the Eurodollar market may serve this purpose
in the short term.

Over a several-year period, however, there is need for a

greatly expanded version of the "oil facility" recently established by the
I M F to assist hard-hit countries meet financial difficulties resulting
from recent price increases, and for monetary and trade adjustments
to enable the hard-hit countries to increase their earnings f r o m the
surplus countries.
b.

The most severely affected developing countries require

special help immediately on highly concessional terms in amounts
totaling $4-$5 billion annually if they are not to go under and if they
are to gradually regain their economic stability and growth.

In

addition to pressuring the richer, capital-surplus OPEC countries!
for major contributions toward meeting these needs, the United
States, whose higher food prices and fertilizer export restrictions
are also a significant contributing cause of the current disastrous
predicament of these poorest nations, should respond affirmatively
to Secretary General Waldheim's appeal for emergency assistance by
providing at least $1.25 billion of additional assistance.

This can be in the

form of food as recommended in House Resolution 1155, as w.ell as by making




22
-3available additional assistance for food production and r u r a l development, in response to President Nixon's request for an increased
authorization under the Foreign Assistance Act for FY 1975.

The Newly Emerging International Order
The emergence of the new international order was symbolized in
1973 by a growing list of shortages, including fuels, and by jolting price
increases and other developments on many different fronts.

Food prices

soared in the United States (wheat prices alone increased more than threefold) to the utter surprise of most American economists, who had failed to
anticipate the acceleration of global interdependence in food.

The quadrupling

of oil prices by the oil-producing countries and the implementation of an
A r a h oil embargo against the most powerful nation--the United States-- were
an even greater surprise to many.

Soaring prices for soybeans led the

world's principal producer, the United States, to embargo their export,
creating a major new crisis with Japan and dramatically undermining the
major American effort to reduce the protectionist agricultural policies of
the European Economic Community.

F e r t i l i z e r shortages have led the

fertilizer-exporting industrial nations to restrict shipments to the developing
countries, leading already to dramatic reductions in some of their crops,
with the threat of more to follow.

These changes have already brought shifts,

many not yet fully perceived, in economic power--and therefore political
power--not only among the developed countries, and between developed
and developing countries, but also among the developing countries themselves.




23
-4The changes the world has experienced in the past year, have resulted
from two quite different sets of circumstances--short-term and cyclical
factors on the one hand, and longer-term and more permanent ones on the
other.

With respect to the short-term circumstances, the early 1970s w i t -

nessed an unprecedented business boom caused by the simultaneous expansion
of a l l the industrial economies for the first time since World War II.

Other

major but short-term factors have included unprecedented droughts in the
case of food, and the Middle East conflict in the case of oil.

I believe,

however, that, viewed from the perspective of ten years hence, the shortage
crises of the past year—while of course accelerated by such short-term
factors—will be seen as essentially the product of major long-term trends:
continuing rapid economic growth taking place within the constraints of an
often finite physical system and of inflexible political and economic
structures.
As the global scale of economic'activity has expanded--from roughly
$1 trillion in global production in the late 1940s to some $4 trillion in 1974-it has begun to push the global system increasingly to the limits of its
adaptive capacity.

There was relatively little strain on the world system

25 years ago, but as the world approached the attainment of its third trillion
dollars of global production in the late 1960s, signs of stress began to appear
in many areas.

We began experiencing an ecological overload, ranging from

massive environmental pollution in cities everywhere to an over-harvesting
of the world catch of table-grade fish, which appears to have led to a decline
in the world fish catch oyer the past three years.




Global increases in

24
-5population growth (averaging 2 per cent a year) as w e l l as increasing
affluence (as measured by a 3 per cent average rise in per capita

income

a year) have doubled the annual increase in demand for food f r o m some
15 million tons each year in the mid-1950s to 30 million tons now, thereby
straining the productive capacity of the world agricultural system.

Even

in the case of many commodities for which additional productive capacity
exists, for example oil and coffee, soaring world demand is bringing about
shifts from the buyers' market circumstances of the last 25 years to those
of a new sellers' market.
It bears remembering that the period since World War I I was characterized largely by material surpluses.

The central economic i^sue of the

period was producer access to the markets of consuming nations.

The

international rules developed under the General Agreement on Tariffs and
Trade (GA.TT), the Kennedy Round of trade negotiations in the 1960s, the
key resolutions by the developing countries at the past three UNCTAD conferences, and the proposed Trade Reform Act of 1973 have a l l taken place
or been developed in this context of seeking to safeguard and to increase
access to markets.

Recent events indicate that an equally important, or

even more important, set of issues is taking shape around the question of
assuring consuming nations reasonable access to essential resources--such
as energy, minerals, grain, fish, and soybeans--and on the associated need
to develop global approaches to the new worldwide problems arising f r o m
scarcity in the market place.




The shift from traditional buyers' markets

25
-6-

to global sellers' markets for an ever lengthening list of commodities is
bringing a host of profound changes, many of which are still only remotely
sensed.
Economists and foreign offices (other than those in the OPEC world)
have been slow to recognize the fundamental character of the change in
progress, a change which in a period of less than 12 months has resulted
in energy shortages throughout much.of the world, soaring food prices
everywhere, a host of related shortages, and widespread speculation about
the possibility of more OPEC-type situations in store ahead.

At present the

trend has been toward each country looking out for itself--the law of the
jungle--rather than toward cooperation with pthers.
As a result, many countries are suffering unduly, and the resourcepoor countries are suffering the most.

A doubling or trebling of grain

prices is for most Americans a bearable inconvenience, but for those in the
cities and towns of South Asia or

Northeast B r a z i l who have been spending

80 per cent of their income on food, it means more malnutrition and the
prospect of an earlier death.
As the world moves toward more than a $ 1 0 - t r i l l i o n gross global
..product by the end of the century, one can safely predict that:
Competition among countries for the earth's limited resources
will, intensify;
A. linkage effect w i l l frequently set in, with shortages in one
field limiting production elsewhere (as when energy shortages
result in f e r t i l i z e r production cutbacks, which, in turn, l i m i t
food production);




26
-7Product substitution w i l l become more difficult;
Economic and, therefore, political power w i l l continue to
shift markedly f r o m buyers to sellers.
In retrospect, it can be said that these trends were w e l l advanced
by early December 1973.

The doubling of oil prices by the O P E C countries

on December 22, 1973--which raised oil prices in 1974 to levels most economists had not anticipated until 1980--has introduced a "system overload"
which may be beyond the capacity of the international order to absorb
without major chaos.

It has also accelerated and brought into stark relief

other important trends which must now be taken into account.

Four trends

in particular merit special attention: the economic dislocations resulting
f r o m the oil price rises; a worsening world food situation; a deepening of
the global recession already in prospect; and major shifts in the economic
and political power of nation states.
Energy Shock
The "energy shock" which many developing countries are experiencing
u
comes f r o m two quite different factors:

(1) the increase in o i l prices,

and

(2) higher prices for essential food and f e r t i l i z e r f r o m developed countries.
I f prices remain at current levels (which are four times those of 1972), the

l_/
1972
A l l oil imports f r o m OPEC (c. i . f . ) $20. 0 billion
Developing country oil imports
3 . 7 billion
O P E C governmental oil revenues
14. 5 billion
(Of which Venezuela's share)
1. 9 billion
OPEC current account surplus
1.6 billion




1973
$36. 0
5.2
22. 7
2. 8
6. 1

billion
billion
billion
billion
billion

1974 (est. )
$100. 0 billion
15.0 billion
85. 0 billion
10. 0 billion
66.0 billion

27
- 8 -

non-oil-exporting developing countries w i l l have to pay $10 billion more for
necessary oil Imports in 1974 than in 1973.

Moreover,

it is likely that

most of this money w i l l be "recycled"—in the form of purchases and investments by

countries--not into the economies of the hardest-

hit jion-oil-exporting couiiLx Les,' but into tfc^i'j

> developed countries.
2

At the same time, the increased cost of the food and fertilizer impart* A
the non-oil-exporting developing countries from the developed countries
w i l l exceed $5 billion.

With wheat and nitrogenous fertilizer prices more

than double those of 1972, the increased import bill of the non-oil-exporting
developing countries for these two commodities alone (both imported p r i m a r i l y from the United States) w i l l be over $3. 5 billion.
As a consequence of these price rises, the developing countries w i l l
need to pay some $15 billion more for essential Imports in 1974.

The

massive impact of these price increases is indicated by the fact that they
are equivalent to nearly five times the total of net U. S. development
assistance in 1972, and are almost double the $8 billion of a l l development
assistance that the developing countries received from the industrial countries in the same year.
Equally important, many developing countries would be further
damaged if the present worldwide economic slowdown were allowed to drift
into a major global recession, further reducing their export earnings.
Those countries which depend heavily on workers' remittances and on
revenues from tourism—for example Mexico and the Caribbean countries-would suffer additional harm.




Whether a global depression can be avoided

28
-9depends on how the developed countries (notably the United States) react to
the new situation.

Effects of the Price Increases on Particular
Developing Countries
Beyond these general effects on a l l of the developing countries,
however, the impact of price increases, as already indicated, varies greatly
among individual developing countries.

The major oil exporters are one

category of developing countries which obviously benefits.

These countries--

whose combined population of more than one quarter billion is greater than
that of North America, the European Community, or Latin A m e r i c a — w i l l
be in a greatly improved position to accelerate their economic .growth.
However, as shown in Table I attached to this statement, the degree of
benefit varies sharply among the countries within this group.

Thus

Venezuela's increased earnings from oil alone w i l l in 1974 more than
triple its total imports of $2.4 billion in 1973.

Indonesia, which is an

extremely poor country within this category, now benefits only to the extent
of $20 per capita from the oil price hikes; but even in this case, the additional oil earnings--in combination with the good prices it is getting for its
other raw material exports--will remove foreign exchange as a major constraint on its development effort.
It must be noted, however, that increased foreign exchange availability does not remove, although it may alleviate, other major development
constraints--the many social problems faced by most oil-exporting countries.




29
-10-

Thus in such disparate countries as V e n e z u e l a , N i g e r i a , A l g e r i a , and
Indonesia-, the serious unemployment and income m a l d i s t r i b u t i o n p r o b l e m s
w h i c h a r c l a r g e l y a consequence of their economic and s o c i a l s t r u c t u r e s and
policies have not been solved, and m a y only be eased, by growing a v a i l a b i l i t y of f o r e i g n exchange.

D j a k a r t a ' s vast u r b a n slums and its recent

r i o t s a r c v i v i d r e m i n d e r s that growing s o c i a l p r o b l e m s can exist side by
side w i t h a c c e l e r a t i n g economic growth and i n c r e a s e d f o r e i g n exchange
•earnings.

Saudi A r a b i a and the P e r s i a n Gulf E m i r a t e s also face m a j o r

problems of transition f r o m feudal to m o d e r n structures.

These countries,

t h e r e f o r e , w i l l need continued technical cooperation in solving their development problems, although they c l e a r l y no longer r e q u i r e any capital financing
on highly concessional t e r m s .
A second category of developing countries consists of those nonO P E C countries which, on balance, either have not been significantly injured
by the p r i c e trends of the past two years or appear to be net beneficiaries
because their advantages in other areas w i l l l a r g e l y offset the net effect of
the p r i c e changes of 1973 or their balance-of-payments.

Some of these coun-

t r i e s a r e n e a r l y self-sufficient in oil or a r e m i n o r o i l exporters; some benefit
substantially f r o m their exports of other raw m a t e r i a l s whose prices a r e
increasing (see Table I I I ) ; and some enjoy both of these advantages.

37-211 O - 74 - 3




30
- l i -

y
China,

Colombia, Mexico, B o l i v i a - - a n d , shortly, P e r u as w e l l - - a r e in

the f i r s t sub-group; while M a l a y s i a , Morocco, Z a m b i a , Z a i r e , and p r o bably also B r a z i l belong in the second.

Tunisia because of its phosphates

and Bolivia because of its tin a r e examples of m i n o r o i l - e x p o r t e r s benefiting under both headings.
Mexico and T u n i s i a , however, also belong to a t h i r d c a t e g o r y of
c o u n t r i e s - - t h o s e which w i l l suiler d i s p r o p o r t i o n a t e l y f r o m any economic
slowdown in the i n d u s t r i a l countries bccause of t h e i r close linkages w i t h
the m a j o r i n d u s t r i a l regions of the W e s t .

T h e s e a r e nations w h i c h d u r i n g

t h e past 15 years have successfully c a p i t a l i z e d on t h e i r p h y s i c a l p r o x i m i t y
to the i n d u s t r i a l countries to increase t h e i r earnings f r o m t o u r i s m ,
r e m i t t a n c e s , and exports of a g r i c u l t u r a l p e r i s h a b l e s .

Greece,

workers1

Spain,

T u r k e y , Yugoslavia, T u n i s i a , and A l g e r i a a r c a m o n g those who have
benefited' greatly f r o m their p a r t i c i p a t i o n in W e s t e r n E u r o p e a n economic
expansion.

Thus

in 1973, Yugoslavia and T u r k e y each earned m o r e than

2 / China became a m i n o r o i l e x p o r t e r in September 1973, and i n 1974 is
expected to :•<hi.p some.3 m i l l i o n tons, valued at a p p r o x i m a t e l y $200 m i l l i o n .
Its o i l exports may increase . g r a d u a l l y - - t o 5 m i l l i o n tons in 1975 o r 1976 - but a r e not oipcetod to increase g r e a t l y in the f o r e s e e a b l e f u t u r e . By the
l a t e 1 970s, tho m a j o r expansion that is now under w a y in its p e t r o c h e m i c a l
i n d u s t r y is -jxpftetod to r e q u i r e l a r g e amounts of d o m e s t i c oil production.
Chi Aft wi.U
however, f r o m the. present high g r a i n and f e r t i l i z e r p r i c e s .
China r i v a l s QiOia as the w o r l d ' s l a r g e s t f e r t i l i s e r i m p o r t e r , and its g r a i n
r
i m p o r t s for 1 -7-1--which a r c unusually h i g h - - a r e expected to r e a c h at l e a s t
9 mi.Uion ton:;. In m o r e n o r m a l y e a r s China's grain i m p o r t s have ranged
between 4 a no o raUlior; ions. In 197 Z the Chinese paid $345 m i l l i o n f o r
t h e i r /;.rain import:; nt-lbo nmch l o w e r p r i c e s then p r e v a i l i n g ; in 1974 t h e i r
g r a i n import bill, is expected to be w e l l o v e r $1 b i l l i o n .




31
-12-

$1 billion from workers' remittances, and Yugoslavia earned an equivalent
amount from tourism as well.

Mexico and the Caribbean have been the

most conspicuous gainers from proximity to the booming North American
market.

Mexico's tourism earnings, for example, exceeded $1 billion in 1973.

A group of countries that are related to this third category, yet
somewhat different, includes countries such as South Korea, Taiwan, Hong
Kong, and Singapore.

These countries are closely integrated with the world

economy but almost entirely through the processing of goods.

The energy

component of their imports is very large, and they also are substantial food
importers.

The combined increase of South Korea's oil and food bills in

1974, for example, is likely to approximate $1 billion.

These countries

clearly are affected adversely by the greatly increased prices of the energy
and raw materials they need.

However, the crisis period for such countries

may well be of relatively short duration, since—provided that there is no
major global recession and the market .continues strong--they should be
able to pass along much of the extra cost to the buyers of their manufactured
exports.

An added advantage of these countries is that in recent years,

most of them have developed sizable foreign exchange reserves as well as
established patterns of access to export credits and to the Wall Street and
Eurodollar markets.
Because of the inherent strength of their ties to the industrial
economies, the problems of this third category of countries and its special
sub-group in adapting to the new price structure should not prove impossible




32
-13unless the slowdown in the industrial countries is serious and long-lasting.
In 1974 and 1975, many of these countries w i l l need access to funds of a type
which should be relatively easy for the international economic community
to provide if the Western nations wish to accommodate the needs of these
countries.

Many of the measures developed for assisting the OECD countries

to adjust to the higher oil prices should be applicable to these countries as
well.

It also should be possible to ensure their continuous access to the
3/

Euro-currency markets and export credits despite their s h o r t - t e r m difficulties.
The fourth category of countries consists of the hard core of seriously
affected

countries, totaling about forty in number.

Most of these countries

a r e in tropical A f r i c a , South A s i a , and the Central A m e r i c a n - C a r i b b e a n
a r e a , but the category also includes Uruguay, and possibly Chile and the
Philippines.

It is important to realize that these countries together contain

some 900 million people, or nearly half the population of the developing
w o r l d exclusive of China.

F o r this "Fourth W o r l d " group of countries, the

consequences of the changes f r o m 1973 a r e overwhelmingly negative.

Most

of these countries not only a r e the poorest in the world at present, but also

3 / I n 1973, developing countries borrowed an estimated $10 billion in the
E u r o - c u r r e n c y m a r k e t s , w e l l above the l e v e l of the preceding y e a r . (See Table I V )
Largsst known borrower:', w e r e O P E C countries in A s i a and A f r i c a , and B r a z i l ,
Mexico, Colombia., and P e r u in .Latin A m e r i c a . Many countries in the second
and t h i r d categories described above borrowed r e l a t i v e l y s m a l l amounts. T h e
impact of the high o i l prices orx E u r o - d o l l a r transactions w i t h developing count r i e s is uncertain, To the extent that A r a b deposits in E u r o - d o l l a r banks a r e
m o r e than offset by European withdrawals to pay for o i l , t h e r e w i l l not be as
much liquidity in Euro-ciii-rcncies, and that m a y deprive developing countries
of an iimportant i ccvnt source, of finance. M o r e o v e r , much of the $10 b i l l i o n
is c a D ' i H c on .short notice; by Hie lending banks, thus increasing the v u l n e r a b i l i t y
of the developing countries.. Oa the other luuul, if A r a b deposits leave the
E u r o - c u r r e n c y ij».:;rhcst m o r e liquid, 197-1 may yield additional l a r g e t r a n s f e r ,
to the u;:velopiu£ cou:il;rio.s-~chiefly the. m o r e advanced ones.




33
-14have the most dismal growth prospect^ for the future.

Their net share of

the identifiable adverse effects of the recent price increases amounts to
some $3 billion.

In addition, these countries face imponderables such as

the cost of reduced direct private investtfnent in the wake of these economic
disriptions or the decline in their export earnings due to the global economic slowdown in 1974.

Finally, if the countries in this category are to

maintain their development momentum, they w i l l need major additional
investments either to increase their food, f e r t i l i z e r , and energy production
to reduce their dependence on these high-priced imports or to establish new
export industries to enable them to pay their vastly higher import b i l l s - or both. An additional $l-$2 billion annually is needed for these purposes.
India, the Philippines, and Bangladesh, for example, probably could
double their grain production in less than a decade with greatly increased
research, more irrigation facilities, and wider availability of f a r m inputs
and credit.

Sri Lanka and Nepal have unexploited hydroelectric potential,

and India--like the United States and several European countr ies--has
large coal reserves which warrant development given the new high price
level for energy.

The poorest countries, however, always have had more

difficulty than the industrial countries in shifting capital and technology
from one sector to another, and this difference is even greater now because
of the higher oil and food prices, which drain f r o m the poorest countries
resources that might otherwise be available for investment.
Extraordinary measures w i l l be needed to assist these countries, as
most of the means suitable for helping the third category of countries




34
-15described above are not suitable for this Fourth World category.

These

poorer countries are unable to assume large additional amounts of shortt e r m or medium-term credits on near-commercial terms because of
their already high debt burdens and limited foreign exchange earning capacity.
The new I M F oil facility has, therefore, limited value for them.

Worsening World Food Situation
It has been apparent for approximately a year now that the current
international scarcity of major agricultural commodities and the major
drawdown of world food reserves reflect important long-term trends as
well as the more temporary factor of lack of rainfall in the Soviet Union
and large areas of Asia.

We are witnessing what appears to be a funda-

mental change in the world food economy f r o m two decades of relative global
abundance to an era of more or less chronically tight supplies of essential
foodstuffs.

This is so despite the return to production of U.S. cropland

idled in recent years.

As noted earlier, a major reason behind this shift

is the fact that growing affluence in rich countries has joined population
growth in the poor countries as a major cause of increasing demand for
fbodgrains.

At the same time, overfishing has interrupted the long period

of sustained growth in the world fish catch--thus limiting the supply of
another important protein source.
As a consequence of these fundamental changes, as well as of the
additional temporary factor of drought, global food stocks have been dropping
in recent years.




Global reserves have dropped f r o m the equivalent of 69

35
-16-

days of consumption in 1970 to some 36 days of reserves by last summer.
Despite the highest grain production and the highest grain prices in history
in the current crop year, global reserves are continuing to fall and had
reached the equivalent of only 26 or 27 days' global supply by June, 1974.
Food production prospects for the developing countries for the crop
year that begins this month are even less hopeful than they were last fall.
Most developing countries w i l l be even more short of foreign exchange as a
result of last December's doubling of energy prices, and hence w i l l be
unable to import energy, fertilizers, pesticides, and other essential f a r m
inputs.

In addition, the world is faced with a world fertilizer shortage

which, w i l l last at least for several years.

Barring some new governmental

intervention, developing countries can expect their fertilizer supply to be
cut back far more than w i l l be the case in the industrial countries.
In the United States, the combination of new acreage being restored
to production, the greater use of fertilizers because of the much higher prices
for grains, and the increased use of urea for feed, has resulted in an unofficial "quasi-embargo" on U.S. fertilizer exports since last October.
As a consequence of the energy crisis, Japan--in recent years the world's
largest fertilizer exporter--has cut back its fertilizer production severely
to the point where in recent months its output has been largely limited to
meeting the demands of its politically important domestic market and to
supplying Communist China.
Developing countries are hurt the most, as evidenced by the shortfall
of 750 thousand to 1 million tons in India's fertilizer imports during the




36
-17past crop year, which w i l l cause a production shortfall of 7 to 10 million
tons of grain.

It w i l l be at least several years before adequate new f e r -

t i l i z e r capacity can be constructed, and under the present policies of the
industrial countries

the adverse consequences of this shortfall are borne

principally by the developing countries.

The FAO estimates the shortfall

of these countries for the present crop year at 2 million tons, which w i l l
necessitate their importing as much as an additional 16-20 million tons of
grain at a foreign exchange cost of some $4 billion.
The extent of global vulnerability is particularly underlined by examining the degree of global dependence on North America for exportable
food supplies.

Over the past three decades, North America--particularly

the United States, which accounts for three-fourths of the continent's grain
exports--has emerged as the world's breadbasket.

Of the 95 million tons

that moved in world grain trade between regions in 1973, 88 million were
from North America.

This contrasts with the mid-1930s, when North

America provided only 5 million of the 25 million tons then moving in trade
between regions.

Exports of Australia, the only other net exporter of

importance, are but a fraction of North America's.

Moreover, the United

States now is not only the world's major exporter of wheat and feedgrains
but it is also the world's leading exporter of rice.

Thus the United States

and Canada together today control a larger share of the world's exportable
surplus of grains than the Middle East does of oil.
Having embargoed new fertilizer sales because of rising domestic
demand and devoid of the food surpluses on which its food aid (PL 480)




37
-18-

p r o g r a m so long depended, the United States--the food and f e r t i l i z e r center
of the w o r l d - - n o longer is implementing even the semblance of a global
food policy beyond that of m a x i m i z i n g profits for a g r i c u l t u r a l exports.

U.S.

food aid this year is o n e - t h i r d its volume of two years ago, and one-half of
this greatly reduced amount goes to Indochina.

A t the same t i m e ,

U.S.

per capita food consumption continues to Trise--amounting to 1, 850 pounds of
grain annually by 1972, as contrasted to 380 pounds per person in most of
A f r i c a and South A s i a - - w h i l e scarce f e r t i l i z e r continues to be used for such
n o n - f a r m purposes as lawns, golf courses, and c e m e t e r i e s in e v e r - i n c r e a s i n g
amounts that already exceed the total f e r t i l i z e r s h o r t f a l l in the developing
countries.
T h e r e is an urgent need for the United States to develop an integrated
global food policy.

The new e r a of increasinly tight supplies brings w i t h it

the need for greatly improved global management not only to avoid l a r g e scale famine but also to increase food availability so that two-digit inflation
does not become a s e m i - p e r m a n e n t f i x t u r e .

Now that idled cropland in the

United States has been returned to production, the opportunity for easily
expanding production in the developed countries has diminished sharply.

As

sources become scarce, the comparative advantage in additional food p r o duction shifts toward those areas w h e r e the resources can b r i n g the greatest
gains.

The increase in food output brought by a given additional amount of

f e r t i l i z e r or energy is f a r higher in the developing countries than in the
industrial countries.




Since f e r t i l i z e r s a r e a l r e a d y applied v e r y heavily in

38
-19the a g r i c u l t u r a l l y advanced nations of Europe, in Japan, and in the United
States, an additional pound of f e r t i l i z e r applied in these nations m a y not
r e t u r n m o r e than 5 pounds additional grain.

But in countries such as India,

Indonesia, or B r a z i l , it w i l l yield at least an additional ten pounds of grain.
Unfortunately and ironically, when w o r l d f e r t i l i z e r shortages emerged in
1973 the m o r e advanced nations acted to r e s t r i c t their f e r t i l i z e r exports to
the poor nations, where the f e r t i l i z e r would have produced much m o r e food.
In some ways, President Nixon's proposal to double U . S . assistance
f o r increasing food production in the developing countries under the F Y 1975
F o r e i g n Assistance A c t m a y be described as one of the lowest cost means
available to the United States for fighting inflation over the longer run.

The

w o r l d ' s principal unrealized potential for expanding food production is now
concentrated in the developing countries.

Soils in Bangladesh a r e fully

equivalent to those in Japan, yet r i c e yields a r e only o n e - t h i r d of those in
Japan.

India's a r e a of cropland is roughly comparable to that of the United

States, but it harvests only 105 m i l l i o n tons of grain while the United States
harvests 250 m i l l i o n tons.

C o r n yields in B r a z i l and Thailand a r e s t i l l only

o n e - t h i r d those of the United States.

Power Shifts
The events of recent months have accelerated the shift of economic and
p o l i t i c a l power to two power c e n t e r s - - N o r t h A m e r i c a and the O P E C c o u n t r i e s - whose leadership role in the months ahead is uncertain, at the same t i m e that
they have weakened and d e m o r a l i z e d the European Economic Community and
Japan, which in recent years had been providing increasing global leadership.




39
-20-

The o i l - r i c h O P E C countries, w i t h a current account surplus of some
$50-$65 billion annually, a r e an obvious source of new power.

Given the

new w e a l t h and the a r b i t r a r y manner in which these countries implemented
t h e i r o i l price increases, it is understandable that many insist that these
countries take the lead in meeting the aggravated financial problems of the
poorest countries.

The O P E C countries have tended to react defensively,

however, and most developing countries have been reluctant to press them
hard for a combination of reasons.

These include some degree of self-

identification w i t h the o i l producers as fellow developing countries, as w e l l
as the same " p r a c t i c a l " politics that have led many industrial countries to
seek b i l a t e r a l deals w i t h the o i l producers.

No m a j o r dialogue, has developed

as yet, t h e r e f o r e , between the oil countries and the industrial countries on
the problems of the poor.

The o i l producers in their defensive reactions

have noted that the price of wheat had increased n e a r l y threefold before there
was a p a r a l l e l o i l p r i c e increase, that most of them a r e not so r i c h per
capita as the industrial countries (in 1974, Venezuela's per capita income w i l l
approximate-$1, 500, N i g e r i a ' s $250, I r a n ' s $ 1 , 0 0 0 , and Saudi A r a b i a ' s
$3, 000 versus $5, 000 for the United States, $8, 000 for Kuwait, and $43, 000
for Abu Dhabi), and that they, solely as newly r i c h , should not be asked to
help the developing countries to a greater extent Ln t e r m s of per cent of
G N P than the industrial countries.

The dialogue initiated by the I M F and

the W o r l d Bank w i t h these countries is useful, but f a r m o r e needs to be done.
T h e r e should be p a r t i c u l a r opportunities for effective dialogue w i t h Venezuela,
Saudi A r a b i a and I r a n .




Venezuela has closer and longer established ties w i t h

40
- 2 1 -

the other L a t i n A m e r i c a n countries than N i g e r i a has w i t h the countries of
its region, or the Middle E a s t e r n countries have w i t h A s i a and A f r i c a .
Saudi A r a b i a appears m o r e concerned than most of the r i c h e r O P E C count r i e s w i t h the potential adverse effects of high o i l p r i c e s .

I r a n , the o r i g i n a l

instigator of high o i l p r i c e s , has been conscious of the need to avoid undulyantagonizing the F o u r t h W o r l d countries.
The second power center strengthened as a result of recent events
is the United States and Canada.

Canada, w i t h increased earnings f r o m its

o i l exports to the United States to offset its o i l imports for E a s t e r n Canada,
is a m u l t i - b i l l i o n - d o l l a r beneficiary of the recent trend toward higher
prices for raw m a t e r i a l s .

A less appreciated, but m a j o r result of r e c e n t

events is the r e l a t i v e l y strengthened position of the United S t a t e s - - a s
reflected in the increasing value of the dollar and the U . S . b a l a n c e - o f payments surplus "for 1973.

This strengthening is the result of a combination

of factors including high, s c a r c i t y - r e l a t e d prices for many of its m a j o r r a w
m a t e r i a l exports; the at least t e m p o r a r i l y improved U . S .

competitive

position in manufactures resulting f r o m the c u r r e n c y realignments that
began in late 1971; and, f i n a l l y , the r e l a t i v e l y m i n o r dependence of the
United States on o i l imports compared to other m a j o r industrial countries.
The o i l imports of the United States represent only some 13. 5 per cent of its
t o t a l energy consumption.

M o r e o v e r , the United States r e l i e s on

imports

f o r only 30 per c e n t - - c o m p a r e d , for example, to Japan's 9 9 . 6 per c e n t - - o f
its o i l consumption.

M o r e o v e r , vast r e s e r v e s of coal and shale ensure f o r

the United States the option of substantial energy independence over the




41
-22-

longer run.

A s a consequence, the United States, despite the l i k e l y eco-

nomic slowdown in 1974, is far m o r e a t t r a c t i v e for A r a b (and other)
investment than a r e other countries and currencies and therefore can be
expected to run a l a r g e balance-of-payments surplus in 1974.

I n general,

then, the r e s o u r c e - r i c h c o u n t r i e s - - s u c h as the United States, China, Canada,
A u s t r a l i a , and the Soviet U n i o n - - s u f f e r less than do s m a l l e r ,

resource-

dependent industrial or developing countries when wrenching changes weaken
the international economic o r d e r .

Elements of a Solution
Possibly most important among the various measures required by the
present situation is the need to avoid a serious global recession at a t i m e
w h e n a l l m a j o r economies a r e simultaneously in an economic slowdown.
Ways also must be found to recycle funds in adequate amounts f r o m the
f o r e i g n exchange surplus nations (notably O P E C , the United States, and
Canada) to the most seriously injured industrial and developing countries.
F o r those c u r r e n t l y able to pay c o m m e r i c a l r a t e s , the Eurodollar m a r k e t
m a y serve this purpose in the v e r y short t e r m , but over a s e v e r a l - y e a r
period there is need for a greatly expanded I M F o i l f a c i l i t y and for monetary
and trade adjustments which w i l l enable h a r d - h i t countries such as the United
Kingdom, K o r e a , and Taiwan to increase their export earnings.
Many developing countries, p a r t i c u l a r l y those of the F o u r t h W o r l d ,
w i l l r e q u i r e special help on concessional t e r m s .

Considering the stakes

involved, the amounts n e e d e d - - $ 4 - $ 5 billion annually f o r s e v e r a l years to




42
-23cover p r i c e rises' and accelerated energy and a g r i c u l t u r a l d e v e l o p m e n t - a r e not l a r g e .

In addition to helping the most severely affected countries

meet their immediate problems in maintaining the flow of essential I m p o r t s ,
a special worldwide effort should be launched to provide them w i t h the techn i c a l and financial assistance necessary to Increase their food production
and to develop alternate sources of energy so that these countries do not
r e m a i n indefinitely Impaired by these p r i c e r i s e s .

The I M F ' s s h o r t - t e r m

capabilities can be effectively employed to help the poorest, h a r d e s t - h i t
countries only If they a r e part of a longer range package which r e s t o r e s the
growth process In these countries.

Without other action by the Industrial

countries, the O P E C countries, and the International community In general,
the contribution of the I M F ' s present f a c i l i t i e s Is at best l i m i t e d .
The rollback of o i l prices is s t i l l an issue at the present moment.

The

significant price reduction being sought by the United States would c l e a r l y ease
the global readjustment problem by reducing the danger of a serious economic
recession and by lessening the severity of the trade deficits confronting
the great m a j o r i t y of countries in 1974, thereby easing the task of r e c y c l i n g
the trade surplus of the O P E C countries back to those in need.

However,

the m o r a l (and logical) position of the United States in pressing for an o i l
p r i c e rollback would be greatly strengthened by a U . S . initiative to (1) ease
the growing burden on the least developed countries resulting f r o m the skyrocketing prices of f e r t i l i z e r and grain, and (2) assure t h e m of access to
v i t a l commodities, p a r t i c u l a r l y f e r t i l i z e r .

Thus there is an urgent need for

reducing the adverse impact of both sets of price r i s e s , and p a r t i c u l a r l y for
reducing their impact on the poorest countries.




43
-24The resolution of the United Nations General Assembly Special
Session on Raw M a t e r i a l s in A p r i l , 1974, is important in this context.

It

called on Secretary General Waldheim to r a i s e emergency assistance to
help tide the most severely affected, or F o u r t h W o r l d , countries over the
next 12 months, and outlined a procedure for developing a m u l t i - y e a r
effort to help these countries regain their financial balance and development
momentum.

The Council of the European Economic Community has offered

to increase its assistance by $500 m i l l i o n if the other r i c h countries w i l l
r a i s e the balance for a fund of at least $3 billion, of which they would expect
the O P E C nations to provide some $1. 5 billion.
The United States Government has a f f i r m e d to Secretary- General
W a l d h e i m that we w i l l participate in this emerging effort, but without
specifying any amount or share.

A f a i r share for the United States total

should be at least one q u a r t e r , probably even a t h i r d , given the fact that
we a r e much less hurt by the recent price dislocations than the Europeans
or the Japanese.

A U . S . contribution in the f o r m of increased food and

a g r i c u l t u r a l production assistance totaling $1 billion w i l l be less than one-half
of the m o r e than $2 billion we w i l l receive in 1974 f r o m the developing count r i e s as a result of our higher food p r i c e s .
The Canadian and Japanese a r e each reported to have offered to put
up $100 m i l l i o n , and the Netherlands $30 m i l l i o n .

I r a n and Venezuela a r e

also reported to have each promised $100 m i l l i o n or m o r e , and D r .

Raul

P r e b i s c h has been conducting a round of discussions w i t h the A r a b countries
in the past two weeks on behalf of Secretary General W a l d h e i m .




The

44
-25S e c r e t a r y General of O P E C has stated s e v e r a l times recently,, but without
substantiating detail, that the O P E C countries w i l l provide assistance in
1974 in amounts greater than 1 per cent of their G N P , i. e . , m o r e than
$1.5 billion.

This includes, however, assistance to such countries as

Jordan and Egypt which, like U . S. aid to V i e t n a m or Colombia, does not
qualify as aid to F o u r t h W o r l d countries.

I m m e d i a t e Next Steps
The scale of the global problems brought on by the events of 1973 is
such that they cannot be coped w i t h through, a series of belated, uncoo.rdinated, and ad hoc m e a s u r e s .

The need is f o r a global cooperative effort

to (1) counter the threats of a severe sustained economic slowdown by
maintaining demand, and of inflationary supply shortages by increasing
production; (2) enable the recycling of surplus funds f r o m O P E C investments
to developed and developing countries In need; (3) help m a i n t a i n m o m e n t u m
in the development efforts of the poorest developing countries d u r i n g these
years of transition and adjustment to higher p r i c e s ; and (4) start evolving
a new set of rules for access to supplies.
S e c r e t a r y Kissinger acted w i t h foresight last f a l l in calling for a
United Nations Food Conference (now set f o r November 1974) and in setting
f o r t h general proposals in his w i d e - r a n g i n g speech to the U . N .

General

A s s e m b l y on A p r i l 15; however, the F o u r t h W o r l d countries r e q u i r e some
$3 b i l l i o n of emergency assistance i m m e d i a t e l y , before governments and
international agencies deliberate on m e d i u m - t e r m and l o n g e r - r a n g e proposals,
and a specific U . S . response is now overdue.




45
-26-

The Overseas Development Council in A p r i l proposed in its Agenda
f o r Action, 1974, seven possible actions to address the urgent needs of the
hardest-hit poor countries;
(1) A g r e e m e n t by food-exporting countries to set aside a portion of
their food exports for t r a n s f e r on concessional t e r m s to the poorest countries;
(2) A p a r a l l e l agreement by c a p i t a l - s u r p l u s , o i l - e x p o r t i n g countries
to set aside a portion of their o i l exports f o r t r a n s f e r to the poorest developing
countries on concessional t e r m s , or to set aside a s m a l l portion of o i l
revenues f o r development, or both;
(3) A g r e e m e n t on a global system, of increased food r e s e r v e s to
meet future shortages;
(4) A joint effort by the capital-surplus o i l exporters and industrial
countries to help the poorest developing countries w i t h t h e i r i m m e d i a t e and
expanding needs for f e r t i l i z e r ;
(5) A g r e e m e n t to launch a worldwide

effort to expand low cost food

production, w i t h particxilar emphasis on the poorest countries and e a r l y action
on IDA replenishment.
(6) A g r e e m e n t on a cooperative effort to help a l l countries find
substitutes for oil, including a) an interchange of information on energy
technology, and b) financing by capital-surplus countries;
(7) A g r e e m e n t on such s h o r t - t e r m financial support for the p r i c e distressed poorest countries as debt postponement.
These actions would be mutually r e i n f o r c i n g if a l l or most of them
could be secured.

37-211 O - 74 - 4




T h e i r total impact would go w e l l beyond dealing w i t h

46
-27immediate problems of the current economic t u r m o i l to hold out the prospect
of accelerated development.

Conclusion
I n many ways, the w o r l d in 1974 is at a watershed comparable to
that of the m i d - 1 9 3 0 s , when the w o r l d chose the wrong direction and p r o ceeded on to W o r l d W a r I I , or to that of the mid-1940s when the decisions "
taken led to a new cooperative w o r l d order which, for a l l its obvious i m perfections, has taken the w o r l d to unprecedented levels of cooperation and
prosperity.

The need in 1974 is for a sense of vision and cooperation c o m -

parable to that of the late 1940s.
The past year has c l e a r l y indicated what can lie ahead i f - - w h e t h e r by
preference or lack of f o r e s i g h t - - t h e law of the jungle r a t h e r than cooperation
remains the response of nations.

Many of the new problems of global

scarcity brought on by r i s i n g affluence and increasing populations c e r t a i n l y
should be amenable to alleviation, and possibly even to solution, through
cooperative international action.

The United States, the w o r l d ' s b r e a d -

basket and the m a j o r beneficiary (by over $6 billion) of s c a r c i t y - d e r i v e d
higher prices for its food exports, has a special responsibility to help the
hardest-hit countries at least on the food aspects of the w o r l d economic c r i s i s .
By skillfully handling the w o r l d ' s most essential raw m a t e r i a l - - f o o d - - t h e supply
of which it dominates, the United States might also begin to pioneer and f o r mulate new ."rules of the game" for access to supplies, for increasing p r o duction to meet demand, and for establishing global r e s e r v e s - - n e w rules that
a r e needed for the benefit of a l l in managing the increasingly tight w o r l d supply
of essential resources.







Table I
Estimated Oil Revenues, Per Capita GNP, Population, and
Total Imports of Eleven OPEC Countries

Country

Estimated
Government Oil Revenue
($ millions)
.1972
1973
1974

Saudi Arabia
Iran
Kuwait
Iraq
Abu Dhabi
Qatar
Venezuela
Libya
Nigeria
Algeria
Indonesia

2,988
'2.423
1,600
802
538
247
1,933
1,705
1,200
680
480

8

4,915
3,8S5
2,130
1,465
1,035
360
2,800
2,210
1,950
1,095
830

19,400
14,930
7,945
5,900
4,800
1,425
10,010
7,990
6,960
3,700
2,150

Estimated
Per Capita
Government Oil Revenue
($)
1974"
1972
1973
393
79
1,758
80
11,700
1.941
176
820
21
45
4

630
123
2.131
141
22,565
2,575
250
1,005
33
71
7

2,456
461
7,223
551
43,636
9,500
870
3,631
114
233
17

Per Capita • Population
GNP
(millions)
(S)
1971
1973
540
450
3,860
370
3,150
2,370
1,060
1,450
140
360
80

.

7.8
31.5
1.0
10.4
0.1
0.1
11\2
2.2
59.4
15.4
124.0

Total
Imports
($ millions)
1971
1972
.

806
1,871
678
656
n.a.
n.a.
2,301
712
1,506
1,221
1,174

1.229
2.410
797
713
n.a.
n.a.
2.433
1.104
1,502
1,760
1.458

0DC estimate based on World Bank estimates for OPEC government oil revenues, population (mid-1971), and population growth rate*,

SOURCES: Oil Revenue figures are informal World Bank staff estimates; GNP and Population figures are from World Bank Atlas, 1974 (Washington;
O.C.: World Bank Group, 1974); import figures are based on International Trade, 1972 (Geneva: General Agreement on Tariffs and Trade, 1973),
Publication Sales No. GATT 1973-3.
•
I




Impact of Oil Pricc Rise on Sclcctcd Developing
^Countries, Ranked by GNP Per Capita

Table H

T

.

Primary
Changa in
Estimated
Oil Import BiII

Total
Imports

($ millions)
Country

1972
25

35

35

Bangladesh
Sri Lanka

1973

50

<$ millions)
1074*

Estimated
Total
Debt Scrvice Reserves
(S millions) ($ millions)

1972

1973

1974

95

929

807

n.a.

1

150

413

536

48

;
1
1

•

1973

b

77

(per cent)

1972

79

.

313

Net O D A
From OAC
.

' GN?
'Per

Countries'*

Capita

Exports

($ million^

(S)

1967-1969

1973°

^..n.a. . i

n.s..
•

Total

Exports
($ millions)

1970-1973*

200°'

Exports
o: % of

Total

Total
Reserves

1972

1971

n.a. . . jute, 4 6
372®
tea. 61

J

200
65

...70.
100

606

110

. . rubber, 19
coconut. I d .

India

265

415

1.350

3,196

4,048

1,403h

550

+ 40

2.401

2,477

' Jute. 2 3
tea. 12

Il
Pakistan
Kenya

65

85

260

1,144

1,455

278

;

396

+118

737

25

40

115

698

854

30

j|

286

•

364 1

30

i
I

1
I
II

Thailand

125

180

510

1.616

1.737

52

Philippines

185

265

740

1*662

2,480

128

1,107;
n.a.

s

•

•;

1,063

1,503

rice. 2 7
.• rubber. 14

53

1,105

1,955

wood, 24

164

223
304* .

.+284
+117

389
633

20

25

70

466

570

49

80

.216

1.057

1,336

102

!
I

205

'. 325

1.075

2.715

3.531

332

| 1.034

425

540

1,425

6,185

329

6.462

Uruguay
Chile

40
.

n.a.

60
147

• 160
362

239
1,211'

369
n.o.

30 '
312

. *T;-.c oi! import bill was calculated cn tho basis of the developing country's projected oil-import'
corsurr.piion at approximately S3.C0 per barrel c.i.f. While'an oil import bill calculated in this
fa:hlon may be unrealistic in terms of what many developing countries can afford to pay, it
.nevertheless reflects the order of magnitude of the economic difficulties faced by these same
countries.
b
As of September 1973, unless otherwise noted.
c
The. value of total exports in 1073 are those (or the second quarter of 1973 expressed In
ar.rvja! rotes, unless otherwise noted.
d
Comp3icd of net bilateral OOA and concessional multilateral flows.
*
'Total reserve position as of July 1973.
'Total reserve figure for Bangladesh obtained from U.S. Asency for International Development.
•First quarter exports expressed in annual rates.
-*--*

'{oil, 9

+ 40

50

j

210
Vfca.

' 562*
. 985

130

I

+245

Morocco

7,109

• •

160

tea. 15

867

Ghana

Korea. South

318

coffea. 24

1,267
i

'Brazil

:

Iron, 7
cotton, 11

• ( sugar. 17
. 'cocoa. 55'
•
phosphate, 2 4
"
:'food, 17

210
j

240

i
60
9 7

!

' j .

250
270

70

1,624

3,088

' wood, 13
| fish, 6

361

j

290

+444

3.991

6.038

1 coffee, 39
cotton, 7

94

'j

460

wool, 4 2

21

;

•

+

20
n.a.

197

I

I
961 ||

338

I

j copper, 7 6

750

j

_ meat, 3 0
962.

39

j

760

reserve position as of June 1973.
'Bas'jd on International Trofe, 1972 (Geneva: General Agreement on Tariffs and Trade, 19731.
Publication Sales No. GATT 1973-3.

SOURCES: Oil Import arid Total Import figures ere based on Informal World ftanlt staff
estimates; Debt Scrvice- figures are from Bureau for Program and Policy Coordination, U.S.
Agency for International Development; Total Reserves'and Total Export figures are from
International Monetary Fund, International Fin»nci»l Statistics, December 1973; Net Official
Development Assistance figures are based on Report by the Chairman of the Development
Assistance Committee, Development Co operation, 1073 Review (Paris: OECD, 1973); GNP
figures are from World D»nk A tits. 1974 (Washington, D.C.: World Bank Group. 1974).

49
Table I I I
Pricc Changes in Major Commodity Exports
of Developing Countries
»
'
Percentage
Change
in Price,
1972-1974"

Per cent of
Total World
Trade, 1970 b

355

5.04

239 c
211
196

n.a.
.48
1.00

Palm Oil
Rice

147
138

.06
.36

Cotton

137

.76

Corn
Sisal
Sugar
Cocoa
Ground Nuts
Copper

114
113°
105
103
91
90

.58
.02
.86
J27
.07
1.29

79*
72

.42
.21

Major
Commodities
Petroleum
Urea
. Rubber
Wheat

Principal Exporters'
Shares of
World Exports of
. Commodity, 1970

„

Soybeans
tin
Iron ore*

46c

£0

Coffee

36 " ~

.93

Tea

19

.21

JUte

17

.05

Saudi Arabia, 15%
Iran, 13%
n.a.
Malaysia, 33%
United States, 32%
Canada, 21%
Australia, 12%
Argentina, 4%
Malaysia, 44%
United States, 27%
Thailand, 11%
United States, 16%
Egypt. 14%
United States, 45%
Tanzania, 33%
Philippines, 10%
Ghana, 35%
Nigeria, 29%
Zambia, 24%
Chile, 21%
United States, 94%
Malaysia, 50%
Bolivia, 16%
Venezuela. 7%
Brazil. 32%
Colombia, 16%
India, 31%
Sri Lanka, 29%
Pakistan/Bangladesh, 50%

f "Price change from 1972 (average) to 1974 (January), unless otherwise noted.
bWortd trade equalled $280.4 billion in 1970, $371.7 billion in 1972, and $487.5 billion
in 1973 (second quarter estimate).
c
Price change from 1972 (average) to 1973 (average).
d
. Prlce change from 1972 (average) to 1973 (October).
I *Oata available for developing country exporters only.
SOURCES: Based on International Monetary Fund, Internationa! Financial Statistics,
Occember 1973, and World Bank staff estimates.




50
Table III
Announced Euro-Currency Lending to Non-OPEC
Developing Countries, 1972 and 1973
(S millions)
Country of Borrower
Argentina
Bahamas
Bahrain
Bolivia
Brazil
Colombia
Costa Rica
Cuba
Dominican Republic
. Dubai
Guinea
Guyana
Haiti
Hong Kong
India
Ivory Coast
Jamaica
Kenya
Korea, North
Korea, South
Lebanon
Malawi
Malaysia
Mexico
Nicaragua
Oman
Panama
Peru
Philippines
Senegal
Swaziland
Trinidad and Tobago
Zaire
Zambia

1972

1973

236.0

87.3
30.0
15.0
6.0
789.0
115.0
11.0
30.0
15.0
120.0

-

•

-

577.4
90.0
-

23.3
4.0
18.3
40.0
-

20.0
-

15.0
-

30.0
-

76.1
490.4
15.0
-

40.0
210.0
61.3
-

3.2

-

12.5
10.0
72.6
10.0
• 95.0
35.6
4.5
51.6
106.0
20.0
5.3
1,247.5
102.0
35.0
251.0
633.6
178.5
90.0
-

90.0
25.0

38.0
346.9
150.0

Total, Non-OPEC Developing Countries

2.065.0

4,713.9

Total, OPEC Countries
Total. Developed Countries

1,023.5
6,385.0

3,080.0
" "12,889.4

WORLD T O T A L

8.473.5

20,683.3

-

NOTE: The interest rates vary. Maturities are largely three to eight years, with a six
month rollover period.
,
SOURCE: International Economy Division, World Bank Group.




51
M r . G O N Z A L E Z . I n your statement you stated t h a t y o u anticipated a
reduction or a decline i n the cost of petroleum, and I was wondering,
this w i l l necessarily be predicated on the fact that we w o u l d have t o
trust the A r a b producing countries that they would not reimpose an
embargo. D o you see any danger or a possibility of a reimposition of
the embargo ?
M r . B E N N E T T . M r . Chairman, as you know, the embargo o f last year
was imposed after the outbreak o f the war, and had an almost exclusively political content. O f course, I am not the expert butt i t is cert a i n l y m y hope t h a t there w i l l be continued progress t o w a r d a lasting
peace i n the M i d d l e Bast, so t h a t the occasion f o r an embargo w i l l not
reoccur. A general embargo f o r economic reasons seems t o me most
unlikely.
M r . G O N Z A L E Z . W i t h respect t o the possibilities t h a t you say the
Secretary and others w i l l be exploring soon, w h a t mechanism or prog r a m caii be devised t o t r y t o absorb some o f this excess money t h r o u g h
the issuance o f Government securities? C a n y o u t e l l us i f any k i n d
of an agreement has been reached by now ? Whether or not some f i r m
proposition was developed d u r i n g the occasion o f the President's visit
t o tthe M i d d l e East? A n d whether or not, i n case such plans are i n
the works, i t w o u l d be necessary f o r the administration t o come t o the
Congress f o r legislation t o provide f o r t h a t t y p e o f mechanism, or
whether or n o t i t could a l l be done w i t h i n the administrative processes ?
M r . B E N N E T T . There have been no suc,h agreements t o m y knowledge
w i t h foreign countries on new investments i n U.S. Treasury or Government securities. Y o u know, o f course, t h a t we do issue special
securities. F o r example, we have about $26 b i l l i o n outstanding now,
o f w h i c h the largest component is held by the German authorities.
I t occurs t o us t h a t i t could be t o the mutual advantage o f the
U n i t e d States. a,n<J t o some other countries t h a t w i l l be accumulating
large government-held foreign investments t o consider similar special
securities.
There is no reason t h a t I know of w h y we should offer any o f these
investors terms more favorable t h a n we offer other investors, includi n g U.S. citizens. B u t i t is, according t o our experience, l i k e l y that
there w i l l be opportunities t o develop securities w i t h special features
t h a t meet our respective needs. I f , f o r example, a M i d d l e Ea^t country
could give us some assurance o f the dates over a coming period on
which specific large amounts would be invested here, we i n t u r n could
design government-to-government securities. These w o u l d be on terms
comparable t o the private securities b u t w o u l d provide them the opp o r t u n i t y o f k n o w i n g i n advance they could invest on a specific day
and t h a t those funds could be recovered by t h e m on the basis o f cert a i n periods of notice t o us, just as we have done w i t h the Germans.
W e have h a d very p r e l i m i n a r y discussions o f t h i s sort o f t h i n g , f o r
example, when the S a u d i A r a b i a n ministers were here recently. W e
agreed to discuss the matter f u r t h e r w i t h them we go out there next
week; but there are no agreements.
M r . G O N Z A L E Z . T h a n k y o u very much.
I n that connection, I am sure t h a t you would want to avoid the situat i o n I understand prevails now w i t h respect t o the W o r l d Bank, where
a country such as I r a n lends to the Bank at a higher interest charge




52
t h a n w h a t the B a n k is lending out i n return. T h i s seems t o me t o be a
questionable policy, and I t r u s t t h a t t h a t k i n d o f situation w i l l be
very carefully studied by the U n i t e d States.
M r . BENNETT. Yes, sir.

M r . G O N Z A L E Z . I f you do not m i n d , M r . Johnson, I am going t o j u m p
over y o u and recognize M r . Orane. H e has been here f r o m the beginn i n g and has anxiously been w a i t i n g to ask some questions. I recognize
M r . Crane.
M r . C R A N E . T h a n k you, M r . Chairman.
F i r s t o f a l l , I would l i k e t o congratulate M r . Bennett upon reaching
the position t o w h i c h he w i l l be confirmed very soon, and I appreciate
his testimony before the subcommittee, as well as t h a t of M r . G r a n t .
There is one question I w o u l d l i k e t o p u t t o you, M r . Secretary—it
may be a premature designation, b u t I am sure i t w i l l be flawless i n
another hour—and t h a t concerns the paragraph on page 5 o f your
testimony i n w h i c h you indicate t h a t y o u do not feel t h a t the current
situation is nearly as grave as some o f the remarks t h a t we had indicated i n a b r i e f prepared f o r the subcommittee b y the staff. I am
t h i n k i n g specifically o f some o f the quotations i n H o b a r t Rowen's
article on the deepening monetary crisis, as well as some o f M r . Levy's
remarks. Y o u go on t o say, at the t o p of page 6, t h a t the problem you
perceive now is t h a t the clear and present danger before us is not inadequate, but instead f a r too much monetary demand f a c i n g the existi n g capacity t o produce. O n the one hand, I can grasp this f r o m the
testimony o f yourself and M r . Grant, b u t on the other hand, i t seems
t o me t h a t w h a t we are t a l k i n g about, i n both your testimony and M r .
Grant's, is t r y i n g t o come u p w i t h a whale o f a l o t o f money. I am
not sure exactly who is g o i n g t o provide i t and h o w — p a r t i c u l a r l y t o
help these least developed countries. T h a t does not strike me as surfeit
of money chasing scarce resources, but rather a distinct lack o f money
available, unless we simply crank u p the p r i n t i n g presses a n d aggravate a l l of the existing problems. I w o u l d appreciate i t i f you could
dilate just a l i t t l e b i t on t h a t point.
Mr. B E N N E T T . I n a time o f surplus monetary demand, i t w o u l d
s t i l l be possible f o r the people o f Bangladesh t o be short o f the
a b i l i t y t o buy imports. I may be wrong, but I understood you to say,
M r . G r a n t , t h a t the U n i t e d States indicated t h a t i t w o u l d participate
i n the U . N . fund.
M r . G R A N T . Rig;ht. T h e emergency assistance effort, not i n the f u n d ;
the emergency assistance efforts.
M r . B E N N E T T . Yes, t h a t is the p o i n t I wish t o make. W e wish t o
cooperate, b u t we have not made any commitment t o p u t money i n t o
this U.N", operation.
I t h i n k this also may be clarified. Y o u mentioned t h a t the Europeans
said, conditionally, t h a t they m i g h t be able t o make some money available. B u t t h a t also is not t o the U . N . f u n d ; i t was t o assistance t o these
most severely affected, i n response t o a U . N . appeal, b u t not necessarily
t o any particular channel. B u t there is no U.S. commitment whatsoever to place any given amount i n t o this effort. I t may be i n t i m e t h a t
t h a t w o u l d be appropriate or t h a t some f o r m of food loans m i g h t be,
but there is no such commitment. I t is our hope t h a t a large p r o p o r t i o n
o f this needed assistance w i l l come f r o m those who are today i n such
a l i q u i d position.




53
M r . G r a n t mentioned an estimate of perhaps $3 b i l l i o n a year. I
have a feeling t h a t f o r this calendar year the need w i l l probably not
reach a b i l l i o n dollars. W h a t i t w i l l be i n later years, who knows. W h o
knows w h a t the o i l price w i l l be—and i t is h a r d t o estimate a l l o f the
commodity adjustments: the price of tea, the price o f beef, and estimates of t h a t type have t o be rather preliminary.
M r . C R A N E . T h e t h i n g t h a t s t i l l concerns me is this point o f liquidi t y crunch. W e have unprecedented interest rates at home r i g h t now.
I understand the balance o f payments deficit f o r I t a l y , i f i t continued
to r u n at this rate t h r o u g h the year, w o u l d be $13 billion, which, even
i f t h e i r gold is revalued u p w a r d t o market price, t h a t would totally
wipe out t h e i r gold supply. E n g l a n d and France have these problems,
though not of the same magnitude. Here are advanced industrial
nations t h a t «are undergoing, I t h i n k , really severe wrenches, and then
on the other hand, we have the underdeveloped countries w h i c h I do
not know where they are going t o come up w i t h the money. I f the
O P E C countries buy W o r l d B a n k bonds, what interest rates w i l l they
be p a y i n g on those bonds ?
M r . B E N N E T T . T h e bonds are i n t w o types lately—a p o r t i o n denominated i n their own currency, and a portion i n dollars. I believe the
rates t h a t have been negotiated lately are mostly at 8 percent.
M r . C R A N E . They are going t o have to lend long at low, very low,
interest rates, w i l l they not, t o the least developed countries, t o t r y
and get them t h r o u g h the present crunch ?
M r . B E N N E T T . L e t me distinguish three things. The money that is
going into the I M F f a c i l i t y to help buy o i l has been coming mainly
f r o m the O P E C countries at 7 percent f o r relending at 4- to 7-year
maturities. The W o r l d B a n k bonds w i l l be f o r long-term I B R D loans,
and these are f o r development projects. I D A is financed f r o m governmental contributions, not f r o m the receipts of bonds.
B u t let me get back to your basic question: Where is a l l of the money
coming f r o m ? W e l l , I g^iess my answer is there is too much money i n
t o t a l ; t h a t we are pushing up prices and pushing down the value of
money. T h a t does not mean that there may not be a need t o help those
who are p a r t i c u l a r l y h a r d h i t . I t does not mean t h a t some particular
country cannot get into trouble w i t h an out-of-date exchange rate or
by t r y i n g to hold prices that are not consistent w i t h the money supply.
B u t take I t a l y . I t a l y has just p u t i n new measures t h a t w i l l substant i a l l y reduce that deficit forecast you mentioned, and i n fact, i n recent
weeks, I t a l y may not even have had a deficit. They have begun to take
measures.
M r . C R A N E . T h a n k you.
M r . G O N Z A L E Z . T h a n k you, M r . Crane.
M r . Young.
M r . Y O U N G . I y i e l d t o M r . Rees.
M r . G O N Z A L E Z . M r . Rees, then.
M r . R E E S . T h a n k you. Congratulations, M r . Bennett. I hope you enj o y traveling.
I have been doing some work i n this field i n terms of the domestic
and international monetary impact of the p r i c i n g of oil, and I noted
that our balance-of-payments deficit f o r the month o f M a y was $776
million. I also notice that there had been a great deal o f overbuying of
agricultural commodities over the past 6 or 7 months f r o m some of the




54
i m p o r t i n g countries, w h i c h actually m i g h t cut down the demand f o r
U.S. f a r m products f o r the balance of the year. W e continue t o i m p o r t
about 30 percent of our oil. W i l l this trade balance—of payments—
continue throughout the year, do you believe ?
M r . B E N N E T T . I t h i n k y o u probably p u t your finger on an i m p o r t a n t
component of t h a t large deterioration i n M a y i n our trade position—
the previous overbuying i n a g r i c u l t u r a l commodities and the drop i n
a g r i c u l t u r a l prices. O f course, we do not know how much, b u t last
year's $8 b i l l i o n i m p o r t b i l l f o r o i l is going to look p r e t t y small compared t o this year's i m p o r t b i l l .
I t is also w o r t h n o t i n g t h a t the way or accounts are kept, these
investments t h a t have been coming i n here increasingly i n recent weeks
f r o m the o i l exporting countries—these investments i n U.S. Treasury
securities or on deposit i n the U n i t e d States—are investments o f
official institutions; they w i l l show u p i n our present method o f publ i s h i n g balance-of-payments statistics as an overall deficit o f the
U n i t e d States. Maybe we ought to consider whether t h a t is not misleading. I t is really an investment; they are not so much f o r e i g n exchange reserves i n the usual sense but more investments o f the national
p a t r i m o n y they w i l l be using down the road. They are not current
balance-of-payments deficits i n the old-fashion sense. B u t I cannot at
this point give you a specific prediction of what our trade balance w i l l
be this year t h a t would be of much w o r t h to you. I t h i n k the i m p o r t a n t
t h i n g is t h a t we have t o remain flexible to respond to what i t t u r n s out
to be. A n y prediction I give you w i l l not be w o r t h much.
M r . R E E S . W h a t bothers me, even i n l i g h t of our adverse balance o f
payments and the possibility t h a t this m i g h t continue, is t h a t we are
s t i l l i n better shape than most of the w o r l d because we produce so much
of our energy. I t a l y , I understand, is b o r r o w i n g on the short t e r m
E u r o d o l l a r market t o solve what is basically a long-term problem.
M u c h of the E u r o d o l l a r market today is composed o f short-term
money—most f r o m the o i l exporting countries. A l l of these various
windows, whether you loan someone 8 percent money to purchase o i l
o r whether you allow I t a l y t o revalue their gold so t h a t they can borrow more on the short t e r m E u r o d o l l a r market, a l l of these are j u s t
solutions f o r 1974. W h a t worries me is 1975. Once a country uses a l l o f
its reserves t o i m p o r t the bare m i n i m u m of t h e i r petroleum needs, t h a t
is i t . They do not have any more reserves; they are broke. I t a l y has
revalued t h e i r g o l d ; they cannot revalue i t again. They have already
revalued i t u p t o where they can borrow. M r . C a r l i m i g h t be able t o do
something to discipline the I t a l i a n economy—I tend t o doubt i t — b u t
what is going to happen i n 1975? W e have taken the i n i t i a l shot, and
we do not have a n y t h i n g to b a i l us out next year.
M r . B E N N E T T . W e l l , let me take the case of I t a l y and illustrate some
of the trends.
F i r s t o f all, I t a l y has been b o r r o w i n g some short term, b u t i n fact,
the b u l k of their E u r o d o l l a r b o r r o w i n g i n the first h a l f o f this year was
long t e r m b o r r o w i n g and not short term. I n fact, they probably borrowed, i n the first h a l f of this year i n t o t a l more t h a n the entire increase f o r the whole year i n t h e i r o i l b i l l . Thus, obviously, there must
be factors i n addition to o i l at w o r k here; factors h a v i n g t o do w i t h
the domestic economy. So appropriate restraint on the domestic
economy does provide hope f o r next year, and the intensity of the prob-




55
lem this year is more than just oil. O f course, they have taken additional measures—they just threw the other day another quarter-a-gallon t a x on the price of gasoline. Those to us would seem l i k e rattier
draconian measures, so I t h i n k they do provide some hope t h a t next
year w i l l be better than this year.
M r . R E E S . Just one f u r t h e r question. A r e you going t o the M i d d l e
East w i t h Secretary Simon ?
M r . B E N N E T T , I es. W e are going not only to the M i d d l e E a s t ; we
w i l l be t a l k i n g to some of the finance ministers i n Western Europe on
the way back. Somehow I have some feeling t h a t some o f the subject
matter w i l l be the same as we are discussing here.
M r . R E E S . T h a n k y o u very much, sir.
M r . G O N Z A L E Z . T h a n k you, M r . Rees.
Before recognizing M r . Frenzel, I would like to report t h a t we have
a t h i r d witness, V i c t o r K u r t z , f r o m New Y o r k , and we w i l l listen t o
h i m after awhile.
I recognize M r . Frenzel.
M r . F R E N Z E L . T h a n k you, M r . Chairman.
I do want to congratulate M r . Bennett and wish h i m a long and
successful career.
I t was indicated t h a t we had committed ourselves to the principle
of some sort of emergency aid t h r o u g h the U.N., but you are c r i t i cized—or we are criticized, I guess—for not setting f o r t h some sum.
I s i t not true t h a t we could w i n d up by p a y i n g the lion's share o f a l l
of those emergency programs, M r . Bennett?
M r . B E N N E T T . I would like to make clear t h a t we have not agreed i n
principle to contribute to a U . N . fund. W e agreed to w o r k w i t h the
U . N . t o study this problem and to t r y to see that this problem is appropriately recognized. W e have not agreed to make any contribution.
I t is true i n the total postwar period we provided the lion's share.
O f course, there are particular cases. W e have not provided the largest
contribution to the Asian Development Bank, or the largest contribut i o n to the A f r i c a n Development Bank. There are exceptions.
I t is our hope that this new Development Council w i l l be able to do
an objective job of studying what is needed and what appropriate responses are and where i t should be possible to obtain appropriate help
f o r those who are most seriously affected.
M r . F R E N Z E L . T h a n k you.
M r . G R A N T . M r . Congressman, may I just—since there is a l i t t l e
play, apparently, here on words.
M r . F R E N Z E L . I f you could do i t i n 30 seconds, because M r . Bennett
has to leave, and you can stay, I t h i n k .
M r . GRANT.

Yes.

The U n i t e d Nations is asked to w o r k on t w o fronts. One, the Secret a r y General is t r y i n g to raise approximately $3 b i l l i o n of emergency
assistance f o r the most severely affected countries, which could be i n
the f o r m of either contributions to a U . N . f u n d or directly, i n the f o r m
of increased bilateral aid. The U.S. Government has stated t o the
U n i t e d Nations t h a t i t w i l l participate affirmatively i n this effort.
There is a second issue of a f u n d to be established next year that w i l l
be designed to w o r k on a multiyear basis. T h a t is what we have said we
would not participate in, i n its present f o r m , as I understand.
M r . F R E N Z E L . Fine. I f either of you two want to a m p l i f y on these
remarks f o r the record, I would be glad to have them.




56
M r . Bennett, you commented on the fact t h a t our a g r i c u l t u r a l sales
abroad are d o w n considerably this year, and t h a t is m y experience, too.
A p p a r e n t l y , our t r a d i n g partners are eating out of the pipeline, so t o
speak, and t h a t leads me to believe t h a t w o r l d food supply figures are
p r e t t y w i l d guesses, at best. I s this your estimate ?
M r . B E N N E T T . W o r l d food prices have tended t o come down, as you
know, since February. U n f o r t u n a t e l y , they have tended t o go u p the
last few days, because some of these adverse weather reports t h a t M r .
G r a n t mentioned have been coming i n , w h i c h is a clear i l l u s t r a t i o n o f
how difficult i t is to forecast i n this area.
M r . F R E N Z E L . W e have done t o w o r l d food prices w h a t we d i d t o the
stock market. E v e r y time somebody says on television t h a t f o o d m i g h t
be short, w o r l d food prices go up. I t may have no relationship t o growi n g conditions or what the anticipated crop is. I t h i n k W a l t e r Cronkite
raised the price of wheat last year by at least a buck, and the market is
getting a w f u l l y sensitive.
B u t certainly, food prices are down considerably. Does t h a t mean we
are going h u n g r y , or demand is off ?
M r . B E N N E T T . The Russians, of course, are not expected t o be an
importer this year. The Chinese are s t i l l expected to be a very large
one. W h a t the Eastern Europeans and the Indians w i l l be is very much
a difficult t h i n g to guess at this point.
I do not want to pose as a food expert. A l l I would l i k e t o do is agree
wholeheartedly w i t h your suggestion t h a t forecasting the food market
ahead is a very difficult project.
M r . F R E N Z E L . O K . T h e final point I wanted t o make is t h a t y o u r
prime interest i n the t r i p t h a t is f o r t h c o m i n g and your p r i m e interest
w i t h i n the Department has been to convince the o i l producers t h a t
their prices have t o come down. I s t h a t true ?
M r . B E N N E T T . I m i g h t c l a r i f y . T h i s t r i p t h a t I have the honor t o
go on w i t h Secretary Simon is p r i m a r i l y to discuss economic collaboration i n trade and investment w i t h the Egyptians, w i t h the Israelis, and
w i t h the Saudis. I n the case of the Saudis, the p r i m a r y concern w i l l be
collaborating w i t h them i n the industrialization of Saudi A r a b i a ,
which, as M r . Hanna mentioned, is t h e i r No. 1 interest.
W h i l e we are there, we w i l l take the o p p o r t u n i t y as bond salesmen
also to t a l k to them on the other subject.
M r . F R E N Z E L . I hope you t a l k about prices too, because i t seems to
me there is not a n y t h i n g better than we can do, p a r t i c u l a r l y f o r the
poorest of the poor, than t o t r y t o reduce those prices. W h i l e we have
been criticized a l i t t l e b i t , i t seems to me t h a t when f o o d got short, we
at least t r i e d to increase food supplies i n every way t h a t was available
to us, while the producers of oil took the contrary course o f action.
I do not t h i n k t h a t we are deserving the same criticism t h a t they do,
and I believe i t is i n their interest to see t h a t those prices come down a
l i t t l e bit. They may get bigger piles of money, b u t they are going t o
spend the same way because of the inflation problem. I y i e l d the balance of m y time.
M r . G O N Z A L E Z . M r . Young.
M r . Y O U N G . Yes. M r . Secretary, before you r u n off, I wonder i f you
m i g h t just say a w o r d about the consequences t o the U n i t e d States of
any of the lesser developed countries actually going bankrupt.




57
M r . B E N N E T T . I have never thought the concept of bankruptcy was
extremely useful i n t a l k i n g about the affairs of a government. Governments, of course, can always p r i n t money. They can default on their
international obligations, and as a major creditor, that is a concern to
us. B u t I t h i n k i t would be more appropriate to look at the u n d e r l y i n g
situation.
I f a government loses its ability to insure some degree o f economic
v i a b i l i t y f o r an economy, what w i l l be the political consequences? W i l l
the government be overthrown ? W i l l they take violent courses or t r y to
make alliances t h a t under normal circumstances they would not
contemplate ?
I t h i n k , ultimately, we have to not only look at the humanitarian but
also the political consequences of severe economic situations. M r .
Grant, I am sure, could answer this better than I .
M r . Y O U N G . I was really t h i n k i n g more along the lines of—well, we
saw Jamaica begin t o raise the price of its bauxite i n an attempt to
remain somewhat stable. T h a t government, f o r instance, where we
have tremendous hotel travel and other kinds o f American investments; should t h a t government begin to totter, i t would not only have
a political impact, i t would have a direct economic impact back on us.
I was t h i n k i n g more i n those terms, because when we t a l k about the
Congress going along w i t h more, or any k i n d of aid, i n view of our
touchy experience last week w i t h I D A , that is what disturbs me about
your somewhat optimistic approach. I t m i g h t be very good economically and i n terms of our whole w o r l d picture, but m terms of communicating any sense of urgency t o Members of this House of Representatives, i t does not quite do justice, I t h i n k , to the condition m
which we f i n d ourselves, a condition which affects us economically and
not f r o m just a humanitarian consideration f o r the rest of the world.
M r . B E N N E T T . W e l l , there is no doubt that government i n extremis
can take violent measures, not only w i t h respect t o foreign investments
there, or exports, but i n other ways. O n the other hand, we have t o temper that w i t h the realization t h a t there has been an unusually large
rash of expropriations and breaches of contract by governments that
were not i n extremis. Y o u cannot say that they only occur i n those
circumstances.
M r . Y O U N G . M y colleague here passed a note t o me saying you can
only legalize the purchase o f gold once.
M r . R E E S . H O W are we going to get the next b i l l t h r o u g h ?
M r . G O N Z A L E Z . W e m i g h t have special d r a w i n g rights, domestic
special d r a w i n g rights.
M r . Y O U N G . T h a n k you very much.
M r . G O N Z A L E Z . M r . Burgener.
M r . B U R G E N E R . I have no questions.
M r . G O N Z A L E Z . M r . Johnson ?
M r . J O H N S O N . I , too, M r . Bennett, want t o congratulate you on your
appointment and hope you have a very lovely swearing i n ceremony
today. I t certainly is a b i g h i g h l i g h t i n your career.
M r . B E N N E T T . I look f o r w a r d t o a calm life.
M r . J O H N S O N . Y O U t h i n k you w i l l survive i t a l l r i g h t ? I am quite
interested i n one statement i n your speech where you said:
Neither do I feel that current developments pose a serious threat of world
depression.




58
Then M r . Gonzalez i n his statement quotes the respected Economist
magazine, saying t h a t :
The world's rich countries are digging the foundations for a major world
depression.

I realize those statements are contrary to each other, and first of a l l ,
w o u l d you comment on your statement t h a t you do not t h i n k i t poses a
threat of depression?
M r . B E N N E T T . W e l l , i t was w i t h statements such as t h a t o f the Economist i n m i n d that I thought i t was appropriate t o p u t i n such a
phrase. E a r l i e r i n the statement, I had pointed out t h a t the o i l and
other economic developments have led t o a cut i n our standard of l i v i n g and have led to a reduction i n our rate of g r o w t h . B u t t o refer t o
t h a t as a recession tends to be misleading.
T h a t is because of a shortage of something real. I t is not the type of
recession we normally t h i n k of, since we a l l studied or grew u p i n the
1930's, i n which there was just p l a i n a lack of money to purchase the
goods and to keep the plants working. T h a t type of recession just does
not seem relevant to t h i n k o f at this time.
Second, I see no evidence t h a t governments at this p o i n t are overdoing their fight against inflation to the extent t h a t they are unnecessarily restraining production, or t h a t one country is overdoing i t and
t h a t w i l l reflect on and h a r m the next country. I n fact, i t is h a r d t o
find a government that has been able t o p u l l itself together t o go f a r
enough i n fighting inflation. T h a t is our problem, not the reverse, not
t h a t governments are overdoing i t and t h a t is h u r t i n g us, or t h a t we
are overdoing i t and that is h u r t i n g other governments.
M r . J O H N S O N . I could ask you more questions, b u t I want t o get y o u
downtown. I want t o get you to the church on time. T h a n k you very
much.
M r . G O N Z A L E Z . T h a n k you, M r . Bennett. W e wish you well.
M r . B E N N E T T . I am sorry I cannot stay here ana argue w i t h M r .
Grant, b u t I appreciate your consideration.
M r . G O N Z A L E Z . I d i d want t o mention t o the subcommittee t h a t we
had the t h i r d witness, V i c t o r K u r t z , here, and we w i l l allow M r .
G r a n t t o finish his summation, because we interrupted h i m . B u t I do
want to point out we have our t h i r d witness, and I would l i k e to see us
remain here
M r . K U R T Z . I am sorry I cannot question M r . Bennett, because I
have accused the administration of terrible, basic errors, w h i c h are
responsible f o r the crisis.
M r . G O N Z A L E Z . W e l l , M r . K u r t z , what I was going to suggest is we
allow M r . G r a n t to finish his summation, and then we w i l l recognize
you f o r the presentation of whatever statement you have, and also have
you introduce yourself to us and give us a l i t t l e background and the
like.
M a y I say by way of explanation t h a t M r . K u r t z has been i n touch
w i t h us f o r more than a year and had wanted t o appear before the
subcommittee a year ago out h a d t o go t o Europe at the time, and he
could not make i t .
So, M r . Grant, we indulge a l i t t l e b i t f u r t h e r on y o u r good kindness
and w i l l come back t o you and leave i t u p to you how you wish t o sum
up. Y o u were i n the process of sunmming up your presentation, and I




59
regret the interruption, but we d i d want to see M r . Bennett leave i n
time f o r his swearing in. So you have the floor.
M r . G R A N T . W e l l , M r . Chairman, I can be very brief, because I was
at the end o f m y statement.
I n essence, i t is that f o r the most severely ~ affected countries, the
F o u r t h W o r l d , they clearly require major emergency assistance, f o r
which the present mechanisms are not adequate. There has been an
appeal by the Secretary General f o r an emergency effort over the next
year, to be supplemented by a longer term arrangement.
I would only say on this t h a t while i t is clear that the o i l countries
need to play a very m a j o r role i n p r o v i d i n g the resource flow ? that so
does the U n i t e d States. This is, i n part, because the financial crises t h a t
the countries of the F o u r t h W o r l d are in, are i n p a r t due to the higher
prices t h a t we ourselves are charging today f o r the goods t h a t we sell.
W e w i l l earn more than $2 b i l l i o n extra f r o m the higher prices f o r
food t h a t we are selling t o the developing countries this year.
I f we would clearly move affirmatively i n p r o v i d i n g additional assistance to these countries to p a r t i a l l y compensate f o r the impact of the
higher prices t h a t we are charging, i t w i l l then become vastly easier
to get the O P E C countries to come t h r o u g h w i t h compensatory financi n g f o r the somewhat larger burden t h a t they are imposing.
F i n a l l y , we do see, looking over the next 4 or 5 years, t h a t the countries which have a capital surplus are, i n the first instance, the O P E C
countries, b u t i n the second instance, the O P E C countries are going to
invest much of t h a t capital surplus i n countries like Canada and the
U n i t e d States, w h i c h are much better investments t h a n ; let us say,
I t a l y or the U n i t e d K i n g d o m , f o r their money; so t h a t u l t i m a t e l y p a r t
of the recycling problem is not only how to get money f r o m the O P E C
countries directly to the F o u r t h W o r l d and the developing countries,
but also how do we get some of the capital surplus f r o m N o r t h A m e r ica and A u s t r a l i a to the countries t h a t are i n short supply.
M r . G O N Z A L E Z . I n other words, would i t be correct and f a i r to say
that what you are t e l l i n g us is that w i t h o u t America not only particip a t i n g but t a k i n g the leadership i n evolving a w o r l d approach, o r a
cooperative venture, i n respect to helping these nations i n distress, that
there is very l i t t l e optimistic outlook f o r a successful venture, either by
the U . N . or by a combination of the other countries ?
A s I gather i t , the thrust of what you are t e l l i n g us is t h a t American
leadership is very essential, necessary, and t h a t w i t h o u t i t , really, i n
effect, we may not solve this problem?
M r . G R A N T . Y o u are absolutely r i g h t , M r . Chairman. T h e events of
the last 2 years have i n many ways returned the U n i t e d States t o the
sort of economic and political preeminence t h a t we had 10 or 12 years
ago. The pattern that we have witnessed i n the late 1960's ana the
early 1970's where the Europeans and the Japanese were t a k i n g an
ever-larger share of the burden, they currently have had their stuffing
knocked out of them much more than we have, and, really, looking
over the next 10. years, we are relatively—as the world's largest raw
material producer—we are i n a relatively much more advantaged
position.
The O P E C countries are raw, nouveaux riches. They do not know
what to do w i t h their money yet. I t w i l l take, I t h i n k , several years to




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get f u l l y responsible behavior out of them, at best. I f d u r i n g this
period the U n i t e d States does not take a vigorous lead, then the fears
o f a 1930's type situation t o me are very, very real.
M r . G O N Z A L E Z . I was very much interested i n what y o u said on page
2 1 , 1 believe, of your statement, w i t h respect to Canada. T h i s is a very
l i t t l e discussed subject matter, and you, I t h i n k , very wisely pointed
out the fact that Canada has been one of the beneficiaries i n its exportation o f o i l t o the U n i t e d States, and also happens to be one of the
great w o r l d g r a i n dealers.
Could you explain a l i t t l e b i t f u r t h e r your reference to Canada's
increased earnings and what you mean by offsetting t h a t w i t h the o i l
imports f r o m eastern Canada ?
M r . G R A N T . W e l l , M r . Chairman, Canada is both a m a j o r o i l exporter t o us and a major o i l importer i n eastern Canada to meet its
requirements.
M r . G O N Z A L E Z . W e l l , w h y is this not more developed i n our national
consciousness? Seldom do you hear any mention about Canada i n this
role, or what its politics has been, or whether there has been a change
i n its politics w i t h respect to the U n i t e d States i n the recent months
because of our added i m p o r t a t i o n of o i l f r o m Canada.
D o you have any statistics on the increase, or what t h a t trade figure
represents?
M r . G R A N T . I do not have an exact figure. W h a t we do know is t h a t
the substantially increased i m p o r t b i l l she pays f o r o i l she brings i n t o
eastern Canada is offset by the very substantially increased export b i l l
she gets f o r oil. She is then a major net gainer i n terms o f the much
higher prices of grains, timber, ores, t h a t she exports.
I f you look at the five or six countries i n the w o r l d t h a t have really
gained f r o m the recent shifts, t w o or three of the A r a b countries, the
O P E C countries, would be first, and then Canada comes i n there as
the fifth or the s i x t h p r i n c i p a l beneficiary.
M r . G O N Z A L E Z . Pardon me, M r . Grant. W e have a signal t h a t a
quorum call is on. M a y I very respectfully and earnestly solicit m y
colleagues to take this quorum call and, i f possible, r e t u r n so t h a t we
can w i n d this u p by g i v i n g M r . G r a n t an o p p o r t u n i t y t o complete and
also t o hear M r . K u r t z present his testimony.
I am sure i t would not take long, and we could come back and w i n d
i t up. I t h i n k we w i l l have t h a t o p p o r t u n i t y after this first quorum.
I s there any objection to doing that? i f not, we w i l l t e m p o r a r i l y
recess to take this quorum call, and return.
[ A b r i e f recess was taken.]
M r . G O N Z A L E Z . The subcommittee w i l l resume.
I expect to have some additional members of the subcommittee comi n g back f r o m the quorum call, and I take this o p p o r t u n i t y t o t h a n k
M r . H a n n a and M r . Y o u n g f o r being here, and M r . Grant, we were
involved on this question of the role of Canada and its impact on the
U n i t e d States and how much potential there is. I n other words, we
like t o t h i n k i n terms o f Europe and distant nations, and we tend t o
overlook our own neighbors. I wanted t o go over some o f the specifics.
M r . G R A N T . W e do tend to underestimate—as one who was b o r n a
Canadian, M r . Chairman, I am conscious of the fact t h a t we do tend
to take our neighbor t o the N o r t h f o r granted. I t is not commonly
recognized, f o r example, t h a t we have as much trade w i t h Canada as
w i t h a l l of Europe and Japan p u t together.




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M r . G O N Z A L E Z . N O ; t h a t is not known at all, I w o u l d say, t o the
average American. I would say that is a fact t h a t is significant because
of how i t has been overlooked. I f i t is a l l r i g h t w i t h you and i f i t is
a l l r i g h t w i t h m y colleagues. I t h i n k we ought t o give M r . K u r t z an
o p p o r t u n i t y to present his statement, and let me advise you
M r . Y O U N G . Excuse me, may I just ask M r . Grant one point?
M r . G O N Z A L E Z . Oh, absolutely, absolutely. Please feel free.
M r . Y O U N G . I n the whole t a l k on agriculture, one t h i n g t h a t we ran
into en route to A f r i c a was the presence of American agribusiness concerns moving into Senegal and Gambia.
D o you have any indication t h a t there is an export of American agribusiness to the F o u r t h W o r l d , and would this i n any way help t o deal
w i t h the problem y o u mentioned about balancing some o f the yields or
u t i l i z i n g some of the more fertile land ?
M r . G R A N T . There clearly has been quite a large degree of activity B Y
American agribusiness i n the developing world. However, most of i t
has been, u n t i l at least very recently, has been directed at producing
products f o r export out into the industrial economy. I t has not tended
to focus on the basic food crops t h a t are so indispensible to these economies t h a t have been lagging. I t is quite clear t o me that i f we are to
seriously address this question of how the w o r l d gets another 400 m i l l i o n tons of increased agricultural food production a year w i t h i n 10
years f r o m now t h a t we need t o harness f a r more effectively than we
have the skills of agribusiness, including their research facilities, t o go
into the developing countries, because as I indicated i n m y testimony,
the low cost potential food producing areas today are the developing
world. W e can increase food here, but w i t h ever r a p i d l y increasing
costs. F o r that, agribusiness corporations are a very i m p o r t a n t means
of technology transfer.
M r . H A N N A . M r . Chairman?
M r . G O N Z A L E Z . M r . Hanna?
M r . H A N N A . I t h i n k t h a t i t ought to be said here that i n considering
this question of the petrodollars t h a t we m i g h t very well make the
point t h a t the energy crisis which has brought the petrodollar t h i n g
into focus is more properly seen i f we realize t h a t the energy crisis is
t w o f o l d : One is the fuel f o r the human body and the other is the fuel
f o r human activities. B u t i t is an energy problem and the crisis i n the
w o r l d , I t h i n k , is t o take the increased volume o f money being produced b y the increased prices of o i l and seeing that a considerable
portion of i t is directed t o w a r d the other face of the energy crisis,
which is to increase food production, because i t occurs to me t h a t so
long as a l l foods contain a considerable amount of sugar they also can
be turned into fuel t h r o u g h the process of m a k i n g methanol or alcohol
as a substitute f o r o i l and gasoline, and I do not t h i n k t h a t has been
stressed sufficiently to make us see this t h i n g i n its t o t a l i t y .
M r . G R A N T . R i g h t , and M r . Hanna, i t is not generally recognized,
f o r example, how much energy i t takes today to produce food, and i t
used to take 1 calorie of energy to produce a calorie of food i n this
country, 50, 60 years ago. Now i t takes 10 calories of energy, and we
are at a point of r a p i d l y diminishing returns i n this. T h i s is one more
reason w h y , i f we want to get cheap food production over the next 10,
15 years, we have t o put more into the devloping countries which have
not yet reached the point of diminishing returns.

37-211 O - 74 - 5




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M r . H A N N A . T h a n k you, M r . Chairman.
M r . G O N Z A L E Z . T h a n k you, M r . Hanna.
M r . Burgener, do you have any questions ?
M r . BURGENER. NO.

M r . G O N Z A L E Z . I f there is no objection. I t h i n k i t w o u l d be proper
t o recognize V i c t o r K u r t z , and I am going t o make a request, M r .
K u r t z , t h a t vou give us a b r i e f autobiographical sketch. M y understanding is, f r o m correspondence w i t h y o u and the fact t h a t you were
interested i n appearing before our subcommittee f o r more t h a n a year,
t h a t you have intimate associations and dealings w i t h the internat i o n a l financial situation. So we iare interested i n h a v i n g a l i t t l e b i t
of your background and i n hearing f r o m you. I f I may suggest a b r i e f
summary o f your statement, though. I f y o u have a prepared t e x t y o u
can introduce i t f o r the record o f the proceedings o f t h i s subcommittee, and I suggest this only because we cannot foretell when we w i l l
have another vote since the House now is i n session.

STATEMENT OF VICTOR KURTZ, ELVIC IMPORT CORP.,
NEW YORK, N.Y.
M r . K U R T Z . T h a n k y o u very much M r . Chairman. I appreciate very
much the courtesy you gave me f o r i n v i t i n g me t o appear before your
committee.
F o r many years I have been i n contact w i t h the administration,
many Senators and Congressmen, b u t a l l I got were very polite letters
b u t no action.
I was born and brought u p i n Vienna and studied international
economies a t the U n i v e r s i t y or Vienna. I have been interested i n geopolitics since my, y outh.
I also lived i n Paris f o r many years.
N a t u r a l l y I speak fluently French and German.
I am a businessman and I have been going f o r more t h a n 25 years—
at least once a year f o r 4 t o 6 weeks—to Western Europe where I have
excellent connections and therefore I am well i n f o r m e d about the economical, political situations i n those countries. Furthermore, I get
every week the most i m p o r t a n t French and German weekly magazines—24 hours a f t e r they appear i n Europe.
I n J a n u a r y 1968 I had a meeting i n F r a n k f u r t w i t h one o f the
highest officials o f the German Federal Reserve B o a r d (Bundesbank)
about the gold crisis and discussed m y ideas w i t h h i m .
F o l l o w i n g some correspondence, M r . Califano, special assistant to
the President, i n v i t e d me i n February t o Washington, t o a meeting
w i t h t h e i r g o l d expert.
T h e student unrest i n France i n M a y 1968 and the flight of capital
f r o m France solved the crisis f o r us at t h a t time.
I n your statement, M r . Chairman, you speak about "potential f o r
economical and political disaster as o f the 1930's." I t h i n k the danger
is even greater.
Before we discuss the causes o f our difficulties and ways t o solve
them, we have t o ask: W h o is qualified t o speak and make decisions
f o r us?
I don't blame the managers o f A R A M C O — E X X O N f o r m e r l y




63
Standard O i l N.J., Standard O i l California, Texaco, M o b i l O i l — t o
accept the order of their K i n g not to supply our A r m e d Forces w i t h
o i l anywhere.
B u t the managers o f the domestic companies who own A R A M C O
have no r i g h t t o decide our policy because they have too many cont r a r y interests.
T h e same concerns international bankers.
M r . Chairman, you said the o i l producers w i l l have a surplus this
year o f $65 b i l l i o n instead of $7 b i l l i o n last year. I t could even amount
t o $100 b i l l i o n i f I r a n ' s pressure t o raise o i l prices prevails.
T h i s means, by next year the foreign exchange reserves o f the
Western World—about $165 b i l l i o n — w i l l be gone. T h i s is an intolerable situation.
W e are not interested i n recycling o i l money. W e want private
investments, not foreign government investments. O i l money is f o r eign government money. T h e o i l price has t o be broken. A possible
new embargo danger cannot be tolerated.
H o w d i d we come t o this situation? A s leading political, m i l i t a r y ,
and economical power, we must have a respected strong money. B u t
somehow M r . M i l t o n F r i e d m a n and M r . Reuss decided t h a t only a
devaluation could help our trade and payment balance.
T h e t r u t h is t h a t our trade balance f o r the first t i m e was negative
because o f the s h i p p i n g strike i n 1971. Because o f the shipping strike
we could not export our grains, soybeans and heavy machinery, while
goods came i n f r o m bonded warehouses and consumer goods b y air.
B u t we had an active trade balance w i t h Europe.
T h e 1971 trade deficit of $2 b i l l i o n was mainly w i t h Canada and
Japan. B u t i n 1972 our trade deficit was 300 percent greater because
our imports cost more and the exports received less. B u t h a l f of our
trade is w i t h countries which d i d not want a cheaper d o l l a r : Canada,
Mexico, Central America, nearly whole of South America, many
countries i n A f r i c a , Israel, Pakistan, I n d i a , Philippines, Yugoslavia,
Greece, T u r k e y stayed w i t h us. B u t because Germany introduced i n
1968 the value added tax, a b i g inflation started there, f o l l o w i n g the
French example.
There are i n France 3 m i l l i o n foreign workers: 1 m i l l i o n Algerians,
500,000 Portuguese, Spaniards, Italians.
There are i n Germany 3 m i l l i o n foreign workers: 1 m i l l i o n Turks,
500,000 Yugoslavians, Italians, and Spaniards.
A l l these foreign workers wanted higher wages and got i t , so
European prices went u p a n d up, while i n spite of the V i e t n a m war,
inflation here was extremely small.
Because of our b i g investments i n Europe, there were many Eurodollars there, b u t according t o the U.S. T a r i f f Commission of M a r c h
1973: " U . S . f o r e i g n affiliates own about $190 b i l l i o n o f l i q u i d assets
i n international markets."
I t w o u l d 'have been possible t o use our foreign assets t o support our
money i n an emergency—the same as the B r i t i s h d i d i n W o r l d W a r
W h i l e i n 1971 our trade balance w i t h Europe was %iy 2 b i l l i o n i n
our favor, i n 1972 i t was negative w i t h $140 million. F o r the whole
year 1972, our trade deficit t r i p l e d f r o m $2 b i l l i o n to $6 billion.




64
O u r official position was, we bad not enough devaluated and the
D o w J ones ticker reported the f o l l o w i n g :
O n February 6,1973:
Representative Reuss s a i d : The Monetary crisis i n Western Europe demonstrates t h a t the d o l l a r i s p a t e n t l y overvalued a g a i n a n d said the U n i t e d States
can't expect the Smithsonian Agreement of December 1971 t o h o l d things together much longer.

O n February 12,1973:
W e are of t h e v i e w t h a t p a r i t y o f the d o l l a r should be fixed by t h e m a r k e t
r a t h e r t h a n the fiat of central.

A tremendous speculation on the foreign exchange market followed
this news. The deutsch m a r k and Swiss franc went up and Chairman
Stein reported on February 12, 1973 t o the President, we have to
devaluate again.
A g a i n , about 50 percent of our foreign trade—specially our neighbors Canada and Mexico—maintained the same relation w i t h our
money t h a n before.
Today we know the tremendous power of the speculation.
A t a bankers convention i n San Diego, i n A p r i l of this year, the
f o l l o w i n g was reported:
I s the giant w o r l d w i d e m a r k e t f o r exchanging n a t i o n a l currencies being rigged ?
B a n k s are d i s r u p t i n g the foreign exchange m a r k e t t h r o u g h excessive speculation.

I f the German and Swiss banks f o r instance take a position of $500
m i l l i o n , there is no way you can go against it.
F o l l o w i n g the oil embargo, as i t was f o u n d out t h a t we depend on
much less oil imports than Europe, the dollar went up about 30 percent. T h a t was the reason that our trade balance i n the last 3 months
of 1973 was i n our favor because of the higher value of our export
dollar and the lower price f o r our imports. B u t as end of January 1974
a l l restrictions f o r capital outflow was l i f t e d , and the dollar was again
under speculative pressure and went down 20 percent.
The tremendous amount of speculation is proven by a German regul a t i o n t h a t starting June 1, 1974, all foreign exchange transactions i n
" F o r w a r d T r a d i n g " have to be reported t o the authorities.
The deutsche bank, the biggest, reported f o r 1973 foreign exchange
transactions f o r over $300 billion—778 b i l l i o n D . M .
T h a t was only one, the biggest bank. There are 350 other b a n k i n g
institutions i n Germany.
T h e foreign exchange t r a d i n g i n New Y o r k was about $5 b i l l i o n per
day.
The tremendous losses m foreign exchange speculation w h i c h one of
the b i g three Swiss banks recently reported, and also the second biggest
bank i n Germany followed now by the bankruptcy of one of the biggest
private banks i n Germany ( H e r s t a t t ) , showed the extent of speculative
t r a d i n g which involved here the F r a n k l i n National B a n k and others
t i l l now unknown.
I don't t h i n k more proof is necessary after the public knows now
about the mystery of f o r w a r d foreign exchange speculation t h a t M r .
M i l t o n F r i e d m a n is dead w r o n g i n saying i n Newsweek of A p r i l 23,
1973:
The p r i v a t e speculation t h a t the governments deplored was socially useful and
h a d desirable effects. The official speculation i n w h i c h the governments engaged
was socially h a r m f u l and had undesirable effects.




65
The B a n k of E n g l a n d does not permit speculation against the pound.
I t is imperative that we immediately stop p e r m i t t i n g to trade against
the dollar.
Since 1971 the German mark went up f r o m 25 cents (U.S.) t o about
40 cents (U.S.).
I n J u l y o f last year, the m a r k was nearly double i n value but at the
same time the German trade balance got better and better. The German
export t o the U n i t e d States rose i n the first 3 months of this year by
18 percent—the imports only 9 percent. The next months were even
better f o r German exports. B u t our export items are also wanted and
w i l l be bought regardless of the value of the dollar. O n l y i f the dollar
is strong, there w i l l be less commodity speculation, less flights f r o m
the dollar, less inflation.
O n l y recently German inflation is smaller than ours.
I n general, Western Europe had overemployment, while we had
underemployment; so the price pressure was greater there.
W e cannot afford a budget deficit because we need international
confidence i n our money.
Because the oil producers received less money f o r the dollar they
received f o r their products, they asked always compensation w i t h
higher prices. The o i l importers d i d not fight i t , because their tax
break got greater w i t h each price raise.
The result, the arrogance of the oil producers showing their strength
leading to an embargo and the attack of the Shah of I r a n to raise oil
prices because he says the o i l companies make exhorbitant profits and
his own imports went up tremendously i n price. I n the meantime, to
stop dollars f r o m leaving our country interest rates going higher and
higher.
The stock market goes down, the b i g board alone shows a reduction
i n value since last year of about $150 b i l l i o n to about $600 billion. T h i s
means that the assets of our b i g public owned corporations can be
picked up extremely cheap f r o m foreign oil governments. This has to
change.
F o l l o w i n g the Herstatt crisis, the German authorities to stop a
market collapse offered money w i t h 9 percent per annum against stocks
( L o m b a r d C r e d i t ) , what we need here. Furthermore, our gold stock
should be a weapon f o r us, not against us. The fact that t r a d i n g is $25
m i l l i o n a day against about $160 b i l l i o n i n official gold reserves at the
market's price is true. T r a d i n g i n the key places i n F r a n k f u r t and
Z u r i c h is even less.
The B r i t i s h Finance Minister, M r . Denis Healey, thinks that additional demand f r o m American citizens would temper the possible
price-depressing effects of new I M F sales of gold and—gold sales f r o m
Central Banks—then the American public would just be p a y i n g a
h i g h price. So Americans would just be the suckers to buy gold at
$150 an ounce—maybe drive the price up to $200 then the speculation
would unload and force the m a r g i n buyers to sell—and would buy
back at h a l f the price or even lower.
The French weekly magazine " L ' E x p r e s s " writes now i n its J u l y 8
edition:
Gold i n d a n g e r : Gold stock correspond t o 30 years of difference between production and consumption. A t least 50 percent of it, is speculation. I f I t a l y starts
to sell i t s gold stock, the m a r k e t could collapse. Our hope is t h a t American
citizens w i l l now be able to buy gold. W h y should the Americans buy gold, i f i t
is no more a secure investment? (ask L ' E x p r e s s ) .




66
So obviously a much higher gold price w o u l d again devaluate the
dollar more tremendously and create a fantastic commodity speculation. The Commodity Exchange Inc., N . Y . , New Y o r k Mercantile
Exchange, Chicago Mercantile Exchange, Chicago B o a r d of Trade
are ready to trade i n gold and are w a i t i n g f o r the suckers.
Now M r . Simon says, his first step is to fight inflation, but we cannot fight inflation i f we permit Americans to buy g o l d ; 75 countries
do not permit their citizens to buy gold, i n c l u d i n g the U n i t e d K i n g dom, Australia, N o r w a y , and Denmark. The citizens of these countries do not lose their freedom because they don't have the r i g h t to
buy gold.
The French and German have the r i g h t , but we should not permit
i t because the American is the most speculative. I f only a few m i l l i o n
of Americans buy one ounce of gold, the gold price w i l l go up and
then our commodities w i l l go up. Then I r a n w i l l again want to raise
prices f o r their oil because the price they pay f o r soybeans and wheat,
et cetera, w i l l go up.
O n l y M r . Yamani, the oil minister of Saudi A r a b i a , sees the danger
f o r the world's economy w i t h higher oil prices, but a l l the other o i l
producers are more or less greedy. They want to give us a lesson t h a t
we should reduce our standard of l i v i n g . B u t we feel we don't have
to reduce our standard of l i v i n g — w e have to break this undeserved
monopoly that ruins the Western W o r l d . W e have now an excellent
foreign policy situation.
W e have a f r i e n d l y relationship w i t h the most i m p o r t a n t o i l producer, Saudi Arabia. W e have the detente w i t h Russia and China.
I r a n wanted to raise the price f o r natural gas to Russia. Russia buys
this n a t u r a l gas and sells i t w i t h profit to Europe. A s Russia refused
the higher price, I r a n doubled it. Russia is extremely dissatisfied, l i k e
us, w i t h Iran's price policy.
W e have now i n the key countries i n Europe, a change i n government, favorable to us. M r . Schmidt, the German Bundeskanzler w i l l
make a more pro-American policy t h a n his predecessor. M r . Giscard
D ' E s t a i n g , the smartest of the European politicians is not a French
chauvenist. O n the contrary, he smashed the Gaullist P a r t y i n the
shortest time since he came to power and is more pro-American than
he admits to his people.
W e should t e l l our European friends t h a t a break i n the price o f
gold would have a long-range positive influence on their o i l imports,
because the most important t h i n g now is t o break the oil price w h i c h
went up about 400 percent since last year w i t h no end i n sight. Over
700 percent since 1970.
I f we sell f r o m our gold stock—$111/0 billion—about $2 b i l l i o n —
over $6 b i l l i o n at today's market price—it would s t i l l leave us w i t h a
higher gold stock than France, Switzerland, England, and Japan.
T h i s amount would break the gold price and would have a tremendous
effect on the M i d d l e East countries which hoard gold.
W h i l e France and Germany {nade b i g contracts w i t h I r a n , what
France sold to I r a n w i l l take them 10 years to deliver, but the amount
t h a t France w i l l sell to I r a n i n 10 years corresponds to a 1-year deficit
i n their o i l imports. The new leaders i n Europe realize t h a t only a
common policy w i t h the U n i t e d States can reestablish the situation
and not g i v i n g i n to the oil producers i n every respect.




67
The underdeveloped countries are i n an extremely bad situation
because o f the h i g h o i l price. They w i l l never be able t o pay f o r i t ,
and ask us f o r help. A l l these countries first supported the embargo of
the o i l producers against us, ( but now they realize the damage t o their
economy—they are most unhappy.
I t is extremely important to help these countries, but before we can
help them, they can help us w i t h strong moral pressure on the o i l producers, t o give up their greediness. I t is not satisfactory that the o i l
producers offer t o loan them a trifle of their income.
We, the U n i t e d States, w i t h our European allies and w i t h the underdeveloped countries have to force a showdown w i t h the greediness of
the oil producers.
O n l y recently A l g e r i a said, i f their new price f o r natural gas which
is about three times the previous price, is not accepted, they w i l l start an
embargo again, so France is most uphappy, and American companies
which made contracts w i t h A l g e r i a do not have the slightest idea how
these contracts w i l l be honored.
I r a n wants to be the biggest power i n its area and place very b i g
weapon contracts w i t h us. W e should, i n agreement w i t h our European
allies, suspend all weapon deliveries to I r a n i f I r a n insist on higher oil
prices. I n the meantime, weapon suppliers here should be paid by the
Government, otherwise there w i l l be tremendous pressure not to suspend the deliveries, because of economic difficulties.
I n the last analysis, i f the Shah of I r a n , whom the C I A brought
back f r o m Rome to his throne, continues to be the leader i n asking f o r
always higher oil prices and menacing to reduce production, we w i l l
have to let h i m know that we can always make i n desperation, an
agreement w i t h the Soviet Union. W e have to let h i m know that to
save Western civilization and Western prosperity, i f he should continue i n his policy t h a t we w i l l have to remember the famous agreement of 1939.
M r . Chairman, you took the leadership w i t h your committee t o look
f o r solution i n our present crisis. I t would be i m p o r t a n t t h a t Congress
does not permit i n the future, hysterical statements which are unfounded to go over the D o w Jones ticker and start a tremendous
speculation which forces then policy decisions which are against our
national interest.
On February 6,1973 the D o w Jones ticker said:
Monetary—Reuss—the dollar is patently overvalued again.

O n February 9, M r . Reuss said:
German export lobby likes the legalized dumping inherent in an undervalued
mark. Washington had joined in this reckless process. Overstimulate German
export which then fracture the jobs of American workers.

On February 12,1973 the Dow Jones ticker said:
Monetary—Reuss—we are of the view that parity of the dollar should be fixed
by the market rather than the flat of central bankers.

Since this time, all officials and private experts agreed that the
February devaluation was unnecessary. There was never a German
export lobby and there were no undervalued mark i n February 1973.
B u t the result was that after our money was devaluated again, the
oil producers started to raise their prices nearly every month to make
up f o r their losses. O n l y the successive price capitulation o f the o i l




68
importers showed the o i l producers their political strength and started
to give them the idea of the o i l embargo. I hope we w i l l not commit
similar errors again.
I hope you w i l l succeed t o b r i n g Congress to its senses and overturn
the g o l d law which only play i n the hands of the o i l producers again 1
because of the new devaluation danger. O n l y w i t h strength can we
break the o i l producers' unity. I n the last analysis, i f absolutely necessary, a cooperation w i t h Russia has to break Iran's o i l blackmail.
[ T h e f o l l o w i n g articles, and letters were submitted by M r . K u r t z
f o r inclusion i n the record:]
[From the New York Times, January 17, 1974]
P B I C I N G I M P A C T CALLED GLOBAL
ENERGY E C O N O M I S T S A Y S R E S U L T M A Y BE DEPRESSION

(By William D. Smith)
Unless t h e s h a r p l y h i g h e r p r i c e s recently imposed by t h e o i l - p r o d u c i n g count r i e s a r e q u i c k l y cut t o a level t h a t t h e oil-consuming countries can a f f o r d t o pay,
t h e e n d r e s u l t w o u l d be a g l o b a l depression, a c c o r d i n g t o W a l t e r J. L e v y , one of
t h e w o r l d ' s l e a d i n g energy economists.
M r . L e v y , a c o n s u l t a n t t o b o t h governments a n d companies, i s n o t p a r t i c u l a r l y
sanguine a b o u t t h e possibilities o f s o l v i n g t h e problem. " T h e t i m e t o a c t w a s
y e s t e r d a y , " he s a i d i n a n i n t e r v i e w . " T h e seriousness of t h e s i t u a t i o n c a n n o t be
exaggerated."
A p o i n t o f c r i t i c a l importance, he said, i s t h a t a reasonable balance be s t r u c k
between t h e u l t i m a t e p r i c e f o r o i l a n d t h e i m m e d i a t e foreign-exchange cost t h a t
w o u l d have t o be met. H e declined t o specify w h a t he t h o u g h t w o u l d be a f a i r
price. P r o d u c e r n a t i o n s have q u a d r u p l e d prices i n t h e l a s t three m o n t h s .
I f a n u n d e r s t a n d i n g can be w o r k e d o u t j o i n t l y between consumer a n d p r o d u c e r
n a t i o n s i t s h o u l d be possible to a l l e v i a t e m a n y of adverse effects n o w a n t i c i p a t e d ,
M r . L e v y said.
A s a first step, M r . L e v y calls f o r i n t e r n a t i o n a l cooperation a m o n g oil-consumi n g n a t i o n s , as he has been since November, 1972, w h e n i n a speech t o t h e A m e r i c a n P e t r o l e u m I n s t i t u t e he u r g e d a "concerted e f f o r t by t h e U n i t e d States a n d
W e s t e r n E u r o p e a n governments a n d t h e i r i n d u s t r i e s t o t r y t o p r o t e c t as best
they c a n t h e i r security a n d p r o s p e r i t y w h i c h depends so decisively on energy
a v a i l a b i l i t y on acceptable p o l i t i c a l a n d economic t e r m s . "
On P r e s i d e n t N i x o n ' s i n v i t a t i o n , a conference of oil-consuming n a t i o n s w i l l be
h e l d Feb. 11 i n W a s h i n g t o n . Members of t h e E u r o p e a n Economic C o m m u n i t y
have j o i n t l y accepted t h e i n v i t a t i o n , w h i c h w e n t also t o Canada, J a p a n a n d
Norway.
M r . L e v y asserted:
" T h e h i g h prices t h a t t h e O r g a n i z a t i o n of P e t r o l e u m E x p o r t i n g C o u n t r i e s have
been able t o e x t r a c t f o r t h e i r o i l m a y r e s u l t i n d i s r u p t i v e t r a d e a n d m o n e t a r y
policies i n c l u d i n g c u r r e n c y r e s t r i c t i o n s as w e l l as social a n d p o l i t i c a l upheavals
t h a t w i l l be most h a r m f u l t o b o t h o i l - p r o d u c i n g a n d oil-consuming c o u n t r i e s . "
SPREADING CONSEQUENCES

T h e strongest c a r d consumers have is t o m a k e t h e p r o d u c i n g n a t i o n s a w a r e
t h a t t h e y w i l l suffer t h e same t e r r i b l e consequences as t h e i n d u s t r i a l i z e d n a t i o n s
i f t h e w o r l d economic system crumbles, M r . L e v y said.
Some believe t h a t t h i s is w h y S a u d i A r a b i a ' s O i l M i n i s t e r , Sheik A h m e d Z a k i
a l - Y a m a n i is r e p o r t e d t o have s a i d recently t h a t the p r i c e of o i l is n o w too
h i g h a n d t h a t t h e p r o d u c t i o n cutbacks o f t h e A r a b p r o d u c i n g n a t i o n s h a v e been
too severe.
M r . L e v y asserted t h a t t h e enormous increases i n w o r l d o i l prices since m i d October t h r e a t e n t o d i s r u p t t h e economic a n d m o n e t a r y s t r u c t u r e o f a l l o i l - i m p o r t i n g countries i n 1974 a n d t h a t because o f t h e w o r l d ' s economic interdependence, n o n a t i o n w o u l d be able t o escape t h e consequences.




69
COST L I M I T S

T h e economist s a i d t h a t t h e r e w e r e r e a l l i m i t s on t h e a b i l i t y of c o n s u m i n g
countries t o meet added costs o f o i l i m p o r t s o u t of c u r r e n t m o n e t a r y reserves or
increased e x p o r t earnings.
" T h e balance w o u l d h a v e t o be covered by c a p i t a l flow f r o m o i l - p r o d u c i n g
countries r e s u l t i n g i n a b u i l d u p i n financial c l a i m s on t h e o i l - i m p o r t i n g countries,
b u t t h i s w o u l d t a k e place over a r e l a t i v e l y s h o r t p e r i o d of t i m e a n d o n a n unprecedented scale," he continued. " T h e r e s u l t i n g s t r a i n s on i n t e r n a t i o n a l financ i a l m a r k e t s a n d i n s t i t u t i o n s w o u l d be e x t r e m e l y g r e a t
" W h a t w o u l d r e a l l y be i n v o l v e d w o u l d be a massive t r a n s f e r of w e a l t h f r o m
o i l - i m p o r t i n g t o o i l - e x p o r t i n g countries. T h e o i l - e x p o r t i n g countries w o u l d become owners of a r a p i d l y i n c r e a s i n g share of the economic resources of the rest
of t h e w o r l d based on w h a t is f u n d a m e n t a l l y a monopolist r e n t f o r t h e i r o i l resources a m o u n t i n g t o some 50 t o 60 times the a c t u a l cost of p r o d u c i n g t h e i r oil.
" M o r e o v e r , as revenues f r o m t h e governments of o i l - e x p o r t i n g countries, investments made w i t h these f u n d s i n o i l - i m p o r t i n g countries w o u l d be pred o m i n a n t l y owned a n d c o n t r o l l e d by f o r e i g n governments. I t is u n l i k e l y t h a t t h i s
state of a f f a i r s could p r o v i d e a stable basis f o r the w o r l d economy or w o u l d prove
acceptable to t h e i n d u s t r i a l i z e d countries."
" R O L L B A C K " NEEDED

M r . L e v y said t h a t i n order to c o n t a i n the serious, i f n o t disastrous, economic
i m p a c t of the o i l cost explosion, i t w o u l d be necessary t o " r o l l b a c k " o i l prices
to a level t h a t could be managed by the v a r i o u s i m p o r t i n g countries w i t h o u t
severe economic dislocations a n d possibly even a w o r l d w i d e depression—"indeed
a most d i f f i c u l t u n d e r t a k i n g , " he conceded.
A p r i c e r o l l b a c k should be h a n d l e d on t w o l e v e l s — t h r o u g h the establishment of
a c o o r d i n a t i n g policy among the m a j o r o i l - i m p o r t i n g countries a n d t h r o u g h discussions, r e v i e w a n d negotiations w i t h the i m p o r t a n t p r o d u c i n g nations.
Some idea of the staggering increase i n costs to the c o n s u m i n g nations is given
i n a s t u d y by M r . L e v y ' s c o n s u l t i n g firm. I t presents d a t a on the cost of o i l
imports, exclusive of t r a n s p o r t a t i o n a n d r e l a t e d charges, f o r 1972 a n d shows
t h a t costs i n 1974 f o r i m p o r t s a t t h e 1972 v o l u m e w o u l d be f o u r or more times
higher. T h e figures, i n b i l l i o n s of dollars, f o l l o w :
1972
1974
U n i t e d States
5
21
Western Europe
11
51
Japan
4
16
On the same basis, government revenues of the o i l - p r o d u c i n g n a t i o n s i n the
M i d d l e E a s t w o u l d increase f r o m $9-billion i n 1972 t o about $5.7-billion i n 1974.
I r a n ' s income f r o m o i l w o u l d go f r o m $2.5-billion t o $16-billion a n d Venezuela's
revenues w o u l d c l i m b f r o m under $2-billion to about $10-billion.
T h e increased cost of o i l i m p o r t s w o u l d p l a y havoc w i t h balances of payments
a n d reserves of f o r e i g n exchange. I n the case of the U n i t e d States, t h e i n d i c a t e d
1974 level of o i l i m p o r t s w o u l d be enough t o s w i n g the t r a d e balance f r o m surplus
i n t o a $13-billion deficit, m o r e t h a n the n a t i o n ' s t o t a l gold a n d foreign-exchange
holdings. T h e increased cost f o r J a p a n w o u l d almost equal her gold a n d foreignexchange holdings of $13-billion as of October, 1973.

[From the Wall Street Journal, April 11, 1974]
F O R E I G N E X C H A N G E A B U S E S BY S O M E B A N K S ALLEGED A T
CONVENTION, SPURRING DEBATE

( B y Charles N. S t a b l e r )
San Diego, C a l i f . — I s t h e g i a n t , w o r l d - w i d e m a r k e t f o r e x c h a n g i n g n a t i o n a l
currencies being rigged?
Some i n t e r n a t i o n a l bankers here f o r t h e a n n u a l convention of t h e B a n k e r s
Association f o r F o r e i g n T r a d e say, t h e a n s w e r is yes. I n a n unusual, l a s t - m i n u t e
press b r i e f i n g c a l l e d by convention officials, several bankers w a r n e d t h a t c e r t a i n
banks are d i s r u p t i n g t h e f o r e i g n exchange m a r k e t t h r o u g h excessive speculation.




70
"The abuses are picking up in speed, size and importance," warned George H .
Chittenden, senior vice president of New York's Morgan Guaranty Trust Co. H e
described some recent market activity, which has caused large and rapid changes
in currency values, as "almost sinister." Mr. Chittenden and other bankers a t the
press conference called for tighter self-policing of the market.
I n private talks during the convention, some other bankers have cited what
they refeT to as "combines" or "syndicates" of banks, mainly West German and
Swiss, which apparently engage i n concerted attacks on the market "It's a kind
of pooling operation, where they suddenly flood the market with orders, driving
up the price of say, the German mark a few points—and there is no way you can
go against it," complains one U.S. banker.
A G B A I N OF ,$ALT

But some other bankers here take such warnings with a grain of salt. For example, Arthur Meehan, an international executive of Boston's New England
Merchants National Bank, discounts talk of market manipulation. H e describes
the wide fluctuation in currency rates as a natural outgrowth of the floating
rate system, in which currencies fluctuate largely, according to market forces.
Mr. Meehan also noted that European bankers traditionally are willing to take
big risks in the foreign exchange market, "American banks are much more conservative," he says.
For example, a foreign exchange trader at a major U.S. bank would normally
be restrained from taking a risk in a single currency of more than $20 million
or so. For a German or Swiss bank, exposed positions of up to $500 million
wouldn't be uncommon, bankers here say.
One foreign banker here suggests that even for German banks this kind of risk
taking is currently declining. Diether H . Hoffman, a director of a major Dusseldorf bank, says: " I would think i t isn't much of a problem now, because some
sizable losses were taken by some banks late last year."
I n addition, some executives of smaller U.S. banks here say they suspect that
warnings of problems in the foreign exchange market by major banks may just
be calculated to frighten off competitors. " I think the New York banks sometimes aren't above issuing pious warnings about possible dangers in this or that
market just because they want to hang onto a good thing," says one Georgia
banker.
A t the press conference, neither Mr. Chittenden nor other participants suggested that possible abuses of trading were widespread. However, Robert F .
Leclerc, vice president of Continental Bank International, an affiliate of Chicago's
Continental Illinois Corp., said the speculating banks were taking positions large
enough to artificially influence exchange rates. Mr. Leclerc is head of the Forex
Association of North America, a professional association.
Mr. Leclrec blamed the problem on top-level management of some banks rather
than the traders themselves. H e said some banks are putting intense pressure on
their trading departments in a search for "windfall profits."
"When they expect a trader to make millions of dollars i n foreign exchange
dealing, he can't do i t through normal business," he said. "You have got to go
out and gamble."
[From the Journal of Commerce, July 11,19741
CONTROLS P U T O N C U R R E N C Y M A R T T R A D E

(By Jess Lukomski)
Frankfurt—The Bundesbank evidently subscribing to the old tenet that "confidence is good but control is better" has moved to acquire from some 350 West
German banking institutes full data on their foreign exchange transactions in
forward trading.
Compulsory registrations of such deals went into effect on July 1.
This requirement provides the Bundesbank with full insight on the volume of
forward trading in foreign exchanges and permits it to gauge the difference between delivery and purchase commitments made by the nation's banks.
Moves i n this direction had been anticipated in the banking circles for some'
time and came as no surprise. But a distinct possibility that the Bundesbank
might take in the future even bolder and tougher steps to control foreign exchange activities is of considerable concern here.




71
REASONABLE

LIMITS

Since the Bundesbank feels r a t h e r strongly t h a t " t h e risks connected w i t h
f o r w a r d t r a d i n g i n f o r e i g n exchanges must be kept w i t h i n reasonable l i m i t s , the
extension of i t s new regulations to foreign subsidiaries of German b a n k i n g
institutes cannot be r u l e d out—point out foreign exchange m a r k e t sources.
The decision of the F r a n k f u r t monetary managers to supervise more closely
foreign exchange dealings of commercial banks has been triggered by t h e i r
enormously intensified involvements i n this field.
German bankers have grasped early i n the floating game t h e i r d w i n d l i n g
earnings i n the classical lending business suffering under the " b r u t a l l y restrict i v e credit policies pursued by t h e Bundesbank" could be compensated by highly
l u c r a t i v e f o r e i g n exchange transactions.
The 1973 business reports of the big German commercial banks show s t r i k i n g l y
the enormous expansion of operations i n foreign exchange and they reveal to
w h a t extent the handsome profits f r o m those dealings have enriched t h e i r overall
earnings.
50 PERCENT G A I N

The Deutsche B a n k transactions i n foreign currencies have reached last year
DM778 billion, a sum w h i c h is equivalent to West German G N P i n 1971. I n the
past t w o years the f o r e i g n exchange business registered a 50 percent gain w h i l e
the number of people employed i n this field was increased by one-fifth.
The Commerzbank w h i c h employs today nearly one-third more foreign exchange experts t h a n t w o years ago managed to expand its t u r n o v e r by 27 percent
i n 1972 and another 20 percent i n 1978. A n d the Dresdner Bank's f o r e i g n exchange deals rose by 50 percent last year alone w i t h only a slight u p w a r d adjustment i n the number of employes w o r k i n g i n this field.
T h i s development is not unique to the three big German commercial banks, the
Girozentrale or savings banks, and the cooperative banking associations have
plunged i n t o foreign exchange transactions to j o i n i n the biggest game i n the
b a n k i n g business."
W i t h most w o r l d currencies floating more or less cleanly the range f o r
speculative transactions is almost u n l i m i t e d and temptations t o engage i n them
often irresistible.
German bankers insist t h a t "speculation i n foreign exchange t r a d i n g is taboo."
There is no firm evidence suggesting t h a t this claim is exaggerated. Yet the very
r i s k o f miscalculating the development on the foreign exchange m a r k e t is f o r m i d able and even decisions based allegedly on nonspeculative consideration can be
extremely costly.
PAINFUL

MISTAKE

The Westdeutsche Landesbank Girozentrale made a p a i n f u l mistake last year
by miscalculating the f u t u r e development on the foreign exchange markets a n d
had to pay a DM100 m i l l i o n penalty f o r its misjudgment.
The f a i l u r e of the large p r i v a t e H e r s t a t t bank is another case i n point. I t was
said t o have lost w e l l i n excess of any other bank here or elsewhere as a result of
unauthorized dealings i n foreign exchange.
I t seems t h a t German commercial banks have not overlooked the clear w a r n i n g t h a t the chance of m a k i n g a k i l l i n g on foreign exchange dealings is not any
greater t h a n the r i s k of being caught short. I n days of fixed exchange rates w i t h
the central banks pledged to support the parities both the chances of m a k i n g
spectacular gains and risks of absorbing heavy losses were n a r r o w l y "defined"
by the central banks obligation to intervene. Today this obligation applies to a
h a n d f u l o f currencies floating j o i n t l y i n the European "mini-snake," and costly
miscalculations i n t r a d i n g i n a l l other foreign currencies must be seriously
considered.
T h i s does not mean at a l l t h a t German commercial banks are abandoning
foreign exchange dealings, but the developments i n the past several months
suggest t h a t they have become more cautious even though t h e i r less hectic
a c t i v i t y i n t h i s area has been strongly influenced by tapering off Euro-money
m a r k e t business w h i c h i n the past has tended to trigger m u l t i c u r r e n c y transactions.
Some German bankers suggest t h a t the decision of the Bundesbank t o supervise more closely banks' f o r w a r d t r a d i n g on the foreign exchange market m i g h t
reinforce f u r t h e r this trend.




72
T H E W H I T E HOUSE,

Washington,

February

5,1968.

M B . VICTOB K U R T Z

Elvic Import
Corp.,
15 West 88th Street,
New York, N.Y.
D E A R M B . K U B T Z : Many thanks for your follow up note of January 3 0 . 1 think
i t might be helpful if you would be willing to run down sometime and discuss
your views with Ed Fried who is the Senior International Economist on the
White House staff and who stays on top of the gold problem for us on a day-today basis.
M r . Fried will await your call and set up an appointment with you.
Sincerely,
JOSEPH A . CALIFANO, Jr.,

Special Assistant

to the

President.

CONGBESS OF T H E U N I T E D S T A T E S ,
H O U S E OF R E P B E S E N T A T I V E S ,

Washington,

D.C., August

16,1969.

M r . VICTOB K U B T Z ,

Elvic Import Corp.,
15 West 88th Street,
New York, N.Y.
D E A B M B . K U B T Z : Thank you very much for your support of my position against
the unnecessary increase in the prime lending rate. I hope you realize how much
the support of the people means on an issue like this.
High interest rates are a destructive force and they can be brought down only
if the people are willing to take the time to make their voices heard against
the special interests. I hope sincerely that you are letting other people know
about your feelings on this very vital issue.
Enclosed is a speech which I recently made on this prime rate increase.
Sincerely,
WBIGHT

PATMAN.

U N I T E D STATES SENATE,

Washington,

D.C., May

5,1911.

M r . VICTOB K U B T Z ,

Elvic Import
Corp.,
15* West 88th Street,
New York, N.Y.
D E A B M B . K U B T Z : I certainly appreciated your recent message and I wanted
to let you know that I value very much the points you made.
I t is vital for me to get the thoughts and opinion of people like yourself. I t
helps me make up my mind on the vital issues which the Senate must decide.
Once again, thanks so much for letting me know what you think and I appreciate your taking the time and effort to write to me as you did.
Best wishes.
Sincerely,




W I L L I A M PBOXMIBE, U . S . S .

73
CONGRESS OF T H E U N I T E D S T A T E S ,
JOINT ECONOMIC COMMITTEE,

Washington,

D.C., October

4,1971.

M r . VICTOR K U R T Z ,

Elvic Import Corp.,
15 West 38th Street,
New York, N.Y.
D E A R M R . K U R T Z : Thank you for your letter of the 23rd. I appreciate your including the detailed recommendations you have prepared on suggested ways for
overcoming the present international monetary crisis. I have passed these recommendations on to the Joint Economic Committee staff for their review and appraisal.
Sincerely,
WILLIAM

PROXMIRE,

Chairman.
M r . H A N N A [presiding]. I appreciate y o u r statement I t h i n k we
need t o a d j o u r n n o w , subject t o t h e call o f the C h a i r .
[ W h e r e u p o n , at 1:10 p.m., the subcommittee was adjourned, subject
to the call of the Chair.]




INTERNATIONAL PETRODOLLAR CRISIS
TUESDAY, AUGUST 13, 1974
H O U S E OF R E P R E S E N T A T I V E S ,
SUBCOMMITTEE ON INTERNATIONAL

FINANCE

OF T H E C O M M I T T E E O N B A N K I N G A N D

CURRENCY,

Washington,
D.C.
T h e subcommittee met, pursuant t o notice, a t 10:15 a.m., i n r o o m
2128, R a y b u r n House Office B u i l d i n g , H o n . H e n r y B . Gonzalez (chairm a n o f the subcommittee), presiding.
Present: Representatives Gonzalez, Reuss, F a u n t r o y , S t a r k , J o h n son, Crane, and Burgener.
M r . G O N Z A L E Z . T h e subcommittee w i l l come t o order.
I n order t o conserve t i m e , and I apologize f o r t h e lateness o f the
hour i n g e t t i n g started—first, Governor W a l l i c h , m a y I t h a n k y o u
f o r t a k i n g t i m e t o be w i t h us and f o r an obviously v e r y good statement.
I m i g h t p o i n t out t o y o u t h a t at the latest count t h a t I made—and
I could be a l i t t l e b i t m e r r o r on the conservative side—there were
over 17 committees, subcommittees on C a p i t o l H i l l i n t h e Congress
g o i n g i n t o some general aspects of the m a i n thesis t h a t we outlined
t o y o u i n the letter when we i n v i t e d you.
However, t h i s subcommittee has more of a direct relationship w i t h
the aspects o f t h e problem, the o i l price increase, the concomitant
problems a t t e n d i n g t h a t , because i t has been i n t h i s area o f o u r legisl a t i v e l i f e t h a t we have h a d t o deal w i t h such t h i n g s as the devaluation
o f the dollar. W e w i l l have t o continue t o decide how we are g o i n g
t o a r r i v e at a continuation o f our policy w i t h respect t o t h e internat i o n a l financial institutions t h a t we have c o m m i t t e d ourselves t o bel o n g i n g t o f o r some time.
Recently, we h a d the I D A b i l l , and we w i l l have t o c o n f r o n t the
question o f t h e A s i a n Development B a n k b i l l , w h i c h t h i s subcommittee approved and f o r w h i c h we obtained a rule last J a n u a r y t h a t is
p e n d i n g before the House. However, i t may be t h a t we have reached
a p o i n t where the Congress has got t o , i n the l i g h t o f developments,
reevaluate a n d reappraise t h i s basic policy i n v o l v e d i n i t s belonging
to these i n t e r n a t i o n a l financial institutions.
Today's hearings are a continuation o f those t h a t we i n i t i a t e d earlier. T o d a y , i n continuance thereof, we are very p r o u d t o have y o u as
an o u t s t a n d i n g witness.
I n J u l y we pointed out t h a t some o f the i n t e r n a t i o n a l monetary
and economic results o f t h i s f o u r f o l d increase i n w o r l d o i l prices, the
accumulation o f massive amounts o f excess capital b y the members o f
the O r g a n i z a t i o n o f Petroleum E x p o r t i n g Countries really poses a
c o n t i n u i n g problem, i f not a threat, t o every one o f us.




(75)

76
I , for one, since long before I thought I would be a chairman of
the subcommittee, have been very much concerned about the fact t h a t
the Congress seems t o have very l i t t l e role except as an after-the-event
agent such as we d i d i n the case o f devaluation. W e were asked t o come
i n and present on two different occasions a par-value modification b i l l .
W e have been asked on diverse occasions to come i n w i t h these bills
on the w o r l d financial international institutions, and each t i m e i t
becomes increasingly difficult f o r us to assure the administration,
which, i n t u r n , tells us t h a t these programs are a must f o r the basic
national policy, to obtain an adequate congressional reception and
approval.
Since our last hearing we have had additional data t h a t has been
presented t o us. W e have had very interesting material presented by
various individuals who appear to be experts i n this area. They are
a l l very disturbing and w i t h o u t any objection, I would like at this
point to introduce into the record excerpts f r o m an article i n the
Washington Post and one by W a l t e r J . Levy i n the J u l y F o r e i g n
A f f a i r s , just very brief excerpts, not over t w o paragraphs.
[ T h e excerpts f r o m the articles t h a t appeared i n the Washington
Post and the J u l y edition of Foreign A f f a i r s , f o l l o w : ]
[Excerpt from an article in the Washington Post]
A n a r t i c l e i n The Washington
Post said t h a t a W o r l d B a n k s t u d y estimates
t h a t by 1980 the accumulated reserves of O P E C countries w i l l 'be $653 b i l l i o n
( c o m p a r e d w i t h $20 b i l l i o n i n 1973) a n d w i l l be $1.2 t r i l l i o n by 1985. T h e s t u d y
s a i d t h a t t h e excess reserves of K u w a i t , Q a t a r , S a u d i A r a b i a a n d t h e U n i t e d
A r a b E m i r a t e s w i l l be a b o u t $1 t r i l l i o n by 1985.

[Excerpt from an article in the July edition of Foreign Affairs by Walter J. Levy]
Today, governments are w a t c h i n g an erosion o f the w o r l d ' s o i l supply a n d
financial
systems, comparable i n i t s p o t e n t i a l f o r economic a n d p o l i t i c a l disaster
t o the G r e a t Depression of the 1930's, as i f they were h y p n o t i z e d i n t o i n a c t i o n .
T h e t i m e is late, the need f o r a c t i o n o v e r w h e l m i n g .
I n sum, the short-to-medium t e r m i m p l i c a t i o n s of the present s i t u a t i o n are
s i m p l y n o t bearable, either f o r the o i l - i m p o r t i n g countries—especially t h e n a t i o n s
a l r e a d y needy—or f o r the w o r l d economy as a whole. . . . T h e f a c t is t h a t t h e
w o r l d e c o n o m y — f o r the sake of everyone—cannot s u r v i v e i n a h e a l t h y or r e m o t e l y
h e a l t h y c o n d i t i o n i f c a r t e l p r i c i n g a n d a c t u a l or t h r e a t e n e d supply r e s t r a i n t s o f
o i l continue on the trends m a r k e d out by the new s i t u a t i o n .

M r . 'GONZALEZ. Therefore, perhaps w i t h not a lot of ado and publ i c i t y , but nevertheless, w i t h a background of what I consider to be
considerable importance and interest to those of us that serve on this
level, we welcome our witness, Hon. H e n r y C. W a l l i c h , member of the
B o a r d o f Governors of the Federal Reserve System, this morning.
Once again, thank you f o r t a k i n g the time out.
I am going to suggest t h a t M r . Johnson, who is our m i n o r i t y r a n k i n g
member, make use of the mike i f he wishes, and then I w o u l d say t h a t
you may proceed i n one of t w o ways. I t is up to you. Y o u have an excellently prepared statement. I f you wish to read i t , t h a t is fine. I f you
wish to summarize i t , well, you use your discretion.
M r . Johnson ?
M r . J O H N S O N . Yes. I , too, want t o welcome you here this morning:,
M r . Wallich.




77
I cannot help b u t compliment the Fed f o r the great cooperation we
have received f r o m you people i n the last month. W e have had, I believe, practically every president of the Federal Reserve bank i n the
U n i t e d States i n here to testify. O f course, D r . Burns has been here
frequently and comes at the slightest request. W e are very glad t o welcome you here this morning. T h a n k you.
M r . G O N Z A L E Z . Does any other member wish to make a prefatory
remark? I f not, M r . W a l l i c h , you have the floor and we welcome you.

STATEMENT OF HON. HENRY C. WALLICH, MEMBER, BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM
M r . W A L L I C H . T h a n k you very much, M r . Chairman.
I appreciate your remarks, and I also appreciate your offer t o let me
summarize the statement. I t is perhaps unduly long, and so I would
like to ease the task of going t h r o u g h i t f o r the subcommittee members, i f I may, by summarizing.
The text I have submitted is, of course, m y official statement.
M r . G O N Z A L E Z . Fine. F o r the record we w i l l just permit you to subm i t the entire statement, which w i l l appear i n the record as you
prepared it.
M r . W A L L I C H . T h a n k you very much, M r . Chairman.
I t h i n k I do not need to go into much detail about the nature
of the international balance-of-payments surplus of the oil-exporti n g "countries. I t is a subject t h a t has been widely discussed. These
countries are likely t o have something like $100 b i l l i o n of revenues f r o m their o i l exports, an increase on the order of $80 billion.
This leads to a surplus i n their transactions on the order of $50 b i l l i o n
to $60 billion, because some of the exporting countries, at any rate,
w i l l ntft be i n a position to increase their imports enough t o absorb
the proceeds of their increased exports. This likewise leads, of course,
to a very great increase i n the b i l l f o r oil of the o i l - i m p o r t i n g countries. W i t h some exceptions f o r a few countries whose o i l production
and o i l needs are well balanced, this includes a l l countries t h a t are not
net o i l exporters. T h i s situation leads almost necessarily to a deficit on
trade account f o r these countries.
Several types o f responses have been suggested to this unprecedented
situation. One that is very important is our domestic supply response.
W e have entered into Project Independence aimed to reduce, and hopef u l l y eliminate, our dependence on imported oil. This effort w i l l help
us. I t w i l l help the rest of the world. A l t h o u g h I regard i t as a major
policy response, I w i l l not focus on i t today because I do not t h i n k it, is
germane to the discussion here.
A second suggested response on the p a r t of the U n i t e d States and
other i m p o r t i n g countries arises f r o m the concept that i n the increased
prices f o r o i l they find themselves confronted w i t h what is very simi l a r to atn excise tax on oil. I f the current rise i n the cost of oil were due
to the action of the government of an i m p o r t i n g country, i t would
have the same effect as an excise tax. B u t i n the present case the proceeds go abroad.
T h i s quasi-oil tax, first, has the effect of reducing aggregate demand.
I n itself, i n a period of inflation, this effect is by no means a bad thing.

37-211 O - 74 - 6




78
B u t , as t i m e goes on inflationary forces are brought under better cont r o l , we w i l l need to watch the deflationary implications o f t h i s — I say
i t i n quotation m a r k s — " o i l t a x . "
B y reducing demand i n the economy, this quasi-tax w i l l make room
f o r some substitute demand. T h i s could take the f o r m o f more investment. A d d i t i o n a l investment w i l l be both appropriate and needed, first
t o take u p slack i n demand as w o r l d inflationary forces are brought
under control, and second because i t is needed t o b r i n g about new o i l
production. T h e problems o f g r o w t h also require i t . F i n a l l y , there is the
tact t h a t inflation w i l l be better contained i f we have the larger capacity t o produce t h a t added investment can provide.
There is, therefore, an o p p o r t u n i t y here as well as great risks. T h a t
o p p o r t u n i t y is more investment and more growth. T h e risks I w i l l deal
w i t h i n greater detail. T h e present situation concerns the O P E C countries as w e l l as the o i l i m p o r t i n g countries because both are interested
i n w o r l d stability and the soundness o f our financial markets and institutions. B u t the o i l i m p o r t i n g countries have an unavoidable deficit
i n the short run.
A corollary of this unavoidable deficit is t h a t there is also automatic
financing o f i t . T h i s has been much discussed. I n measure as the exp o r t i n g countries act t o create surpluses, they cannot avoid the necessity of p u t t i n g the proceeds of these surpluses somewhere. Wherever
these proceeds go, they can be borrowed. B u t what is sometimes overlooked is t h a t they cannot be borrowed b y everybody. I t takes good
credit standing i n order t o have access t o these funds.
There is thus an automatic recycling i n the aggregate, t h a t is, f o r
the o i l - i m p o r t i n g countries as a group. B u t this automatic financing
of deficits is b y no means available t o every country, nor f o r every
i n s t i t u t i o n t h a t wants t o participate i n the market.
T h e unavoidability of a sizable aggregate deficit f o r the oilimporters has another implication. I f some countries t r y to reduce these
deficits to zero, and do i t very aggressively, they are l i k e l y to reduce
t h e i r own deficit by increasing t h a t of some other countries. T h i s is because the O P E C countries cannot, i n the short r u n , buy a great deal
more t h a n they were already likely t o do. I f country A cuts down its
deficit, i t probably does so at the expense of country B , b y policies t h a t
c u r t a i l the exports, or drive u p the imports, of country B . So we may
see a game of musical chairs played w i t h the deficit.
T h a t does not mean the i m p o r t i n g countries should not watch t h e i r
balance of payments. I n particular, they should t r y t o eliminate those
payment deficits t h a t result f r o m payments f o r things other t h a n oil.
There have been many balance-of-payment deficits i n recent years,
before the cost of o i l became an unavoidable source of deficits. Some
of these have been large deficits. B u t over and above elimination of
non-oil deficits, the o i l deficits have to be accepted—by someone. There
is a real problem where these deficits are g o i n g t o end up. Moreover,
i t is not clear that this is a situation w h i c h can be smoothly adjusted to
w i t h o u t a decrease i n the price of oil. A decrease w o u l d undoubtedly
greatly ease a l l aspects of the situation.
A m o n g the i m p o r t i n g countries there is a group t h a t is worse h i t
t h a n others. Some of them are developing countries. Others are those
of the i n d u s t r i a l countries t h a t have special difficulties i n dealing w i t h
t h e i r deficits. These are problems t h a t give one pause.




79
The problems of the less developed countries exclude such questions
as the question whether 1 they are going to have enough food. O i l leads
to fertilizer, fertilizer leads to food. I f a country cannot i m p o r t enough
o i l or i f i t cannot i m p o r t enough fertilizer instead of m a k i n g i t at
home f r o m oil, there is a consequence f o r its food supply. T h i s affects
the price of food throughout the world. W e are thus a l l involved i n the
problems of the developing countries.
I n d u s t r i a l countries, i n some cases, face very large deficits because
their a b i l i t y to reduce their use o f o i l is limited. T h i s is the case when
a country does not have a large automobile population, or i t does not
use o i l f o r a number o f uses t h a t are compressible. I n such cases the
problem of the increased cost o f o i l hits their industrial output and
creates problems there.
I w i l l come back t o some of those problems i n a minute. F i r s t , let me
say a couple o f words about the U.S. balance o f payments, as a p a r t o f
this overall picture.
W e have done very well i n the improvement o f our balance o f trade.
A f t e r the successive devaluations t h r o u g h the end o f 1973, we achieved
a surplus at an annual rate of a l i t t l e over $4 billion. B u t that has now
been converted into a deficit on the order of $7 b i l l i o n by the middle
o f the present year. I f we eliminate f r o m this deficit the increased cost
o f oil, and i f we also leave out of account the special advantages we
have had f r o m h i g h prices on our agricultural exports, we see t h a t
there has been a real underlying structural improvement i n our trade
situation on the order o f $11 b i l l i o n per annum.
I do not say this as an excuse f o r the deficit. T h e deficit is there.
B u t i f we want to see the underlying structure o f our foreign trade,
then we have to make this calculation, and i t does show a substantial
u n d e r l y i n g improvement.
A t the same time, we have seen significant fluctuations i n the rate of
the dollar. T o some extent these fluctuations reflect trade and payment
developments. T h e most h e l p f u l view is not the dollar's relationship to
this or t h a t currency, but is, rather the so-called effective rate. This is
the weighted average of our dollar exchange rate w i t h respect to many
other currencies.
T h a t is, I find the f a m i l i a r representation o f the exchange market—
the dollar is down, the dollar is up, i t is d o w n again w i t h respect to
one or only a few currencies—largely misleading. I f we look at the
average, at the effective rate, we see t h a t the dollar's exchange value
is d o w n about 17 percent compared to the period before the revision
o f the whole exchange rate structure.
T h a t 17 percent refers to the industrial countries. W h e n we look
at the w o r l d as a whole—including both industrial and developing
countries—the exchange rate o f the dollar is down only 12 percent. The
reason, i n particular, is t h a t developing countries have acted to keep
their currencies closer to the dollar. I t is m a i n l y the industrial countries t h a t have appreciated, especially Europe and Japan, t h a t have let
their currencies appreciate w i t h respect to the dollar. T h e dollar was
down severely f o r p a r t o f last year, then up quite sharply early this
year; down a l i t t l e again, and has now been quite stable f o r some time.
W e have been helped i n l i v i n g w i t h these fluctuations b y the system
o f floating rates. I n fact, i t is h a r d to see how, w i t h o u t floating rates,




80
we would have handled the situation. O n the other hand, floating rates
generate problems o f t h e i r own, and we cannot ignore them. T h e y are
problems special to this new financial regime.
Before floating exchange rates became general, one concern was t h a t
i n a regime o f floating rate countries would t r y to gain export advantages by a l l o w i n g their currencies t o depreciate. B u t , i t is interesting
t o observe t h a t this has not happened. O n the contrary, i f I read the
record correctly, countries have been eager to see their exchange rates
remain high.
I believe t h a t the motivation is a conviction t h a t keeping the exchange rate h i g h is a means of helping to h o l d down inflation. T h e
higher the exchange rate, the less is the cost o f imports, and the less
imports affect the price level.
T h i s has removed some of the concern about floating rates. O f course,
we cannot be sure that the situation is going t o stay as i t is. I f w o r l d
conditions change, i f demand i n w o r l d markets diminishes, countries
m i g h t begin to adopt different policies.
I t is fortunate, therefore, t h a t i n t h i s picture of floating rates the
Committee of T w e n t y of the I M F has proposed a set of guidelines f o r
floating. T h e aim is to help i n l i m i t i n g extreme fluctuations, and i n
avoiding inappropriate intervention, or intervention at cross purposes. L e t me t u r n now t o the financial consequences of the o i l deficit
and the capital flows associated w i t h i t .
F o r e i g n direct investment i n the U n i t e d States has been high. P o r t
f o l i o investment has been relatively quiescent. B a n k investment—
both bank lending abroad and the i m p o r t of funds t h r o u g h our banks—
have expanded. T h e t w o amounts come f a i r l y close t o offsetting each
other.
These developments reflect both the removal early this year of
restrictions on international capital movements and effects of the
o i l financing needs of other countries. I t is perhaps of some interest t o
p o i n t out t h a t these international capital movements i n t o and out o f
the U n i t e d States do not change the volume of dollars i n this country.
N o d o l l a r creation occurs due to such capital movements. W h a t happens is t h a t the foreigner, w i s h i n g to b r i n g capital t o the U n i t e d
States, buys dollars f r o m an American who wants t o own foreign
currency. I f there are no ready sellers of dollars on the American side,
the effect o f the foreigner t r y i n g to buy dollars is to raise the exchange rate, t h a t is, to raise the price of dollars w i t h respect t o other
currencies. B u t the number of dollars, w i t h some exceptions, is always
the same.
A n o t h e r easily demonstrated feature of the capital movements we
are observing arises f r o m the fact t h a t capital is very mobile. Except
i n those countries where there are restrictions on capital flows, we have
an international capital market t h a t is only s l i g h t l y compartmentalized. T h a t reduces the importance of any particular dollar amount
or amount of any u n i t of currency t h a t lodges i n any particular p a r t
o f this market.
I f money flows into, say, the U.S. compartment of the international
capital market, i t w i l l have the effect of displacing capital t h a t is
already there, or of discouraging other capital f r o m coming in. Thus,
capital tends to be rather evenly distributed over the whole range of
the market.




81
However, capital w o u l d not go where i t feels exposed t o excessive
risks. T h a t is, lack o f compartmentation of the international capital
market does not mean t h a t capital w i l l go everywhere.
T h a t leads me t o say something about the O P E C countries as capital
exporters. These countries are quite different f r o m t r a d i t i o n a l capital
exporting countries i n the degree of their financial experience, i n the
degree t o w h i c h they are likely to accumulate reserves, and i n the
reserves of wealth—oil reserves—they now have. A l l this makes, of
course, f o r policies potentially different on their p a r t f r o m those we
know.
W h a t we have observed so f a r is t h a t they have employed very
cautious investment methods. They choose h i g h l i q u i d i t y , and very low
risk assets. Also, they have acted responsibly as investors. T h a t leads
one to ask how things are going t o develop i f O P E C money piles UP
f u r t h e r and f u r t h e r i n the same markets and i n the same financial
instruments.
I t is h e l p f u l , I t h i n k , to compare magnitudes. W e are t a l k i n g about
an O P E C flow of perhaps $50 to $60 b i l l i o n a year. Some of this w i l l
not go into the international capital markets but into bilateral and
other aid to the less developed countries, or into other nonmarket
channels. The amount t h a t is l e f t w i l l go into markets which annually
raise something on the order of $400 to $600 billion. T h a t is the magnitude of the credit raised by the nonfinancial sectors of national
capital markets.
I n the U n i t e d States the amount o f credit raised b y nonfinancial
borrowers is some $200 billion. So the $50 b i l l i o n or thereabouts is
considerably smaller than the annual flow into these markets. This
leads us to hope t h a t the petrodollar funds w i l l be manageable. A
similar impression arises when you look at the E u r o d o l l a r market,
which was expanded by some $50 b i l l i o n i n 1973.
W h a t we have, therefore, is not an overall problem, so much as •
problems relating to the effects o f petrodollar flows upon particular
markets, institutions, and countries. B u t these problems are serious—
i n some cases, very serious.
One aspect of the problem t h a t arises i n particular markets is t h a t
interest rates w i l l change. I f an investor wants to invest i n only
the highest grade assets he w i l l drive down interest rates on those
assets. One t h i n g is clear—as I said before, an inflow of capital does
not change the money supply, except i n special circumstances. So this
does not affect the Federal Reserve's ability t o maintain its overall
monetary policy.
I f the flow of funds into a particular market is larger t h a n the
increased payments resulting' f r o m o i l there w i l l be an impact on the
exchange rate. I t w i l l raise the value of the local currency unless that
country decides to recycle t h r o u g h its market. Most of the so-called
recycling we have seen has taken place t h r o u g h the E u r o d o l l a r
market, but of course recycling could take place t h r o u g h national
money markets, including the U.S. money markets. T h e effect, however, of such recycling is that i t leaves the recycler i n the position of
intermediary. H e has borrowed and he has lent. H i s f u t u r e is therefore
tied u p w i t h the future o f his creditor and his debtor.
There are advantages to that situation. B u t there could be disadvantages to countries t h a t get less capital than their o i l b i l l amounts




82
to. These countries have a variety of adjustment possibilities. T h e y
can borrow f r o m surplus countries provided their credit standing is
good enough. T h e y could borrow f r o m the O P E C countries or international institutions i f they are of a m i n d to lend. I w o u l d t h i n k t h a t
i n p a r t i c u l a r l y difficult situations the O P E C countries, inasmuch as
they are the cause of the situation, would feel a responsibility t o help.
I n addition t o borrowing, there is a possibility of balance-of-payment adjustments. These could r u n the gamut f r o m moderate measures
to very drastic measures, and possibly we w o u l d ultimately be forced
to accept the idea t h a t there is no measure t h a t w i l l produce any
tolerable situation.
F o r any one financial i n s t i t u t i o n problems arise when depositors
insist upon very h i g h l i q u i d i t y . W h e n funds are p u t i n t o an instit u t i o n m a i n l y on an overnight basis, this poses f a m i l i a r problems i n
m a k i n g use of the funds. However, such institutions do have means o f
defending themselves. T h e y can cut down the interest rate t h a t they
pay and thereby make short-term deposits less attractive. T h e y can
adapt the nature of the investments they make w i t h such money t o its
characteristics. They can ultimately stop accepting such funds. H o w ever, t h a t means leaving p a r t of the problem t o the rest o f the market
or t o official institutions.
I n this respect, i t should be noted that private markets may not be
able to handle the whole problem. T h e monetary authorities have an
obligation t o see to i t t h a t markets function. They have to safeguard
the l i q u i d i t y of markets even though they do not necessarily b a i l out
every i n d i v i d u a l institution t h a t may have trouble. Thus, i n t h a t area
where the l i q u i d i t y of markets is tending to disappear, or where
markets begin to malfunction, there is a place at which p r i v a t e markets
may not be able t o handle this problem, and i t w o u l d have t o be l e f t
to some k i n d of official action.
L e t me conclude, M r . Chairman, by getting back t o the domestic
area. A l l of these problems would be greatly eased, of course, b y a
reduction i n the price of oil. I t is certain t h a t they w o u l d be eased b y
successful action against domestic inflationary forces, t h a t is, those
not arising f r o m the increased cost of oil. T h a t is a key problem everywhere. F i n a l l y the petrodollar problems w i l l be eased b y whatever we
can do t o step up the rate of investment i n the means of substituting
f o r oil, and i n the economy generally.
T h a n k you very much.
[ M r . WaUich's prepared statement f o l l o w s : ]




83
Prepared
Statement by
Henry C. W a l l i c h
Member, Board of Governors of the F e d e r a l Reserve System
b e f o r e the
Subcommittee on I n t e r n a t i o n a l
of

Finance

the

Committee on Banking and Currency




U . S . House of

Representatives

August 13,

1974

84
Mr. Chairman and Members of the Subcommittee:
I welcome the opportunity to discuss with you some of the
problems created by the enormous increase i n the price of o i l i n the
past y e a r .

As a r e s u l t of t h a t increase, oil-consuming nations w i l l

be paying out over $100 b i l l i o n a year to the o i l - e x p o r t i n g (OPEC)
countries a t current prices and volumes, an increase of some $80
b i l l i o n i n the revenues of these countries i n one y e a r .

Even a f t e r

allowing for a steep r i s e i n t h e i r expenditures for imported goods
and services, the OPEC countries w i l l be l e f t with a surplus of
funds a v a i l a b l e for investment of some $60 b i l l i o n .

This surplus

w i l l almost c e r t a i n l y diminish as time goes by, e i t h e r because the
price of o i l i s reduced to l e v e l s more compatible w i t h a s t a b l e world
economy, or because the OPEC countries w i l l use a greater share of
t h e i r increases to buy c a p i t a l and consumer goods and services from
other countries, and to provide assistance to countries most severely
a f f e c t e d by r i s i n g costs of o i l .

Nevertheless, without t r y i n g to

project i n t o the more d i s t a n t f u t u r e , we must address our a t t e n t i o n
to the l i k e l i h o o d t h a t the OPEC countries w i l l have huge surpluses
for some time to come.
I n analyzing the consequences of t h i s enormous new flow of
funds i n the world i t i s h e l p f u l to look f i r s t a t the r e a l impact on
income and investment i n the consuming countries and then to consider
the f i n a n c i a l problems r e l a t e d to managing t h i s flow of funds.




These

85
two aspects of the o i l s i t u a t i o n are i n t e r r e l a t e d , of course, and
i f the f i n a n c i a l mechanism does not prove equal to the demands t h a t
w i l l be placed upon i t the consequences w i l l enormously aggravate
the already severe problems of the r e a l sector.

E f f e c t s on Economic A c t i v i t y
The f i r s t immediate and obvious e f f e c t of higher prices paid
for OPEC o i l i s t h a t funds are pulled out of the income stream i n the
consuming countries, and, since as a group the OPEC countries cannot
for some time spend more than a f r a c t i o n of these funds on current
output, there i s a r e l a t i v e reduction i n consumer demand.

You w i l l

r e c a l l t h a t l a s t October we also confronted a reduction i n supply,
when we were faced w i t h a cut i n o i l imports, which would also have
reduced production c a p a b i l i t i e s .

This s i t u a t i o n set i n motion an e f f o r t

a t planning i n i n d i v i d u a l countries, and m u l t i l a t e r a l l y through the
follow-up on the energy conference held i n Washington i n February —
to share research programs, to reduce dependence on imported petroleum
and to share o i l i n the event of f u r t h e r embargoes.
P r o j e c t Independence got underway.

I n the U . S . ,

I would regard i t as a serious

mistake i f we should allow the more relaxed supply s i t u a t i o n to cause
us to slow down these e f f o r t s .

For the United States i n p a r t i c u l a r ,

the most e f f e c t i v e way to deal with the energy problem
i s to mount a strong n a t i o n a l program for holding down energy use and
moving as quickly as possible to develop substitutes for imported o i l .




86
Not only w i l l t h i s give us some leverage i n dealing w i t h the present
p r i c e and supply problems — i t w i l l move us i n the r i g h t

direction

f o r the long-run b e n e f i t of the country.
I n some ways the e f f e c t of the jump i n payments for
can be likened to an excise tax — c u t t i n g down consumption of

oil
oil

i t s e l f as the price r i s e s , and c u t t i n g consumption of other goods to
the extent more i s spent for o i l — d i r e c t l y and i n d i r e c t l y .
there are important d i f f e r e n c e s :

But

the q u a s i - t a x i s levied by f o r e i g n

governments rather than by a domestic government, and the use of the
funds i s not under our c o n t r o l , although, as I s h a l l point out

later,

we can nevertheless guide the s h i f t s i n demand and output t h a t
w i l l r e s u l t from the q u a s i - t a x .

As I s h a l l point out,

the d e s i r a b l e s h i f t of production i s i n the d i r e c t i o n of more i n v e s t ment.
I t i s important to note t h a t while these payments to OPEC
countries tend to dampen consumption demand i n the oil-consuming
c o u n t r i e s , and may cause severe s e c t o r a l d i s l o c a t i o n s i n some
c o u n t r i e s , they do not i n themselves reduce our o v e r - a l l productive
capabilities.

R e c a l l t h a t when the o i l price change was occurring

the United States and other i n d u s t r i a l countries were approaching
together the crest of a remarkable boom i n world demand — accompanied
as you know by an explosion of world prices as our economies were
being driven a t near to f u l l p r a c t i c a b l e c a p a c i t y .




By the f a l l of 1973

87
nearly a l l
over

of

governments were t r y i n g

policies.

concerned about

for

so t h a t

In that

the

any advocacy of

t h e m was c l e a r l y

the

fact

activity,

the

in oil

shift

investment.

supply

up i n v e s t m e n t s
financial
thought

to

the

I

problems

and s h a l l




take

oil

there

place.

to

of

pay-

compensate

countries

that

has

demands o f
some

This

redress

sector

the
is

financing

the

caused

some

additional

substitution

imbalance

especially

these

steps

from consumption

problem of

are

aware

inflationary.

situation

is

are

depress

- - we n e e d t o t a k e w h a t e v e r

such v e n t u r e s

between

into

demand

inflation.
important.

Stepping
The

huge a n d we s h o u l d
investments,

give

w h i c h we h a v e

make.

w o u l d now l i k e

priorities

countries,

of

to

be

oil

t h a t were

investment

that

underlies

the energy

capacity

to

will

that

requirements

t h e economic

domestic

in

is

the

our economic a c t i v i t y

Such a s h i f t

and p o t e n t i a l

policies

initially

and i n

take place

more of

of higher

has c o n s e q u e n c e s

the c o n t r a c t i o n

elsewhere

does n o t a u t o m a t i c a l l y
we c a n t o

prices

on p e t r o l e u m ,

investment

and

t h e boom, we m u s t be i n c r e a s i n g l y

consumer demands,

depending

room f o r

of

fiscal

Now, a s we a n d o t h e r

as t h o s e o b s e r v e d

One r e s u l t

sectors

of

boiling

t h e r e was n o r e a s o n t o

expansionary

misplaced.

rise

as w e l l

i n aggregate

context,

demand-depressing e f f e c t s

e x p e r i e n c i n g an abatement
of

on t h i s

demand, a n d w e r e a d o p t i n g more r e s t r i c t i v e

monetary

ments,

to put a l i d

to

turn from questions

t o t h e more g e n e r a l
focus

first

problems

upon t h o s e

of

reordering

of a l l

countries

our

oil-importing

that

are

hardest

88

h i t , many of them less developed, but some also among the
countries.

industrial

I f the less developed countries t h a t are severely

a f f e c t e d cannot a f f o r d to buy the o i l they need, or the food and
fertilizer

they need, t h e i r present already low standards of

living

w i l l f a l l f u r t h e r , and t h e i r hopes of making some gains by i n d u s t r i a l i z i n g
w i l l i n many cases have to be shelved.

Unless adequate ways to help

these countries are found, an important part of the r e a l cost of
a d j u s t i n g standards of l i v i n g to pay for o i l w i l l f a l l on those
l e a s t able to bear such a burden.

countries

Food prices are now r i s i n g

g e n e r a l l y , and the added problems of paying for f u e l and f e r t i l i z e r
may w e l l reach the point of depriving some countries of t h e i r minimal
subsistence needs, posing very harsh a l t e r n a t i v e s .

I t can cogently

be argued t h a t the a d d i t i o n a l problems of these developing countries
should be the r e s p o n s i b i l i t y of the o i l - e x p o r t i n g c o u n t r i e s .
We can see how the burden of high o i l prices w i l l

impact

i f we look a t the way i n which the balances of payments of d i f f e r e n t
groups of countries are l i k e l y to be a f f e c t e d unless these prices
come down.

The OPEC countries w i l l have a huge surplus i n t h e i r

current account - - an export surplus - - amounting to perhaps $60
b i l l i o n or more per year a t current p r i c e s .

They w i l l dispose of

t h i s surplus i n various ways; some w i l l go i n t o b i l a t e r a l a i d programs,
or i n t o the i n t e r n a t i o n a l i n s t i t u t i o n s , and t h i s can help take some of
the s t r a i n o f f the poorer countries; but the bulk of the funds w i l l be




89
placed

i n the

c a p i t a l markets

The i n d u s t r i a l
account

countries,

deficit

this w i l l

with

investment

capital

inflow

that

repay
to

their

to

their

debts,

replacement
likely

moment a g o .
financed,

It

real

true

for

not,

through

measures,
of

their

those

perhaps a f t e r

This

is not

incomes need n o t

be a b l e

r u n down e x i s t i n g

correct

--

oil

n o t have
imports

they w i l l

until

not

that

can

not

sort

provided the

oil

deficits

be much d i f f e r e n t

an i n f l o w

requirements.
After

of

or

oil
be

or
price

problems

they would face

not

that

will

policy

that w i l l
can i n

a

they

is

through public

These c o u n t r i e s
that,

oil

from what

capital

begin

c a n be

countries

the market,

to

I mentioned

as w e l l as d e v e l o p i n g
of

absorb

be a b l e

their

the

will

exporting

the high

say t h e r e w i l l

oil

and

t h e OPEC c o u n t r i e s

of

in

saying

to,

by

the exhaustion of

to

by a

a n o t h e r way o f

But t h a t

reserves.




is

however,

about

prices.

to attract

new i m p o r t

is

full

countries

the r i s e

the workings

the aggregate,

energy sources

d o e s mean t h a t ,

industrial

current

my p r e s u m p t i o n

and i n d e e d

industrial

w o u l d have been w i t h o u t

if

countries.

s u c h t i m e as t h e OPEC c o u n t r i e s

a g a i n as a g r o u p ,

the

In

This

their

by a l t e r n a t i v e

in

have a l a r g e

as a g r o u p w i l l

exports;

to encourage.

of adaptation

--

industrial

t h e OPEC c o u n t r i e s

pay f o r

until

run trade d e f i c i t s ,

its
is

equal

of

countries
to

goods and s e r v i c e s ,
imports

financed

f r o m OPEC c o u n t r i e s .

be a b l e ,

will

t h e OPEC c o u n t r i e s .

plans

these w e a l t h i e r

indeed not

the w e a l t h i e r

as a g r o u p ,

be a u t o m a t i c a l l y

capital

of

take

some

care

cases

drastic

90
adjustments unless they receive support.

Taking these three groups

of countries as aggregates, we f i n d one group, the OPEC c o u n t r i e s ,
very much b e t t e r o f f both i n terms of current incomes and i n terms
of t h e i r claims on future world production; we f i n d a second group,
the w e a l t h i e r countries w i t h a t t r a c t i v e c a p i t a l markets, or good
capacity to borrow, t h a t are very uncomfortable perhaps about a
r i s i n g debt to OPEC countries, but would be able to cope w i t h the
r e l a t i v e l y small loss of r e a l incomes t h a t might occur; and we f i n d
another group of countries — some counted as LDC's and some counted
i n the ranks of i n d u s t r i a l countries - - who w i l l face serious
difficulties.

Their d i f f i c u l t i e s may i n t u r n react adversely upon

the countries o r i g i n a l l y i n a more favorable p o s i t i o n .
I

remarked j u s t now t h a t some of the w e a l t h i e r

countries

may be increasingly uncomfortable about a r i s i n g debt to OPEC c o u n t r i e s .
I n f a c t , some countries d i s l i k e the idea so strongly t h a t they may
resolve to avoid i t by bringing t h e i r current account i n t o balance
— t h a t i s , they may t r y r e a l l y to pay f o r o i l by^either

increasing

exports or decreasing other imports w e l l below the l e v e l s t h a t would
otherwise be observed.

This sounds very virtuous — we a l l f e e l t h a t

going i n t o debt should be l i m i t e d and should be for some productive
purpose. But the r e s t of the world happens to be i n a unique s i t u a t i o n
v i s - a - v i s the OPEC countries — u n t i l those countries as a group buy
more than they s e l l , they can only p i l e up f i n a n c i a l surpluses




91
abroad.

Thus,

if

t o be a r a t i o n a l

each consuming c o u n t r y
fashion —

c o u l d o n l y be a g r e a t e r
countries.

In real

tried

d e b t a c c u m u l a t i o n by o t h e r

terms,

the

oil

that

trade

balance being d r i v e n

be t h e

some c o u n t r i e s
might

do t h i s

balance,
taking

currently,

countries

their

otherwise

case and t h a t

while

their

into

their

some e x t r a m e a s u r e o f

debt

to

independent
countries
if

of

experiencing

i n the
only

inflation

the o i l

many c o u n t r i e s

rise
not

curb

price

try

d e b t w o u l d be

countries
deficit

deficits

controls

exchange

restraint

would

rate

of

more t h a n

to a f f e c t

their

of a major

them s h o u l d

indeed e l i m i n a t e

we w o u l d ,

setback

a breakdown i n

the r u l e s

for

us b a c k t o

practices

of

the

those d e f i c i t s
I

believe,

fair
the

t r a d e among n a t i o n s

or
demand.

arising

now, and

from

serious

the

danger

but also
that

the

But

resulting

i n w o r l d economic a c t i v i t y

trade

desirable

them.

be i n

They

it,

any payments d e f i c i t
exist

effect,

rest.

to depreciate

Such d e f i c i t s

would

In

upon t h e

situation.

oil,

find

t o h o l d down d o m e s t i c

or e l i m i n a t e

to eliminate

there

consuming

The h o l d i n g down o f demand may i n many c a s e s be e n t i r e l y
i n order

appeared

d e b t was i n c r e a s i n g .

by u s i n g d i r e c t

or m a n i p u l a t i n g

avoiding

other

w o u l d be u n l o a d i n g t h e i r
either

i n what

to avoid going into

paying for
their

— acting

of

could

take

1930's.

We have not come near to such a state of turmoil i n the
world trading system.

I believe we can avoid i t .

But i t i s d i f f i c u l t

to predict the decisions of nations when they f i n d themselves confronted




92
w i t h major d i f f i c u l t i e s .

Some countries may w e l l consider the problems

confronting them insolvable a t the present price of o i l .

I n the absence

of a s u b s t a n t i a l reduction i n t h a t price unforeseeable conditions could
develop t h a t could make the s i t u a t i o n d i f f i c u l t i f not impossible to
manage.
I would l i k e to t u r n now to the U.S. balance of payments,
and to the e f f e c t s of the o i l c r i s i s on our i n t e r n a t i o n a l

position.

Our trade balance has already f e l t the weight of the sharply higher
cost of imported f u e l — i n the second quarter of t h i s year we were
paying $28 b i l l i o n a t an annual r a t e for f u e l imports - - about $20
b i l l i o n more a t an annual r a t e than we were paying a year ago.

This

i s almost e n t i r e l y a price e f f e c t - - i n volume terms imports of f u e l s
were nearly unchanged.

Mainly because of r i s i n g f u e l imports, our

trade balance for a l l goods has worsened sharply from a surplus a t
an annual r a t e of $4.2 b i l l i o n (balance-of-payments basis) i n the
fourth quarter of l a s t year — when we reached the high point of
recovery from the deep d e f i c i t i n 1972 — to a d e f i c i t a t an annual
r a t e of nearly $7 b i l l i o n i n the second quarter of t h i s y e a r .

How-

ever, our underlying trade balance, that i s , abstracting from the
a r b i t r a r y increase i n o i l prices and also leaving out the extraordinary
jump i n a g r i c u l t u r a l exports, has shown considerable strength, moving
s t e a d i l y from a d e f i c i t a t an annual r a t e of about $12 b i l l i o n i n the
f i r s t quarter of l a s t year to a d e f i c i t of only about $1 b i l l i o n i n




93
the second quarter of t h i s year.

I n volume terms we have done even

b e t t e r , w i t h export volumes r i s i n g and import volumes no higher than
they were e a r l y i n 1972.
So f a r as our merchandise trade i s concerned, we seem to
have made the kinds of gains i n competitive p o s i t i o n t h a t could be
expected from the depreciation of the d o l l a r since 1970, and t h i s ,
together w i t h the extraordinary r i s e i n the value of a g r i c u l t u r a l
exports, has helped to o f f s e t the huge jump i n o i l imports.

However,

l i k e other countries we must be concerned w i t h achieving an o v e r - a l l
balance i n our accounts, including c a p i t a l movements, that w i l l underpin a stable d o l l a r i n exchange markets.

The part of t h a t under-

pinning t h a t must come from an appropriate net inflow of c a p i t a l
from abroad could be s i g n i f i c a n t l y less than the e x t r a $20 b i l l i o n
i n payments due to the higher .price of o i l ,

i f i t turns out that

there are s u f f i c i e n t improvements i n the rest of our accounts.
There have been considerable gyrations i n the exchange value
of the d o l l a r since the second devaluation i n February l a s t year.

But

since about mid-May the d o l l a r has held f a i r l y stable against a
weighted average of the currencies of the countries that are our
major competitors i n world markets.

As i t stands now, the d o l l a r

has depreciated about 17 per cent against those currencies since May
1970, and has moved up s l i g h t l y i n recent months.

On a broader measure,

taking i n t o account the movement of the d o l l a r against a weighted

i7_9ii r»




94
average of nearly a l l f o r e i g n currencies, the devaluation of the
d o l l a r has been appreciably less — amounting to perhaps 12 per cent
since 1970.

The smaller d e p r e c i a t i o n measures the d o l l a r ' s

" e f f e c t i v e r a t e , " against the world as a whole.

so-called

The reason for the

d i f f e r e n c e between the two measures i s t h a t while the currencies of
most of the major i n d u s t r i a l countries have appreciated quite sharply,
against the d o l l a r , those of numerous other countries, including most
of the developing world, have tended to stay w i t h or near the d o l l a r .
I t i s the average r a t e r e l a t i o n s h i p t h a t comes closer to representing
the longer run e f f e c t s on our balance of payments, r a t h e r than changes
from time to time against p a r t i c u l a r f o r e i g n currencies.
Recent r e l a t i v e s t a b i l i t y of the d o l l a r has of course been
gratifying.

I t has m a t e r i a l i z e d w i t h i n an environment of f l o a t i n g

exchange r a t e s , i n which very wide swings had occurred during the
12 months following the breakdown of the f i x e d r a t e s system i n
February-March 1973.

Rate f l e x i b i l i t y has proved i t s usefulness

times of severe disturbance.
to new concerns.

in

I t has given r i s e , on the other hand,

Among these has been the fear t h a t

flexibility

might be abused to engage i n competitive d e p r e c i a t i o n as a means
of s t i m u l a t i n g exports.

So f a r nothing of the kind, and indeed

perhaps the very opposite, has happened.

Faced w i t h strong demand

for exports, and w i t h domestic i n f l a t i o n , most countries have had a
motive to keep the value of t h e i r currencies high.

That holds down

the price of imports and helps r e s t r a i n domestic i n f l a t i o n .




Downward

95
f l u c t u a t i o n s of the d o l l a r , such as occurred i n the middle of 1973 and
i n the e a r l y months of t h i s year, must i n the l i g h t of t h i s nexus be
regarded as harmful to our e f f o r t s to curb i n f l a t i o n i n the U.S.
Of

course one cannot a n t i c i p a t e t h a t n a t i o n a l preferences as

regards exchange r a t e s w i l l always be the same and w i l l always
favor a high r a t h e r than a low value for the l o c a l currency.

If

demand i n i n t e r n a t i o n a l trade should slacken, or i f some countries
should begin to make strong e f f o r t s to eliminate t h e i r o i l

deficits,

n a t i o n a l preferences and the trend of f o r e i g n exchange rates may
change.
I t i s of considerable i n t e r e s t , t h e r e f o r e , t h a t as part
of the e f f o r t to reform the i n t e r n a t i o n a l monetary system,
guidelines for f l o a t i n g rates have been proposed.

certain

The reform

e f f o r t has met w i t h only l i m i t e d success, which was to be expected
once skyrocketing o i l prices and u n i v e r s a l i n f l a t i o n engulfed the
world.

No long-run reform has been agreed upon, although valuable

preparatory work has been done.

But among the immediate steps that

were agreed upon by the Committee of Twenty of the I n t e r n a t i o n a l
Monetary Fund, the proposal e s t a b l i s h i n g guidelines for
provides some hope t h a t extreme and inappropriate r a t e

floating
fluctuations

can be contained.
The recent s t a b i l i t y of the d o l l a r i n the exchange market,
w i t h i n a context of f l o a t i n g r a t e s , indicates that the net movement
of c a p i t a l to the United States has increased s u f f i c i e n t l y to j u s t




96
about o f f s e t the d e t e r i o r a t i o n i n our balance on goods and s e r v i c e s .
U n f o r t u n a t e l y , we do not yet have a c t u a l data i n d e t a i l to support
t h i s i n f e r e n c e , but c e r t a i n patterns were showing up e a r l i e r .

In

the f i r s t q u a r t e r , U.S. d i r e c t investors' net outflows were q u i t e
low, while there was a very large i n f l o w of c a p i t a l from f o r e i g n
business concerns acquiring businesses i n the United S t a t e s .
p a t t e r n of d i r e c t investment may w e l l be continuing.

This

Portfolio

investments i n v o l v i n g i n t e r n a t i o n a l dealings i n s e c u r i t i e s seem to
have dropped o f f sharply t h i s y e a r , w i t h Americans buying only a
small volume of f o r e i g n s e c u r i t i e s even though the I n t e r e s t
E q u a l i z a t i o n Tax on such purchases has been dropped, w h i l e

foreign

purchases of U.S. corporate stocks — an important type of i n f l o w i n
the past few years — has also paused.

Moreover, new issues of bonds

i n the i n t e r n a t i o n a l markets outside the United States have been less
t h i s year than i n any recent year.
By c o n t r a s t , there has been an e x t r a o r d i n a r y surge so f a r
t h i s year i n i n t e r n a t i o n a l c a p i t a l flows through banks i n both d i r e c tions — we see i t i n our own data and also i n terms of new loans
arranged i n the Eurodollar market.

U.S. banks, including the U.S.

agencies and branches of f o r e i g n banks, increased t h e i r

foreign

assets by about $9 b i l l i o n i n the f i r s t f i v e months of t h i s y e a r ,
spread over many countries but e s p e c i a l l y d i r e c t e d toward Japan.
A simultaneous massive r i s e i n l i a b i l i t i e s reduced the net outflow




97
— which measures the net impact on our i n t e r n a t i o n a l balance and
on our domestic c r e d i t markets - - to only about $ 1 - 1 / 2 b i l l i o n .
I would associate part of the increased

international

a c t i v i t y of U.S. banks w i t h the removal or reduction of b a r r i e r s
to such transactions t h a t occurred both here and abroad e a r l y i n
the year.

At times, d i f f e r e n c e s i n r e l a t i v e i n t e r e s t rates have

also been important, with U.S. rates moving up r e l a t i v e to foreign
rates a f t e r the e a r l y part of the year.

But I believe much of the

heightened a c t i v i t y was a r e s u l t of the new o i l s i t u a t i o n , which
generated a demand for loans by some countries to help meet the
higher costs, and a t the same time resulted i n an added supply of
l i q u i d loanable funds i n i n t e r n a t i o n a l markets as OPEC countries
placed t h e i r revenues w i t h the Eurobanks.
I n examining these manifold flows of c a p i t a l , i t must of
course be borne i n mind t h a t an inflow or outflow of funds does not
o r d i n a r i l y influence the amount of bank reserves i n the U.S. banking
system or the American money supply. Foreign c a p i t a l does not bring any
new d o l l a r s from abroad.

Every d o l l a r of foreign c a p i t a l "flowing" to

the U.S. was i n f a c t i n the U.S. before.

I t simply s h i f t e d ownership.

This s h i f t could have taken the form of an American s e l l i n g d o l l a r s
to the f o r e i g n e r , i n which case the inflow was matched by an outflow
as the American acquired whatever f o r e i g n currency or assets the
buyer paid him w i t h .




Or i t could have represented a s h i f t among

98
f o r e i g n holders, for instance i f the foreigner acquired d o l l a r s
from a f o r e i g n c e n t r a l bank which had held them previously as p a r t
of i t s reserves.

What changes as a r e s u l t of changes i n c a p i t a l

flows, under our present regime of f l e x i b l e exchange r a t e s , i s the
exchange r a t e , as a r i s e i n the demand for d o l l a r s , i n the case of
c a p i t a l inflows, or i n the supply i n case of outflows, s h i f t s the
balance of the market i n favor or against the d o l l a r .

Only i n s p e c i a l

cases i s a d i f f e r e n t i n t e r p r e t a t i o n a p p r o p r i a t e .
One f u r t h e r conclusion t h a t I would draw from the v a r i e t y
of o f f s e t t i n g c a p i t a l flows t h a t have occurred i s that under today's
conditions, c a p i t a l i s h i g h l y mobile.

The w o r l d ' s n a t i o n a l

money and c r e d i t markets are more open to s h i f t s among countries —
sometimes v i a the Eunro-markets, than they have been since before the
1930's.

Hence the system of n a t i o n a l and i n t e r n a t i o n a l c a p i t a l markets

c o n s t i t u t e s i n e f f e c t something l i k e a large and only moderately
compartmentalized pool, r a t h e r than many separate w a t e r t i g h t compartments.

As a r e s u l t , any move of c a p i t a l i n one d i r e c t i o n i s q u i t e

l i k e l y to be o f f s e t by movements i n the opposite d i r e c t i o n .

A large

outflow from the United States tends to d r i v e down i n t e r e s t r a t e s
abroad, which makes American c a p i t a l markets r e l a t i v e l y more a t t r a c t i v e
and causes other funds to come to the U . S . , and i n v e r s e l y .

To pour

c a p i t a l , whether owned by OPEC countries or others, i n t o any one p a r t
of t h i s market does not mean t h a t the net supply i n that market i s




99
increased by the f u l l amount.

C a p i t a l already present there tends

to be pushed elsewhere, thus tending to even up the supply elsewhere.
Of course, these equalizing movements w i l l take place only i f
conditions are otherwise p r o p i t i o u s .

When there are heavy r i s k s

of a c r e d i t , exchange, or p o l i t i c a l s o r t , the movements w i l l not
occur, or w i l l occur only i n response to severe declines of exchange
rates or increases i n i n t e r e s t r a t e s , or both.

The evidence t h a t

i n today's markets c a p i t a l i s highly mobile should be kept i n mind
i n examining the possible e f f e c t s of placement of OPEC money i n any
one p a r t i c u l a r market.
This leads me to some comments on the more s p e c i f i c aspects
of the flows of funds derived from OPEC revenues, and t h e i r impact on
f i n a n c i a l i n s t i t u t i o n s and structures.

I believe i t i s worth emphasizing

that there w i l l be great d i s p a r i t i e s among the OPEC countries i n t h e i r
a b i l i t y to u t i l i z e t h i s new wealth to improve t h e i r own countries, and
i n t h e i r plans for investment of t h i s huge cash flow i n f o r e i g n
c a p i t a l markets.

We see already t h a t I r a n has made plans for

i n d u s t r i a l i z a t i o n and i s developing t i e s w i t h countries t h a t can be
h e l p f u l i n t h a t process.

We know that Kuwait, for instance, has been

thinking through the requirements of an acceptable investment p o r t f o l i o for some time, and i s probably f a i r l y w e l l d i v e r s i f i e d .

In

the case of Saudi Arabia, the i n i t i a l r e a c t i o n , which was simply to
l e t funds accumulate i n l i q u i d forms i n the Eurodollar market, seems




100
to be moving already i n the d i r e c t i o n of f i n d i n g more permanent
lodging i n such investments, perhaps, as special issues of U.S.
Treasury o b l i g a t i o n s .

According to IMF data, the reported increase

i n monetary reserves of the OPEC countries i n the f i r s t h a l f of 1974
was about $15 b i l l i o n , but the gains were a c c e l e r a t i n g , and were
$3-4 b i l l i o n per month i n May and June, w i t h larger increases

still

to come.
These funds should not be regarded as a monolithic mass
of maneuver, poised to s h i f t t h i s way or t h a t for speculative or
p o l i t i c a l reasons.

There are many i n d i v i d u a l OPEC governments

involved and there is no evidence t h a t they are taking any unnecessary
r i s k s w i t h t h e i r funds.

Working with t h e i r f i n a n c i a l advisers,

these

countries are l i k e l y to d i s t r i b u t e t h e i r funds over a wide range of
investments, always mindful of the need for security and s t a b i l i t y .
I n r e t u r n f o r continued r i s i n g l e v e l s of o i l output i n OPEC
c o u n t r i e s , those countries understandably wish to be provided w i t h
s u i t a b l e ways of holding t h e i r accumulating assets.

I doubt t h a t

there w i l l be attempts to a t t a i n dominance over p a r t i c u l a r

large

companies or economic sectors i n the i n d u s t r i a l c o u n t r i e s ,

since

t h i s would expose them to considerable economic and p o l i t i c a l

risks.

At the same time, the amounts involved are formidable by any normal
standards of i n t e r n a t i o n a l c a p i t a l flows.

Questions n a t u r a l l y a r i s e

about the a b i l i t y of c a p i t a l markets to absorb such flows without




101
suffering
are

severe

justified,

dislocations.

but

that

of

of,

funds

total

say,
in

of

$50 b i l l i o n

countries
By f a r

the greater

sectors
other

together

of

to

part

countries

is

over-all

for

industrial

three

times

of

times

i n recent

funds

the

flow

effect
years

importance,
is

and i n t u r n w i l l

i n national markets.
has been c a p a b l e

claims

of

of

being deposited

between

domestic

funds

vis-a-vis

of

the Euro-currency

The r e c o r d
very

rapid

one b a n k o n a n o t h e r

within

forming "the market")




part

of

to

is,

the eight

after

For

in

markets
to

have
receipts

in

these

borrowers

the Euro-currency

the past.

(that

the

accounts

g r o u p o f banks

shows t h a t

growth i n

The E u r o - m a r k e t s

in their

be l o a n e d by t h i s

the Euro-currency market

c o n s i d e r e d as

amount.

i m p o r t a n c e a s a m e c h a n i s m t h r o u g h w h i c h f u n d s move

t h e OPEC c o u n t r i e s

of

that

on c a p i t a l m a r k e t s

since a large

size

all

is

now t a k e n on i n c r e a s e d

net

the

a year;

markets.

banks,

flows

States alone

a n d f r o m n a t i o n a l money a n d c r e d i t

of

of

credit

flows

though a t

flow

i n U.S.

two t o

these

Also,

concerns

sectors

can have a s i g n i f i c a n t

countries.

have grown i n

I n the United

$200 b i l l i o n

of

t h e economy,

individual

c a n be c o m p a r e d w i t h

the t o t a l

these

exaggerated.

r a i s e d by n o n f i n a n c i a l

m a r k e t s a r e now c l o s e

some o f

o f ways i n w h i c h a n a n n u a l

f i n a n c i a l markets.

funds

believe

others are

T h e r e a r e a number
funds

I

market

instance,

the

eliminating

countries

g r e w b y $25 b i l l i o n

usually
in

1972 a n d

102
b y $50 b i l l i o n

in

of

$30 b i l l i o n

has o c c u r r e d

of

the market

of

of

several
the

assets

preferences

of

of

various

levels,

first

would imply

may r e s u l t

I

there

would expect

of




liquid,

say, mortgages.

growth of

size

financing
in

it

will

not

but

investment

the

into

existing

of

asset

financial

widely

--

government

a

at

institutions.

o f OPEC g o v e r n m e n t s

t h e m t o be m o r e

interested

traded both

strongest

nationally

guarantees.

on d i f f e r e n t

kinds

of

on more l i q u i d

I n the case o f

inflow

sectors.

oil,

the

i n those countries

t o major U.S.

a s seems p o s s i b l e ,

i n those

in handling

for

reflect

reducing yields

s h o u l d be a l a r g e

on y i e l d s

growth

the net

t h e amounts i n v o l v e d ,

preferences

i n the yields

obligations,

net

dislocations.

and d e p o s i t s

and backed by t h e

on,

bringing

the normal stream of

investment

some s h i f t s

the rate

of

potential

are r e l a t i v e l y

to yields
if

size

payments

debt and e q u i t y ,

the

a further

we h a v e p r o b l e m s

and i n s t i t u t i o n s

i n national markets,

to Treasury

that

of

place,

different;

that

sheer

mortgages,

ana i n t e r n a t i o n a l l y ,

States,

if

in a given country w i l l

hand,

may b e q u i t e
i n assets

kinds

corporate

other

the

investors

mixture

relative

to mid-May,

funds associated w i t h higher

financial

assets

year

that

billion.

seems t o me t h a t

In

On t h e

i s an e s t i m a t e

this

$185

be s o much b e c a u s e o f
because

There

to about

It
flows

1973.

the

financial
assets
United

banks

some d o w n w a r d

T h a t d o e s n o t mean

the monetary aggregates w i l l

That

be

and

pressure
necessarily
significantly

103
affected,

but

some t i m e

t o come.

d e s i r e d degree

it

d o e s mean t h a t

of

Another
some i s
or

c o u l d be c h a n g e d

for

The F e d e r a l R e s e r v e c o u l d e s t a b l i s h a n d m a i n t a i n

any

over-all
kind of

the Eurodollar

irregularity

is

they w i l l

the world.

their

sooner

or

later

debt

if

deficits,

t h e y do n o t
it

t h e OPEC c o u n t r i e s .

and b r o a d c a p i t a l
investments
a number
to borrow

to cover

the a d d i t i o n a l
is,
of

their

liquidity

c a p i t a l markets
the

recycling

could allow




available

Also,

currencies

find

it

on t h e i r

the

could well

to

First,

w o u l d be a b l e
i n these

to

attract

limits

which

own

strong

surplus

to

countries
deficits

economies

s h a r e o f OPEC

be one o f

to

capacity.

funds

stronger

other

in

private

borrowing

their

them

countries

—
needing

take advantage
countries

—

c o u l d do a c o n s i d e r a b l e
receiving

depreciate,

inadequate

so t h a t

the

countries

difficult

a disproportionate

countries

directly

the weaker

t o cover

i n these c o u n t r i e s

job.

their

deficits

based

t o governments and

some o f

are possible.

trouble-

OPEC d e p o s i t s

succeed i n a t t r a c t i n g

— and the U n i t e d S t a t e s

be

economies and

a few c o u n t r i e s w i t h

markets a t t r a c t

of adjustments

receive

policy.

could

assets

strongest

place

m u s t be t h a t

If

that

burdens reach the

a r e a t t r a c t i n g more t h a n enough f u n d s
with

prefer

the

s h o u l d and p r o b a b l y w i l l
However,

cover

to

likely

flows

The p r o b l e m o f

f r o m t h e m a r k e t as t h e i r

the market

in

m a r k e t and l e n d them out
over

—

are

ease i n m o n e t a r y

So may t h e b a n k s t h a t

borrowers a l l
obvious

relationships

or

on t h e c o u n t r i e s w i t h

broadest markets.

funds

restraint

t h a t OPEC c o u n t r i e s

indirectly

yield

part

of

of
that

part

financing
the

104
adjustment
a point,

could

come t h r o u g h c h a n g e s

however,

would not

take

some p o i n t

of

these accommodations

care

was r u n n i n g o u t

of

the problems

o r who c o u l d n o t

to relieve
be l a r g e

the

be f o r

through

of

adjust

their

relative

the responsible

to

The t o t a l

investment

s h o u l d we e x p e c t

countries

parties

amount o f

i n terms

oil

to

If

of

the

t h e OPEC c o u n t r i e s

those countries

t o a c t as

a t market

t h e OPEC c o u n t r i e s
of

financial

rates

to contribute
the contrary

--

believe

t h e economic
but

rather

b u r d e n on t h e s e c o u n t r i e s
donors.




that

capacity
beyond

logical

t h e OPEC c o u n t r i e s

financial

of

might
the

assets

progress

of

that

that

should c a l l

be

the

challenge,

i n excess

these assets

of

of

to cover

cost

terms?

countries

poorer

not

b o r r o w i n g f r o m OPEC

extending aid

industrial

--

world
in

do n o t m e e t t h i s

r e c e i v e OPEC f u n d s

t o emphasize
that

and i t

stability

borrow a t market
the

solution

aid required would

intermediaries,

a r e sound, w h i l e

because I
to

--

and w i t h a s s u r a n c e

c o u n t r i e s who c a n n o t

question not

whose d e b t

t h e m o u n t i n g OPEC r e s e r v e s ,

countries.

needs

After

mechanism

trade balance

the most

economy t h a n a c o n t i n u i n g a c c u m u l a t i o n o f

their

balance.

the market

countries

such s i t u a t i o n s

the burden.

a more f r u i t f u l

stronger

trade

necessity.

To d e a l w i t h
would c l e a r l y

in

I

raise

should

countries

there

the

--

this
cease

quite

i s now a new

f o r t h a new s e t

of

aid

105
T h e r e has a l r e a d y been a c o n s i d e r a b l e
by t h e OPEC c o u n t r i e s
some o f
or

the LDC's,

institutions

disbursement
Nevertheless,

but

is

of

quite

if

mediary

position,

to

of

these

of

flows

In particular,

o f OPEC f u n d s

w o u l d be u n w i s e

up-to-date
in

the

last

t o meet

information,
resort

m a r k e t s and t h e

by a c t i o n

these

of

that

system.

But g i v e n p r o p e r




actual

particular

countries.

t o do t h e i r

share

w i t h an untenable

inter-

for

the

flow of

on t h e

petrodollars

institutions

untenable

in

that

strains

risks,

develop
liabilities

this

individual

by o b t a i n i n g and

would safeguard

the

financial

problems

sides,

difficulties

less

question

liquidity

for

—
banks.

providing

r e g u l a t i o n and s u p e r v i s i o n ,

on a l l

causing

a r e u s u a l l y much

c a n go w r o n g f o r

from c r e a t i n g

caution

aiding

world

t h e payments mechanism by k e e p i n g

o f a n y one i n s t i t u t i o n

of

the

t o be c o m p l a c e n t a b o u t

problems

sometimes expressed

funds

available.

outlets

by c a r e f u l

integrity

new

p r o v i d e mechanisms

will

b a d j u d g m e n t s may be made a n d t h i n g s
We m u s t be p r e p a r e d

for

coming i n as v e r y s h o r t - t e r m
find

for

how w e l l

clear

left

activity

the burden

proposals

are w i l l i n g

sources are not

f o r w h i c h banks must q u i c k l y
It

not

are not

another aspect

impact

f i n a n c i a l markets.

liquid?

is

we s h o u l d be a b l e

Finally,

from a flood

it

of

relieve

meet t h e needs o f

countries

c o u n t r i e s when m a r k e t

the

long,

list

t h e OPEC c o u n t r i e s

industrial

is

though the

funds w i l l

and t h e

concern

t h a t may u l t i m a t e l y

amount o f

the

and
of
possible
entire

I

believe

that

fears

are

greatly

exaggerated.

106
Banks and t h e i r
rationalize
side
to

the

flow of

the m a t u r i t i e s

countries

asset

side,

practice

are

appears

the

very

this

currency

other

liquidity

of

in

smoothly.
large

year,

Countries

sums i n
for

to express

these

does n o t mean t o say t h a t
On t h e c o n t r a r y ,

if

they are
their

risks.

oil

Given present
the o i l

--

to act

prudently,

prices,

t h i s may l e a v e

met t h r o u g h o t h e r c h a n n e l s .
t h a t the problems, p a r t i c u l a r l y




cut

almost

oil.

first

Euro-

a s much

institutions

demands on t h e m .

limits

have t o
of

the

investment

importers
at

keep

acceptable

substantial

of the borrowing countries
of

able

year.

T h e r e can be no a s s u r a n c e ,

i n the p r i c e

it

efficiently

i n the

they w i l l

operations w i t h i n the

at

anticipating

financial

e x p o r t e r s and b o r r o w i n g n e e d s o f

without a substantial

flows

—

t h e y c a n m e e t a n y and a l l

t h e s c a l e and k i n d o f

So f a r ,

instance,

i n our

the

the

f u n d s have been

$20 b i l l i o n

faith

on

c a n be a d j u s t e d

1973 and f a r more t h a n i n a n y e a r l i e r

Nevertheless,

assisting

by

announced medium- and l o n g - t e r m

t o t a l e d about

enough

funds;

alleviated

markets

For

deposit

banks a r e

the market.

with

the Eurodollar

on t h e

their

rate

i n need o f

some t i m e a h e a d .

publicly

for
is

to

are dropping

assets;

outlets

begun

that

or y i e l d s

changing conditions

bank c r e d i t s

as i n a l l

needs of

reports

l e a d i n g banks have d e a l t

requirements
of

seek out

the problem of

to reflect

that

raise

half

out,

f i n d more s u i t a b l e

some o f

and r e l a t i v e l y

their

to

there are

stretching
to

have a l r e a d y

o f m a k i n g t e r m l o a n s whose i n t e r e s t

intervals

to

funds:

c a u s e OPEC g o v e r n m e n t s

these

OPEC c u s t o m e r s

this

to

be

time,

c a n be m e t

107
W h e t h e r the p r o b l e m s I
dollars

become a c u t e

on our a b i l i t y
investment

in

make p r o g r e s s

or n o t depends

to get

control

the areas
on t h o s e

problems

of adjustment

strains,

will

not




have d i s c u s s e d r e l a t i n g

of

shortages.

we c a n be m o r e h o p e f u l

to high o i l

degenerate

capacity

into

prices,
serious

petro-

also

i n f l a t i o n and g e n e r a t e

of greatest
fronts,

i n good p a r t

to

or t o other
impasses.

more
If

that

we c a n
special

unexpected

108
M r . G O N Z A L E Z . T h a n k you very much. I n your statement, on page 1 7 ,
you first discussed the question o f the investment flow of this money,
excess money i f we want to call i t that, and t h a t perhaps some k i n d of
special issues of U . S . Treasury obligations—you point out t h a t the
I M F data shows a reported increase i n monetary reserves of the O P E C
countries i n the first h a l f of 1974 of about $15 billion. Secretary Simon
had t o l d us on the eve o f his departure to the M i d d l e East t h a t this was
one o f the things t h a t probably would be discussed and t h a t is the
attraction of some o f this money i n t o the U n i t e d States and t o official
paper t h r o u g h some type of a special security. B u t then I t h i n k you
reflect the fact t h a t since then an A r a b finance minister has stated t h a t
one reason they have been slow i n doing t h a t is t h a t they want t o make
sure t h a t i f they do i t w i l l be on some k i n d of paper t h a t is inflation
proof. I t h i n k you reflect t h a t on page 19 by saying t h a t you w o u l d
expect and I quote " t h e m t o be more interested i n assets t h a t are relat i v e l y liquid, widely traded both nationally and internationally and
backed b y the strongest guarantees." W h a t k i n d of securities w o u l d
t h a t be, M r . W a l l i c h ? W h a t would be an example ?
M r . W A L L I C H . A S you know, M r . Chairman, the interest rate t o some
extent inflation proofs a security. T h i s is p a r t i c u l a r l y so i n the case of
a short t e r m security because i t has to be issued repeatedly. A t each reissue, the interest rate can be p u t at the level t h a t current market conditions require. T o the extent, then, t h a t interest rates move w i t h inflat i o n there is considerable protection i n the short-term instruments.
M r . G O N Z A L E Z . S O an interest yield h i g h enough to make i t interesti n g would be one of the things?
M r . WALLICH.

Yes.

M r . G O N Z A L E Z . O n page 2 0 you say the Federal Reserve could establish and m a i n t a i n any desired degree of overall restraint or ease i n
monetary policy i n case the impact was such t h a t i t would have or tend
to have an impact t h a t w o u l d have t o result i n some k i n d of a policy
and you seem to be very confident about the a b i l i t y of the Federal
Reserve t o develop t h a t strong policy i n the l i g h t of what D r . B u r n s
said just last week, w h i c h was to a layman l i k e myself i t was u t t e r l y
astonishing. I n case, he said, the current policies were to result i n a
6 percent unemployment, then as a must the Government w o u l d have
to go into the public works arena but now this is what he and others
have been saying has been the cause of the bad inflationary tendencies
to begin w i t h so i t seems t o me rather tragic to say we are g o i n g to
admit t o a policy t h a t is going to b r i n g about unemployment so i n case
i t gets t o a p o l i t i c a l l y unbearable degree, well we w i l l get to the o l d
nostrum and have public works. I s not t h a t a self-confession of contrad i c t o r y policies and results ? W o u l d not the same t h i n g happen here ?
M r . W A L L I C H . Before t r y i n g to respond t o your question let me exp l a i n w h a t I meant to say i n t h a t p a r t o f m y prepared text to w h i c h
you refer. I have heard i t said t h a t inflows of o i l money w o u l d affect
the U.S. money supply and therefore monetary policy. I merely meant
to explain t h a t technically t h a t is not so. T h e money supply does not
change—it just changes hands. T h e Federal Reserve's a b i l i t y to control
i t is not altered, broadly speaking. A s f a r as particular specific monet a r y policy such as Chairman B u r n s was t a l k i n g about, I t h i n k t h a t
monetary policy has one p r i n c i p a l objective now, and t h a t is t o b r i n g




109
inflation under control. I t can do this job more effectively i f some of the
undesirable byproducts of anti-inflation policy can be prevented. One
such action would be to supply public service jobs so that the unemployment rate is kept down.
M r . G O N Z A L E Z . O n page 22 i n mentioning one other aspect of this
flow and some consequences i n case you have, as you very w e l l point out,
O P E C funds coming i n as very short-term liabilities w h i c h would o f
course create a problem f o r the institutions, the bank institutions. Y o u
say i n t h a t case, we must be prepared f o r this risk by obtaining and
p r o v i d i n g up-to-date information, by careful regulation and supervision and i n the last resort by action t h a t w o u l d safeguard the
l i q u i d i t y markets and the i n t e g r i t y of the payments.
M y question is, should we not now be anticipating t h a t as a very,
very real possibility we could have this influx of short-term liabilities or capital and what is i t that we could be doing i n the meanwhile
i n anticipation? W o u l d i t require legislation or is this something that
would be an administrative policy now w i t h i n the confines of the
regulatory agencies, or would they have to have some legislation f r o m
us.
M r . W A L L I C H . Insofar as I can foresee the problem, I belive that i t
can be handled under existing powers. The problems raised by petrodollar flows relate not only to i n f o r m a t i o n about our domestic banking
system, and the situation of our financial markets. I t relates to banking
and t o financial markets worldwide, because the operations of banks
and financial markets are worldwide. W e are i n the process of strengthening our i n f o r m a t i o n domestically and internationally, p a r t i c u l a r l y
w i t h respect to the foreign exchange positions of banks. Thus, I t h i n k
the w o r k that you suggest, M r . Chairman, is going f o r w a r d .
M r . G O N Z A L E Z . O u r final question. I s there any possibility t h a t our
country could develop any k i n d of muscle, any k i n d of pressure i f you
want to use t h a t w o r d on the oil-producing nations to b r i n g about some
reason ? There is no question they have been gouging us unmercifully.
Y o u know, an increase of 400 percent is just not w i t h i n the realm of
reasonable or justifiable, i n the normal sense t h a t we use that word.
D o we have t o ? I s the country powerless ? I s the political situation such
that our country does not exert pressures t h a t i t m i g h t otherwise be
able to i n this area of o i l p r i c i n g ?
M r . W A L L I C H . I w o u l d say our best bet is to go f o r w a r d i n developing
our own sources of supply—developing an increased capability and
thereby reducing our dependence on foreign sources. T h i s w i l l have
t w o effects. One w i l l be the reduction o f demand f o r o i l i n w o r l d markets. T h a t w i l l tend, according to the laws of economics, t o b r i n g the
prices down. The other effect, by m a k i n g us more independent i n our
policies w i l l be to give us more leeway f o r action.
M r . G O N Z A L E Z . I t seems though t h a t Project Independence i n the
effort to make ourselves sort of fortress America is t h a t respect is not
one of easy realization, or at least not i n the very near foreseeable future. A l l the experts seem to indicate t h a t there is this reliance on this
M i d d l e East oil. W h a t I do not understand is f o r example, the reports
that some of the countries i n the A r a b i a n producing w o r l d such as the
Saudis w o u l d be amenable t o a reduction i n price but are kept so by
such obdurate attitudes as those reflected by the Iranians, and there

37-211 O - 74 - 8




110
I am asking a question and perhaps i t is one t h a t really we should address to other officials and that is, is i t politics that is keeping us f r o m
t a l k i n g t u r k e y to the Iranians ?
M r . W A L L I C H . L e t me begin w i t h the first p a r t of your question. A s
I have said, I t h i n k a reduction i n the price of o i l is necessary i n order
to be sure the petrodollar problems are manageable. W i t h respect t o
Project Independence, i t must be realized that, to a potential investor
i n a substitute energy source, these plans may i m p l y t h a t possibly the
price o f energy sources w i l l go down. I n t h a t case, his incentive t o make
the investment w i l l be less. There are t w o sides t o the subject of the
potential decline of o i l prices. I t may help on the O P E C side, but i t
does not help on the side of domestic investment.
A s f a r as the O P E C countries are concerned, I am not a specialist
i n this area. M y impression is t h a t different countries are quite d i f ferently situated w i t h respect to the price of oil. Countries t h a t have
reserves of only l i m i t e d size are more interested i n obtaining a h i g h
price f o r their l i m i t e d supplies. F o r them, the flexbility lies i n decisions as t o whether the o i l should be brought above ground now or
later. B u t , countries t h a t have v i r t u a l l y u n l i m i t e d reserves can be less
concerned about price because i t applies to an unending flow. So there
are v a r y i n g conditions here and i t is difficult to judge how an approach
could be made and its effect.
M r . G O N Z A L E Z . T h a n k you very much. M r . Johnson ?
M r . J O H N S O N . T h a n k you, M r . W a l l i c h . I wish I had had time t o
really read your statement. I t certainly is a very scholarly statement
and has an a w f u l lot of meat i n i t as they say.
I am t h i n k i n g of one o f the statements you have made t h a t this year
our purchases of o i l abroad w i l l j u m p f r o m about $5 b i l l i o n to about
$25 billion. T h a t is a $20 b i l l i o n increase i n cost and no doubt a great
strain on our b a n k i n g system. These firms i n the U n i t e d States t h a t
are b u y i n g this oil, how are they financing t h i s $20 b i l l i o n extra cost
t h a t they are going t o be faced w i t h ?
M r . W A L L I C H . U l t i m a t e l y , o f course, i t comes f r o m the consumer;
we are a l l p a y i n g f o r i t . The o i l companies presently have t o carry
higher inventories. A s they are very strong companies, I do not doubt
t h a t they have good credit facilities. I am concerned about the fact
t h a t when the o i l price goes up, i f they are on a first-in, first-out accounting basis, this gives them a very large visible profit which is not
a real p r o f i t ; i t is just a capital gain on which they pay tax. A c t u a l l y ,
their l i q u i d i t y is reduced as a result o f h a v i n g had this r u n u p i n the
price o f their inventory. B u t I have never heard t h a t the o i l companies
have had any difficulty i n financing these inventories.
M r . JOHNSON. I read over the weekend t h a t there is a greater demand
f o r bank loans today than at any t i m e i n history. I s this huge demand
f o r bank credit the result of a demand f o r o i l loans? A l l o f a sudden
we need $20 b i l l i o n extra to buy o i l f r o m the Mideast?
M r . W A L L I C H . I cannot say specifically w i t h respect t o the o i l inventories. W i t h respect to a l l inventories I t h i n k there is a very good
case to be made t h a t w i t h the rise i n the price o f inventories, and the
taxes levied on them, the l i q u i d i t y of corporations has been reduced.
T h i s w o u l d force them i n t o the banks.
M r . J O H N S O N . I was t r y i n g to t h i n k , as you have been delivering
your statement, how the Federal Reserve banks can enter into this




Ill
picture and be h e l p f u l as f a r as financing the purchases o f the oil. Y o u
can rediscount the notes f r o m a bank t h a t loans money to a b i g o i l
company to buy oil, can you not ?
M r . W A L L I C H . T h a t is r i g h t . There has been a very significant expansion o f credit, particularly commercial and industrial loans. There
has also been a significant expansion o f the money supply, although
currently at a lower rate. Consequently, I do not t h i n k there has been
any lack of financing f o r the o i l companies.
M r . J O H N S O N . N O W also, these O P E C countries are of course being
the recipients o f large inflows of cash. Where w o u l d they deposit t h a t
money? A r e they p a r t i a l to American banks over there like Chase
Manhattan, and F i r s t National C i t y Bank, and Continental, and some
of the b i g banks, or do they deposit i n their own local banks?
M r . W A L L I C H . I t has been tending t o go into the E u r o d o l l a r market
and to a lesser extent into banks i n the U n i t e d States. American banks
have branches i n the Eurodollar market, which is m a i n l y but not
exclusively situated i n London. They have a very i m p o r t a n t share of
t h a t market. So i n those t w o senses money is going i n t o American
banks f r o m O P E C countries.
M r . J O H N S O N . The reason I asked t h a t is i t seems t o me that I read
where Chase Manhattan B a n k was anticipating deposits maybe to the
extent of $25 billion. O f course they would have t o i n some way handle,
and as you mentioned i n your statement, provide l i q u i d i t y f o r i t because they are i n the nature o f very, very short-term deposits.
M r . W A L L I C H . Yes, t h a t is a problem f o r banks. So f a r , they have
been getting predominantly short-term deposits. T h a t puts a constraint
on them regarding the m a t u r i t y of the use t h a t they can make o f these
funds.
M r . J O H N S O N . T h i s month Saudi A r a b i a very wisely agreed w i t h M r .
Simon to hold an o i l auction and they have set the target date. They
w i l l ask f o r bids f o r the sale of i y 2 m i l l i o n barrels of o i l a day f o r 16
months, and I t h i n k M r . Simon and everybody is hoping t h a t b y
reason of the 2 b i l l i o n barrel a day g l u t r i g h t now i n o i l markets t h a t
those bids m i g h t be as low as a reduction of $2 a barrel. D o you have
any i n p u t on that? D o you t h i n k t h a t is possible under the present
situation wherever there is a tremendous overproduction o f o i l i n the
world?
M r . W A L L I C H . There is certainly room f o r a decline i n the price of oil.
Whether this particular mechanism is likely t o produce i t , I have no
means of judging. I am no expert on this subject. One has t o bear i n
m i n d of course t h a t an increased supply f r o m any one country could
be offset by reduction i n the supply f r o m others. T h i s w o u l d be the
case unless the country t h a t is expanding its production has such great
productive capacity that its expansion would result i n an increase i n
aggregate output even though others were c u t t i n g back. These are
complexities t h a t we cannot see t h r o u g h very effectively at t h i s time.
B u t actions designed to b r i n g down the price of o i l w i l l certainly bear
exploring.
M r . J O H N S O N . W e l l , is i t not true as M r . Gonzalez mentioned t h a t we
have not used any political pressure as is nonexistent? A b o u t the only
t h i n g t h a t is going to b r i n g down the price of o i l is the l a w of supply
and demand and the i n a b i l i t y of the Arabians t o sell the oil. I understand the storage facilities are just jammed f u l l all over the w o r l d and




112
we may see a surprising drop i n the price of oil. I k n o w someone said
they can c u r t a i l their production. I come f r o m the Pennsylvania oilfields and i f you curtail production of a prolific lease by reason o f pror a t i o n o r something, when you w a n t t o restore production back again,
w h y paraffin has set i n t o the o i l sands and you don't get the production
back. T h a t could well happen t o these people over there although I do
not know the character of their o i l sands, whether a precipitous curtailment of production would cause the sands to fill up w i t h paraffin
and asphalt.
M r . W A L L I C H . I lack expertise here also. I always thought o f the
m a i n pressure on the price of o i l as coming f r o m the development o f
substitute sources of energy, not only of o i l b u t o f other sources. B u t
conceivably, such a t h i n g as storage limitations may have a much
greater impact.
M r . J O H N S O N . T h a n k you. I believe m y t i m e has expired.
M r . G O N Z A L E Z . M r . Reuss?
M r . R E U S S . T h a n k you, M r . C h a i r m a n ; and M r . W a l l i c h , t h a n k you
f o r a masterful paper. I have several hours of questions b u t I w i l l
compress them i n t o 5 minutes.
O n page 2, you say, t o w a r d the bottom o f the page, " f o r the U n i t e d
States i n particular, the most effective way t o deal w i t h the energy
problem is t o mount a strong national p r o g r a m f o r h o l d i n g down
energy use, and m o v i n g as quickly as possible t o develop substitutes
f o r imported o i l . " I certainly agree, and I want t o p u t t o y o u w h a t , t o
me, is the most worrisome t h i n g about the o i l supply price i m p o r t
situation; and let us see what your reaction is.
I am not p r i m a r i l y worried—and I know you are not, either—about
M i d d l e Easterners acquiring investment interest i n the U n i t e d States.
I t h i n k we can protect our interests there, a l l r i g h t . N o r am I p r i m a r i l y worried about M i d d l e Easterners who now hold enormous
reserves, and w i l l h o l d even greater reserves, b r i n g i n g the temple down
by destructive dumpings o f dollars or some other currency; because
f o r one t h i n g , they would h u r t themselves about as much as they w o u l d
h u r t t h e i r intended victim. W h a t I am concerned about—and I wondered whether you share m y concern—is simply this r here we are, i n
the U n i t e d States—we w i l l just t a l k about our country t h o u g h the
same situation prevails i n most of the other industrial countries—here
we are, on an essentially business-as-usual, o i l consumption-as-usual
basis. W e are t r y i n g some conservation, but not much, as anybody who
is d r i v i n g down the highway can p l a i n l y see; and meanwhile, the
O P E C countries are accumulating horrendous reserves. Y o u gave us
the arithmetic on that, and because they are not going t o spend them
a l l currently, they are going to invest them. Those reserves are going
t o grow. They are keeping t h e i r poker chips on the table, i n short, and
t h e i r p i l e is g r o w i n g higher and higher.
I f , i n 5 or 10 or 15 years, about the time we hope, i f we are l u c k y , i n
reaching something like Operation Independence of our o w n — i f about
t h a t time the A r a b countries decide t o spend f o r imports i n t o t h e i r
country these fantastic accumulations; and p a r t i c u l a r l y i f t h a t t i m e
coincides, as w e l l i t m i g h t , w i t h an increased scarcity o f materials
worldwide, are we not l i k e l y t o have i n this country, w i t h really no
option about i t , a serious d i m i n u t i o n i n our real income, because o f the




113
necessity to p a r t w i t h these resources which we ship overseas; a n d / o r
a b o i l i n g inflation as domestic demand and foreign demand coincide?
I n short, i t seems to me t h a t we are not i n the lucky situation we
were i n i n the 1960's, when by and large we let the Germans and the
Japanese m a i n t a i n an overvalued dollar exchange rate, and then supp l y us w i t h enormous quantities of Volkswagens and M i n o l t a cameras
at cheap prices; and they d i d not know, u n t i l i t was a l l over, how they
devaluations of the dollar, much deprewould be frustrated by
ciation of the d o l l a r plus much inflation. I do not t h i n k the Arabs are
going t o be t h a t shortsighted. W e are floating, so we cannot devalue.
A n d i f we continue t o inflate, our creditors w i l l start b u y i n g while the
b u y i n g is good.
D o you share m y concern t h a t this is the real t h i n g we ought t o be
concerned about, and t h a t unless we want t o impose o n the American
people a no-choice alternative i n , say, 10 years, o f h a y i n g t o undergo a
considerable d i m i n u t i o n i n national income and the i n d i v i d u a l standa r d of income, we should take more seriously the need t o conserve
imported o i l now ?
M r . W A L L I C H . Congressman Reuss, I have been very conscious of this
problem, but w i t h a s l i g h t l y different emphasis. I have looked at i t i n
the f o l l o w i n g terms. W e are i n c u r r i n g a great debt, which w i l l require
service. Someday i t w i l l have to be repaid, presumably when the O P E C
countries can accept trade deficits instead o f h a v i n g surpluses. T h e
way t o p u t us i n position to service this debt, and ultimately repay i t ,
would be t o accumulate more capital i n the real sense. T h a t is, use the
leeway created i n the economy now by this o i l " t a x , " the d r a i n i t creates
on consumer demand, i n order to step up the rate o f capital formation.
Then we w i l l have a bigger capital stock. The return on t h a t stock w i l l
help t o pay interest on the debt that is outstanding. U l t i m a t e l y i t could
serve, also—although I doubt t h a t would happen—to repay the debt.
So, by d o i n g this, I t h i n k we would i n the main meet the problem that
you are concerned about.
However, since such a process never works completely smoothly, I
t h i n k i t is certainly true t h a t whatever we can do to reduce the oil
deficit i n the first place w i l l be a l l to the good.
M r . R E U S S . O n t w o of the factors which are likely to keep things
f r o m going as smoothly as you and I would like, the first one is that the
O P E C countries are not l i k e l y to supply as much of the funds which
they have skimmed off f r o m us i n higher prices back here i n the f o r m
of investment and equipment as may be needed; and second, both the
capital goods, the tools and equipment that you mean when you say
capital investment, a n d the things they make, w i l l have an increasing
proportion o f high-cost imported components—copper, bauxite; you
know the whole list. W e l l , would you agree t h a t those are possible
variables w h i c h may t h r o w off your nope a 1bit?
M r . W A L L I C H . T h e y are definitely variables, and they present difficulties. I w o u l d add just one thing. Suppose the O P E C money should
not come to the U n i t e d States—although i n fact there is no particular
reason t o t h i n k t h a t we w i l l not get some reasonable share of i t , having
good capital markets. B u t even i f t h a t should happen, so long as demand is reduced by the payment of h i g h prices f o r o i l and by the flow
of money abroad, there is o f course a gap i n the economy, i n real terms.




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T h i s can be filled b y some other f o r m o f demand. A n increase i n investment is just as good, or even a better way o f filling t h a t gap t h a n
raising consumption spending. T h e market w i l l tend t o b r i n g i t about,
although one cannot be sure t h a t i t w i l l b r i n g i t about completely.
T h i s w i l l happen due to a f a l l i n interest rates and by other circumstances—such as the limitations placed upon industrial capacity. These
factors w i l l encourage investment and b r i n g about the needed increase
i n capital formation.
M r . R E U S S . T h a n k you.
O n another subject, you speak approvingly—and I surely j o i n you—
i n what the Committee o f T w e n t y has done i n its recommendations
w i t h respect to rules o f the road and guidelines on flexible exchange
rates; so f a r , so good.
I am concerned, however, about another recommendation of the
Committee of T w e n t y ; namely, that despite a l l that we have learned,
we should now, i n effect, p l a n a return to the stable b u t adjustable rates
of B r e t t o n Woods days, and thus apparently deprive the U n i t e d States
o f the o p p o r t u n i t y to float, as i t is now floating, when i n its sovereign
judgment we determine t h a t i t is the t h i n g to do. Instead, i t w o u l d be
up to the I M F to decide this question.
I f I read the C - 2 0 r i g h t — a n d I t h i n k I do, because I have read i t
again and again—shouldn't the Congress now serve notice t h a t i t
simply w i l l not r a t i f y any amendment t o the I M F articles t h a t w o u l d
envisage such an improvident impairment of our r i g h t t o make our
currency flexible ?
M r . W A L L I C H . T h e output of the Committee of T w e n t y is not a final
agreed-upon report. I t is simply a report t h a t states the positions w h i c h
the group had arrived at when i t dissolved.
M r . R E U S S . A n d w i l l recommend t o the Governors?
M r . W A L L I C H . Yes; b u t what i t recommends t o I M F ' s board is
essentially a series o f short-run i n t e r i m steps. Those short-run objectives do not include a r e t u r n to stable b u t adjustable rates. T h a t is
p a r t of the longrun perspective. I would be concerned about something
t h a t compelled the U n i t e d States t o give u p a floating posture so l o n g
as the U n i t e d States thought t h a t there was an advantage i n maint a i n i n g i t . O n the other hand. I see considerable advantages, over the
l o n g run, i n stability o f exchange rates. I believe everybody does, and
i f we can create conditions i n which stable rates are possible, then I
w o u l d see a r e t u r n t o them as quite feasible. T h a t is, I can envision
circumstances i n w h i c h stable rates w o u l d be i n our interests. B u t this
is a conjectural matter. One cannot foresee how conditions w i l l develop, and t h a t is one reason the C-20 never settled this p o i n t i n
reaching i n t e r i m agreement.
M r . R E U S S . Then i t is your view, as you read the C-20 recommendations of June of t h i s year, t h a t they do not recommend a r e t u r n to
stable but adjustable rates; t h a t they are simply t a l k i n g about the
sweet by-and-by, and something that should be talked about, and t h a t
Congress w i l l not be confronted w i t h new articles of the I M F f o r
ratification w h i c h adhere to stable b u t adjustable rates?
M r . W A L L I C H . N o t as a result of this negotiation. I t h i n k i t is f a i r
to say t h a t there was a s p i r i t i n the committee approving the general
idea of stable but adjustable rates, b u t t h a t the circumstances at the




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time were so uncertain that no proposals of that k i n d are going t o be
made to legislatures.
M r . R E U S S . T h a n k you. I have not been told, but I suspect m y time
is up.
M r . G O N Z A L E Z . Yes; well, the Chair is being liberal w i t h the members.
M r . Crane?
M r . C R A N E . Yes; thank you, M r . Chairman. I w o u l d l i k e t o welcome
M r . W a l l i c h before the subcommittee, too.
M r . W a l l i c h , i n your testimony on page 2, you made reference t o a
relative reduction m consumer demand, and t h a t this relative reduct i o n i n consumer demand could help to alleviate some o f our problems.
B u t I am wondering about a reduction, say, i n demand f o r food, where
we are faced w i t h the prospect of heightened demand worldwide
because of shortages and increased food needs. T h i s summer, unfortunately, we are faced w i t h the prospect of a major drought.
The last figures I saw contended t h a t we are going to be about 30
m i l l i o n tons of g r a i n short of our anticipated yield this year. W e also
have other significant problems i n housing and, w i t h a g r o w i n g number of the young people who were a product of the post-World W a r I I
baby boom i n the process of f a m i l y formation, i t seems to me that
there are additional and inevitable strains there.
There is the f u r t h e r problem of job creation to avoid rather significant unemployment rates—and I am t h i n k i n g again of that postW o r l d W a r I I baby boom population, and the need by industry to
absorb almost twice as many people into the w o r k force today as they
have been doing f o r the past 7 years. A s I understand i t , that is to
continue f o r about another 7 years before we get back to normal job
creation i n a h i g h l y industrialized society, where i t costs about $25,000
to create a job.
The question I am wondering about is, how you achieve reduction i n
consumer demand when you are stuck w i t h those givens.
M r . W A L L I C H . L e t me say something about how I visualize the impact on demand. I t h i n k that i t would be very widely spread. People
are very l i k e l y to cut back a l i t t l e here, a l i t t l e there. T h e y are going
to cut back on what they spend on gasoline; perhaps not i n dollar
terms, but i n terms of the amount of gasoline, and i n the other forms
of o i l which they use. A reduction i n demand f o r food is not involved,
I believe. Food is mainly a supply problem at this time.
H o w does that fit into an overall aggregate demand policy ? I quite
agree w i t h you, we need a proper balance. W e have h a d substantial
excess demand, and t h a t has contributed to inflation. I t needs to be
cured. O n the other hand, we have to be careful not t o develop an
overall demand weakness which would make i t difficult to absorb
g r o w t h i n the labor force. T h a t is a problem of the medium term, I
w o u l d say. The demand trend has to be sufficiently u p w a r d t o absorb
new entrants to the labor force.
M r . C R A N E . Another question t h a t came to m y m i n d t h a t Congressman Reuss touched upon, concerns this necessity f o r developing substitutes f o r imported o i l ; and one of the concerns t h a t I have—and i n
fact a number of m y colleagues do—is over the impact o f some of the
environmental legislation that we have passed i n significantly in-




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creasing demand f o r this product. Then, such delays as construction
of the Alaskan pipeline, and so f o r t h — I am wondering i f , i n your
judgment, there should be a continued effort at relaxing and extendi n g the timetable f o r implementation of some of our efforts at cont r o l l i n g p o l l u t i o n of the environment.
M r . W A L L I C H . A S an economist, I like to see balanced adjustments.
W e have had the misfortune at a time when we took what seemed to
be desirable environmental action, we experienced an unforeseeable
rise i n the cost of these policies. I t seems appropriate t h a t on the one
hand we pay a l i t t l e more, and on the other, demand a l i t t l e less. T h a t
way we w i l l bridge the gap.
M r . C R A N E . W e l l , i t is the p a y i n g a l i t t l e more t h a t I t h i n k is a p a r t
of the problem, too, at a time when there are such demands f o r money
i n so many other sectors, whether i t is developing additional f u e l resources, or whether i t is job creation i n industry, and so f o r t h .
L e t me t u r n t o another point. O n page 4 o f your testimony, where
you made reference t o control o f b o i l i n g over of demand i n the f a l l of
1973, and you added t h a t nearly a l l governments were adopting more
restrictive fiscal and monetary policies, f r o m late f a l l of 1973 t h r o u g h
1974 d o w n t o the present time, what has been the rate of expansion m
the money supply ?
M r . W A L L I C H . The rate o f expansion i n the n a r r o w l y defined money
supply i n the U n i t e d States was of the order of 7.6 [6.8] 1 percent f o r the
6 months preceding, February t h r o u g h J u l y of this year. L e t us take
the last 9 months, November 1973 t h r o u g l i J u l y 1974. O f those, the
average of the last 3 months was 4.4[4.8] 1 percent, and the average of
the 6 months preceding t h a t was about 6.8 [7.5] 1 percent. So, this averages 7.1 [6.6] 1 percent f o r the 9 months.
M r . C R A N E . JBut most recently, i t has been i n the 8-percent range i n
the preceding 6 months.
M r . W A L L I C H . T h e last 3 months, i t has been at 4 . 4 [ 4 . 3 ] 1 percent rate,
and before t h a t — i n other words, the aggregate o f 9 months—approximately 7.1 [6.6] 1 percent.
M r . C R A N E . I see.

W i t h respect to fiscal policy, there have been some proposals t h a t I
t h i n k are i n line w i t h other recommendations t h a t you nave made, t h a t
we m i g h t relax—or, i n fact, reduce—some of the taxes on capital investments, capital gains; even some relaxation or reduction o f corpor a t i o n taxes as a means of t r y i n g to stimulate increased investment,
because of the expectation of a higher r e t u r n on investment; and i t
w o u l d seem t o me that t h a t coincides w i t h some of the other recommendations i n your statement. W o u l d you recommend any specific
changes i n our tax laws here, t o encourage more investment ?
M r . W A L L I C H . I have a h a r d t i m e being very specific about these
suggestions. I am aware o f the objective ana I am also aware t h a t they
are t a x devices t h a t could be useful. I n t h a t respect, may I d r a w y o u r
attention t o an aspect of the corporate-profits picture. Due t o the fact
t h a t price rises have inflated inventory profits, the true profits o f
business are currently very substantially overstated—in the economic
sense, at least. I f you take into account the fact t h a t corporations must
1

Figures I n brackets indicate revisions made August 21, based on new data.




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pay t a x on these inflated inventory valuations, the rate o f taxation
on corporate income is really much higher than i t appears t o be. B u t
that is an economic, not a legal, calculation.
M r . C R A N E . F i n a l l y , you make reference also i n your statement t o
the need t o take whatever steps we can t o s h i f t more o f our economic
activity f r o m consumption into investment and I assume particularly
you are concerned about return on investment and energy related
fields, whether i t is o i l or what have you. D o you know what the
r e t u r n on investment at the present time is f o r the m a j o r o i l companies i n this country ?
M r . W A L L I C H . N O . I don't. I would have to look at the figures. I
would guess t h a t because o f the profits on inventory d u r i n g the period
when the price of o i l rose, i t would be necessary t o take a longer
period i n order to get a meaningful figure. I t would be very h a r d t o
p u t i t , say, i n terms of 1973 or i n terms of 1974 only.
M r . C R A N E . T h e reason I raise t h a t point is because unfortunately
i t seems t o me t h a t the o i l companies have come under undue criticism.
There have been very dramatic headlines advertising the percentage
of profit increase over say last year or the preceding 6-month period,
when, i n fact, the r e t u r n on investment of the m a j o r o i l companies
i n this country d u r i n g the preceding 5 years t o the time o f the o i l
embargo was, relatively speaking, lower t h a n the r e t u r n on investment
i n other forms o f industry i n this country. I t just seems t o me t h a t
the o i l companies have taken something of an u n f a i r and unwarranted
criticism i n this regard and that i f we are going t o stimulate t h a t
investment then i t is necessary to develop a degree o f self-sufficiency,
t h a t instead o f t a l k i n g about nationalization of American o i l companies we ought instead t o be applauding a return on investment t h a t
finallv has exceeded a return t h r o u g h the p r i m e rate, and i t was below
that t o r several years.
M r . W A L L I C H . I would never accept a percentage w i t h o u t stating
the base and w i t h o u t relating i t t o longer r u n data.
M r . C R A N E . T h a n k you, M r . W a l l i c h . M y time has expired.
M r . G O N Z A L E Z . T h a n k you. M r . Burgener.
M r . B U R G E N E R . T h a n k you very much, M r . Chairman.
Governor W a l l i c h , i t is a privilege t o have you here. I would l i k e to
ask a few monetary policy questions and w o r k m y way t h r o u g h o i l
and end u p i n Eurodollars maybe. Chairman B u r n s suggests t h a t
monetary policy alone can certainly not solve inflation, although i t is
an i m p o r t a n t part. H e says that fiscal restraint on the p a r t o f Government, on the p a r t of individuals, labor, management, and everybody is
essential. H i g h e r p r o d u c t i v i t y , a l l of this combined w i t h monetary
policy can tend to attack the problem. I s t h a t generally how you see
his views?
Governor W A L L I C H . Yes; t h a t is the way I see i t . Monetary policy
should not be made t o carry the f u l l burden.
M r . B U R G E N E R . A l l r i g h t . Now am I correct i n m y assumption t h a t
i f the Federal Reserve dramatically reversed its field and eased money
and made i t easy and i t is t i g h t at the moment, t h a t t w o things would
happen. I recognize t h a t this is oversimplified. A m I correct i n assipiing, (a) t h a t interest rates would come d o w n ; and (b) t h a t prices
would go up?




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M r . W A L U C H . I f i n d i t difficult to generalize about monetary policy.
B u t let me p u t i t this w a y : Over a period of time inflation and the
movement o f prices reflect developments i n the money supply. I am
not speaking t o the precise situation now, because there are always
particular aspects that have t o be taken i n t o account. B u t speaking m
general, i f at any one t i m e the central bank suddenly steps u p the rate
of g r o w t h of the money supply and the money supply eases i n the
sense y o u said, Congressman Burgener, the immediate effect w o u l d be
a decline i n interest rates. Subsequently, however, prices w o u l d go up.
R i s i n g prices tend t o p u l l up interest rates i n the long run. I do not
know exactly what the t i m i n g w o u l d be. B u t the final result w o u l d
be higher interest rates.
M r . B U R G E N E R . The Federal Reserve most recently has a slower
money supply g r o w t h rate o f about 4 percent as opposed t o last year's
8. W h a t do we know i n general terms about the g r o w t h o f money
supply i n foreign countries, p a r t i c u l a r l y our t r a d i n g partners—Japan,
Europe, the A r a b countries, and so on? H o w is t h e i r own currency
g r o w i n g or is it?
M r . W A L L I C H . Some of those countries have i n the past had very
much higher rates of money growth. Some o f them, however, have
been quite successful i n l o w e r i n g the rate of g r o w t h o f money. Japan,
f o r instance, had a severe rate of increase i n the money supply i n
1972-73. T h e U n i t e d K i n g d o m d i d also. They have managed t o cope
w i t h t h a t t o some extent. B r o a d l y speaking, one can trace these effects
of monetary policy and price behavior. The countries I mentioned
need to balance their payments. The rate of exchange o f t h e i r currency
also has great significance w i t h respect to prices. I n addition interest
rates have an international relationship. Thus, p a r t i c u l a r l y i n smaller
countries, rates tend t o be influenced by rates abroad. A l l this makes
i t harder t o follow the mechanisms, i f I understand you correctly, t h a t
you are t r y i n g t o examine. B u t , broadly speaking, I t h i n k i t is validated.
M r . B U R G E N E R . I s i t true, t h a t w i t h o u t passing judgment on whether
i t is a good or bad idea, t h a t Japan moves very quickly i n terms o f
allocating credit w i t h i n the nation t h a t we do not?
M r . W A L L I C H . I n Japan they have had a system i n w h i c h the Government has had a great deal of control over the allocation o f credit. M y
own impression is t h a t they feel the t i m e has come t o reduce t h a t degree of control. They have t r i e d to make their markets more responsive
t o what we w o u l d call market forces.
M r . B U R G E N E R . O n the O P E C countries, i f t h i s large reservoir is
seeking h i g h l y l i q u i d or low-risk investments I assume t h a t h i g h r i s k
brings h i g h returns and low risk generally low returns. Y o u state
i n your testimony that that would have a tendency to force the rate
of r e t u r n down. I s that what you are saying? I f they are seeking low
risk w i l l not t h a t b r i n g their interest rates down ?
M r . W A L L I C H . T h a t is correct. I meant t o say t h a t i f more money
flows i n t o low-risk areas, such as short-term Government securities,
the supply o f funds there w i l l be increased and t h a t w i l l necessarily
tend to drive down rates.
M r . B U R G E N E R . O f course, I guess currently our Government securities are quite h i g h r e t u r n or is t h a t just the short-term ones?




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M r . W A L L I C H . I am a f r a i d that i n considering interest rate levels
one always has to consider the rate of inflation, Congressman Burgener.
M r . B U R G E N E R . I S 8 and 9 percent low return ?
M r . W A L L I C H . T h e nominal rate, o f interest consists, economists
would say, of the real rate, plus an inflation premium. I do not know
what rate of inflation investors expect. B u t you could visualize an
8-percent interest rate that would contain a very sizable inflation
premium.
M r . B U R G E N E R . W e are p a y i n g about $20 b i l l i o n more f o r o i l and
we are not getting more o i l and I take i t we are not getting less oil.
The point is are we conserving energy or are we just t a l k i n g about i t ,
i n your opinion ?
M r . W A L L I C H . I am not an energy expert, but m y overall impression
is this. There is some conservation at the consumer level. Consumer
conservation of energy was better d u r i n g the period of the boycott
than i t is now. There is a significant effort at the business level, where
conservation practices are based on precise calculations. There is a
longrun effect but no one knows just what t h a t includes. There are
structural factors such as a change i n the size of the average car, the
insulation of the average house, and the way the factories are b u i l t ,
which w i l l take a long time t o become effective. B u t effort i n this area is
proceeding. I t h i n k i t is probably the main part of this conservation
effort.
M r . B U R G E N E R . W o u l d i t be safe t o assume t h a t as of r i g h t now i t
is more of an intention than a f a i t accompli ?
M r . W A L L I C H . I would say i t is certainly not a f a i t accompli. I
would add t h a t I t h i n k everybody has the best intentions. B u t , unless
these intentions are backed by economic reality I do not t h i n k they
are going to get us t o the desired result. I do see the reality of higher
prices w o r k i n g on people, so that regardless o f intentions they are
likely to be pushed i n the direction of conservation.
M r . B U R G E N E R . A l l r i g h t . F i n a l l y then, I take i t a E u r o d o l l a r is
an American dollar i n a European bank regardless of how i t got there
or what the source. Y o u mentioned i n your testimony t h a t Eurodollars
increased some 50 b i l l i o n last year. I s that roughly correct?
M r . WALLICH. Yes, sir.

M r . B U R G E N E R . Can you break down the source of t h a t increase
i n any way?
M r . W A L L I C H . I t certainly was not i n any major p a r t the U . S . balance
of payments, although that is one possible area f r o m w h i c h the Eurodollar market can be fed. I believe there is some internal generation
i n the creation of funds i n the Eurodollar market, proceeding i n the
same way as i n any banking system. T o look at the detail, I w o u l d
have to go back t o m y sources, and I am sorry to say t h a t m y informat i o n about t h a t market is not as precise as I w o u l d wish i t to be, because i t is an international market where many monetary systems, of
many countries, come together. Y o u can perceive events over a given
interval. B u t i t is quite difficult to go beyond t h a t and trace the fundamental causes of the events.
M r . B U R G E N E R . A m I correct i n m y assumption that the immense
b u i l d u p of Eurodollars tends to make all dollars worldwide less valuable, less desirable, devalued so to speak ?




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M r . W A L L I C H . T h a t is an interesting hypothesis. I could not characterize i t as more t h a n that. G i v i n g you a very broad opinion, i n
one sense the E u r o d o l l a r market increases the international availab i l i t y of dollars, but demand tends at the same time to press against
i t . The U.S. dollar is being used a l l over the w o r l d f o r trade, f o r
reserves—privately, and by official holders. The fact t h a t the dollar
plays t h a t great a role is of course an i m p o r t a n t element i n the demand
f o r dollars. T h e upshot is contradictory forces: possibly increased
supply o f dollars, but also an institutional underpinning o f the dollar
due to demand f o r i t . I do not know i n w h i c h way the net effect takes
place.
M r . B U R G E N E R . T h a n k you very much, M r . Chairman. M y t i m e has
expired.
M r . G O N Z A L E Z . T h a n k you. M r . Fauntroy?
M r . F A U N T R O Y . T h a n k you M r . Chairman. M r . W a l l i c h I j u s t have
one line o f questions and i t has t o do w i t h the possible use o f t a x ref o r m and its effect upon the whole o i l industry and upon prices. T o
what extent w i l l a decrease i n the o i l depletion allowance affect the
o i l investment picture ?
M r . W A L L I C H . M r . Congressman, realizing t h a t I am not a t a x m a n
p r i m a r i l y , m y reaction has been, w i t h respect to depletion, t h a t i t is
a device t h a t encourages both the discovery and the production o f oil.
W h e n the price of o i l became h i g h and i t suddenly became very i m p o r t a n t t o find more o i l I t h i n k a legitimate question was raised
whether we should not g h i f t t o taxes t h a t would emphasize f i n d i n g
and conservation, rather t h a n the l i f t i n g o f o i l above ground. T h a t ,
i t seems t o me, would be responsive to the economic needs.
T h e second question is, what rate o f r e t u r n do the o i l companies
need i n order to take on the admittedly h i g h risks of exploration and
additional production ? Problems enter here such as: H o w assured are
the markets? W h a t are the chances t h a t , after they have b u i l t refineries or d r i l l e d a well, o i l w i l l suddenly go down to a lower price
and the investment w i l l lose its value ? A l l these things, I t h i n k , have
to be considered j o i n t l y when you t a l k about o i l taxation.
M r . F A U N T R O Y . T h a n k you, M r . Chairman.
M r . G O N Z A L E Z . T h a n k you. One t h i n g has been pointed out. I t h i n k
i t is well f o r the record t o c l a r i f y , M r . Burgener i n his colloquy w i t h
you defined the Eurodollar, as an American dollar i n a European
bank. More technically and correctly speaking, is t h a t not really a
claim on a European bank denominated i n American dollars ?
M r . W A L L I C H . Yes, I t h i n k one could call i t both. I f the d o l l a r is i n
a European bank, then i t is a claim on a European bank. W h e n we say
i t is a dollar, i t is a claim denominated i n dollars. There is not necessarily a dollar i n the U n i t e d States behind this Eurodollar. I t is necessary to make t h a t point, w h i c h I regard as a distinction.
M r . B U R G E N E R . I f the chairman w o u l d y i e l d I t h i n k this is i m p o r t a n t and I certainly do not pretend to understand i t yet. I t h i n k i t was
M r . W r i g h t the other day who set the example o f going i n t o a L o n d o n
bank and opening an account and asking f o r the account t o be i n U.S.
dollars f o r $100,000 and you give the banker a check on a New Y o r k
bank f o r $100,000, we a l l understand t h a t transaction.




121
A different k i n d of a transaction would be to say I want t o open
an account f o r 100,000 American dollars. I do not have the money,
but I have collateral, so you loan me the $100,000 and w i l l open m y
account and I t h i n k i t was M r . W r i g h t who said they opened your
account w i t h nothing, w i t h no American dollars and w i t h no relationship t o any Federal Reserve requirements i n our country at all.
H e alleged they just created out of t h i n air $100,000. N o w d i d they,
or d i d they not? D o they have reserve requirements? T h a t is w h a t we
are getting at.
M r . W A L L I C H . E v e n the experts argue about this process, because i t
is curiously h a r d to p i n down. M y own view is t h a t the market can
create dollars, but that b y no means a l l of the dollars t h a t are i n i t
have been so created. T h e y could have come out o f the U n i t e d States.
Essentially i t is easiest t o t h i n k about the E u r o d o l l a r market as i f
the whole market were a single bank. Just as a bank can make a loan
to you i f you supply collateral and the 'bank w i l l w r i t e up its l i a b i l i t y
the Eurodollar market can do likewise. There are no reserve requirements against deposits such as U.S. banks maintain. However, the
" E u r o d o l l a r b a n k " — t a k i n g the whole E u r o d o l l a r market, f o r purposes
of discussion, as a single bank—maintains, o f course, some l i q u i d i t y
i n the U n i t e d States. I t does so because i t is called upon f r o m time
to time to make a dollar payment, and then i t must be able to provide
dollars i n the U n i t e d States. T o do that, i t must either have those
dollars or must have short-term l i q u i d assets w h i c h can be sold to
obtain dollars.
M r . B U R G E N E R . I guess what we are finally, M r . Chairman, getting
to is that while you, the Federal Reserve, makes a real effort t o restrain inflation by monetary policy, 4 percent, 8 percent, 6, and
wherever you go, can you really come to grips w i t h i t w i t h no cont r o l really over the Eurodollar ? I do not know.
M r . W A L L I C H . T h e E u r o d o l l a r market is somebody's money supply
but no country's money supply—the Eurodollar does not enter into
any country's statistics as money. The data appear to me t o indicate
that this market has been g r o w i n g faster than money supplies around
the w o r l d . T o the extent t h a t i t has the effect of stimulating demand,
this may have contributed to generating excess demand i n the w o r l d .
I do not t h i n k i t p a r t i c u l a r l y affects the U n i t e d States, because the
impact o f the people who spend out o f Eurodollar l i q u i d i t y is worldwide. Thus, the impact on the U n i t e d States o f E u r o d o l l a r spending
would at most be a small fraction of the total. B u t I t h i n k t h a t on a
worldwide scale i t probably has been o f some effect i n increasing
demand.
M r . B U R G E N E R . T h a n k you.
M r . G O N Z A L E Z . There is one final question, M r . W a l l i c h . I t looks as
i f our U.S. commercial banks are going to have t o recycle some of these
petrodollars and loan them i n t u r n to countries t h a t are, or possibly
can be, very bad credit risks. I s that not a dangerous situation ? Isn't
there a n y t h i n g t h a t we should t h i n k i n anticipatory action ?
M r . W A L L I C H . I t h i n k the banks are conscious of these risks. A wellr u n bank w i l l have an idea of how much exposure i t can afford i n any
particular country. Even so, accidents can happen, of course. The




122
obverse of this is t h a t countries t h a t are not strong credit risks may not
be able t o get the money they need. Then a problem arises f o r other
countries, s h o u l d they help this country? Should the international
institutions enter the scene? Should the country make a desperate
effort to adjust its balance of payments by some f o r m o f restriction
or depreciation ? A l l these variables enter i n t o the matter. I f the banks
act prudently they w i l l protect themselves, but they w i l l not protect
each and every country t h a t is i n need of financing, and a problem is
therefore l e f t to be dealt w i t h .
M r . G O N Z A L E Z . W e l l , we h a d one gentleman witness who mentioned,
and o f course I am just repeating, I am not an expert on this, t h a t we
had the experience of the F r a n k l i n National B a n k , and his remarks
were to the effect t h a t i n some countries, and I t h i n k he mentioned
E n g l a n d and Germany, the governments had a flat prohibition, proh i b i t i n g the banks f r o m speculating against their own currency, and
t h a t the U n i t e d States does not have this control. I s t h a t an accurate
report? I s t h a t true? I s there such a t h i n g as that?
M r . W A L L I C H . I t contains an element of t r u t h . Some countries cont r o l the degree t o w h i c h a bank may speculate and i n this group each
country does t h i s to a different degree. Some countries p e r m i t no specul a t i o n against the home currency. Others impose no constraints at all.
I note t h a t f o r the most p a r t restraints where they exist refer t o specul a t i o n only against the home currency. T h i s means the central bank is
t r y i n g to protect the currency f o r which i t is responsible. Such restraints do not, by any means—even when they are extensive—protect
banks because i t is s t i l l possible f o r a bank t o speculate i n currency B
against currency C, leaving the home country out of i t . Risk arising
f r o m t h a t k i n d o f speculation remains, and i t is i n f o r m a t i o n on t h a t
problem t h a t we are now t r y i n g to get.
M r . G O N Z A L E Z . I see. W e l l , thank you very much, M r . W a l l i c h . W e
are deeply g r a t e f u l t o you.
M r . W A L L I C H . T h a n k you very much, M r . Chairman.
[Whereupon, at 11:55 a.m., the subcommittee recessed, subject t o the
call of the chair.]
[ T h e background material on the " I n t e r n a t i o n a l Petrodollar
Crisis" prepared by the staff o f the subcommittee and referred t o b y
Chairman Gonzalez on page 3, f o l l o w s : ]




123
HENRY B. GONZALEZ, TEX., CHAIRMAN

ALBERT W. JOHNSON. PA.
J. WILLIAM STANTON, OHIO
PHIUP M. CRANE. ILL.
FRENZEL, MINN.

HENRY S. REUSS. WIS.
WILLIAM S. MOORHEAO, PA.
THOMAS M. REES. CALIF.

waT™YPAS^RO^C.
FORT^Y^^ET^tark. JR.. CAUF.

B|i_|_

U.S. H O U S E O F




REPRESENTATIVES

SUBCOMMITTEE ON INTERNATIONAL FINANCE

>. STEPHENS, JR.. GA.

Q

p

j

H £

COMMITTEE ON BANKING AND CURRENCY
NINETY-THIRD CONGRESS

W A S H I N G T O N , D.C.

Background

20515

Information
for

Hearings
on
International

Petrodollar

Prepared by Subcommittee
July

1974

Crisis

St-

124
Hobart Rowen

T H E WASHINGTON POST

June 20, 1974

The Deepening Monetary Crisis
A little more than a month ago in
Basel, Switzerland, the rich nations'
central bankers had one of their regular and secret sessions on the status
of the world economy.
This time, the subject was the deepening financial crisis occasioned by
the high price of oil set by the producers' cartel, which is causing horrendous balance of payments problems for Italy, France and G r e a t
Britain — as well as financial chaos
for the hardpressed developing countries.
But the most important financial
men were far from the quaint little
Swiss city. They were in Vienna, preparing for a meeting of the Organization of Petroleum Exporting Countries in Quito, Ecuador, where subsequently they would decide that the
oil-consuming world would get no
price relief.
Last week, the IMF's Committee of
Twenty met in Washington for a session which once had been targeted as
the final "wrap-up" conference for
international monetary reform. But
as financial jitters spread, the best
that the IMF could come up with was
adoption of a few tentative steps attempting to ease the burdens placed
on developing and developed countries
alike by the high price of oil.
, The plain fact is that there can be
only postponement—not settlement—
of the threatening international monetary crisis so long as the consuming
nations must meet oppressive bills on
a continuing basis.




"For the first time, international

financial

men speak of a world-wide recession "
For the first time, some prominent
bankers and international financial
men speak of a worldwide recession,
with the remaining strong nations—
the United States and Germany—being forced to bail out other countries.
Writing in the July issue of Foreign
Affairs, oil consultant Walter J. Levy
warns that we are witnessing "an
erosion of the world's oil 6upply and
financial systems, comparable in its
potential for economic and political
disaster to the Great Depression of
the 1930s."
Italy has already been driven to the
edge of bankruptcy by a deficit in her
balance of payments running at an
annual rate of $13 billion in the first
four months of 1974. It is true that
Italy has had other problems besides
oil—a raging inflation, excessive imports of consumer goods, and a weak
government. But it is oil that has
pushed Italy to the brink, and reduced
her credit-worthiness to almost zero.
France and Great Britain could be
close on Italy's heels. The British
balance of payments deficit just for oil
this year is likely to be $7 billion, or
as much as the estimated 1980 value

proposed it to.a surprised group of
his colleagues at that meeting a month
ago (in Basel.
The Europeans for long have been
urging that they be allowed to settle
their debts with each other by the
exchange of gold at real market
prices. This would enable them, they
held, to "unfreeze" that portion of
their reserves consisting of gold—but
which they obviously wouldn't' part
with at $42.22 an ounce.
The wily Burns reasoned that something had to be done for Italy in a
hurry, but that an across-the-board
inflation of total world gold reserves
would not only be unnecessary, but
dangerous.
The gold "collateral" compromise,
a concession by the United States,
may buy time for Italy and other countries fortunate enough to own a gold
stockpile.
But how about the poor countries?
The Trilateral Commission, a private
of highly-trumpeted North Sea oil progroup of American, Japanese and Euduction.
, ropean citizens, speaks eloquently of
The tremors are being felt, as well, i the "economic disaster" that could
in the huge, $150 billion Euro-dollar
befall the 30 poorest nations if the
market, where major companies as
developed world and the suddenly
well as nations have been borrowing
wealthy OPEC nations fail to agree on
money. This source could dry up quicka crash rescue program.
ly, because it has been fed by Arab
Everything done so far in the wake
"petro-dollars," placed on deposit for
of the oil crisis—for the industrial or
very short periods of time.
LDC countries—including the steps
Recently, Chase Manhattan Bank
taken at the C-20 session, is inadequate
head David Rockefeller expressed pubor spineless. Untold hazards lie ahead
lic concern about the Euro - dollar
unless there is some alteration in the
market. The best way for banks to
vast shift of funds demanded by the
get in trouble, he pointed out, is by
OPEC nations. That requires lower oil
borrowing for short periods of time
prices.
(from the Arabs) and lending for periods up to 7 years (to European countries in deficit).
It is for this reason—in desperation
—the major governments quietly got
together in Washington, and over dinner at the Watergate Hotel agreed that
Italy and others in the same boat
should be allowed to pledge their gold
reserves as loan collateral, not at the
official $42.22 an ounce price, but at
something "related" to the open market price of more than $150 an ounce.
This clever, stop-gap device was the
brainchild of Federal Reserve Board
Chairman Arthur F. Burns, who first

125

Perils of Oil Complacency
By THOMAS E. MULLANEY
OME constructive developments In the international
The New
oil and energy situation during the three months
Y o r k Times
since the end of the Arab embargo—especially in
S I recent days—have encouraged some economic analysts and seemingly eased the overwhelming pressures
J u n e 2 3 , 1 9 7 4 that last fall's oil offensive suddenly created throughout
the world.
The real improvement, however, has been relatively
minor and promises to be no more than a short-term
palliative both for the United States and all the other
nations that are so heavily dependent on the Middle
East's, great resource now and for some time ahead.
The real danger is that the recent abatement of the
Oil-supply crisis will mask for a while the potentially
catastrophic financial consequences that lie ahead as a
result of the sudden and explosive rise in the cost of
petroleum during the finarquarter of 1973.
Equally worrisome is the possibility that the oilconsuming nations will become too complacent and fail
to eMbrace a program of austerity and cooperation to
mitigate the awesome economic and political problems
that the recent startling changes in oil tupply-and-price
conditions have created for every nation—even-the most
advantaged and affluent in energy and other resources.
• Perhaps the best recent news—though a email7 comfort—was the fact that the oil-producing nations, at their
meeting last weekend in Quito, Ecuador, did not push
through another increase in prices and Confined themselves instead to raising royalty payments from the oil
companies by 2 per cent, which hopefully, will not be
passed along to consumers. After a bruising intramural
battle, Saudi Arabia successfully beat back the strong
efforts of her producer colleagues to raise posted prices
of oil at this time.
What is needed now is an actual reduction in world
oil prioes. That may come later on. It depends, probably, upon either the continued aggressive goodwill'of
the Saudis or the ability of the United States to get Iran,
the most militant of the oil producers, to accept the fact
that the high level of oil prices is disastrous for all.
Since mid-March, when the Persian Gulf states lifted
their politically motivated embargo Against certain
nations, it is true that there has been some improvement
in the over-ail oil picture and other problems related
to it, but the specter of new and even darker troubles
remains ominous.
* The supply situation is better because of increased
production and reduced consumption. And the cost of
the liquid gold, which snot from 90 cents a barrel in
1970 to $3 last October and then to $7 at the end of
1973, has since stabilized at that high and unbearable
level. •
:
Moreover, much thought and some effort have been
devoted to various ways to reduce dependence on Middle
East oil as well as viable solutions for recycling the
vast new monetary wealth that has been flowing into
the producing nations. •
In addition, some steps have been taken to ease the
financial burden of nations most affected by the disruptive influences created by the huge increases in their
food costs, though these have been mostly pledges that
•till have to be redeemed—things such as promises not
to engage in trade policies that would further aggravate
payments positions, improvements in trade preference
systems for the poorer nations and some additional
monetary aid for the developing world. But not nearly
enough has been done so far.
There is evidence, at the same time, that there has
not been sufficient effort so far m many nations to
reduce consumption of this vital resource and to push
the creation of additional sources of energy.
While American industry, for instance, did achieve
considerable conservation of energy in the period of
greatest stringency and high prices test winter, there
is a conviction among many analysts, both in Government and elsewhere, that greater opportunities in that
area are still available.
To that end, the United States Federal Energy Office
is planning discussions with several of the nation's largest energy consumers to seek ways to cut their consumption. Walter Sawhill, the new director of that office,




has already visited some of the auto companies with
a view toward exploring ways for developing cars tljat
use less gasolaie.
As any one who has motored along some of the major
highways in recent weeks has noted, the public is out
on the roads again in much greater volume and driving
at faster speeds than they were when the gasoline
shortage was so severe last winter.
Traffic has not yet returned to pie-embargo levels in
most states, but there are signs that there will be mora
summer driving than was expected a few months ago.
.Highway traffic in Michigan, for instance, came within
2 per cent of last year's volume over the Manorial Day
weekend after being down 10 per cent in the early part
of this year. And parkways in New Jersey and Ntrw,
York, which showed'declines of 17 per oent or more as
recently as February, have seen the drop narrow to 3 or
4 per cent in recent weeks.
The prospective increases in highway traffic and other
uses of energy may soon turn demand for petroleum
products shaiply upward again after significant declines
in the early months of 1974. Total demand was down
about 7 per cent in January from * year before, off 12
per cent in February and 6 per cent in March md do#n
less than 2 per cent ki April, when the country's con-v
sumption of all petroleum products ran about 16 million
barrels a day.
For the four weeks ended June 7, total demand wail
still around that level, but in that last week, the figure,
jumped to 16.7 million barrets a day, up about 10 per
oent in that period from the previous one and about 3
per cent above the same week of 1973.
The greater availability of gasoline and other petroleum products, combfhed with the disappearance of the
irritation of waiting in lines to get to gasoline pumps,
may weaken the earlier public support for programs to
bolster the nation's independence of foreign sources of
energy. There may be a greater tendency to defer the
hard choices that must be made if the nation is to commit financial resources to the necessary research and
development of alternative sources of supply.
And it is clear that the United States and the rest
of the world do have some hard choices to make. It is
unrealistic to believe that, this country can become completely independent of foreign energy by 1980, but it
could sharply reduce that dependence if it pushes forward with a number of proposed high-coat programs. .
Hie job ahead for all nations in the energy area was
cogently outlined by a respected international oil economist, Walter J. Levy, in the July issue of Foreign Affairs.
After setting down the grim prospects for every one of
the present realities in international oil supply trends
and prices, he stressed the importance of extreme austerity in consumption.
He suggests reducing the growth of consumption to
a 3.3 per cent annual rate from the 5.6 per cent level
that prevailed duping the 1968-72 period and a "wideranging coordinated program among all importing countries" to achieve. "sOme downward adjustment of foreign
crude oil prices to all consumers."
In a concise sum-up of his perceptive analysis, Mr.
Levy commented:
"Four elements are essential to move to a reasonable
adjustment: far-reaching cooperation among the oilimporting nations; an understanding by the importing
nations of the interests and aspirations of the producing
countries; a clear-cut (and painful) program of energy
austerity by the oil-importing countries, and a recognition by the producing, countries that even in an austerity
situation any attempt to hold prices high must result in
worldwide dangers to which they could not be immune.
"Only with far-reaching consumer cooperation can it
be expected that the producing countries will come to
this necessary conclusion. At the same time, cooperation
without austerity will not do the job; Both are needed,
and a large new dose of political will, not yet in sight,
will be required to achieve them."
In this whole* effort the United States will obviously
have to play a pivotal role of leadership. The world cannot afford to bear the tragic consequences that it surely
faces if some dramatic steps are not taken to counteract actions by ttye Arab and other oil-producing states
that have increased their cost of such a vital resource
to the staggering total of $100-billion this year.

126
THE NEW YORK TIMES

Bus i n e s s / F i n a n e e
J u n e 17,

197^

R I S I N G O I L PRICES CREATING DISMAY

E c o n o m i e s o f B i g Consumer
N a t i o n s A r e C o n f r o n t e d . byHuge Payments D e f i c i t s
REMEDIAL PLANS HAZY
E x p e r t s F e a r a W o r l d Slump
May Come B e f o r e A c t i o n
I s T a k e n on P r o b l e m s
By C l y d e H .

Farnsworth

PARIS, J u n e 15 — I t ' s h a p p e n i n g f a s t e r e v e n t h a n t h e
experts thought.
The m a j o r o i l c o n s u m i n g n a t i o n s — F r a n c e ,
B r i t a i n a n d I t a l y — a r e p i l i n g up h u g e d e f i c i t s i n e x t e r n a l
a c c o u n t s , a n d t h e c o n c e r n i s m o u n t i n g a b o u t how t h e s e d e f i c i t s
w i l l be f i n a n c e d .
A b a n k e r i n F r a n k f u r t , West Germany, c o m m e n t s :
"The m o n e t a r y
w o r l d h a s c h a n g e d r a d i c a l l y a n d f o r g o o d as a r e s u l t o f t h e e x plosion in o i l prices."
A b a n k e r f r o m New Y o r k s p e a k s o f h i g h e r
o i l p r i c e s as t h e " f i n a n c i a l monkey w r e n c h " i n t h e w o r l d e c o n o m y .
L o o m i n g i n t h e c a l c u l a t i o n s o f many f i n a n c i a l men o n b o t h s i d e s
o f t h e A t l a n t i c i s t h e s p e c t e r o f a n o t h e r w o r l d economic s l u m p .
A l t h o u g h t h e f i r s t s i g n s h a v e a p p e a r e d o f more c o o p e r a t i v e p o l i c i e s b y t h e m a i n o i l i m p o r t i n g n a t i o n s , many e x p e r t s a r e s t i l l
w o r r i e d t h a t nations w i l l act too l a t e t o stop the d r a i n of
w e a l t h and j o b s r e p r e s e n t e d by h i g h e r o i l payments.
Discouraging

Trends

The s e c r e t a r i a t o f t h e O r g a n i z a t i o n f o r E c o n o m i c C o o p e r a t i o n
and Development i n P a r i s , t h e N a t i o n a l I n s t i t u t e i n London, t h e
F i r s t N a t i o n a l C i t y Bank i n New Y o r k , t h e D r e s d n e r Bank i n F r a n k f u r t , G e r a l d A . P o l l a c k , s e n i o r economic a d v i s e r t o t h e Exxon
C o r p o r a t i o n , a n d W a l t e r L e v y , a p e t r o l e u m c o n s u l t a n t who h a s t h e
e a r o f S e c r e t a r y o f S t a t e K i s s i n g e r a r e among t h o s e who a r e m o s t
d i s c o u r a g e d by t h e l a t e s t t r e n d s .
The o i l money i s a c c u m u l a t e d b y a h a n d f u l o f p r o d u c e r g o v e r n m e n t s .
I t does n o t d i s a p p e a r f r o m t h e s y s t e m .
Some o f t h e f u n d s go i n t o
good and s e r v i c e s f r o m t h e i n d u s t r i a l c o u n t r i e s .
Some a r e i n v e s t e d
i n t h e money m a r k e t s o f t h e W e s t .
A c c e l e r a t i n g r a t e s o f i n f l a t i o n h a v e meant t h a t much o f t h e
money i s k e p t o n s h o r t t e r m d e p o s i t .
So s h o r t t e r m i n f a c t t h a t
a b a n k e r f r o m London snapped,
s e v e n days n o t h i n g , we w i s h we
c o u l d h o l d t h e money f o r more t h a n 2 b h o u r s . "




127
THE NEW YORK TIMES

June 17,

197^

The q u e s t i o n i s w h e t h e r t h e s e s a v i n g s o f t h e o i l p r o d u c e r s
c a n be t r a n s f e r r e d i n t o t h e c a p i t s l t h a t c r e a t e s j o b s .
And
as M r . P o l l a c k o f E x x o n o b s e r v e s , " u n l e s s g o v e r n m e n t s a d o p t
suitable r e f l a t i o n a r y p o l i t i c s , c a p i t a l formation could actually
fall."
The g o v e r n B u t w h a t i s h a p p e n i n g now i s j u s t t h e r e v e r s e .
ments w i t h t h e b i g g e s t d e f i c i t s a r e d e f l a t i n g i n e f f o r t s t o
improve t h e i r f o r e i g n t r a d e .
The c r i t i c a l d a n g e r , as t h e
O . E . C . D . s e c r e t a r i a t p o i n t s o u t , i s on c o m p e t i t i v e d e f l a t i o n
as c o u n t r i e s f i g h t f o r s m a l l e r a n d s m a l l e r e x p o r t m a r k e t s .
H i g h i n t e r e s t r a t e s h a v e a l r e a d y s l o w e d c o n s u m p t i o n i n many
c o u n t r i e s , i n c l u d i n g t h e two b i g g e s t markets f o r t h e w o r l d ' s
e x p o r t s , t h e U n i t e d S t a t e s a n d West Germany.
I t a l y ' s G o v e r n m e n t f e l l l a s t Monday when t h e t r a d e u n i o n s a n d
s o c i a l i s t s r e f u s e d t o a c c e p t a s t r i n g e n t f i s c a l package on t o p
o f t h e s e v e r e c r e d i t squeeze imposed by t h e bank o f I t a l y .
They
f e a r e d a sharp r i s e i n unemployment i n t h e f a l l .
Y e t , I t a l y ' s desperate f i n a n c i a l p o s i t i o n s — c a u s e d by h i g h e r
o i l p r i c e s s u p e r i m p o s e d o n a n i n f l a t i o n w e a k e n e d economy—made
some s o r t o f s t r i n g e n c y a c o n d i t i o n f o r t h e i n t e r n a t i o n a l l o a n s
i t has t o have t o pay i t s b i l l s .
" T h e I t a l i a n s i t u a t i o n i s b a d , b u t i t i s l e s s w o r s e now b e c a u s e o f t h e g o l d a g r e e m e n t , " a b a n k e r i n Z u r i c h commented l a s t
week.
He was r e f e r r i n g t o t h e a c c o r d i n W a s h i n g t o n t h a t p e r m i t s
c e n t r a l b a n k s t o p l e d g e g o l d a t m a r k e t r e l a t e d p r i c e s as c o l l a t e r a l for loans.
$12-Billion in

Gold

The 2 , 5 0 0 t o n s o f g o l d i n t h e v a u l t s o f t h e Bank o f I t a l y a r e
w o r t h some $ 1 2 - b i l l i o n , when v a l u e d a t n e a r t h e p r i c e f o r g o l d
i n t h e f r e e m a r k e t , as o p p o s e d t o t h e $ 3 . 5 - b i H i o n when v a l u e d a t
the o f f i c i a l price of gold.
This gives I t a l y a l i t t l e time —
A " b r e a t h o f a i r " as t h e
Common M a r k e t ' s e n e r g y c h i e f H e n r i S i m o n e t p u t s i t .
But i n t h e
f i r s t f o u r m o n t h s o f t h i s y e a r t h e I t a l i a n t r a d e d e f i c i t was r u n n i n g a t an a n n u a l r a t e o f $ 1 3 - b i l l i o n .
So t h a t g o l d c o u l d go
pretty fast.
N o t o n l y o i l , b u t f o o d i m p o r t s h a v e s w o l l e n t h e b i l l s . Many
e x p e r t s o n t h e I t a l i a n economy s a y t h e c o u n t r y s h o u l d be p r o d u c i n g
more o f i t s own f o o d .
B u t t h i s i n t u r n w o u l d t a k e away m a r k e t s
f r o m some o f t h e p r i n c i p a l s u p p l i e r s s u c h as F r a n c e , Y u g o s l a v i a
and. t h e U n i t e d S t a t e s .
Petroleum c o n s u l t a n t W a l t e r Levy observed t h a t a t t h e p r e s e n t
p r i c e s f o r o i l , I t a l y s i m p l y cannot pay i t s b i l l s and w i l l have
t o be b a i l e d o u t — e v e n t u a l l y b y W a s h i n g t o n .
M r . L e v y r e a s o n s t h a t much o f t h e o i l p r o d u c e r s ' f u n d s w i l l
f l o w i n t o t h e U n i t e d S t a t e s , a n d t h a t i n t h e l o n g r u n i t w i l l be




128
THE NEW YORK TIMES

June 1 7 ,

197^

t h e U n i t e d . S t a t e s t h a t w i l l have t o r e c y c l e money t o t h e
debtors, accepting the debtors' ever d e p r e c i a t i n g promissory
notes.
S o , i n t h e end., t h i s p r o c e s s w i l l mean a l o s s o f r e a l r e s o u r c e s
f o r t h e United. S t a t e s .
W i l l the American people accept t h i s ,
M r . L e v y a s k e d l a s t week i n a n i n t e r v i e w .
He s a i d h e d o u b t s i t ,
e s p e c i a l l y i f i t w o u l d lead, t o more u n e m p l o y m e n t i n t h e U n i t e d .
States.
Y e t , t h e a l t e r n a t i v e c o u l d be I t a l i a n b a n k r u p t c y a n d c r a s h i n g
f i n a n c i a l m a r k e t s , s i n c e i f I t a l y cannot pay i t s b i l l s t h e banks
t h a t h a v e a l r e a d y l e n t i t m o n e y — i t has b o r r o w e d i n t e r n a t i o n a l l y
some 1 0 - b i l l i o n o v e r t h e l a s t t w o y e a r s — w i l l be i n deep t r o u b l e .
West Germany i s t h e b i g s u r p l u s c o u n t r y i n E u r o p e a n d w i l l
p r o b a b l y be t h e f i r s t t o b e c a l l e d , o n t o h e l p p a y I t a l y ' s b i l l s .
A l t h o u g h , t h e German a c c o u n t s l o o k g o o d o n p a p e r , t h a t c o u n t r y ,
t o o , f a c e s enormous i n c r e a s e s i n i t s e n e r g y c o s t s .
And i f
markets a r e s h r i n k i n g f o r i t s e x p o r t s , i t can a l s o r u n i n t o
trouble.
Recard. T r a d e

Deficits

L a s t week, b o t h France and B r i t a i n reported, r e c o r d t r a d e d e f i c i t s ,
s i g n s t h a t I t a l y may be j u s t t h e f i r s t o f many d o m i n o e s .
The F r e n c h d e f i c i t — a t 6 0 0 - m i l l i o n i n May—was e v e n h i g h e r t h a n
t h a t f o r e s h a d o w e d , b y F i n a n c e M i n i s t e r J e a n - P i e r r e Fourcad.e when h e
announced a s e r i e s o f a n t i - i n f l a t i o n measures on Wednesday.
The F r e n c h a c t i o n i s aimed, a t c u t t i n g t w o - t h i r d s f r o m t h e
17 p e r c e n t i n f l a t i o n r a t e a n d g e t t i n g t h e i n t e r n a t i o n a l a c c o u n t s
b a c k i n t o e q u i l i b r i u m w i t h i n 18 m o n t h s .
The F r e n c h a r e c h i e f l y
c o u n t i n g o n West G e r m a r y b u y i n g o f a l o t more F r e n c h - m a d e c a r s ,
machine t o o l s , f a r m p r o d u c t s and p e r f u m e s .
B u t t h a t means some
German r e f l a t i o n , w h i c h has y e t t o be s e e n .




129
T H E WASHINGTON POST

June 30, 1974

Joseph R. Slevin

Threat of Worldwide Recession Grows

m

THfi THREAT of a worldwide recession is causing
mounting concern among
«gnomic forecasters.
It's only a cloud on the
hwrizontoutit looms larger
than it did a month or two
ago.
A sampling of government
and private forecasters discloses that few are willing
to predict that a worldwide
slump actually will occur.
Many are quick to warn,
however, that it is a very
•real possibility that must be
reckoned with.
The experts see two main
weaknesses in the international economic scene.
One is the serious, impact
that the steeip Arab oil
prices may have, on the capacity of oil consumers to
buy other goods.
Jr„..The second is the restrictive effect of the increasingly rigorous anti-inflation
programs that industrial nations are pursuing.
Federal Reserve Board




Chairman Arthur Burns
and his West German opposite number, Bundesbank
President Karl Klasen,
three weeks ago joined at
the International Monetary
Conference in flatly declaring there will be no world
recession.
WHILE
THE
central
bankers clearly were anxious to bolster public confidence and undoubtedly
would take the same upper
approach today, the economics of the' major countries
have a weaker look than
they did.
"Check them out," a top
federal forecaster urges.
"There isnt one important
country that's expanding
rapidly, not one."
The government expert
stresses that most countries
seem to be chalking up impressive gains because their
nominal output volume is
being swollen by inflationary price increases. Real

production, however, is
changing little, with small
increases or small declines
being typical.
Germany is the envy of
most other countries for it
has the lowest inflation rate
and best international payments performance but German industrial production is
only 1 per cent above a year
ago and is lower than it was
during the winter.
The huge U.S. economy is
struggling to grow again after having slumped sharply
but the consensus judgment
is that it will post only tiny
gains at most during the
rest of this year— and that
it could sink into a deepening recession if that is the
way the world is going.
TIGHT MONEY is causing even greater housing
weakness than seemed
likely when Burns issued his
"no recession" forecast. Consumers are behaving like reluctant spenders and busi-

nessmen are showing signs
of pulling in their horns,
too.
French President Valery
Giscard d'Estaing has announced new austerity
measures to curt) inflationary spending and the Bank
of France recently boosted
its discount rate to a record
13 per cent.
Germany is holding to its
tight money policy as are
the British and the inflationridden Japanese.,
Italy has resolved its cabinet crisis with an agreement
to carry out firm fiscal antiinflation measures to bolster the Bank of Italy's restrictive credit program.
All the major Free World
governments are consciously
seeking sluggish economies
to break their inflation spirals. It would not take much
to push them over the line
and into the worldwide recession that Burns and Klasen said won't happen.

130

T H E UNDER SECRETARY OF T H E

TREASURY

WASHINGTON. D.C. 20220

JUN 6 1974

Dear Mr. Chairman:
You wrote to Paul Volcker on May 30, following your
meeting with Congressmen Reuss and Johnson, about three
areas i n which you desired follow-up information i n
connection with reconsideration of IDA replenishment
legislation.
The f i r s t area concerned the Administration's
p o s i t i o n on l e g a l i z a t i o n of p r i v a t e gold ownership, w i t h
p a r t i c u l a r reference to the Dominick Amendment. I have
attached, as Appendix I , a memorandum s e t t i n g f o r t h our
views on t h i s t o p i c .
I have also attached, ag Appendix I I , a memorandum
on another area you mentioned, i . e . , the status of
negotiations concerning the valuation of SDR's, and the
r e l a t i o n of the "basket" approach to U.S. maintenance of
value obligations i n the i n t e r n a t i o n a l f i n a n c i a l i n s t i t u tions .
F i n a l l y , you asked what steps the OPEC countries are
taking — other than the purchase of World Bank bonds —
to help a l l e v i a t e the problems of IDA c l i e n t countries.
I would l i k e to point out by way of introduction that the
sharp increase i n revenues of the o i l producers occurred
only w i t h i n the l a s t eight months, a r e l a t i v e l y b r i e f
time for the o i l producing countries to r e a l i z e the
extent of t h e i r new wealth and then to begin to accept
the i n t e r n a t i o n a l r e s p o n s i b i l i t i e s that go with i t .
Viewing the matter i n perspective, I believe the o i l
producers have made a good s t a r t - - perhaps b e t t e r than
we might have expected l a s t January - - but they must be
encouraged to do more, p a r t i c u l a r l y , as you point out,
i n the area of t r u l y concessional financing.
Some concrete actions which we are aware have been
taken by the OPEC countries are as follows:




131
-

2

-

Six OPEC countries have pledged over $3 b i l l i o n
to a special f a c i l i t y i n the IMF to provide
supplementary financing for o i l importing
countries. Four more OPEC countries are considering contributions.
I t is contemplated that
t h i s f a c i l i t y would be somewhat below market
r a t e s , but not i n the concessional area, ana
would help both developing countries and
developed countries with balance of payments
problems a r i s i n g from increased o i l costs.
Kuwait i s expanding i t s Economic Development
Fund from approximately $600 m i l l i o n to over
$3 b i l l i o n . Assistance from the Fund w i l l no
longer be confined to Arab nations, and the new
funds are to be l e n t on a concessional basis.
Expansion of operations from current levels may
be r e l a t i v e l y slow because of the Fund's
shortage of q u a l i f i e d technical personnel, but
the World Bank has o f f e r e d technical assistance
to overcome t h i s s t a f f i n g problem.
I r a n i s extending over $1 b i l l i o n i n b i l a t e r a l
project assistance on favorable terms to Middle
East and South Asian countries in addition to
providing special price and financing arrangements
f o r c e r t a i n of i t s o i l exports. Saudi Arabia
and I r a q are extending s i m i l a r project and/or
o i l financing f a c i l i t i e s i n the region.
Venezuela is a c t i v e l y negotiating the establishment of a $500 m i l l i o n t r u s t fund with the I n t e r American Bank for concessional lending. Venezuela
i s also making a further $30 m i l l i o n a v a i l a b l e
to the Caribbean Development Bank.
Negotiations were completed i n May on a charter
for a 24-member Islamic Development Bank, with an
i n i t i a l c a p i t a l i n excess of $1 b i l l i o n .
Formal
approval is expected i n July, with an operational
target of end-1974.
On the basis of .less d e f i n i t e information, Middle
East OPEC countries appear to be considering
special funds for A f r i c a t o t a l l i n g perhaps




132
-

2

-

$500 m i l l i o n , including a $200 m i l l i o n fund,
which would i n i t i a l l y help w i t h financing o i l
imports and then be recycled into longer term
projects.
While we do not have complete and d e t a i l e d informat i o n on a l l the f i n a n c i a l i n i t i a t i v e s , I think the preceding
l i s t amply indicates that o i l producers are channelling a
portion of t h e i r resources to the poorer countries, that
a t least a p a r t of these resources i s being made a v a i l a b l e
on the favorable terms that the s i t u a t i o n requires, and
that we can a n t i c i p a t e s t i l l more constructive steps i n
the f u t u r e .
Mr. Volcker w i l l return to Washington by next Monday.
I know he i s looking forward to accompanying Secretary
Simon for his testimony before your Subcommittee i n
support of IDA next Tuesday, and he hopes Committee
approval and Floor action can then follow i n short order.

/

The Honorable
Henry B. Gonzalez
Chairman, Subcommittee on
I n t e r n a t i o n a l Finance
Committee on Banking and Currency
House of Representatives
Washington, D.C. 20515
Enclosures




^(or-V:

MdEMY FUND;

4/1 r / ? ^ -

Monetary

Accord

Reached

guidelines
tor
manaiinP
Anv arm= n d m e n t. that are
•
h | igreed ip r\
fl ii ^
hii V r -ite
uld ha e t f
William F Simon haifed the re- he | r Ih
M i l 1 rx-s would submitted to Congress -<ind
sults a-; i-omprehensr.-e and nhli h h lid t K e of
d
other natior1 a 1 legislatures. 1 he
WorM Financial Harmony]
r HI till
H
aid ih
n<i! 1 h i
1
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ill b- le.ai d
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1
and Aid for Poor PUtlens j n ^ mi r h d J m[ li ned in riai,1-or ,shouM no r ridm r
r' eri ••
directors ol tne
uti
the
1
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hangc roe.
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Set in Interim Agreement
nd
nierna'i IM ft if Th | in
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i n M' J Permanent Reform Sought 1
11
1
a, r ME,it HE aid r ,
B*
L. DAUE Jr. I
teps
t r tional crm.l'i.
I'»dav s meeting was the last •
>1
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l««**l wn» mv Tort Tt*W
greater stability/ in mone'ai . id I us ting urplu ps hn d d f
1 the 1 mmitt e >
f
\ hi h
in the balance 01 payments
relatJ n among the nations
WASHINGTON, June IS —I
i
ahl hed in Septenih r
luri^f r
r i
hi n
t the t r mn
I lie.se
to irv to negotiate permaThe 20 nations negotiating
that rial inns hold.
the p,u" k 1 > • e
.
nent reform of the monetary
world monetary reform a j m e d
< ^ n nl r l 1 n t 1 1 svstem following the collapse
1
n
«' [fr it t i p - nl ti
! today on an eight-potrvt pack- impo
he, ' in the Internaof'the old svstem when the
U n I e - the
lage of "interrm'' arrangements ^no'n l \ n i r Find
t-irtii^
e1
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c
pit itl in r
to promote financiai harmony
imnM Hte|' I--- mike loan to
I
h 1 liar nt „ Id in! e •
v. hose balance of pavin the world and help the less
hanee rales he^an to tloat.
m-nt-. 1 i
m hall mt
The eommittee. though taildeveloped c o u n t r y pending an
H1
f huher il
IL t r I h IGR t-ment n M m
eventual return to more stable
In
h l| s uld h
orr es
1 n) runt 1 u
had nnd^
currency-exchange rates.
a 1 HI 1 r r tn in lu mi
1 onsiderahle prepress h \ last
>
! In a major gesture
that
the monetar.' fund, September But then the huge
OIJ iltriec id r a n a hi red memnereased the way to the unanih h ill m t r guhrl =
1
1
i el (nM u
air
ii me
rl- f m netai
mous a^reecwTit, the United
y
,
in'o dr-arra'. The committee
j S t a t e i a^re«d to "reconsider"
•i h ^
df. 'ded m pome last Jar>uarv
1 t r p Ml T ra ink, F i«,hts
1
jits lonj-standiftf oppewition to
enal crrmmittee
based on 1 f l kw t ll- 1 ad
I a "link" between ft+d for the
1 the World Ban
nk, irr TM |P'S and bearing, for
1 poorer countries and future isthe transfer
the tune hem? an interest rate
suance of the new international
t
I
I pi
t
p r 1 Th 4 1 ni d
<
1
reserve money C-allod Special
•v 1 h speo I atten- The outiine of what has been
1
hange
ill mal-e
r> F —
D r a w i n g Rights. The less-develr,e h |e
t
n t rt-ns
m'r s ^arde t
^ H,,-i , L igr d t r th
1 nl1 a lal" [
1
Id— 1 ah' t b\ the e.\pl,,siuii of oil, t,»<i shape ol the permanent svstem
oped countries had made this
" ^ till r pri e
1
,n
t "m rr<
v
-.ettlements among namfl 1 r u N l
an absolute precondition f o r a
Amendment of Agreement
1 n „.,n o.nn th* h^w .a
t7 n n M
general agreement.
negotiations, though no
Most of the elements in the
[t
>
q.-xerr. u 'nt ? fnn'ipl hut
1 the
1
;elf.
1 im
ed
package had been previously
1 hr
I 1 ' I '.e| n 1 r nl 1
tahl h
f
disclosed in general outline, but
-rill are • I her new monetarv irti I
deadline ot
i ind len 1 ti
today's c o m m u n i q u e p r o v i d e d
, 1 tin r^^^f" ^
is in thi
additional details.
ni d n
Secretary of the Treasury




T 1
-

1

I the 1 h fei
floating

IMF
e
market pn- t

Guidelines

134
The Wall Street Journal

June; 1 1 ,

1974

9

World s '74 Oil Costs Seem'Manageable'
Bank for International Settlements Says
By RlCHAKD F. JANSSEN
deposits on which the banks have based meitaff Reporter of TH* WALL STMKT J U N L
O R Adium and long-term loans of Eurodollars,
BASEL—The world's oil-related financial which are dollars held outside the U.S.
problems appear likely to be "manageable" Arabs Move. Funds
this year, but just barely so, the Bank for
In response to tlifct concern, private
International Settlements indicated in its bankers here said, Arab countries are startannual report. .
ing to move money into the biggest and preAlthough highly hedged, the finding is sumably safest banks from those with deapt to be received in financial centers as re-posits of under $1 billion. And to mlmlmlze
assuring. As the central bank for European the danger of overdependence on volatile
central banks, the BIS has a reputation for deposits, they say, some large U.S. and forsilent shrewdness most of the time but for eign banks are starting to insist that Arab
often-pesadmistic candor vin its annual re- countries commit their deposits for terms
longer than the one-month maturities the
ports.
Despite an estimated 160 billion of extra Arabs prefer.
Even before much Arab oil money beoiMmport costs this year, the evidence so
far suggests "that the payments problems came available, "the London-centered Euroin 1974 should generally be manageable, dollar market continued growing" vigorthough individual Countries are likely to en- ously, the BIS said. Net loans outstanding of
counter serious, difficulties," the BIS dollars and other currencies deposited outside their home countries rose to (170 billion
summed up.
The world might be much less able to at the end of March from $1^5 billion at the
cope with the huge outflow of money to a end of 1973 and from $105 billion a year befew oil producer nations if an overall deep fore, the bank said in its yearly analysis of
slump were developing, the bank observed. the Eurodollar market.
In an "I-told-you-so" tone, the BIS said
But the early 1974 worry of a "significant
the
recession" in Industrial nations has faded on floating of currencies since March 1973
"more Tecent indications that the setback has on balance "complicated the problem of
attaining and maintaining monetary stabilwon't be prolonged," it said.
ity." The breakdown of fixed exchange
Although there aren't any indications of rates has spared countries such as West
a general rebound in economic output, over- Germany from the need "to expand domesall activity in the quarter ending June 30 tic money supply by purchasing foreign exdoesn't seem "much changed" from the change at rates declared in advance to the
first quarter, Rene Larre, the BIS general market," it conceded, thus ending one
manager, said in a signed conclusion. And source of inflation.
while inflation rates are generally the fastest since the end of World War n, "the ex- But "far from providing a policy-making
treme pessimism of some observers doesn't nirvana," floating rates haven't freed other
countries from tough decisions on supportseem Justified," Mr. Larre said.
ing their. currencies or lessening steep declines that worsen their inflation by making,
Most countries are seeking to keep over- imports more costly. Currency market par! all demand from "heating up again," and ticipants too often drove rates of some cur!
the boom in commodity prices "can reason-rencies sharply lower instead of stabilizing
ably be expected to taper off" so that the them at realistic levels, it complained, with
| speed with which wage increases are the large swings worsening the "inflation' granted again could become the main rea- ary atmosphere" by contributing "to a lack
son for varying rates of Inflation in differentof confidence in money."
• countries, Mr. Larre said.
Nevertheless, the BIS view is optimistic
only against the background of fears of a
sharp recession or even an economic coli lapse akin to that of the 1930s. That cata| strophic view wasn't mentioned in the re[ port, although it was verbalized in the inforv mal conversations of central bankers at the
f BIS annual meeting. Mr. Larre did warn
{• that "problems loom ahead which may pose
f a real threat to the world economy and test
} the strength of Intergovernmental cooperaj tion."
While the oil countries' surplus ''could in
principle be recycled to deficit countries by
private financial intermediation, the need
for prudence by both financial institutions
and the borrowing countries will present obstacles," Mr. Larre cautioned. In effect, this
puts the BIS on the side of those who worry
that even the biggest banks could be endani gered if Arabs pull out the very short-term




655

France and Iran Sign $4-Billion Accord;
Shah Will Receive Five Nuclear Reactors
Paris Payments
Expected

Problem

to Be Eased

Rider Sees Saudi

Switchj

for Higher Oil Prices

i

Lze Joint negotaatiani among!
PARIS, June 27—Franc* end
oil-coniurnirtg and
oil-prxiu-j
cing countries, with a rtarw t o
I r a n signed a massive 10-ye*r
lowering prices.
|
development agreement today,
The Shah of Iran has betn!
i n c l u d i n g provision foe the u l <
proMing for itiH higher price*,
to Iran of five 1,000-megawatt
against the reaiatanoe o< K l n g |
nuclear reactors worth $ l . l - b i l Faisal of Saudi Arabia, w h o ha«|
lion.
been sympathetic t o A m e r i c a n
The over-all value of cocarguments that continued rlaei
etracts and i n d u s t r i a l plans w a i
endanger the fur>ctk*itn| at j
estimated at 54 b i l l i o n , m a k i n g
the world's economy.
France Iran's leading industrial
Nonetheless, the Shah Mid 1
partner.
at a news conference in
Th»- deal w i l l go a long w a y
Grand Trianon palace at VerThe Shah of Iran d l i c u m t o w a r d easing France's acute
ing a f r * * n » « n t y a s t M d a y .
sailles today that "Saudi Arabia
balarn_e- of -payments
problem• w i l l have joined our camp"
p r o v o k e d p a r t l y by the rise in
The agreements, aigned at the when it reache* 100 per c m t
oil prices. Far f r o m seeking conclunor ot a Jtate visit by take-over of the
foreign-owned
credits, as is usual in vast in- the Shah of Iran and his' Em- oil companies, a re«uJt, he said
d u s t r i a l purchases, Iran has presa, represent the f i r s t vast he hoped current Saudi negoagreed to make a_n advance de- iuccew of the French effort to tiations with tha companiei
p..,Mt of $1-billion i n the Bank oope independently with the oil- w o u l d effect.
<»f France and to pay for three- price crisis through huge sales.
The nuclear
rtactori,
each
quarters of the nuclear installa-j France has refused to join on a giant »cale, represent the
tion cost in five years. Delivery the cooperative approach lrutiis to be completed by 1985.
! ated by Washington to organ-; Continued




136
THE NEW YORK TIMES

FRIDAY,

JUNE 28, 1974

France and Iran Sign $4-Billion Pact
for more than five years Iran estimates of the total value.
had declared herself '"ready to Other projects ace also being
largest part of the French- turn our area into a nonnudear Siscussed.
Iranian deal. Other aspects Of tone, that is, an area where no According to the doriununithe deal include the electrifica- nuclear weapons should be used qu€, the agreement pledges
tion of Iranian railways and all or stored. And 1we stick to this additional quantities of Iranian
railway construction, the crea- policy."
Oil to France, and. will toake
tion of a petrochemical Indus- The French-Iranian deal also France the leader of an enry, building a subway system involved military sales. But the
n Teheran and perhaps other Shah said he could not give devSop Iranj^natural gas and
cities and construction of a gas details at this time, beyond transport it to Europe. France
liquefaction plant and pipeline. mentioning the purchase of a will also engage in further oil
exploration m Iran.
The nuclear deal includes the group of nst motor boats,
training of Iranian scientists
to Assure Passage
Shah Favors Nationalization
and technicians and the estab- Iran's purpose, he said, was
lishment of a nuclear-research not to become policeman of the, The Shah saiid at his news
nter.
<«m Persian Gulf, as has been conference that he would like
There was no public mentkm charged, but to assure open to see the whole oil business
of safeguards against using the passage through the Gulf and nationalized and then have inreactors as a base for making the Straits of Hormuz, which ternational transactions conductedon attate-to-statebasis.
nuclear weapons. The French control the southern entry.
Since,that does not seem feasij Foreign Office spokesman said
the agreemnt had implied safe- *lfcis is a matter of life and ble, however, he said, it is
death fqr us," he add, adding necessary to limit the comguards.
that Western Europfc and Japan panies" excessive profits.
Other ItMtles Signed
also had a vital interest in free He defended the dramatic
, The agreement provides that navigation in that area.
rise in oil prices, saying it was
both parties will respect President Valfcy Giscard no larger than in other comDTEstaing bailed the agreements modities such ad steel, cement
France has signed the
as a sign that "in international or wheat and had been made
Treaty, which prohibits dis- affairs, Iran and France have inevitably by inflation In indus[ semination of weapons or parallel attitude* since both in- trial states.
weapon-making capacity to tend to maintain their bide- "We're trying to defend ournon-nuclear powers, and Iran
selves against your rampant inhas signed and ratified the to cooperate in the advent of a flation," he said. "You tare
Nuclear Nonproliferation Treaty, new international order."
going to blow up, and youte
1 which calls for the safeguard Finance Minister Jean-Pierre going to blow Us up with ytota."
system of the International Fourcade, said the accords Paris put on a grand show for
Atomic Energy Agecny.
would mean "fabulous" earn- the three-day imperial visit The
Canada, however, is believed ings for French cojnpanies, highlight was a fete at Verto have hpposed these safe- notably Creuzot-Loire, which sailles, With dinner, ballet and
guards when selling reactors to will be tile prime supplier of fireworks to which, for the first
India and India has since con- the nuclear plants and of a time/ the public was admitted.
ducted an underground nuclear steel $30-mHlioti plant
The Shah and his Empress,
test.
President Giscard's spokes- who have visited two French
The Shah was questioned man M d oply contracts already nuclear centers, are remaining
about his intentions at the news signed or far-advanced" in in France for two more days ,
|
conference. He assested that negotiation were included in as "private visitoift^. .




137
From t h e W a l l

Street

Journal,

June

17,

1974

OPEC Talks Suggest Oil-Price Postings
Won't Change Much; Saudis Back a Cut
B y JAMES C. TANNER
Staff Reporter

I

of THB W A L L STREET JOURNAL

QUITO, Ecuador—The Organization of
Petroleum Exporting Countries will continue
deliberations today in an effort to reach a
compromise on petroleum prices for the
next three months.
Late last night, after OPEC delegates
completed a second day of deliberations,
there was little indication of what those
prices might be except that they aren't
likely to vary much from' the postings that
have been frozen at current levels since
Jan. 1.
'
Most of the 12 oil-producing countries
that make up OPEC and account for mqre
than 80% of the world's oil exports pushed
for an increase in petroleum postings for the
third quarter or, alternatively, higher taxes
on the oil companies operating within their
borders.
•/
'
But While OPEC delegates attending the
secret sessions denied a split had developed
over prices, Saudi Arabia is known to have
recommended a reduction In postings rather
than an increase.
In an interview, Sheikh Ahmed Zaki Ya<
mani, Saudi Arabia's influential oil minister, pledged: "We won't Join them in increasing prices or taxes."
Posted prices aren't true market prices




but are used by the producing country governments to circulate taxes paid them by
the oil companies. An increase in postings
means an increase in taxes. This, in turn, is
passed on by the oil companies to consumers. Thus, a change in postings is directly
reflected in prices paid by the world's oil
consumers.
To resolve their differences over postings, the OPEC delegates continued their
talks into last night. But Indications we^e
that the thorny issue soon would be settled
through a compromise.
Iran's interior minister, Jamshid Amouzegar, suggested p. decision was near. And
Saudi Arabia's Mr. Yamani w^s, planning to
leave today before the end of the meeting.
Many of the other OPEC delegates, however, plan to 'remain in Ecuador for the
week after concluding their deliberations.
The deliberations began Saturday in
Ecuador's legislative palace, little used except for international functions under the
country's military government. Because Ec- t
uador is the newest member of OPEC and 1
host for the meeting, delegates named Ecuador's minister of natural resources, Navy,
Capt. Gustavo Jarrin, as president. Replacing Mr. Amouzegar of Iran, Capt. Jarrin
will serve ail president until the next OPEC
meeting.
In other actions over the weekend, the
OPEC delegates:
—Appointed a seven-member commission to study, a restructuring of the OPEC
secretariat and statutes.
-Listened politely to pleas of representatives of Guyana, Liberia, Sri Lanka and
Nepal for more assistance to developing
countries burdened by the tripling of oil
prices within the past year.
-Turned down applications of the Congo
and Trinidad and Tobago for membership to
OPEC. The countries, however, were
granted "observer" status at the Quito
meeting along with Bolivia, Colombia and
Pefru.
After the price deliberations, the OPEC
delegates will take up further discussions
today of an OPEC development fund and' an
OPEC bank.

138
FROM THE CONGRESSIONAL RECORD, JUNE ?4,

F I N A N C I A L ASPECTS O » T
SITUATION

(By David Rockefeller)
I n the final quarter of last yew the Organization of Petroleum Exporting Countries
(OPEC) Increased the price of oil fourfold.
Given these price* and present level* of production. they will receive more than •100
billion yearly for their <41 exports. Of this
•100 billion, the oil-producing nations will
spend some HO billion for goods and ssrviosa,
leaving $60 billion or so of surplus to be invested. Total reserves of the oil-producing
nations are likely to exoeed $70 billion by
the end of 1974. $140 billion by OTS. and
$200 billion by the end of 1976. These huge
surpluses must of necessity be offset by corresponding deficits on the part of oil conThls suggests a structural disequilibrium
of major proportions in the balance of payments of countries around the world—ons
that could have serious implications for the
pluses of the oil producers must be recycled
bade to the deficit on consumers. I f recycling
does not occur, the oil consumers will bo
forced eventually to deflate their economies,
with severe worldwide consequences.
I n considering this recycling problem I t
is helpful to distinguish between the short
run—say the next year to 18 months and
the longer period. We already have soma
experience of recycling In the short run. The
first steaMe payments were made by the oil
companies to the producer nations I n March.
April, and May. and thus far they have been
recycled successfully—principally through
the International banking system. The oilproducing nations have been placing their
money mainly in the Eurodollar market or In
sterling. The banks have been the major
recycling vehicles, taking this, money on doposit. usually at call or on very J — '
turtty, and mending It to oilnations for periods at five to
This
far this year. $13 billion or
committed to industrial nations to help
cover their 1974 balance-of-payments deficits.
While this process oan be suoessTul for a
limited period oC time, them a n at least
four vary serious shortcomings to It, especially In view at the
First, the banks cannot continue Indefinitely to tain very short-term money and
lend it out for long periods. Second, and even
more serious, 1* the likelihood that banks
eventually will reach the limits of prudent
credit exposure, especially with regard to
countries where tt Is not clear how balanceof-payments problems can be solved. Third,
the oil-producing countries cannot ba expected to build up their bank deposits Indefinitely. They, too, will soon reach prudent
limits for individual banks or even for Individual nations. My own view is that the
process of recycling through the banking
system may already ba Close to the and tor
some countries, and in general It Is doubtful,
that this technique can bridge the gap for
aaore than a year, or at most 18.months.
Finally, this form of recycling is not even
a temporary solution, for lesser-developed
countries in a weak financial position—countries like India, Bangladesh, and Sri Lanka
which are not I n a position to borroy at all




Justments, of course, will gradually get trader way between the economies of the ofl
producers and the consuming nations. Prloes
may decline somewhat, and the oil producers
win step up their Imports and Increase the
speed at their own Internal development. But
in the Interim, they win be large accumulators of reserves. Moreover, countries such as
Saudi Arabia, Kuwait, and the united Arab
Emirates clearly lack Internal absorptive capacities commensurate with the Incomes they
will receive. On the contrary, one of their
major alms is to accumulate a body of invested wealth outside their countries which
will yield an Inoomo great enough to replace their oil revenue as I t runs out. Naturally they are concerned about such matters
as world inflation, exchange risks, and the
possibility of expropriation of their assets.
Though not yet large, long-term Investments by Middle Eastern countries In the
Industrial nations are beginning to build up
In real estate, selected securities, and some
direct investments In industry. Yet th« sums
requiring investment are so enormous, and
the Institutional facilities necessary to cany
this out so limited, that I question whether
such Investments will have much Impact on
the gap for some time to oome. All at this
clearly suggests that both the World Bank
and the I M F win increasingly bo called upon
to play key redes In the recycling process.
Iran, for instance, has already offered to
lend funds to the World Bank and IMF, and
. t i n to ^ ' ^ t
direct loans to ^ f f
^
others at oonoessionary rates to finance oil
Imports. Similarly, the raoently announced
willingness of the oil producers to establish
a $2.75 billion "oil facility" to help countries with balance-of-payments problems Is
a positive move, at least In the shorter term.
I tear, however, that this oan only be seen
as a modest first step when one
the magnitude of the fnnds that must be redistributed. If we arrive at constructive longrange solutions, i r techniques, si
a haw to ba 4
have to ba plaoed on International cooperation.

which would represent a basks* of
oles and hence neutralise the exchange risk
between major currencies. Perhaps this assat oottld play a cola In future invnslinut
plans at the ofl-producing nations, and. Indeed, it is assumed that It win ba part of the
now IMF "ott faculty." I t may also ba possible to work out International guarantee

Investments abroad—they could leave the oft
in the ground.
I t Is highly desirable that ways be found
to channel surplus ofl revenues Into projects
designed to create alternative souroea of energy. This would not only help the wortjl at
large, but would also provide a source of continuing revenues for the on-producing nations- after their oil reserves are exhausted.
Finally, tt Is Imperative that the developed
countries Join with the ofl producers to assist the less-developed countries. Unless there
Is a far more concerted effort In this direction. I fear that the result can only ba economic and political chaos.
Underlying aU of these requirements Is
the fact that we must come up with a means
at recycling funds on a far mom massive
scale than now possible. Soma argua that we
should simply wait foe the fames at supply
and demand to bring prioss down and thereby create a new structural equilibrium.
lam. While there is some validity to both

1974

of these positions, I believe we must also
be aware of their limitations. First of all, inflation has little hope of answering the problem since the purchases of even the largest
oil producers are so relatively smalL Second,
X fear that relying solely on supply and demand can have disastrous results for many
nations—leading to disruptive unemployment and depression.
Creating a mechanism to handle recycling
of this scale and to determine acceptable
concessions and rides is exceedingly difficult.
Perhaps the mission of the I M F could be expanded In this direction, or perhaps it would
be beet to create a separate vehicle so as to
avoid burdening the IMF with the dual responsibility of policing monetary affairs and
curbing unemployment. Whatever the means,
I believe it Is imperative that we develop
—
a new way at looking at world flnah-

appears that production is i
somewhat ahead at oonsun^ti
on prices could very well

, be large enough to solve the
recycling problem. Indeed. I would guess that
we would need a price reduction of some 40%
or 80% to produce anything close to * new
structural equilibrium. Thus we have no
choice but to free the recycling challenge
and, tn cooperation with the oil produoers,
to dsvtsa the Institutional arrangements necessary to cope with It.
The suuuussful creatkm of such mechanisms wfll ba highly dependent on the political climate. The Mlddft East countries,
by reason of a shift of wealth and resources,
are entering a new period I n which their
- -"teal lnflu ~
- " • -.tit, wffl I
At the same time, the new wealth of the
is likely to strengthen the hands
of moderate t
orient them i
XT sustained, this trend toward moderation
may well ba a highly desirable and significant
political dividend. I t will also be essential In
assuring the stability that must underlie an
orderly approach to the redistribution of
. International capital.
Qiven a dear realisation of the Interdeof an the nations Involved. I bean find ways to transform the problem of surplus capital tn the hands of some
nations Into many positive opportunities for
grass and development worldwide. But
i wtn not happen by itself. I t wffl demand
the invotvment and dedication of both the
public and private sectors on a scale tar exceeding that which exists now. Above aU. It
must Involve a degree of global teamwork
which we have not seen up to this point. I f
the nations of the world approach the.energy
to hope that It oan ba use
catalyst and a rallying point for" a i




139
FROM THE NEW YORK TIMES, JUNE 10,

1974

Oil Fueled U.S.-Arab Tie
But Milestone Pact Has Given Little
Glue to Future ior Prices or Output
By LEONARD SIElC
bo^
$tabl$ ,e£opomic
t h S t S S V n r nfifitali
growth and to WQrld moneagreements reached this past' tary order.
weekend between the United
Yet there was no evidence
States and the Saudi Arabian that anything tangible has
Governments was oil. But oil yet been agreed to by the
Saudis regarding the future
was the catalyst that precipiprice or volume of oil productated this new "special rela- tion. In an interview, Prince
tionship" between the Saudis Fahd Ibn Abdel Aziz, Second
and the Americans.
•Deputy Premier and halfFrom the Aral*! stand- brother of the king; said, "we
point, ,the most faf-feaching wish the price of oil to go
result of the October war was down." But neither the
-the discovery of oU as a po- prince, who was the chief
litical weapon. Despite the negotiator here, nor any of
shock of the economies ofHhe his ministers present would
United States, Western Eu- indicate just how lower oil
rope and Japan, the oil weap- prices might come about.
Hisham Nazer, the Minister
on is leading to decisive
changes in the bilateral rela- of State for Planning, inditions between the rich indus- cated that the Saudis-intrial countries of the West tended only t^ fty to persuade
and the Middle Eastern oil other member governments
producers. The United States of the Organization of Peagreement with $a*idi Arabia troleum Exporting Countries,
may be the lcey to a series who wiH meet in Quito,
Ecuador this %eek, to lower
of similar pacts.
From the Americans' stand- oil prices. But Saudi Arabia,
would not act
point, access to oil in ade- he added, to reduce its. own
unilaterally
quate volume and at lower price.
prices is regarded -as crucial
Asked why Saudi Arabia
did not increase its oil productiqp as a me4ns of putting
greater pressure on world oil
prices, Mr. Nazcr said his
country was already producing more than it should,
given long-hm needs to conserve oil resources. He said
that if Saudi Arabia were
prepared to break with its
partners—which it is not—
if would simply reduce its
to Saudi Arabia, James Akins,
who was at a party ^t the
Saudi Embassy in Washington last Friday nigiht, said
Saudi Arabia is already producing nine million barrels of
oil a day and that its fullcapacity production was only
9.2 million. The. American
hope in the negotiations was

140
NEW YORK TIMES

MONDAY, JUNE 10, 1974

Oil Pact Gives Little Clue to the Future for Prices
to induce the Saudis to increase their capacity and
daily output over the longer
run, Mr. Akins indicated.
The atmosphere among the
Arabs at the Saudi Embassy
was* close to euphoria last
weekend. Prince Fahd, who is
considered the most likely
successor to the Saudi throne,
said he was delighted with
his trip to the United States
and thought it had been "ve'ry
successful." He said he found
Mr. Kissinger*"brilliant" and,
referring t orecent changes
in American policy toward
the Middle East, the prince
added, "Mr. Kissinger should
have done it sooner."
There was a great throng
of top American Government
officials—virtually the whole
inet—-present at the Saudi
top layer of the Nixon CabArfbian Embassy, together
with many private American
bankers and industrialists.
Said one American banker:
"Fantastic — imagine it, the
great of the world coming to
kowtow to the Arabs."
A Second Weapon
There was little reference
to what the Arabs wjll do
with, the billions of dollars
they are receiving for their
oil. However, there is general
recognition that the oil
weapon has given birth to a
second bargaining weapon
that may inspire as great repect as oil among the Western officials and financiers.
Salah al-Din al-Bitar, a
former Syrian Prime Minister, has suggested that the
Arbs now Have a second
weapon, the'money weapon.
If billions of dollars of Arab
money were to be withdrawn
from European banks, he has




said, this "would' give rise tion, manpower and educato an unprecedented financial tion, technology, research and
crisis in most Western development, and agriculture.
countries."
The Saudi-American agreeHowever, the Saudis them- ment seems more cautious in
selves appear adverse to suggesting that the joint
risking any such world mone- commission will seek ways to
tary crisis. That is.why they encourage cooperation in fiare virtually alone among nance—4he area of-greatest
the oil-producing countries in interest to the private investfavoring lower oil prices,
ment community in this
However, Western finan- country.
ciers and businessmen do
However, Prince Fahd, like
not let them forget the his half-brother the king,
power and 'attractiveness of seems far more concerned
their vast and rapidly-grow- about political stability in the
ing supply of oil dollars. Middle East, the "rights" of
The Arabs are receiving the Palestinian Arabs, anjl
more proposals for what access to the Arabs' holy
they should do with their shrines in Jerusalem.
money than they can
Basic U.S. Policy
quickly evaluate and process/
They appear to be in no
Yet the Saudis appear to
huiry to do so. They insist be moving, without being
their priorities are, first, to willing to say so explicitly,
assure the security of their toward some sort of accomcountry; second, to promote modation with Israel.
its economic and social deIn praising Mr. Kissinger's
velopment and, third—appar- diplomacy, and celebrating
ently a poor third—-to expand their own success in achievtheir long - range foreign ing^ new relationship with
investments.
2 Joint Commissions
The pacts they have negotiated With the Americans
reflect these .priorities. They
have set up two joint commissions on security and
economies. The security commission will be headed by
Robert F. Ellsworth, who left '
his post as President Nixon's ,
Ambassador to NATO to join 1
Lazard Freres, the invest- '
ment banking concren, and
has now rejoined the Administration as Director of International Security Affairs at
the Pentagon.
, The joint economic com- 1
mission, which will be headed
by Secret ary of the Treasury i
William E. Simon, will work
on programs of industrializa- ;

the United States, the Saudis
appear to accept the basic
United States policy line;;
enunciated last November by
Mr. Kissinger
"We have a special relationship with Israel an4, we
are committed t > protect her
x
security, and we believe
that Israel's security can.
only be protected by respect
for your sovereignty. If we
have a special relationship'
with Israel,, we do not regard
it as incompatible with the
friendship we want to promote and consolidate with
you . . . what we want is
that the peoples of this area
should build their own system of life and security in
conformity with what they
see fit and in harmony with
world facts."
The new Saudi-American
agreement of this past weekend appears to represent real
motion in that direction.

141
N o t e : T h i s i s f r o m " I n t e r n a t i o n a l F i n a n c e " a b i - w e e k l y p u b l i c a t i o n o f Chase
M a n h a t t a n B a n k , June 3 , 197^*

W o r l d Payments Problems i n 1974 and 1975
Higher oil prices have thrown a financial monkey
wrench into the world economy, with an unprecedented impact on the current account of the balances
of payments of both the oil-producing and the oilconsuming countries. The current account includes
the basic non-capital items in a nation's balance of
payments—the import and export of goods, and receipts and payments for services such as tourism,
shipping, and insurance. I t is generally a good indicator of the state of a nation's external financial health.
Forecasts of current account deficits also give a rough
idea of external borrowing requirements, since the
size of any country's deficit can only be as large as the
total that can be financed by capital inflows—including borrowing abroad—and the drawing down of foreign reserves.
The problem of massive oil-related current account
imbalances w i l l not last forever. As higher prices induce greater conservation in energy use and the development of alternative energy sources, oil imports
w i l l eventually put less of a strain on nations' payments accounts. But in the meanwhile, the importing
countries' deficits w i l l pose a major problem of world
financial adjustment.
Clearly, this year and next are critical. According to
latest estimates, the oil producers will achieve an
aggregate current account surplus of roughly $60
billion in 1974 and again in 1975. This compares with
a combined surplus of $4.6 billion in 1973 and only
$1.6 billion in 1972. Saudi Arabia is setting the pace
for the major oil producers, with its current account
surplus projected to soar from $2 billion last year to
$17 billion in 1974. I n second place, Iran's surplus is
expected to grow from $200 million last year to $11.5
billion this year. Other producers w i l l show smaller
—but still very substantial—gains in 1974.
Future surpluses w i l l enable the oil-producing
countries to increase their financial assets—their claims
on foreign resources. Over time, these countries w i l l
utilize their financial assets to purchase more goods
and services from the oil-consuming countries. But
during the next two years, none of the oil producers
can effectively absorb the huge increase in imports
that would be required to balance their current accounts. Even in those countries that have the potential, the Texperience, and the institutional framework
for undertaking import-using development projectssuch as Iran and Venezuela—it w i l l be at least two
years before a substantial volume of funds can be
spent effectively. I t takes time to undertake feasibility




studies, to select projects, to develop engineering plans,
and to order and receive equipment from abroad.
Therefore, in 1974 and 1975, the main problems posed
by the recent oil developments for the producing
nations will be financial—in which countries or markets to place their rapidly accumulating funds, which
intermediaries to use, which financial instruments to
select, etc. Later, there will be the economic problem
of transferring real resources from the oil-consuming
to the oil-producing countries.
Of course, oil-producing nations can record current
account surpluses only if the oil-consuming countries
run an aggregate deficit of equal magnitude. Close
to $40 billion of this deficit, or two thirds, w i l l be
borne by the developed countries, and the remaining
$20 billion or so by the less developed and socialist
countries. Britain w i l l face the largest current account
deficit—about $9 billion—this year, followed by $6
billion for Italy, $4 billion for France, $3.5 billion for
Japan and $3 billion for the United States^ Germany
should post a current account surplus of some $3 billion this year, due to continuing strong foreign trade
and a relatively moderate rate of inflation.
The current account deficits expected this year and
next could be met, to some extent, by the drawing
down of reserves. However, most countries have moderate or minimal reserve holdings. Thus, in 1974 and
1975, the main problem facing most oil-consuming
countries w i l l also be financial—how to finance their
very large current account deficits. A number of these
countries have already succeeded in obtaining financing from foreign private banks—the so-called balanceof-payments loans. But the more that any one country
borrows, the more difficult it becomes for that country
to obtain additional financing. Also, there is an overall
limit to the volume of funds that private financial
institutions will want to recycle—especially if the
process involves converting short-term borrowings into
longer-term loans.
Large current account deficits are expected to persist through 1975 and probably throughout most of
this decade. This makes the world financial system
highly vulnerable to disturbances. If any important
financial institution becomes over-extended, or if one
country is unable to repay its financial obligations,
or if one key country seeks to improve its current account position at the expense of others—through trade
controls or deliberately depressing the external value
of its currency—then all countries and their financial
institutions may be in difficulty.

Richard H. Kaufman

142

Saudis Agree to Buy
Large U.S. Special Securities Issues
By JOHN 6ERRITY

THE MONfY MANA6EH

JUNE 17. WW




WASHINGTON—Much more is riding on
the success or failure of President Nixon's
unprecented visit to four Arab states than
the mere erasure of tarnish from M r . Nixon's
political image at home, as many of his
critics have hinted or openly charged.
Perhaps the most delicate diplomatic accomplishment hanging in the balance, that
will be determined in the final assessment
of the President's dual journeys to the Middle East and Soviet Russia, is the new
"special relationship" accord reached between the United States and Saudi Arabia,
the world's largest exporter of oil.
A key feature of this aecord, the "Money
Manager" learned last week, is a proviso
whereby the United States will play a very
dominant role in the so-called "recycling"
of vast amounts of new oil revenues by absorbing perhaps as much as $10 billion of
the Saudis' heavy cash accumulations annually through the sale of new, possibly gold
backed, "special issues" of U.S. Government
securities to Saudi Arabia.
The accord, with its special proviso for
a U.S. Government securities swap for excess oil revenues was reached on Saturday
morning, June % at a formal signing ceremony at the State Department.
The principal' figures in the ceremony
were Secretary of Sttite Henry Kissinger and
Prince Fahd Ibn Abdul Aziz A1 Saud, regarded by Middle East experts to be the
second most important map in Saudi Arabia.
State Department and Treasury officials
refused to discuss specific details of the
securities-for-oil swap deal, such as whether
the Government's "special issues" may or
may not be gold-backed, rates of interest to
be paid, maturities, and so forth.
Neither is there any confirmation of an
absolute "fix" or "ceiling" on the total
amount the United States may issue in special Government securities, to help drain off
currency accumulations Saudi Arabia would
acquire as a result of the 400% increase in
crude petroleum prices at the peak of the
fuel crisis earlier in the year.
Of the total increment in oil revenues to
Middle East countries, estimated generally
to be about $50 to $60 billion, approximately
one half, or $25 to $30 billion, would accrue
to Saudi Arabia as the largest exporter of
oil in the world.
I n light of other international monetary
Continued




ARAFRBMF
developments last week, most notably
new gold arrangement contrived
%y the Group of Ten Industrialized
"Countries to help bail Italy out of
iter economic troubles, the possible
future use of gold-backed special U.S.
Government Security issues to help
<soak up an over-abundance of cash
Concentrated in a single country, is a
development that's bound to generate
Imaginative reactions and conjurings.
Just prior to the formal accordSigning ceremony, P r i n c e F a h d
stressed to both President Nixon andlo, Secretary Kissinger that longrange development of good U.S. relations with Arab world would be
"contingent" upon further Israeli
Withdrawals from Arab-claimed lands.
" Additionally, the U.S.-Saudi Arabian agreement provides for the U.S.
recognition of Palestinian "national
rights".—a neat diplomatic phrase,
which means simply the ultimate
establishment of a Palestinian state
op the lands now occupied by Israel's
forces in the west bank of the Jordan
River.
The President's visit to the Middle
East counties, in effect, certifies his
personal involvement in the general
Agreement aimed at strengthening.
economic ties between the U.S. and
the Arab world.
Too much stress has very probably
been placed on the assumption tihat
the U.S. might beeome "militarily involved" in the Middle East, according ip'one State Department official.
;
"This is especially so," he said, "in
view ofthe erroneous interpretation
that some attached to a $100 million
*ftpecial requirements fund' provision
in the Pfesident's $6.19 billion fiscal
1975 fowigs aid pregxsm."

Secretary Kissinger explained to
both House and Senate Foreign Affaire Committees that, while some of
this $100 million "special requirements fund" might be given to Syria
to help rebuild war-damaged areas,
particularly the provincial capital of
Quneitra, no "hard commitment" for
such aid was made as part of the
peace pact ending, the seven-year war
between Israel and Hie Arab republics.
Obviously Egypt, Syria and Jordan,
as well as Israel, which will share in
the (proposed $907.5 million aid program for the area* "welcome the

new: compact will prove to be somewhat overblown.
But there can be no masking the
fact defense pacts are not sufficient
at this juncture of history. Of far
greater importance 'is the economic
assistance that can be made available,
pins, Of course, the extent to which
the United States is able to fill the
void left by the withdrawal of Soviet
Russia support for Arab states.
In all of this delicate maneuvering,
the President's role and presence is
important, and significant—and is not,
as some have asserted, an exercise in
"political barnstorming," calculated to
offset political damage caused by the
Watergate affair.
The Uftiterf State*
Certainly, the President will draw
political refurbishing from hia Middle
Sagdi Affrftw t j r p t i f Bf
East visit and: his summit meeting in
Soviet Russia, that begins on June 27.
proTUesftrfoeHS.
But whatever personal gains lb*
recognitor $f Mestiatat
Nixon makes on the home front, they
are regarded as "ancillary" to the
"Batfowl rights."
larger achievement of new and vigorous links between the United States
prospects of U.S. aid flowing in," the and the Arab world.
State Department official said.
Moreover, Mr. INixon's direct parOil-rich Saudi Arabia, which has ticipation in this new and highly senlong nurtured strong pro-U.S. sym- sitive venture into geopolitics is conpathies, is, in a very distinct sense, sidered a very important element in
"special case to be regarded in a winning the necessary Congressional
special manner."
support for his world-embracing dipThis separate-but-contingent rela- lomatic endeavors.
tionship, is rooted in the simple fact
But the excitement provoked by any
that Saudi Aaabia wants U.S. tech- securitiea-for-oil agreement is subject
nology and commitments for .markets to some serious caveats.
to help industrialize that desert kingThe U.S.-SaUdi Arabia accord, no
dom.
more and no less than any other
Indeed, according to the State De- agreement the United States might
partment, increased American eco- reach with a foreign country is, in.
nomic involvement in the MiddleEast the final analysis, a treaty, subject
was always considered to be a key to ratification by the Senate.
component in whatever new diplomatic
There's no gainsaying the fact that
relations might evolve between the
the President's massive foreign aud
U.S. and the Arab states.
program—to say nothing about such
It may be that expectations of far-rmdmc "apodal arrangements"
benefitsflowing-to both sides in the as that with 8aadi Ar»6i*-**m ran

into some tough questioning and opposition in Congress. "I'd like to know how far thest
commitments go," said Cong. H. R.
Gross, R-Iowa, with respect to the
overall, agreements' resulting from.
Mr. Kissinger's Cairo-to-Damascus
diplomatic junketing. "I am waiting
to see' all of the commitments that
fiaye been made in the'Middle East.
Echoing a similar belief that the
President and Mr. Kissinger face a
tough selling job with Congress "under the best circumstances," Peter
Frelinghuysen, R-NJ., said "if .experience is any guide, some severe slashing will be made" in the total dollar
request.
Senator Barry Goldwater, R-Ariz.,
one of Mr. Nixon's most stalwart
backers throughout the entire Water*
gate matter, waa even more outspoken
on his personal hostility to any aid
that might be given to Syria.
Senator Goldwater sharply criticized t h e "Special Requirements
Fund" as an aid program "inappropriate to a country we have never attacked, never been particularly
friendly to, Mid whose aid we have
never particularly sought."
The Arizona -law-maker added that,
in his judgement, "it was time for a
long, thoughtful discussion" of U.S.
foreign aid programs, which he suspects have "been largely failures
from their beginning."
Besides these sorts of obstacles,
there's an. undefined mass of opinion,
especially in the House of Representatives, that balks at the notion of the
U.S. rendering economic assistance to
the Arab fttates, which together with
Venezuela, were largely responsible
for the fuel crisis and inflated oil and
gas prices.
- "It jnst doesnt mike sense to me to
have the United States subsidizing
C i i i h m — Mat page




144

Arab Peal
rO>fctfnu«d

from preeediag page

its <yonomie enemies," one member
of the House Foreign Affairs Committee said.
Committee Chairman Thomas R.
Morgan, D-Pa.. a long-time hacker of
foreign aid programs through Republican and Democratic administrations
alike, voiced s«m« similar concerns.
After a Jong, ol<wed-door session
with Secretary Kissinger, chairman
Morgan emerged, shaking MB head
thoughtfully, to aay to reporters that
he had some "serious reservations"
about the entire aid program for the
Middle E*»t.
It was just because of *ueh comments and fears as Mr. Morgan expressed that Secertary Kissinger went
to some pains to repeat on several occasions that he would "consult
closely" with Congrasa on all specifics
such as the Saudi Arabian accrd, the
proposed 1350 million military aid
scheduled for Israel, the $207.f. million
military and «-conumic aid for Jordan
and the $25<> milHon economic aid
program for Egypt.
Consequently, it can be taken for
granted that, si nee the a>.vord involves
the issuance of new instruments of
Federal Government dvbt, the Senate
Finance Committee, as well as the
Senate Foreign Relations Commit t.-v,
will sihare in the pre-ratiflcation
process.
In that sort of environment, close
questioning an-l fairly intense surveillance can be regarded as matters of
fact, which won't be dealt with
casually.
•




145
THE WASHINGTON POST

rrUv.Mv3.mi

Saudi Arabia Could
Buy Into Oil Companies
Reutar,
. '
• ""
NEW YORK, May 2—Any <»n buy oiir stock, IncludiHg
Saudi Arabian interest Jn Skudi Arabia."
buying into four; giant Amer- . One administration offiican oil companies faces lit- cial saidthat the governtle opposition, according to ment cofctd oppose the purchases on grounds of nagovernment and industry tional security, but even
sources.
that seems unlikely at the
U.S. laws, designed to pre- moment.
•*
vent companies from lessen"Since those companiefing competition, "never envisioned direct government sell fuel to the Defense D&*
purchases," a top Justice partment and have other
Department official said to- government contracts, thecf' J
retically, a foreign governday.
ment in control would cei*'
Deputy assistant attorney tainly not be in, our best tis-'j
general Keith Clearwaters terests," the official said."
pointed out teat present an- "Out since this is aU so hisT
titrust laws apply only to pothetical us doing anything:
cant see at any rate, %
corporations, pot to- coUn- abput it yet".
'
tries, which, In theory at
If the Saudis actually go"
least, would give the Saudi ahead with the stock buyirifc"
government a free hand.
plan the cost would be enor* *
Two newspapers in Ku- njous, even for a country
wait reported yseterday that that could earn $20,000 milthe Saudis are interested in lion this year from selling,
buying large stock intei*sts oil.
*
in the four Ajnerican partExxon alone has close tp
ners of the Arabian Amerl- 250 million shares issuM
can
Oil, '' Company selling for about $80 each.
(ARAMCO)—Epxon CorpoJust to bpy a 5 per cefit,
ration, Texaco, Mobil Oil interest in Exxon—2' per
and Standard Oil of Califor- cent more than the amourit
nia.
held by. Chase Manhattan •
Spokesmen /or the four Bank, the biggest owner < f »
ac «
companies declined to offer preseni>T-the -Arabs would,;
any confirmation of the re- have to pay in the rfeighba^V
ports, but an Exxon official; hood of $1 billion,stoeTmat, '
•lid "Anyone who wants ket encysts estimate.

146

CHAIRMAN OF T H E BOARD O F

GOVERNORS

FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551

June 1 9 ,

1974

The H o n o r a b l e Henry B . G o n z a l e z , Chairman
Subcommittee on I n t e r n a t i o n a l F i n a n c e
Committee on B a n k i n g and Currency
House o f R e p r e s e n t a t i v e s
W a s h i n g t o n , D . C.
20515
Dear M r .

Chairman:

Thank you f o r your l e t t e r o f May 2 9 , r e q u e s t i n g my comments on
r e c e n t developments i n t h e p e t r o l e u m m a r k e t .
I s h a r e your v i e w t h a t t h e r e c e n t a c t i o n s o f OPEC c o u n t r i e s i n
m a n i p u l a t i n g p e t r o l e u m shipments and p r i c e s a r e h a r m f u l t o t h e
i n t e r e s t s of the United S t a t e s .
I n d e e d , by weakening t h e i n t e r n a t i o n a l monetary system, OPEC c o u n t r i e s a r e a c t i n g a g a i n s t
t h e i r own b e s t i n t e r e s t s as w e l l .
For t h e l o n g e r - r u n , I see no v i a b l e a l t e r n a t i v e t o a r e d u c t i o n
i n the p r i c e of petroleum.
The l o n g e r t h e p r e s e n t p r i c e i s
m a i n t a i n e d , t h e more i n t e n s e w i l l become t h e economic f o r c e s
operating to modify i t .
Most c e r t a i n l y , a l t e r n a t i v e sources
o f energy w i l l be d e v e l o p e d and c o n s e r v a t i o n i n energy use
increasingly practiced.
An i m p o r t quota scheme, such as t h e one P r o f e s s o r Adelman has
s u g g e s t e d , has s e r i o u s l i m i t a t i o n s . A quota i n i t s e l f w o u l d ,
i f s e t a t a low enough l e v e l , r e d u c e our energy i m p o r t s .
Howe v e r , u n l e s s energy c o n s e r v a t i o n t e c h n i q u e s and expanded d o m e s t i c
energy p r o d u c t i o n were a l r e a d y i n p l a c e , cutbacks i n our energy
i m p o r t s c o u l d s u b j e c t our economy t o s e r i o u s s t r a i n s .
Furthermore, s i n c e such a quota system c o u l d be i n t e r p r e t e d by t h e OPEC
n a t i o n s as an a g g r e s s i v e a c t on our p a r t , i t m i g h t s e r v e as a
r a l l y i n g point for t h e i r c a r t e l .




Sincerely

yours

Arthur F.

Burns

147
"3***.% £

Hfli

Burden of Oil Money Worries Bankers
By EDWIN L. DALE Jr.
SpcaUl to The Nw Yoffc Timet
e
WILLIAMSBURG. June
Two leading Bankers expressed
deep reservations today over
how long the international
banking network could carry
the burden of recycling the
vast flows of money resulting
from the huge jump in
prices.

remarks were summarized later.
The one Arab speaker at the
conference, Edward C. Awad,
technical manager of Petromin,
the Saudi Arabian oil agency,!
told reporters that he generally
agreed with the diagnosis of the
bankers—that short-term recycling would only create a
"false financial atmosphere"
and was not a long-term soli)-;
tion.

At issue was the channeling
But he had nothing to proback to oil-consuming coun
pose on a longer-term investtries of the tens of billions of
ment strategy for oil-exporting
dollars that have begun to flow
countries, saying only that "it
to a small group of oil-producis a question of education" and
ing countries, particularly Arab
that general policy had not yet
nations with small populations.
been established.
The forum was a session toAccording to the summary of
day of the International Monethe meeting, none of the extary Conference here, which
perts expressed the hope that a
brings together bankers and
drop in the price of oil—even
government officials from the
though some decline was possiUnited States, Europe and Jable—would be sufficient to
pan.
solve the financial problem of
The doubts about the ability
the vast flows of funds to oilof the international banking
producers.
system, including the Eurocur- director of the Deutsche Bank Giving new estimates, Mr.
rency markets, to handle the of West Germany.
Rockefeller said total monetary
problem for more than about Mr. Rockefeller made public "reserves of the oil-producing
another year were expressed his address, although the ses- nations are likely to exceed
by David Rockefeller, chairman sions of the conference are $70-billion by the end of 1974,
of the Chase Manhattan Bank, closed to the press. Mr. Guth's $14Q-billion by end-1975 and
and Wilfred Guth, managing
$200-billion by the end of
1976."
He added that "these are
staggering amounts" and said
they "could have serious impli-j
cations for the world economy1
and international financial
mechanisms."




The payments to the oil
countries have only just begun,
Mr. Rockefeller said, and "thus
far they have been recycled
back successfully—principally
through the international banking system." But he cited four
reasons for his doubt that this
could continue beyond "the
next year to eighteen months'
f"The banks cannot continue indefinitely to take very
short-term money and lend it
out for long periods of time."
This concern was also expressed at a session of the conference here yesterday.
f'Banks
eventually will
reach the limits of prudent
credit exposure, especially with
regard to countries where it
is not clear how present balwc^f-payments problems can
3 "The oil-producing countries cannot be expected to
build up their bank deposits
indefinitely. They, too, will
soon reach prudent limits for
individual banks or even for
individual nations."

q'This form of recycling is
pot even a temporary solution
for lesser developed countries
in a weak financial position."
He mentioned such nations as
India and Bangladesh "which
are not in a position to borrow
i t all in commercial markets."
Mr. Rockefeller, injured in a
fall in Taiwan last month,
moved about with aluminum
crutches, but otherwise seemed
in good condition.
Emphasis on Credit
Mr. Guth also emphasized
the problem of creditworthiness
—that private banks could not
go on making loans to governments where thfc prospect of
repayment was dim because of
a continuing deficit in national
balance of payments. Payment
deficits reduce monetary reserves and thus the means Of
repayment
At an earlier session today
on the general problem of world
inflation Herbert Stein, chairman of President Nixon's Council of Economic Advisers, argued that the "fundamental" or
"traditional" means for curbing
inflation—control of government spending and deficits, and
restraint on the growth of
money and credit—had not
failed in recent years but rather
had not been sufficiently used.
"Our own history of accelerating inflation in the past decade," he said, "certainly is not
the history of a vigorous end
unsuccessful adherence to the
old-time religion."
Mr. Stein cited figures on
large budget deficits and large
increases in various definitions
of the nation's money supply
ovnr most of the period since
1965 to back up his point

148
THE HEW YORK TIMES

June 3, 1974

Oil and the Cash Flow
By C. Fred Bergsten
Second, the prophets of doom conWASHINGTON—Arab oil earnings
will rise by $65 billion this year, the fuse the balance of trade and the
amounts will get even bigger in fol- balance of payments. They ignore the
lowing years, the balance-of-payments simple but central fact that the oil
positions of the consuming countries exporters must invest in the industrial
will plunge into the abyss, the inter- world any of their increased earnings
national monetary system will col- that they do not spend. The Arabs
lapse, the Arabs will buy up all our will not bury the money in the ground.
companies—so goes the refrain heard Thus, there can be no deficit in the
frequently since the dramatic increase balance of payments of the industrial
world as a whole.
in oil prices in December.
There are indeed extremely serious * To be sure, the flow of money from
the Arabs will not necessarily go to
consequences of the oil crisis:
individual industrial countries in
Inflation has spiraled upward; re- amounts that precisely match the decessions are possible if governments cline in the trade balance of each.
mistakenly cut back aggregate de- Some industrial countries may wind
mand to cope with shortages of
up with a sizable surplus; others may
supply; countries producing other raw have deficits.
materials have been encouraged to
But this problem is solvable solely
emulate oil exporters; a few of the through action by the industrial counpoorest countries will suffer serious tries themselves to recycle the money
deprivations, and political tensions de- to where it is needed. Much financial
riving from the energy problems recycling will take place through norcould intensify among countries.
mal market forces. Some can be
But the international monetary situ- handled by government borrowing in
ation adds relatively little to the prob- the private capital markets.
The Eurocurrency markets — those
lem. No industrial country will go
that lend a variety of currencies from
bankrupt. The monetary system will
European centers—have grown as rapnot collapse. The prophets of financial
idly in several past years as they will
doom simplistically compare the increase in each country's oil bill with have to grow now, and the United
States capital market is now fully
its existing monetary reserves. They
available with the abolition of connote that United States imports will
rise by $15 billion and that its reserves trols. Together, they can handle the
vast bulk of the money on their own,
are $12 billion, and conclude that the
and are in fact doing so even as the full
United States cannot pay—even for
amount of the higher oil earnings is
one year.
now being invested.
Such observations are absurd. First,
they ignore that a sizable share of
The rest of the money can move
the increased earnings of the oil-exporting countries will be spent on im- , through such existing intergovernmenports from the industrial world. Some tal institutions as the swap network
among central banks and the Interoil countries will spend virtually all of
national Monetary Fund. Indeed, such
their increased earnings themselves;
backstopping will be needed for any
all are rapidly revising their developindividual borrowers whose creditment strategies and military plans to
worthiness comes under doubt in the
do so. Some will lend their monev to
private market. But Italy is the only
others who will quickly spend it.
such case to date.
So even the trade balances of the
industrial world will not decline by
In any event, no special cooperation
more than, say, half of the increase
with the oil exporters is needed in
in its oil bill this year. Those trade
this area. It helps for the International
balances will be even better in subseMonetary Fund to borrow from them
quent years, as any further increases
to help finance members' deficits, but
in oil countries' earnings are more
there is no reason to give the oil exthan offset by their increased imports.
porters better terms than other lenders.
Indeed, the United States appears to
Doubts are sometimes raised about
have already reached its new plateau
the plausibility of such smooth hanof oil imports in April at an annual rate dling of the oil money. First, it is feared
of $27 billion), but there was a surplus that the money, like th6 oil itself, wm
in over-all trade as exports reached an be "politicized." But it is highly doubtannual rate of almost $100 billion.
ful that .the Arabs will try to promote
monetary instability by shifting their
funds from place to place. Once invested, the very size of the funds
will make it increasingly difficult for
the Arabs to liquidate quickly without incurring substantial losses. If they




were to make such shifts, the money
could readily be recycled through the
swap network.
Second, it is argued that some industrial countries may be unwilling to
accept the needed shift in the structure of their balance-of-payments positions. It is certainly true that all of
their trade balances will deteriorate
and be offset by increases in capital
inflows. But such a situation might
well be sustainable indefinitely since
the capital inflow will by definition
continue as long as the trade imbalances do. And it is certainly sustainable for the interim period until enorgy conservation and the development of new sources of oil and
alternative forms of energy are
brought into play to change the energy
situation to its roots.
Third, some industrial countries
fear that many of their companies will
be taken over by the oil producers.
They need not. Most of the oil countries will soon find, ways to spend
most of their income on goods and
services. And since they have decided
to nationalize most of the foreign business concerns within their boundaries,
they are quite unlikely to seek majority control of firms within the
boundaries—and legal jurisdiction—of
others. Even if they wanted to, they
do not have the manpower to exert
much effect on the operations of very
many firms anyway. So the present
pattern of diffused and highly liquid
portfolio investment in a wide range
of financial assets is likely to persist.
Finally, the proposed solution to
the monetary problem requires the
industrial countries to agree on at
least a broad pattern of exchangerate relationships among them, around
which the financial flows can be recycled. It will be tricky to reach such
agreements, which amount to taking
oil out of each country's balance of
payments for the purpose of determining exchange rates.
However, there was already evidence of progress toward such agreements before oil prices soared. They
atfe a necessary component of any
stable monetary system for the future,
and were thus already at the top of
the agenda for monetary jeform. And
history clearly shows thamhe alternative of competitive exch|nge-rate depreciations will not work.
v
It seems clear from the series of
official pronouncements on the subject
that all countries have recognized
these facts and that this latest crisis
—like most/past crises—will speed
rather than derail needed monetary
reform. There is good reason for confidence that the mistakes of the nineteen-thirties and the nineteen-sixties
can be avoided in resolving the latest
international monetary crisis.
C. Fred Bergsten is a senior fellow
at the Brookings Institution.

149
FEDERAL

ENERGY

OFFICE

W A S H I N G T O N , D.C. 2 0 4 6 1

JUN 2 0 1974
THE

ADMINISTRATOR

Honorable Henry B. Gonzalez
House of Representatives
Washington, D.C. 20510
Dear Mr. Gonzalez:
Thank you f o r your l e t t e r of May 28, 1974, i n which you
discuss Professor Morris Adelman's proposal f o r an o i l
import quota system to c u r t a i l the c a r t e l power of the
Organization of Petroleum Exporting Countries, and h i s
ideas on the r o l e of o i l companies.
Professor Adelman's suggestion that the US Government
should r e - e s t a b l i s h o i l import quotas, with quota r i g h t s
to be auctioned o f f by d i r e c t , sealed competitive bids
to o i l producing nations eager to gain access to the
US market, raises a number of questions.
Professor Adelman's theory that producing countries eager
to get access to the US market w i l l submit lower bids,
produce more crude, and thereby force down o i l prices,
neglects several points. F i r s t , i n a s e l l e r ' s market f o r
o i l , the OPEC countries are free to s e l l t h e i r o i l to more
than one prospective buyer. I f the US i s unwilling to
purchase t h e i r o i l , other countries may buy i t a t r e l a t i v e l y high prices. Most, i f not a l l , members of OPEC
would probably not favor a program that would increase
t h e i r own r i v a l r i e s .
Because of the small number of members (11) of the o i l
producers' c a r t e l , i t would be d i f f i c u l t to protect the
secrecy of the bids submitted by the producer countries.
Indeed, the national o i l companies of the producer
countries would f i n d i t i n t h e i r i n t e r e s t s , to exercise
collusion i n bidding on the quota r i g h t s . Thtis, the
fundamental problem i s to avoid collusion between producer countries and somehow n e u t r a l i z e the effectiveness
of the OPEC c a r t e l .
CONSERVE
VAMERICA'S
1 ENERGY




Save

Energy

and You Serve

America!

150
2

As you i n d i c a t e , Professor Adelman's ideas on the future
r o l e of o i l companies are i n t e r e s t i n g . However, he f a i l s
to give the companies s u f f i c i e n t c r e d i t for the important
l o g i s t i c a l and technological contributions that they have
made. At the same time, I share your concern over the
p o s s i b i l i t y of p r o f i t e e r i n g by some o i l companies i n t h e i r
foreign operations.
The Federal Energy O f f i c e recently i n i t i a t e d several
studies on the i n t e r n a t i o n a l o i l companies. One of the
studies involves a comprehensive survey of o i l company
cash flows and p r o f i t s from domestic and i n t e r n a t i o n a l
operations. Another study was r e f e r r e d to i n my recent
testimony before the Church Subcommittee on M u l t i n a t i o n a l
Corporations on June 5, 1974. I indicated that an i n depth study was to be undertaken on o i l company government
relationships around the world. I t s purpose i s to help
policy-makers by providing the a l t e r n a t i v e s open to the
US Government to have an e f f e c t i v e voice on the terms
under which o i l i s imported.
Unfortunately, both inquiries are presently a t an early
stage and, therefore, I am unable to respond f u l l y at
t h i s time to your request for information on the r o l e of
the o i l companies. The f i r s t study i s t e n t a t i v e l y
scheduled to be completed i n e a r l y July while the study
on the relationship between o i l companies and governments
w i l l be finished by next spring. When the p r o f i t s study
i s completed, a copy w i l l be sent to you.




151
HENfcY B. GONZALEZ, TEX.. CHAIRMAN
HENRY 8. REUSS. WIS.
WILUAM S. MOORHEAD, PA.
THOMAS M. REES, CALIF.
RICHARD T. HANNA, CALIF.
WALTER E. FAUNTROY, D.C.
ANDREW YOUNG, OA.
FORTNEY H. (PETE) STARK. JR.. CAUF.
ROBERT G. STEPHENS. JR.. OA.

U.S. HOUSE OF REPRESENTATIVES

ALBERT W. JOHNSON, PA.
J. WILUAM STANTON, OHIO
PHIUP M. CRANE, ILL.
BILL FRENZEL. MINN.
JOHN B. CONLAN. ARIZ.
CLAIR W. BURGENER, CAUF.

SUBCOMMITTEE ON INTERNATIONAL FINANCE
OF THE

COMMITTEE ON BANKING AND CURRENCY
NINETY-THIRD CONGRESS

W A S H I N G T O N , D.C.

20515

May 28, 1974
B4a
The Honorable John Sawhlll
Administrator
Federal Energy Office
Room 3^00 - Post Office Building
12th & Pennsylvania Avenue, N.W.
Washington, D. C.
20044
Dear Mr. Sawhlll:
As Chairman of the Subcommittee on I n t e r n a t i o n a l Finance,
I am becoming Increasingly concerned about the lack of action
by the United States and other o i l consuming nations against the
price increases imposed by the Organization of Petroleum Exporting Countries. My Subcommittee has l e g i s l a t i v e r e s p o n s i b i l i t y
i n two areas seriously affected by the o i l price increases: the
i n t e r n a t i o n a l monetary system and the m u l t i l a t e r a l development
lending i n s t i t u t i o n s .
I am not sure how w e l l the world monetary system w i l l hold
up under the strains of the approaching petrodollar glut and how
i t can accommodate the d i s t i n c t p r o b a b i l i t y of the Arab o i l producers owning 70# of t o t a l world monetary reserves by 1980. While
there i s a number of schemes f o r recycling the petrodollars i n the
works, I question t h e i r v i a b i l i t y .
I am sure that you are f a m i l i a r with what the o i l price increases
w i l l do t o the economies of the less developed countries. They now
face a sad f a t e , a f t e r so many years of economic growth aided by the
United States through b i l a t e r a l a i d , m u l t i l a t e r a l aid and private
foreign investment. Yet we seem powerless t o do anything about i t
except beg the o i l producers t o give some a i d t o those countries
which the OPEC group i s i n the process of bankrupting. But the aid
funds being set up by the o i l producers w i l l be only a minor help
to the developing countries.




152
The Honorable John Sawhlll
Page - 2 -

May 28, 1974

I t seems t h a t the Administration I s reconciled to the
o i l c a r t e l and the prices I t has set and that I t f e e l s that
somehow through cooperation the disastrous e f f e c t s of OPEC
price Increases can be minimized. I am not sure t h a t the
evidence supports t h i s p o s i t i o n . I t would appear t h a t we
are being f a r too weak I n the face of a price gouging, i n t e r n a t i o n a l monopoly which is c l e a r l y harmful t o American i n t e r e s t s .
I am impressed with the proposal by MIT Professor M. A.
Adelman t h a t the U.S. auction Import t i c k e t s f o r o i l as a means
of undermining the c a r t e l , or at least protecting ourselves
p a r t l y against I t . He f e e l s t h a t the U.S. should Impose o i l
Import quotas to be sold by sealed competitive bid to anybody
who I s w i l l i n g to pay cash f o r a s e l l i n g l i c e n s e .
Professor Adelman also feels that high o i l prices are e a s i l y
maintained under the present system wherein the o i l companies i n
e f f e c t act as agents f o r the o i l producing nations. He f e e l s t h a t
i f i t can be done i n unison with i o t h e r countries, the U.S. should
get I t s o i l companies out of the crude o i l marketing business and
leave t h i s function t o the OPEC countries.
I would l i k e t o know your opinion of Professor Adelman^
proposal f o r an Import t i c k e t system and his Ideas on the r o l e
of o i l companies. Your ideas would be very much appreciated as
w e l l as most h e l p f u l .
With best regards, I am
Sincerely yours,

Henry B. Gonzalez
Member of Congress
Chairman
Enclosure




153
F r o m FORBES m a g a z i n e ,

June

1,

1974

Enlightened Self-Interest
What can the oil-rich countries do to help
the poor countries? In his deal with India,
the Shah of Iran is showing what can be done.
W IE the Arab oil-billionaires preach
H
L
Islamic solidarity and the brotherhood
of the T h i r d W o r l d , Muslims are
starving to death i n Central Africa.
Perhaps out of t i m i d i t y , perhaps out
of greed, the Arab oil magnates have
done little b u t talk about sharing their
wealth—or even lending it out—in any
b u t the most conventional ways.
Iran, however, is a different matter. I n a shrewd mixture of self-interest and benevolence, the Shah's
government last m o n t h committed
over $1 billion to help I n d i a t h r o u g h
the crisis created b y swollen oil
prices. I n the long run, the deal w i l l
mean more to India than the atomic
bomb it recently detonated.
India desperately needs the help.
Its runaway inflation and food shortages are especially hard on the already suffering poorest classes. Thus
India's social stability may be seriously threatened for the first time since

Prime Minister
Gandhi of India
deal, too. I t locks I n d i a i n as a customer against the day when oil may
be in surplus and hard to sell. I t also
strengthens I n d i a at a time w h e n the
Arabs,
the
Shah's
enemies,
are
strengthening Pakistan, India's enemy,
Beyond politics and price, however, the deal also gives Iran access
to India's potentially rich b u t undeveloped raw materials. Iran, on a
crash course to industrialization, w i l l
need all kinds of basic products. The
deal between the Shah and Mrs. I n d i ra Gandhi provides for Iran to l e n d
over $1 billion over 20 years to expand India's basic industries: cement,
sugar, steel products, paper and newsFORBES, JUNE 1, 1974




the turbulent years when it achieved
independence f r o m Britain.
I n 1972 I n d i a ' s ' o i l b i l l was $250
million, already a heavy burden for a
country that has chronic troubles
making ends meet. But last year it
soared to $625 million, and this year
it could go as high as $1.5 billion. T o
p u t it in perspective, it is as though the
U.S. spent $35 billion to import oil.
A n d India wastes little oil: O n l y a
t i n y share goes for private motoring.
The bulk is needed for India's industries and public transportation.
But where can India find the extra $1 billion-plus? India simply does
not have this k i n d of money. A n d
w h o is there to lend it?
Enter Iran. India's needs are not
huge: less than 500,000 barrels a
day, about what the U.S. uses every
40 minutes. India produces about a
t h i r d of those needs indigenously; it
imports 70% of the rest from Iran

print. India w i l l repay the loans in
the products of the expanded industries. Again, the interest rate w i l l be
a nominal 2.5% w i t h 20 years to repay.
The products that India w i l l supply
to Iran are i n short supply throughout
the w o r l d and desperately short i n India. "These things are needed at home
also," concedes C. Subramanian, India's Minister for Industrial Development, " b u t we must strike a balance
on how far we should starve the home
market to get the fuel we need to
keep our industries going."
The first t w o projects involve iron
ore and bauxite. I r a n w i l l p u t u p nearly $140 million for a plant to extract
alumina f r o m bauxite; I r a n w i l l get
two-thirds of the expected 330,000ton annual output. I r a n has also
pledged around $500 million to develop a low-grade iron ore deposit i n
Kudremukh, i n the south I n d i a n state
of Karnataka. W h e n the project is i n
f u l l operation it w i l l produce 8 million-plus tons of i r o n pellets yearly,
all of it for export to Iran.
I n making these deals, I n d i a has
quietly abandoned the r i g i d socialist
planning that has characterized her
economic policy ever since independence. The softening of India's stand
is undoubtedly made easier b y the

and the balance from Saudi Arabia
and Iraq. Under the terms of the fiveyear agreement, Iran w i l l supply all
the needs of India's Madras refinery,
w h i c h ran 2 1 million barrels last year
b u t w i l l be expanded, perhaps eventually to 4 1 million barrels. The National Iranian O i l Co. is a partner in
the refinery. Iran w i l l also provide at
least 7.4 m i l l i o n barrels a year over
the refinery's needs.
For India, the best part of the
agreement involves price. Officially,
India w i l l be paying the m a r k e t price.
Unofficially, she w i l l be getting a
huge discount. T h e deal works like
this: India pays $3.50 a barrel—in
cash. But the balance, $6.50 or so a
barrel, is deferred, w i t h no payments
for five years and w i t h a nominal
interest rate, 2.5%. T h e principal is
payable over five years—after the fiveyear grace period. Looked at as a
hard business deal, the discounted
present value of India's deferred payments cannot be more than 60 cents on
the dollar. Thus, in effect, India is gett i n g the Iranian oil at $7.50 or so a
barrel, 25% below the going market
price. This is a way to cut prices
w i t h o u t openly cutting them. A n d it
buys India time to adjust.
Iran

stands

to

benefit

from

the

fact that Iran is not one of the traditional imperialist powers or one of
the principal Cold W a r
antagonists. The main motivation, however,
is that I r a n is an oil-exporting nation.
" W e are doing this iron-ore deal because it is I r a n that wants i t , " says a
h i g h I n d i a n government official. " W e
wouldn't do it for anyone else."
There are other signs of a loosening
u p i n India's old policy of economic
isolation. After years of waffling on
whether Western o i l companies w o u l d
be allowed to d r i l l offshore, the Indian government has given the Natomas Co. d r i l l i n g rights on 7 million
acres i n the Bay of Bengal. T h e government is also t r y i n g to streamline
the almost unbelievably bureaucratic
procedures that are required of anyone wishing to invest i n India. I n
the past a "yes" or "no" could take
as long as six years; now they sometimes come i n as little as 90 days.
T h e Iranian deal, the d r i l l i n g contract
and the liberalized license rules suggest the Indians are finally facing
reality: T h e Iranians offered to help
India, b u t asked that India, i n turn,
bend some of its socialist dogma. India accepted. For India, the situation
remains desperate, b u t perhaps it is
not too late. •

154
AMERICAN PETROLEUM
1801 K STREET, NORTHWEST

INSTITUTE
WASHINGTON, D.C. 20006
(202) 833-5580

Frank N. Ikard

June 1 4 , 1974

PRESIDENT

The H o n o r a b l e H e n r y B . G o n z a l e z
U . S . House o f R e p r e s e n t a t i v e s
2446 R a y b u r n House O f f i c e B u i l d i n g
W a s h i n g t o n , D . C . 20515
Dear Congressman

Gonzalez:

I a p p r e c i a t e d r e c e i v i n g y o u r l e t t e r o f May 2 8 r e l a t i n g
t o y o u r concerns a b o u t t h e i m p a c t o f o i l p r i c e i n c r e a s e s upon
the i n t e r n a t i o n a l monetary system and t h e m u l t i l a t e r a l development l e n d i n g i n s t i t u t i o n s .
I f u l l y share i n your a p p r a i s a l o f t h e possible impact
o f these abnormal p r i c e s .
Up u n t i l r e c e n t l y , many k n o w l e d g e a b l e
people urged us t o use "cheap and abundant" f o r e i g n o i l and
f o r g e t domestic development.
I r e p e a t e d l y warned o f heavy r e l i a n c e upon f o r e i g n o i l , n o t i n g t h a t once t h e U . S . became e x c e s s i v e l y dependent t h i s o i l would p r o b a b l y be n e i t h e r cheap n o r
abundant.
As y o u n o t e , t h i s impact i s f a r g r e a t e r upon n a t i o n s
a l m o s t w h o l l y d e p e n d e n t u p o n OPEC o i l t h a n u p o n t h e U . S . , a n d
h i t s h a r d e s t a t weak d e v e l o p i n g c o u n t r i e s .
The A P I h a s n o t f o r m u l a t e d a n y p o s i t i o n w i t h r e g a r d t o
t h e p r o p o s a l s o f P r o f e s s o r Adelman.
Consequently, a l l I can do
i s give you a few personal thoughts f o r whatever they are worth.
I t i s d i f f i c u l t f o r me t o s e e how r e i n s t a t i n g a n o i l
import quota program could b e h e l p f u l a t t h i s t i m e .
Uncertainty
a b o u t s u p p l y , stemming f r o m t h e o l d i m p o r t q u o t a p r o g r a m , was
a f a c t o r w h i c h a c t e d t o d i s c o u r a g e new r e f i n e r y c o n s t r u c t i o n a n d
c o n t r i b u t e d t o our energy problems.
Moreover, i t c o u l d have
some u n f o r e s e e n a n d s e r i o u s i m p a c t s u p o n c r u d e o i l s u p p l i e s .
T h i s p r o p o s a l w o u l d need l o n g and s e r i o u s s t u d y b e f o r e a d o p t i o n .
I know
P r o f e s s o r Adelman and have h i g h r e s p e c t f o r h i m a s a n
economist.
O n t h e q u e s t i o n o f OPEC, h o w e v e r , h i s p r e d i c t i o n s
a b o u t t h e f a t e o f such a c a r t e l have n o t , u p t o now, m a t e r i a l i z e d .
H i s p r o p o s a l f o r b r e a k i n g i t u p seems a l i t t l e t o o s i m p l i s t i c .




155
Hon. H e n r y B .
Page - 2 -

Gonzalez
June 14,

1974

W i t h r e g a r d t o the r o l e o f o i l companies, i t i s e v i d e n t
t h a t a m a j o r and permanent s h i f t i s t a k i n g p l a c e i n t h e w o r l d
marketing of o i l .
However, I would q u e s t i o n a b l a n k e t r u l e
r e q u i r i n g U.S. f i r m s t o get out o f crude o i l marketing i n
foreign nations.
Such a r u l e m i g h t m e r e l y r e s u l t i n a s u b s t i t u t i o n o f o t h e r f o r e i g n o i l companies f o r U.S. f i r m s .
I quest i o n whether a simultaneous withdrawal of i n t e r n a t i o n a l o i l
companies c o u l d be a c h i e v e d .
I t w o u l d seem t o me i n t h e i n t e r e s t s o f our n a t i o n t o t a k e advantage o f the access t o o i l
s u p p l i e s w h i c h U . S . o i l companies a r e a b l e t o m a i n t a i n .
I
c o n t i n u e t o b e l i e v e t h a t t h e U . S . o i l i n d u s t r y has t h e t e c h n i c a l , f i n a n c i a l , a n d human r e s o u r c e s w h i c h c a n p e r m i t i t t o
c o n t i n u e t o p l a y a n i m p o r t a n t and u s e f u l r o l e i n t h e d e v e l o p m e n t o f n a t i o n a l e c o n o m i e s , and w o n d e r i f i t i s n e c e s s a r i l y
d e s i r a b l e t o r e s t r i c t t h e a c t i v i t i e s o f o i l c o m p a n i e s a n y more
t h a n t h e y w i l l be r e s t r i c t e d by h o s t g o v e r n m e n t s .
I recognize the importance o f the issues r a i s e d i n
your l e t t e r .
A l l o f us a r e g r a p p l i n g w i t h t h e s e d i f f i c u l t
and c o m p l e x p r o b l e m s w h i c h a f f e c t n o t o n l y o u r i n d u s t r y and
t h e n a t i o n , b u t c o u l d l e a d t o w o r l d m o n e t a r y i n s t a b i l i t y and
serious hardships f o r developing nations.




156
THE WHITE

HOUSE

WA S H I N G TO N

Dear Mr.

Chairman:

The P r e s i d e n t has asked me t o r e p l y t o your l e t t e r o f A p r i l 3 0 , 1974,
concerning t h e impact o f o i l p r i c e i n c r e a s e s and t h e problem t h i s has
c r e a t e d f o r t h e s t a b i l i t y o f t h e i n t e r n a t i o n a l monetary system and,
more p a r t i c u l a r l y , f o r o i l - i m p o r t i n g l e s s developed c o u n t r i e s .
I n response t o your q u e s t i o n as t o what t h e U n i t e d S t a t e s i s doing
about the o i l p r i c e i n c r e a s e s , t h e most d e s i r a b l e s o l u t i o n t o t h e
whole problem would b e , o f course, a s u b s t a n t i a l s o f t e n i n g or r o l l back i n petroleum p r i c e s ; and I can assure you t h a t t h e U n i t e d S t a t e s
Short o f adequate movement
i s endeavoring t o promote t h i s s o l u t i o n .
i n t h i s d i r e c t i o n , however, t h e most i m p o r t a n t t h i n g t h e U . S . can do
i s t o develop our own n a t i o n a l energy r e s o u r c e s i n o r d e r t o m i n i m i z e
U.S. v u l n e r a b i l i t y , i n c r e a s e t o t a l w o r l d energy s u p p l i e s , and reduce
t h e impact o f U . S . demand on the energy m a r k e t .
The Congress c l e a r l y
has a c r u c i a l r o l e and an immense r e s p o n s i b i l i t y i n advancing t h i s
" P r o j e c t Independence."
I n r e s p e c t t o t h e i n c r e a s e d pressures on t h e i n t e r n a t i o n a l monetary
system as a r e s u l t o f t h e quantum jump i n o i l producers* income,
I b e l i e v e t h a t t h i s i s a manageable problem; a l t h o u g h i t i s one t h a t
must be r e s o l v e d on t h e b a s i s o f i n t e r n a t i o n a l c o o p e r a t i o n .
The
U n i t e d S t a t e s i s working c l o s e l y w i t h o t h e r developed n a t i o n s , as
w e l l as w i t h t h e o i l p r o d u c e r s , t o develop and s t r e n g t h e n t h e f i n a n c i a l mechanisms and i n s t i t u t i o n a l arrangements needed t o p e r m i t
t h e r e c h a n n e l i n g o f t h e o i l funds t o p r o d u c t i v e uses w i t h o u t d i s r u p t i n g t h e i n t e r n a t i o n a l monetary system. We have a l s o i n i t i a t e d
a c o o p e r a t i v e e f f o r t among consuming n a t i o n s t o a v o i d d i s r u p t i v e
c o m p e t i t i o n i n t r a d e and monetary p o l i c i e s designed t o manage
i n d i v i d u a l balance of payments problems; and we have proposed a
program t o e x p l o r e means f o r a c c e l e r a t i n g development o f a l t e r n a t i v e
energy resources and expanding t h e p o s s i b i l i t i e s f o r energy conservation.
I n a d d i t i o n t o these e f f o r t s w i t h t h e major consuming
n a t i o n s , we a r e a l s o i n i t i a t i n g c o n s u l t a t i o n s w i t h t h e Government
o f Saudi A r a b i a c o v e r i n g a range o f s u b j e c t s o f mutual i n t e r e s t ,
i n c l u d i n g o i l p r i c e s and p r o d u c t i o n .




157
Page 2

W i t h regard t o t h e l e s s developed c o u n t r i e s , t h e higher cost of
i m p o r t e d f u e l and p e t r o l e u m based p r o d u c t s has c r e a t e d n o t o n l y
a d j u s t m e n t d i f f i c u l t i e s , b u t a l s o , as y o u r l e t t e r p o i n t s o u t ,
s e r i o u s b a l a n c e o f payments problems f o r t h o s e LDCs w h i c h have
n e i t h e r a r e s e r v e c u s h i o n nor s t r o n g e x p o r t e a r n i n g s from O t h e r
products.
T h e r e i s , as you know, a l r e a d y a number o f i n t e r n a t i o n a l
schemes and p r o p o s a l s t h a t have been p u t f o r w a r d t o meet t h e a d d i t i o n a l LDC f i n a n c i n g r e q u i r e m e n t s .
The U . S . p o s i t i o n i s t h a t
the primary r e s p o n s i b i l i t y f o r r e s o l v i n g t h e o i l r e l a t e d problem
l i e s w i t h t h e o i l e x p o r t e r s , and t h a t t h e y have an o b l i g a t i o n t o
ease t h e burden by l o w e r i n g o i l p r i c e s and by p r o v i d i n g f i n a n c i a l
assistance.
W i t h i n t h i s framework, t h e U n i t e d S t a t e s i s working
a c t i v e l y t h r o u g h m u l t i l a t e r a l as w e l l as b i l a t e r a l channels t o
d e f i n e t h e magnitude and t i m i n g o f t h e problem f o r each o f t h e
h a r d e s t h i t LDCs.
However, t h e m a j o r c o n t r i b u t i o n of t h e U . S .
must be t o c o n t i n u e t h e a s s i s t a n c e l e v e l s we c o n t e m p l a t e d b e f o r e
the events of l a s t F a l l .
The i n c r e a s e i n o i l p r i c e s makes our
development a s s i s t a n c e more — n o t l e s s — e s s e n t i a l .
Our a b i l i t y
t o c o n t i n u e development a s s i s t a n c e a t p r e v i o u s l e v e l s i s , however,
handicapped by t h e Congress* r e l u c t a n c e t o meet c u r r e n t f o r e i g n
aid funding requests, including t h a t for the I n t e r n a t i o n a l
Development A s s o c i a t i o n .

P e t e r M. F l a n i g a n
Assistant to the President
f o r I n t e r n a t i o n a l Economic

The H o n o r a b l e Henry B. Gonzalez
Chairman
Subcommittee on I n t e r n a t i o n a l F i n a n c e
House o f R e p r e s e n t a t i v e s
Washington, D . C .
20515




Affairs

158
HENRY B. GONZALEZ
GAIL J. BEAGLE

20TH DISTRICT, TEXAS
*ITXAR COUNTY

KELSAY R. MEEK
MRS. BONNIE CALDWELL
RAYMOND I. CANTU
ELLA M. WONG
IRMA DE LEON
LUCIA GONZALES
MRS. CHRISTINA MOONEY
MRS. LORRAINE G. INMAN

C o n g r e s s o f tfie ® m t e b & t a t e *
$ou*e ot Dtepreaentattoetf
Wasfofogton, 3B.C. 20515

SAN ANTONIO. TEXAS
78205
5 1 2 - 2 2 9 - 5 5 1 1 , EXT. 4 3 8 9
OR 5 1 2 - 2 2 3 - 8 8 5 1

A p r i l 30, 1974
B4a

MRS. LUZ G. TAMEZ
MRS. CORA FAYE CLAYTON
MARY JESSIE GONZALEZ

The Honorable Richard M. Nixon
President of the United States
The White House
Washington, D. C.

20500

Dear Mr. President:
As Chairman of the Subcommittee on I n t e r n a t i o n a l
Finance, I am becoming increasingly concerned about:
( 1 ) the disastrous e f f e c t s of the OPEC o i l price i n creases, and ( 2 ) the p o t e n t i a l damege t o the i n t e r n a t i o n a l
monetary system and the woxld economy as a r e s u l t of the
petrodollar glut.
I am sure t h a t you are f a m i l i a r w i t h what the o i l
price Increases w i l l do to the economies of the less developed
countries. They now face a sad f a t e , a f t e r so many years of
economic growth aided by the United States through b i l a t e r a l
a i d , m u l t i l a t e r a l a i d and p r i v a t e foreign investment. Yet we
seem powerless t o do anything about i t except beg the o i l producers to give sjme aid t o those countries which the OPEC
group i s i n the process of bankrupting. And I seriously
question the v i a b i l i t y of the a i d funds being set up by the
o i l producing countries.
Secondly, I am not sure how w e l l the world monetary
system w i l l hold up under the strains of the approaching p e t r o d o l l a r glut and how i t can accommodate the Arab o i l producers 1
owning 60$ of t o t a l world monetary reserves by 1980. While
there have been some suggestions f o r recycling the p e t r o d o l l a r s ,
I also question t h e i r v i a b i l i t y .




159
The P r e s i d e n t
Page - 2 -

April

30,

197^

I n t h e U . S . , we h a v e w o r r i e s a b o u t g a s o l i n e p r i c e s
and l o n g - t e r m programs f o r development o f o u r abundant
energy resources.
W h i l e s o l v i n g t h e s e p r o b l e m s we c a n n o t
l e t t h e r e s t o f the w o r l d s i n k around us.
Based on t h e
t h o r o u g h i n f o r m a t i o n c o l l e c t e d b y my S t a f f , I c a n see f e w
reasons f o r o p t i m i s m .
S o m e t h i n g m u s t be done a b o u t t h e
c a r t e l a c t i v i t y o f OPEC a n d t h e r e s u l t a n t o i l p r i c e s .
I w o u l d a p p r e c i a t e y o u r a d v i s i n g us w h a t t h e U n i t e d
S t a t e s i s d o i n g o r i s g o i n g t o do a b o u t t h e o u t r a g e o u s
p r i c e i n c r e a s e s b y OPEC a n d t h e a p p r o a c h i n g p e t r o d o l l a r
glut.
With best wishes,




I am
Respectfully

yours,

Henry B. Gonzalez
Member o f C o n g r e s s
Chairman

160
THE NEW YORK TIMES. MONDAY, MAY

13, 1)74

Recycling Petrodollars
The enormous increase In oil prices and resulting
transfer of purchasing power to the oil-exporting nations
has confronted the world with "an over-all disequilibrium in trade accounts of unprecedented magnitude."
Behind that temperate estimate by H. Johannes Witteveen, managing director of the International Monetary
Fund, lies the staggering reality that the balance-ofpayments deficits of oil-importing countries this year
alone may amount to $65 billion. The sum is so large
that it threatens the world economy with simultaneously
contractionary and inflationary forces. For the moment,
the forces of Inflation are most evident. But if the drain
continues; many oil-importing countries will suffer a
devastating blow-to their real incomes and living standards. The danger affects such developed countries as
IfcdywulBritain but is greatest for the developing nations of South; Asia arid Central Africa where massive
starvation and death could result
This world payments problem will not automatically
be corrected by ail increase in imports by the oilexporters or by their investment of funds in the deficit
countries. The situation is analogous to the critical period after World War II, when a devastated world
economy was dependent for its reconstruction on a
recycling of funds by the United States—which this
country carried out through the Marshall Plan and other
aid and loan programs.
Will the oil-producing states, which created the present payments disequilibrium, now participate in a genuine effort to resolve it?
On the face of it, the answer would appear to be no.
Obviously, the simplest method of. solving the problem
would be a major cut in oil prices. Yet the nature of the
cartel andttie^pofitfcs' of"manyof its members makes
a large enough price rollback unlikely unless there develops a breakdown in the world economy—and an attendant shattering of the oil cartel.




The International Monetary Fund has taken the initiative of persuading the oil-exporting countries to recycle part of their oil money back to the importers via
a new "oil facility." According to Dr. Witteveen, Arab
and other oil exporters have just "indicated their willingness" to the I.M.F. to lend that facility about $2.75 billioh.
But even excluding the developed nations, the developing countries face extra oil deficits of at least $20 billion
in 1974 alone—seven times as much as the oil producers
are offering to lend.
I t is far'from sure, that even this modest amount will
be forthcoming. The.Saudi Arabian oil minister, Sheik
Zaki al-Yamani, has expressed coolness toward the I.M.F.
plan. Since his country had initially offered Dr. Witteveen more than $1 billion, a Saudi Arabian decision to
withdraw could undermine the proposal. Actually, however, the oil-exporting countries have strong reasons of
their own to lend, under appropriate terms that would
give them security and a reasonable rate of return. That
is precisely what the I.M.F. hopes to provide.
Given the difficulties and risks of placing their enormous gains in secure foreign loans and investments
—and their common,stake in the viability of the world
monetary system-*—the oil. exporters have a powerful incentive to help make the i.M.F.'s "oil facility" succeed.
It could help tide over for: the next year or so the poorest
of the developing nations. In the long run, however,
lending back hundreds of billions of dollars to the deficit
countries seems out of the question. The disequilibrium
is too great..

161
T H E WASHINGTON POST

A p r i l 13, 1974

By Brace Handler
ers, further diversity their
S e i ltoThe W s i go P s
p ca
a hn t n o t
economies and coordinate inGUATEMALA CITY—The dustrial development
world oil crisis is threatening Despite some rocky spotsthe economies of the Central El Salvador and Honduras
American countries, wiping {ought a mini-war in 1969 and
out 13 years of economic prog- stopped trading with each
ress they had made by joining other—the Central- American
Common Market has survived.
in a common market.
Central America, including A new social class of busiGuatemala, El Salvador, Hon- nessmen, independent farmers
duras, Nicaragua and: Costa and ranchers, and white-collar
Rica, produces no oil.
workers has started to emerge
If crude oil prices remain at and industrial production tricurrent levels or go up, ex- pled between 1960 and 1972..
perts say all five of these The value of textile output
small republics could be dowrr rose from $25 million to $116
to their last centavo in re- million. Production of shoes
serves by 1975.
and clothing rose from $49
A U.S. economist here put it million to $111 million. Light
this way: "If the international machinery and home appli-i
oil picture continues _ ance maufacturing output inchanged, it's all over for Cen- creased from $1.4 million to
tral America."
$26 pillion.
(
"The oil crisis is a serious Central America's total for-j
problem in places like the eign trade rose from $1.2 bil-j
I United States and Europe, of lion in 1963 to $2.7 billion in
course," an American busi- 1972. Trade within Central
nessman in Guatemala City America skyrocketed from $16
said, "But in underdeveloped million in 1950 to $64 million
countries, its effects are far, in 1960 to $611 million in 1972.
far worse.
RoadS and communications
"Central America's economy improved-greatly, and directis baaed on agriculture," he distance-dial telephone link
explained. "Governments in Tegucigalpa, Honduras, and
this region have been trying Guatemala City—an impossito modernize farming methods ble dream only a few years
aid increase production, and ago.
they've made progress. But to
do this, you need tractors and Despite some rocky spotsfertilizer.' Well. ^ half the El Salvador and Honduras
world's fertilizers are made fought a mini-war in 1969 and
from petrochemicals, and trac- stopped trading with teach
othgr—the Central American
tors don't run on bananas."
Ustil the lMQs, Central Common Market has survived.
America — slightly
larger A new social class of bwithan California and with 16 nessmen, independent farmmillion people—was a remote, ers and ranchers, and whitfbackward and economically collar workers has started to
emerge and industrial ptfcstagnant region.
Its economy depended on duction tripled between 1960
coffee and bananas. Power lay and 1972.
with a few local millionaire The value of textile output
landowners and large foreign rose from $25 million to $116
fruit exporters, Most others million. Production of shoes
were illiterate, underfed peas- and clothing- rdse from $49
million to $111 million. Light
! ants.
j During World War n, the machinery and home appliI United States financed the ance manufacturing o u t p u t
increased from $1.4 million to
| building of a highway through
! Central America, to gate a stra- $26 million.
tegic overland route to the Central America's total forPanama Canal. Panama itself elgn trade rose from $1.2 bilis not considered part of Cen- lion in 1963 to $2.7 billion in
1972. Trade within Central
tral America.
This road made .trade among America skyrocketed from $16
the Central American repub- million in 1960 to $64 million
lics possible for the first time. in 1960 to $611 million in 1972.
It also- allowed medium-size Roads and communications
agricultural entrepreneurs to improved greatly, and directopen the rich Pacific coastal distance-dial telephones link
-plain to cattle ranching and Tegucigalpa, Honduras and
growing of cotton, sugar and Guatemala City—an impc
ble dream only a few years
vegetable oil seeds.
In 1960, the five countries *go.
formed a Central American The Common Market, alio
Common Market. The purpose made this region less depend•frarto eliminate trade barri- ent on the United States. In




1963, the United States bought, of this decade-long struggle
and sold 43 per cent of the to- in less than two years.
tal imports and exports. By Guatemala, the most popu1972, this figure had fallen to lous country, had $213 million
33 per cent.
in its treasury at the end of
Gold, and hard currency re- 1973. But it spent $30 million
serves climbed slowly from on oil products last year$130 million in 1961 to $416 compared to $15 million in
million in 1972, but the oil 1971—and its estimated Oil bill
crisis could erase the results for 1974 is $105 million:




T H E WASHINGTON POST TkmnJky.MviS.im

HobartRowen

The Oil Cartel and Development Aid
Despite the noble efforts of IMF
Managing Director H. Johannes Witteveen, the oil cartel countries have
bpeii willing to cough up only small
amounts of money to help the oil-importing countries meet the outrigeous
prices that the cartel itself has set
The defense offered by the Organisation of Petroleum Exporting Countries (OPEC) is a mixture of clever,
chetoric and sheer , arrogance. In essence, they argue tHat the cartel countries have not become truly rich, like
the industrialized West, but merely
<nore "liquid"; that oil prices are still
below the level that should be
achieved to balance off inflation in
other commodities; and that the West
-r-notably the United States and Canada—are soaking the poor countries by
extortionate prices for food.
Dr. Abderrahman Khene, the SecretaryOeneral of OPEC, made the
rounds here recently, delivering this
pitch. He argues that the industrial nations have been raising the prices of
their manufactured goods and food,
and that the problem of the poor countries thus didnt start with OPEC.
; Agriculture policy in this country, of
course, has stupidly contributed to inflation. But as Dr. Khene knows, the
price of wheat bears a close relationship to weather and crop yields—a
matter quite different from a halfdozen oil sheikhs sitting down in Teheran, arbitrarily deciding on a price
for oil that costs 10 to 30 cents a barrel
to produce—a cost that hasn't Varied.
If tbe United States decided to price
wheat the way OPEC prices oil, it has

"The lack of generosity of other countries
does not excuse the OPEC for the burden
they placed on the rest of the world*9
enough leverage on the market to get
|20 a bushel.
But there is little doubt that the major countries of the world, especially
the United States, must be faulted for
lack of generosity in development aid.
Far from meeting the recommended
goal of 1 per cent of total Gross National Product, UJ3. development aid is
about one-fourth of that figure, ranking 19th in a list of 16 wealthy countries.
That does not excuse the OPEC
countries for the special and sudden
burden they have placed on the rest of
the world, notably on the poor countries, by a fourfold increase in the
price of oil within a year's time.
When Dr. Khene talks of OPECs
"moderation" and "wisdom" in
"limiting" the price of oil to provide a
government-take of $7 a barrel, he is
talking economic nonsense. The abrupt
shift of $50 to $60 billion of resources
from the oil-consuming countries to
OPEC (even if some of the burden is
postponed byfinancingschemes) is beginning to raise havoc in industrial as
well as less developed nations.
"In thinking about the effects of the
sharply higher oil price," Federal Re-

serftf adviser Robert Solomon said lit a
thoughtful speech the other day, 1
haw. found it useful to view It as a
sales tax on consumption. Hie imposition of this tax* has raised the price of
petroleum products."
Solomon, vice chairman of the Committee of Twenty Deputies, points out
that the OPEC countries "must lend
their enlarged revenues" back to those
who are paying through the nose for
their oil.
But not much it coming hack.
Against the $58 billion increase in
OPEC surpluses this year alone projected by Witteveen (to a total of $65
billion), the total amount pledged for a
special IMF 'facility" is some $2.8.bfllion.

of the hardeethit countries is so 4ea*
perate that the World Bank is scraping
together about $160 million tar diverting some of the International Development Agency (IDA) funds—pitifully
small to . begin wtthHto the poorest
countries on the list.
International agencies calculate that
higher oiVfOed, fertilizer, and capital
goods casta to the poor nations this
year will rim about 90 button mora
than what the? will recover in higher
export price* Assistance by theIMF-and other interaationar agencies, plus a reduction
of reserves will cover f t bllBon, Wav
ing a minimum of $2 billion in new assistance needed by the poor countries.
Projections are that this
"gap" will increase to f * J WIHon In
1975, and run to $4 or $5 billion a year
from 1976 to 198&.
In the immediate and desperate period ahead, the United Nations is trying to get contributions—in any form
— that would work out to roughly a 60>
50 share between the industrUized
world and OPEC.

But the industrialized world, even if
Much has been made of some sales .
of oil at concessional terms to India.* it comes through with contributions BUt the concessions dontseem overly this year equal to OPEO's, is likely to
generous—and in total, are a drop In resist carrying an equal share into the
the bucket. For example, India will get future.
about $100 million worth of oil from
The strong view of the United
Iraq and a similar amount from Iran
States, as it sees new OPECs over the
in special deals. Against that, India's
horizon for bauxite and other commodextra cost for oil this year is move
ities, is that the btgge^ p * v m m
than $1 billion.
burden outfit to Jail en thee* w e r e The need to get cash into the hands ate the problem. h'

O
to

163
T H E W A L L S T R E E T JOURNAL
Editorial

May 6, 1973

Attracting Petrodollars
With one easy stroke, the United
states can go a long way toward improving its eminence as an internatianal capital market, with financial
benefits that would exceed the $200
'million the Treasury would lose i n
tax revenues. The necessary step is
the elimination of withholding taxes
on. interest and dividends that flow
out , D the U.S. to foreigners holding
<f
U«S.
securities.
The
prograun
ambunts to a tariff on foreign cafciThese taxes have been on the
books a long time, but until t h e « r rival of petrodollars have been of
relatively little significance. The
l e rate 6i 30% applies to all residents (other than Americans) of
Countries that don't ^have tax
treaties with the United States. Most
of our m a j o r trading partners do
have treaties with us which lessen

the sheiks cqugh up 30% of their intome from investments here when
they can keepi it all when their investments are cycled through Londoi*?
We are not prepare^ to atgu*
that this simple tax change will
mean an extra $4 billion to $6 billion
a y e a r of investment in the United
States, as some proponents of the
change a r e ' forecasting. A1EW& all,
whichever market is recycling the
oil money will put" it here, directly or
indirectly, when that market finds
superior opportunities here. The
withholding tfexes simply insure that
Landon^nd Geneva will do the picking and choosing, not New York. I f
the zxiost promising investment for a
Kuwait dollar is in Niger or Bolivia,
it won't be banked through New
York
consideration.
Thia no ^vial

S^Tdln . S
tors and on capital flows Butthe
wlrproducmg nations of the MidcUe

reserves

merket.

through v the

. ,

.Eurodollar

.

What this means is that as a matter of natidhal.policy, the United
States is protecting the Eurodollar
and Eurobond market to the detrfment of its domestic capital market.
The $200 million t r e a s u r y would
forego by eliminating these taxes is
admittedly a lot of money, but it is
. m a l l potatoes compared to the tens
of billions in petrodollar business
that the U.S. is throwing away to
foreign capital markets. Why should




6Very

%

to

^

^

diation.

^

or two of banking profits
recycled petrodollar adds
^ ^ ^ the gross

^

financial interme-

v.,,.
P ™ * * ® of rebuilding i h e
U.S. capital market began earher
^ i s year when Treasury elumnated
m t e
™
equalizafaon tax and.
A
^ ^ q ^ i S ^ ?
ment
'
P«>gram* that
E

w
^0^1.mar!cft\
Tag
B 7 j
will be further aided if U.S. tax laws
. invite, rather than discourage, all
that oil money.

164
FROM THE WALL STREET JOURNAL, JUNE 19,

1974

REVIEW &> OUTLOOK
Squeezing the Goose i n Quito
Having acquired the golden agree to cut back production, and as
ffoose, the Organization of Petro- fast as they cut production, and the
leum Exporting Countries is discov- world economy continues to soften,
ering that the* bird has . to< be they'll have to cut again. With the
squeezed harder and harder to pro- Saudis refusing to go along, even
duce the same size eggs. Global in- toying with increased production,
flation coupled with decreased de- there's not much chance the other
mand for crude keeps nibbling away producers would commit thexnat the real incomes they'd projected selves to that kind of play. And if
for themselves.
they don't, the marketplace itself
force
So the cartel met in Quito, Eeua- ^
Production cutbacks. Connor these past few days to plan its ® u m e r s « W * y won't buy all the oil
squeeze for the next three months. * * * Producers want to sell at the
on
While it couldn't resist h ^ g the P n c e s
charging,
royalty rate on crude by 23 cfents a
The strains in the cartel result
barrel, it wisely decided against the because each of the OPEC nations
inclination of 11 of its 12 members to has its own optimum timetable for
cut into the goose. All but Saudi Ara- selling its oil. Those who want revebla favored another sizeable in- nues now, fast, for internal developcrease of the tax on the crude ment are the most stubborn about >
shipped by foreign companies.
sticking to the high cartel prices.
I t occurs to Saudi's Sheik Ya- B u t to d o *°> tkey have to bet I
a ainst n e w
mani, who went to school at Har- ^
supplies and oil substi-1
yard, that OPEC's 300% price in- t u t e s coming along before they no
00
1
crease over the last nine months may J ®® " need expanding oil revenues
have had something to do with both to finance development. A global reglobal inflation and faltering de* cession throws all their schedules
mand for crude7~ Although be o£f » Pitting them closer by that
time
couldn't manage to impart this wis- m u c ?
competition from
dom to his fellows, he did get them
and North Sea oil, as well as
now
to hold off merely by refusMg to go
unknown > technological breakalong with them on the tax increase. tkroughs <» ^ demand side. A reHe won't apply the royalty increase cession of serious proportions or dubl w
aither, and because Saudi Arabia r a t £ n ^
P
?PEC "Pa*\.
can by itself control the world price, „ Mr. Yamam understands all this,
this split in OPEC is bound to widen B u t ™ colleagues insist on learning
Mr. Yamani was turned down
way Eventoally they will
when he recommended a Cut, rather ^ v e to learn that while a successful
than an increase in price postings, cartel has its obvious advantages, it
But give him time. The sharp drop ? a n t ^ ^ u l a t o d from fiie probmte
from projected demand for crude* in l e m ® ®f
*?rld ^co^omy
"
response to its higher price is now g r a t e d
° s np
^
8
accelerating in reaction to a soften- S T ? ™ ' ^ J f ^ be prepared to see
ing Wo»ld economy. Treasury Secref a c i a l assete it accumulates
tary Simon says second quarter real
^ ^
^ T ' '
<*»;
GNP growth in the United States ? r a l h a ? k a c a n n o t Po^cally resist
will be close to zero. If it remains
money growth to pay the
flat the rest of the year, simple P 1 *™! 18 - And if the cartel insists on
arithmetic suggests there ^ i l l soon ^ ^
protection, tying its oil
be more oil around than anyone F " c e ? to 8 1 1 m . d e x o f l t s choosing, ,
there 8 no
can
wants to buy.
escape driving |

. oc/ ± orrf t
f
f
?

«
m a

.yCar

" " son. Increased price postings now
a
have had a chilling effect on

I n order to maintain the current even clearer picture of how destrucVosimgs, obviously some tive and self-defeating that would I
countries would have to be.

OPEC




165
B S E S WE My 1 , 1 7
UN S EK a 1 9 4
I

Commentary

by John Pearson

The crisis of paying for the oil
When the gasoline queues disappeared
from the filling stations a few weeks
ago, it may have appeared to many
consumers that the worst of the energy
crisis was over. Italy's abrupt restrictions on imports, aimed at stemming a
sharp deterioration in its balance of
payments, are a reminder that the
crisis is only beginning. The problem
now is not the availability of oil, but
how to pay for it.
A t least half of I t a l y ' s average
monthly trade deficit of $l-billion in
the first four months this year stemmed from the steep rise in the cost of
oil imports. But the Italian trade curbs
will not slow the inflow of vital oil. Instead, the measures will cut back imports of other products, from meat to
automobiles, and thus shift the trade
deficit to Italy's traditional trading
partners. The result could be increasi n g pressure on countries such as
France to take similar steps to shore up
their balance of payments.
Thus Italy's unilateral action could
set a precedent for beggar-thy-neighbor protectionism without doing anyt h i n g to solve the oil crisis. The oil consuming countries, taken together, will
run a deficit of $40-billion or so in trade
w i t h the oil exporters in the year
ahead, and they cannot diminish it by
buying less from each other or selling
each other more. Such protectionism
poses a real threat of a trade war.
Heavy borrowing. Even i f such a conflict
is averted, European bankers such as
Dr. Andries Batenburg, president of
the Dutch Bankers Assn., are warning
that the energy crisis may reappear in
the shape of an international financial
crisis. That is because most oil consuming countries can finance the increased
cost of energy imports only by borrowing heavily. The Italians, British, and
French have already done so by tapping international financial markets
for billions of dollars in loans. Ultimately, a big part of the funds for such
loans will have to come from the oil exporting countries themselves.
Managing Director Johannes Witteveen of the International Monetary
Fund announced this week that he has
persuaded Saudi Arabia, Iran, and
other nations to contribute $2.8-billion
to a special fund that will make medium-term loans to member nations to
help pay their oil bills., But much more
will be needed, and private capital
markets are the only other mechanism
available for "recycling" large amounts
of the oil producers' surplus money. So




far, the oil-rich states have shown a
marked preference for putting their
money into short-term "Eurocurrency"
deposits that bankers in London and
other financial centers then lend out to
oil users.
The trouble with this system is that
the borrowers, even i f they are financially respectable European governments, will eventually exhaust their
credit. No banker in his right mind will
keep supplying money to a client who
uses i t to meet current expenses, unless
the borrower has a credible plan for
getting his income and expenditures
back into balance and paying off the
loans. The oil consuming nations, unfortunately, have no such plan. Instead, they are looking desperately for
financial gimmicks, including the revaluation of official gold reserves in order to create new money that could be
used to pay for oil. But more than monetary wizardry is needed to deal w i t h
the energy crisis that underlies the financial threat.
Wishful thinking. Of course, the oil shortage "scare" and the rising cost of fuel
have slowed the dizzy growth of energy
consumption in industrial countries
from 5% annually in recent years to an
estimated 2% to 3% this year. But unless economic growth comes to a complete standstill, oil imports are bound
to keep rising until alternate sources of
energy are developed.
Faced with this bleak prospect, Administration officials are taking the official line that oil prices will have to
come down. More and more, this sounds
like wishful thinking.
There is, in fact, no cheap and easy
solution. I f a new crisis is to be
avoided, it wifl require a combination
of energy programs and financial measures, including heavy investments to
develop new sources of e n e r g y ;
stepped-up recycling of "petrodollars"
through intermediaries such as the IMF
that can make loans w i t h longer maturities than private banks; and encouragement of long-term investments by
the oil producers in the U. S. and other
consuming countries.
Even so, tougher energy conservation measures may be unavoidable. The
Italian government is talking about reviving restrictions on automobile use
and cutting back on home heating next
fall. While curbs on energy use are politically unpopular, the alternative may
be financial and economic turmoil that
would lower oil consumption by plunging the world into a recession.

166
BUSINESSWEEK

A p r i l 6, 1974

Oil:
How the poor nations
hope to pay their Mils
The world's poor nations are scrambling frantically to find ways to pay
their sharply higher oil bills. And while
the outlook is grim, some of these efforts promise to show results. This
week, Hassan Shash, Egypt's ambassador to Ghana, announced in Accra that
the Arab oil states have set aside more
than $800-million to help African economies. Last week, Libya's fiery leader,
Mu'ammer al Qadafi, announced a
three-tier price system for Libyan oil
that would favor less-developed and
Muslim nations. Meanwhile, a committee of the Organization of Petroleum Exporting Countries (OPEC) are
discussing ways to recycle Arab oil
money to the developing nations in the
form of cheap loans.
Individual governments also are active. Prime Minister Zulfikar Ali
Bhutto of Pakistan, whose country will
benefit from Libyan price adjustments
two ways-as a less developed country
(LDC) and as a Muslim state-made
plans to visit Iran this week for talks
with the Shah.
Export earnings. Certainly the LDCs need
all the help they can get. The Londonbased Overseas Development Institute
estimates that their 1974 oil bill will
soar to $12.2-biUion from last year's
$2.2-billion. Singapore will be nicked
for an extra $517-million, while Kenya,
Tanzania, and Uganda as a group must
fork over $178-million more.
Tiny Jamaica will have to ante up an
additional $123-million, roughly half
the island's export earnings. The bite
explains Prime Minister Michael Manley's widely publicized efforts to obtain
higher prices for his country's bauxite
exports. Manley would like to join that
select group of lucky LDCs that either
have their own existing or developing
oil reserves-chiefly Indonesia, Nigeria,
and Malaysia-or that have other valuable resource exports whose prices are




strong enough to pay for expensive oil.
Thus, the Philippines had no trouble
raising a $500-million loan from a
group of U. S. banks led by New York's
Manufacturers Hanover Trust Co.
Roughly $150-million of the money will
help Manila pay its oil bill. "Even
though the Philippines now pays three
times the price for its oil," says Tristan
E. Beplat, senior vice-president of
Manufacturers Hanover, "it is selling
copper at $1.50 a lb. instead of 40* or
50*. I t will sell sugar at high prices, too.
And the same goes for lumber, copra,
and nickel." Nations without resource
exports essential to industrial countries are in more serious trouble. Says
William J. McDonough, senior vicepresident of First National Bank of
Chicago: "Some of the Latin American

nations have pretty strong little economies. But all they produce are agricultural products. What do you do if you
can't get a higher price for bananas?"
Easy term*. No country, of course, faces
so gloomy an outlook as India. The oilpoor nation has a large industrial base
that needs energy, and it may have to
spend as much as 60% of this year's anticipated export earnings of $1.4-billion
to buy oil. So New Delhi is hustling to
stave off disaster. One deal calls for the
purchase of Iranian oil for $3.50 per
bbl. in cash and the balance in deferred
payments of 2.5% interest or in barter
arrangements. Last week, India arranged a similar deal with I r a q - a $10million loan to purchase 2.S-million
tons of Iraqi crude this year.
The Indian government also is hoping to roll over some of its international debt at a meeting with creditor nations this month. Yet it still may
have to draw on its nearly $l-billion in
reserves. Tapping reserves is a delicate
matter for an LDC. Commenting on
what may be the Catch-22 of international banking, M a n u f a c t u r e r s
Hanover's' Beplat notes that "if these
countries pay cash and get their reserves down, then everybody will be so
damned scared it will become hard for
them to borrow money."
•




T H E W A S H I N G T O N POST

Sunday, May 19, 1974

Inadequate Plans in Payments Crisis
By C. Gordon Teiher
Financial Tim«a

For all the efforts of Managing Directors. J. Witteveen to put a brave
face on ^t, the drive the International
Monetary Fund has emfoarked lipon to
enftet tbe cooperation of the oil-producing countries in resolving the mammoth international payments crisis
their price increases have sparked does
not eetfea to be getting us very far.
And aa the fund itself can only perform a-;, bridging, operation and - the
Euro-oufency market is ill-suited to
do morel than fill the breach temporarily, the further outlook remains grim—
unless t&at is, Wo can quickly think up
some entirely newrecyclingideas.
According to ^itteveen's latest appraisal, the oil producers are going to
shcrW an overall surplus in the region
of # » billion in 1074 or about $58 billion more than they did last year. The
corresponding deficit elsewhere will
be distributed in a ratio of about two
to one between the advanced countries
and the less-developed world.
The f i l producers' are thus best
plaeedto help sort out this monument a l new payments mess. Yet the visits

the fund's top brass have made to
these countries to interest them in providing financial backing for its proposed special oil loans to oil-importing
countries seem to have produced
plenty of expressions of good intentions but remarkably little money. I n
fact, the total promised for 1974 so far
amounts to a bare $3 billion.
The IMF has, of course, some money
of itis own it can throw into the battle.
But the fact is that its total funds
amount—even valuing its gold stock at
the current free market price—to ma-

lt

•

News Analysis
terially less than the oil-importing
countries' 1974 deficit alone. So Witteveen is doing no more than stating
the obvious when he says that his projected oil facility can only be "a bridging operation while longer-term solutions are worked out."
The Euro-market might appear to be
a better bet, being seemingly able to
generate money like water to meet
each and every need, provided there is
a willingness to pay the interest rates
demanded. But, as Witteveen himself

and other experts have been pointing
out, it is an unsuitable vehicle for massive medium-term and long-term operations.
j The fund's chief was certainly not
exaggerating, therefore, when hp concluded a recent progress report on the
attempt to resolve the recycling problem with the assertion that "we cannot
see with any clarity what arrangements will eventually be made to provide for an orderly investment of oij
revenues in the medium term."
The fund is affecting to believe that
the best hope lies in getting the oil-importing countries to open their markets to long-term foreign investment.
And to this end, it is proposing to
make a member's access 'to the proposed oil facility conditional upon it
"taking measures to encourage capital
inflows in the required amounts." But
these things are far easier said than
done.
What we really have to aim to do in
the Interim is to provide the surplus
countries with a way of investing their
money that meets their present preference for keeping it in relatively liquid
form yet is not so exposed to rapid
purchasing power erosion as the paper

currencies they are accumulating now.
And in this connection, it is as well
to recognize that the new-look Special
Drawing Bight, "denominated in a basket of currencies," which the fund
plans to offer them in exchange for
donations to its "oil facility" futnd in a
few months time, can have no more appeal than a typical currency. For it,.
too, will be losing value at the average
inflation rate.
This points to a way in which the
speedy remonetization of gold could do
great service for the frorld in a double •
sense: For it seem^more than likely
that the oil-producing countries would
be prepared to think in terms of accepting gold in settlement of a sizeable
part of their vast surpluses for a while
—always provided this was part of an
international monetary stabilization
program which guaranteed that the
purchasing power of the metal they absorbed would itself be maintained.
Since such a plan could pave the
way for all-out attack on the global inflation menace now threatening our
entire planet, it would be serving the
interests of the peoples of the oil-importing countries hb less than those of
the exporters.

O*




168
FROM THE WASHINGTON POST, MAY 2 5 ,

Arab Money Seen
Moving Into U.S.
Real Properties
Oil rich Arab nations may
soon become stiff competitors with Japanese investors in the acquisition of
real estate investment properties in the United States,
according to a leading real
estate research firm.
, SfidcQe East oil nations
this year alone will accumulate $80 billion in investment capital, a study by
New Orleans-based Robert
L. Siegel firm reveals.
"At least $2 billion will
flow into the United States,
most of it for real estate,"
said SiegeL
The firm's study found
that Arab investors are
seeking the same types of
Javestments that have attracted Japanese funds for
more than two years: income producing residential
housing and retail facilities,
resort proiperties, hotels and
other transient facilities
and land developments.
So far, the bulk of Arab
investments have been concentrated mainly in the
East, Midwest and South,
while most Japanese funds
have been invested in Hawaii, California and other
parts of the West.
u
One factor — the fear of
nationalization — has made
the Arab investor more
cautious than his Japanese
counterpart in placing his
fundaJaMthe United States,
the sinfey reported.
"Some Arab nations have
nationalized their oil industries so they tend to be
mewhate fearful that the
me tactic could be used
against them when they invest funds in another nation," Siegel said.
Some examples of Middle
East real estate investments
in the United States, the
survey reveals, include:
• Financing of a major
office building on New
York's Fifth Avenue by the
Iranian government.

S

• Providing $200 million
.n capital for the development of a mammoth apart-;
ment project in St. Louis.
• Providing $50 million in
investment capital by Kuwait dnd Lebanese sources
to a Louisville investment
company for the purchase
of U. S. real estate.
• Financing oflhe development of an islahd xeaoEt
off the coast of South Carolina by Kuwait money.
• Purchase of raw land in
California by Saudi Arabian investors for future development <
Siegel also 'reported that
Middle East oil money has
flowed into Atlanta for the
financing of new retail and
hotel facilities in the downtown area.
"The American motorist
was the first to feel the
pinch when the Arab nations raised the prices of
crude oil. Now, the funds
are coming back into the
United States and the real
estate industry is the first
to feel the effect," he said.
While Siegel sees an
Increasing flow of Arab investment funds into the
United States, he 'believes
that few, if any, of these
p r o j e c t s actually will be
developed or managed by
the Middle East nations.
"These off-shore investors
need the expertise of the
American developer, who
can put the entire package
together for toe group providing the money," hejsaid.

1974

169
T H E WASHINGTON POST

May 14, 1974

Impact of Massive Oil Price
Seen Hitting Gradually
Jg** By Hobart Rowen
tiuWuhlnctoB

Fort Staff Writer

M h e real burden on the
^JNSonsuming world caused
fer^massive boosts in oil
S e e s will be gradual rather
A immediate because of
k inability of the oil-exg countries to quickly
e their imports,
i, according to Robert
lemon, deputy chairman
~
IMF's Committee of
y Deputies and senior
r to the Federal Bei Board* "the real imgsct on the standard of liv
Ipg of the rest of the world
gill be mitigated."
He. made these observations in a speech prepared
delivery to a conference
New York yesterday. A
dbpy of the text was made
available here.
Solomon, who will leave
the C-20 to resume full-time
duties at the Fed after midyear, was actually in Paris
for the deputies' meeting
prior to the full committee
session here June 1243. His
speech was read for him by
Edwin M. Trtiman of the
Fed.
Solomon said that the oilexporting countries, even
those with more diversified
economies, will develop
large surpluses because it
will take time to "increase
their imports in line with
their increased export earnings."
Thus, the consuming nations for the time being will
be paying for their higherpriced oil with debt, rather
than transferring goods and
services.
But the rfeal effect can not

r




be delayediorever, Solomon
Solomon declared, "as indistressed, and the deficits vidual ell-importing coun, must befinancedpreferably tries' go into debt to finance
by co-ordinated moves in
which countries try to di- their unavoidable trade defivide <tp the debt burden cits."
He pointed out that the
equitably, and not try to
consuming cquntries as a
shift it to each other.
group will be able to repay
In finding ways of financing the debt—which could be their debts only when the
exporters are in a posin the neighborhood of
biljieo—S&ldmon said "it may tiOft to buy mop goods from
become necessary to alter a world markets.
"Thus, we come back to
number of conventional
the question of the real burways of thinking."
For example, he said it den of the oil price inmay be necessary to set crease," Solomon said. "Just
aside usual fears about fi- as; the real burden is denancial institutions that bor- lved by the inability of
row "short" and lend in the many oil exporters to accelerate their imports, their
long term.
ability to collect their debts
- He pointed out that funds —to accept repayment—-will
placed by the oil exporters , be delayed until they are
in what are. usually termed able to generate an excess
short-term assets (as in of imports over exports." *
Euro-currency) are likely to
be held for a long time,
while the exporting nations
develop the capacity to absorb large imports.
At the same time, whatever form the borrowing by
oil consumers takes, "tile
fact is that they are likely to
be debtors for a long
time...
v "All this means that conventional fears about financial Institutions borrowing
short and lending long
ought to be looked at ana
tempered in the light of the
likely patterns over time of
the balance of 'payments
positions of oil consumers
and oil exporters," Solomon
said.
Conventional attitudes toward creditworthiness may
have to be revised, as well,

170
T H E W A L L S T R E E T JOURNAL

January 2 2 , 1974

REVIEW and OUTLOOK
The Robin Hoods of OPEC
Fundamental to the oil problem is to subscribe to romantic notions about
who will lose and who will gain from where the OPEC winnings will be reinthe seemingly imminent sudden trans- vested. I t is likely that most of them
fer of an added $50 billion a year from will be reinvested right back in the inoil consumers to oil producers. I t can dustrial world, where there are estabbe said with some assurance that if the lished capital markets, experienced
OPEC price boosts stick, few people in bankers, political stability and any
the world will not feel aome effect. number of viable projects. For examThere can be less assurance in trying ple, a Kuwaiti investment company has
bought a 20% interest in an Atlanta
to assess specific effects.
But economics being what they are, firm that plans' to finance a resort in
history shows that the poor are usually South Carolina.
the first affected by adversity. I t is a
None of this is to say that the indusreasonable bet that it will be already trial world won't suffer as well from
underprivileged places like Recife, the big oil payoff. Economist Walter
Bombay and Mombasa, rather than . J. Levy, one of the soundest oil experts
Paris or Atlanta, that will feel the around, fears that the sudden moveworst effects of the OPEC price grab. ment of that much money out of the
For that reason, the leaders of nations foreign exchange coffers of the induslike Brazil, India and Kenya might do trial nations could precipitate a worldwell to re-examine the notion that wide recession. His view may be
there is any real community of interest overly pessimistic; if money managers
among the so-called "Third World" na- in the industrial lands don't become
tions, of which both they and the OPEC too panicky and over-inflate their curcountries are a part. Their best inter- rencies to compensate for the loss,
ests may well lie in joining with the in- there might even be some beneficial
dustrial nations to persuade oil nations effects from damping down industrial
of the unwisdom of their cartel-type en- world consumption and applying some
deavor.
of the OPEC bank deposits to capital
The OPEC nations, have, of course, projects. But the large foreign exnot been unmindful of the opinion of change dislocation could indeed be disthe other Third World nations. At a ruptive to industrial economies.
meeting of the so-called "Committee of
Conversely, there could be some
24" Third World nations, held in Rome benefits to the non-oil producing Third
last week concurrently with a meeting World. Some of oil capital may well
of the International Monetary Fund go to Niger or Zaire in search of new
"Committee of 20" industrial coun-, oil or other mineral resources. The retries, a delegate from India voiced his sources they already have may prove
fears. But an oil nation representative more valuable than money in the bank
on the Committee of 24 is said to have in an inflationary world.
offered assurances that oil nations
But by and large, the effects on
would divide their new riches with Zaire, Niger and similar places are
other Third World countries through likely to be bad. With foreign exchange
special aid and lending programs. The reserves crimped, there will be less
Committee of 20, in the rather vaguely money for foreign aid and developworded communique issued after its ment in the Third World. The U.S.,
meeting, also recognized the special having been burned by the Third World
problems of the oil-poor of the Third oil producers, has become more inWorld and proposed that developed na- clined to develop its domestic retions, the World Bank and the I M F all sources rather than seek projects
seek ways to help out.
abroad. Outside help for nation buildAs to the Committee of 24 promises, ing might become hard to find.
indeed it is a noble thought that the
We suspect that a good many Third
OPEC nations will play Robin Hood. World countries are having difficulty
But historians have ungenerously sug- deciding whose side they shoufd be on.
gested that for even the real Robin We can offer a suggestion: Cartels are
Hood, helping the poor was rather sec- seldom good for anyone, even the naondary to the main object, which was tions who build them, in the long run.
robbing the rich.
Taking a stand for law and order is
I n other words, we would suggest much more realistic than' expecting a
that the Third World not be too quick handout from Robin Hood.




171
MASSACHUSETTS INSTITUTE OF TECHNOLOGY

DEPARTMENT

OF

ECONOMICS

CAMBRIDGE,

MASSACHUSETTS

02139

*

E52-350

May 14, 1974

Honorable Henry P. Gonzalez
Subcommittee on I n t e r n a t i o n a l Finance
Committee on Banking and Currency
Washington, D. C. 20515
Dear R e p r e s e n t a t i v e Gonzalez:
Thank you f o r y o u r l e t t e r o f May 9 . Enclosed are (1) a l e t t e r t o
Honorable Henry S. Reuss, and (2) a t a l k g i v e n i n Washington l a s t week,
(3) an a r t i c l e from F o r e i g n P o l i c y , and (4) a f o r t h c o m i n g paper from the
American Economic Review.
These summarize my suggestions about how t o
b e g i n undermining or a t l e a s t s t o p p i n g the i n t e r n a t i o n a l o i l monopoly.
I do n o t see any o t h e r method by which we can s t a r t t o b r i n g a l i t t l e
c o m p e t i t i o n i n t o :the w o r l d o i l m a r k e t . But I t h i n k t h e more I m p o r t a n t
t a s k i s t o convince more people of your o p i n i o n , which I s h a r e , t h a t w h a t ' s
bad f o r the c a r t e l i s good f o r the U.S.A.
I t seems q u i t e c l e a r t o me t h a t the a d m i n i s t r a t i o n i s n o t o n l y
r e c o n c i l e d t o t h e c a r t e l and the intended h i g h p r i c e s b u t has a c t u a l l y
helped them from the s t a r t and i s a r g u i n g i n f a v o r o f g i v i n g them what
they w a n t , so long as they " r e c y c l e " enough d o l l a r s back t o t h e U n i t e d
S t a t e s , and p e r m i t us t o pay f o r o i l by handing over our c a p i t a l e q u i p ment. I have even seen ( i n t o d a y ' s New York Times (May 13)) a h i g h
a d m i n i s t r a t i o n o f f i c i a l quoted as b e l i e v i n g t h a t s e c u r i t y o f o i l supply
i s b e s t achieved by b e i n g dependent on Saudi A r a b i a , and s h i p p i n g them
arms and o t h e r goods.
I t h i n k t h e panic about shortages w i l l g r a d u a l l y s u b s i d e , and more
of your colleagues w i l l share your o p i n i o n t h a t t h e problem i s one o f a
w o r l d monopoly which can be thwarted and broken up i n t i m e . The o n l y
i r r e p a r a b l e damage would be done by t h e k i n d of a long term commodity
agreement a t which Mr. K i s s i n g e r seems vaguely t o h i n t , a t a " j u s t p r i c e " .
I f e a r the loss of d i s c r e t i o n on t h i s c o u n t r y ' s p a r t . So long as we
remain uncommitted I t h i n k common sense w i l l p r e v a i l b e f o r e t o o much
time has passed.




Yours s i n c e r e l y

M. A . Adelman
Professor

172

The Petrocurrency Peril
The oil-supply emergency ended
this spring with the lifting of the Arab
petroleum embargo, but a different kind
of world oil crisis is approaching with
onrushing speed. It is a potential money crisis caused by the quadrupling of
oil prices orchestrated last fall and winter by the Organization of Petroleum
Exporting Countries. The threat that
these increases pose to world financial
mechanisms absorbed much of the attention of bankers and government officials from the U.S., Europe and Japan
who gathered in Williamsburg, Va., last
week, but their deliberations produced
no clear solution.
The dimensions of the threat are
simply stated. This year the twelve OPEC
countries stand to run up a trade surplus of $65 billion, v. a mere $7 billion
last year, and the money will come out
of the financial hide of the rest of the
world. Underdeveloped countries that
do not happen to be oil producers, such
as India, Kenya and Bangladesh, could
run up a combined trade deficit of $20
billion or more—if they can beg or borrow the money to pay for oil. The industrialized nations of the non-Communist world, which enjoyed a combined
trade surplus of $12 billion last year,
likely will swing this year to a deficit of
around $40 billion.
Costly Debts. Financing such enormous deficits puts a heavy strain on the
Western banking system. Already,
many European nations are having to
borrow at interest rates of 10% or so to
pay for their oil. Though most have good
credit, Italy recently had trouble raising $1.2 billion; it wound up borrowing
from no fewer than 110 banks. Franz Aschinger, economic adviser of the Swiss
Bank Corp., warns that over the next
eight years "the accumulated debt [of
the industrialized oil-burning nations]
would be $400 billion with annual interest payments of $30 billion."
European bankers worry that some
day one government, most likely Italy's,
will default on paying interest oh its
loans, putting several banks under and
setting off a Continent-wide banking
panic. Even if that is avoided, the most
strapped nations will be sorely tempted
to cut their imports of non-petroleum
goods so that they can save cash to pay
for the oil, a strategy that could cripple
world trade. Italy in April did in fact
clamp restrictions on many non-oil imports, to the anger of its eight partners
in the European Common Market, who
fortunately did not follow suit.
The solution is to somehow "recycle" the oil money—or, more bluntly,
get it back from the oil producers in the
TIME, JUNE 17,1974




form of purchases, loans and investments. It is fairly easy in the case of
four oil producers, Algeria, Indonesia,
Iran and Venezuela, which have large
populations and ambitious industrialization plans. They can be counted on to
spend much of their wealth buying goods
and services from the U.S., Europe and
Japan. But the richest oil producers, Saudi Arabia, Kuwait, the United Arab
Emirates and Libya, have small popu-

derstandably reluctant to make longterm loans out of money that may be
swiftly snatched away. Indeed, the Arab
strategy carries its own danger: that billions in Arab cash switching suddenly
out of one currency into another could
set off an international monetary crisis.
Several ways out of the bind are under consideration. H. Johannes Witteveen, managing director of the International Monetary Fund, is setting up an
"oil facility" that would accept deposits
from oil producers and lend the money
at bargain rates of about 7% interest to
nations that have trouble paying for petroleum. Unfortunately, he has collected
pledges for only $3 billion in deposits, an
amount far too small to be of much help.
Some European countries want to
quadruple the $42.22-an-ounce "official" price of the gold stored in their central banks, putting it about in line with
the free-market price of gold. That
would in effect give Italy more than $10
billion, and France almost $ 13 billion, of
new reserves to cover oil deficits. The
U S. opposes the idea, fearing that it
might help restore gold to an unwarranted special position in world monetary affairs. Some highly technical compromises have been suggested that would hold
the official price in theory while allowing countries in effect to pay for oil with
revalued gold—a sensible idea.
The best solution of all might be for
the Arabs to launch a massive program
of loans and aid to poor countries that
have no oil. The poor countries could,

lations and preindustrial economies;
they can spend on imports only a minor part of the $100 billion oil revenues
that they will collect this year.
So for, the Arabs have been reluctant to put their excess cash into longterm investments, where it would help
stabilize world finance. Western stocks
and bonds, they believe, do not pay
enough to be a good hedge against skyrocketing inflation, and real estate holdings could be seized by Western governments. Instead, the Arabs have been
putting most of their money into the
shortest-term investments possible: U.S.
Treasury bills, New York and London
bank certificates of deposit, and Eurodollar bank accounts—many of them
"call" accounts from which the money
may be withdrawn instantly without advance notice. That is a form of recycling that does little good; banks are un-

(hen build up their economies with
frany purchases of industrial goods and
msrh'mery from the U.S., Europe and
Japan. But the Arabs so far have shown
iir-ue interest in helping the Third
World. Perhaps that attitude will
change, and the reluctance to make
long-term investments in the industrialized world will diminish as the Arabs
become more sophisticated in handling
immense wealth. The question is whether a change in attitudes will come quickly enough to avoid bankruptcy for some
of the Arabs" best customers.

173
WASHINGTON STAR-NEWS

Washington, D. C., Sunday, March 10,1974

Super-Rich Arab Oil Sheiks
Begin Bringing $$$ Back
By John Hotasha
Star-News Stall Writer

American businessmen keep having this bad dream. I t involves a
dark-eyed man who steps unannounced one night from an airplane
at New York's Kennedy Airport. He
carried a briefcase bulging with
checks bearing the imprints of companies like Exxon and Texaco.
Quietly he sets off on a-series of
clandestine meetings with managers of major pension and mutual
funds. A few days and a few billion
dollars later, the United States
learns that the ruler of an obscure
Arab principality has taken over
General Motors. Or U.S. Steel. Or
DuPont. Or all three.
Although it is the feeling of most
Arab watchers that the newly super-rich sheiks don't presently plan
to seize control of important U.S. '
companies, it is clear they will have
the financial capacity.
Right now, the Arab oil producers
are estimated to have $50 billion in
liquid capital. All the outstanding
common shares of G M could be purchased for about $15 billion at current prices.
And their wealth continues to
mount. The oil producers will take
in an estimated $40 billion to $60 billion this year alone. By 1980, some
experts project they will have taken
> in as much as $750 billion.
T H E Q U E S T I O N is, what a r e
they going to do with that ocean of
money?
A vast amount, of corirse, will be
spent to develop industries in the
producing countries and to improve
the quality of life of Arabs in general. But some of the biggest producing states are sparsely populated.
Saudi Arabia Was able to absorb

3 7 - 2 1 1 O - 7 4 - 12




only half its 1972 income of $3 billion, even with welfare state programs such as interest-free home
loans. This year it may have as
much as $10 billion in surplus forThe situation is even more acute
in Kuwait which has one-fifth as big
a population as Saudi Arabia (less
than 1 million) and an estimated
income of $9 billion to $10 billion.
The Arab leaders' problem is how
to preserve that wealth against the
day the oil runs out—not an easy
task in an uncertain world. H i e lesson of Spain, which squandered its
New World gold in a few genera- .
tions pf opulence and then sunk
back into poverty, is not overlooked.
See ARABS, A-12

174
u.2>. tanks mm tear retaliation against their overseas

FINANCIAL sophistic* 1
. tion varies greatly from
country to country, al- ,
though all have progressed I
beyond the thinking of Abu
Dhabi's, Sheik Shakbut who
was overthrown in 1966 for
keeping the national treasury in cash under htebed.
Nevertheless, according to.
the
British
magazine
Economist: "The typical
Arab investment strategy is j
still to put funds O bank '
Q
deposit while waiting for
the ^brainwave to come/'
One brainwave that has
struck some Arabs is U.S.
real estate. The experienced
and fabulously wealthy
KuwaitjThaifls turned up in
-•several p r o j e c f r r ^ - * ^ ^
The goverument-pnrate-Kuwait Investment Qo> recently paid $J7.3 million for
Kiawah I s l & d off Charleston,. S.C. It plans to spend ,
$100 million over the next
decade developing it as a
resort. The same company
put up $10 million for a half
interest in the new Atlanta
Hilton.
A peal estate company in
Louisville, Ky., says it is
dickering through intermediaries for SSO mfllioh in
Kuwaiti .money to be invested in properties such as of-;
fice buildings, shopping
centers, and apartments.
B.
M.
HOLLINGSWORTH, of Enck, Hollingsworth & Reveau said there
were indications the deal'
might eventually swell to
$500 million. He said the
investors don't care about
income now. They want "secure positions; they aren't
Richard WlllUtrason,
represents the Kuwait Lbvestment Go. in tiie United
States describes its investment program as "extremely broad." He adds:
"They're not especially
concerned aoout casn now
now; they're looking for a
solid investment with upside potential" Nor are
their appetites confined to
real estate. "There's very
little we're not interested in
as long as it is attractive
and the people involved are
ethical."
Money, he makes it plain,
is not a problem. He doesn't
have a budget. "We receive
the money as it is required.
If we find a good investment, the money is there."




WILLIAMSON estimated
that the Kuwaitis, using
both public and private
funds, have already invested about $ O million directSO
ly in. the UnfcedStates. Another $3.5 billion 1*8 gone
into portfolio investments —
stocks, bonds, Treasury
securities, etc. — he estimates.
He said the Kuwaitis
aren't interested in takeovers. "We're looking for
passive investments that
will just leave us in a position to participate in t£e
discussions if something
oes sour. We're not the
apanese,"
Williamson
said.
Massive Japanese purchases of propety and resorts in Hawaii and West
Coast states in the last few
years have prompted calls
for laws restricting foreign
investment in the United
States. Ironically, the massive oil bills due the Arabs
has taken the steam out of
the Japanese buying binge.
Other reported Arab real
estate investments include
an office building on Fifth
Avenue inf New York purchased by the Shah of Iran
and $1 million in California
land bought by Adnan Khashoggi, a flamboyant Saudi

J

Arabian thought to be close
to the ruling family.
Last year Khashoggi
bought Security National
Bank of Walnut Creek,
Calif, from Democratic
Rep. Fortney H. Stark. At
that time, Stark expressed
surprise that Khashoggi
was willing to pay $29 a
share for the bank's stock
when die open market price
was in the $10-$12 range..
T H E R E HAVE been ,
some reports that Arab
interests favor buying into
American banks or organizing their own to help control
their investments here.
Foreign-owned banks with
head offices overseas have
an advantage over domestic
banks since they can
branch nationwide. U.S.
banks are not allowed to
branch across state lines,.
Rep. Wright Patman, DTexas, the chairman of the
House Banking Committee,
has introduced a bill to
regulate and restrict foreign branch banking in this
country—a move which has
sent tremors through major

The overseas brandies of
U.S. banks, particularly in
London and Beirut, profitably handle largfe amounts of
Arab deposits. Ova-half the
70 banks operating in Beirut
are reported to be partiallyforeign owned.
A Commerce Department
official, recently returned
from a Mideast investment
conference, said the Arab
participants scoffed at the
idea of massive takeovers
of U.S. companies. "Why

*b09l**Make oveMSM,"

he quoted one as -saying,
"What would we oo with
it?" He slid the Arabs were
aware they lack the
managerial talent to run
sucha massive enterprise.
In Saudi Arabia, for
example, there are less
than 5,000 college graduates..
ONE EXCEPTION to the
no-takeover policy thatrwas
discussed; the official said,
was "downstream petrochemical operations." This
includes everything from oil
refineries to neighborhood
gas stations and plants using oil/based fee-stocks.
. An indication of what the
future might hold is a deal
made last year by Ashland
Oil, Inc. In return fora half
interest in a Buffalo, N.Y.
refinery and a chain of
service stations, the Shah of
Iran agreed to supply 60,000
barrels of oil a day to the
refinery. .
As their experience with
refining and marketing increases, it is not unreasona. ble to expect that the oil
producers will seek to control and profit from their
product from the well to the
gas pump.
It appears likely that
Arab purchases of real
property in the United
States is likely to continue.
For one thing, the dollars
we pay for oil have got to
come home eventually. And.
buying something substantial is a good way to preserve the wealth represented by those dollars.
Currencies are fragile.
Inflation erodes their value.
If the United States has 10
percent inflation this year,
an investor in a 9 percentbond actually loses 1 percent.
DEVALUATION is a constant threat. Some cynics
have suggested that we pay
the Arabs anything they ask
for oil and than just devalue
the dollar drastically.
It is improbable the U.S

175

government would ever
adopt such a plan. Nevertheless. Saudi Arabia, Lybia
and Kuwait were reported
hurt badly try the two recent 10 percent dollar
devaluations.
" K u w a i t . . . lost a half a
billion dollars'as a consequence of its extraordinary
conservatism" in sticking,
with dollar
securities'
through the devaluations,
Harvard Prof. Howard
Stauffer told a congressional panel last November.
Nationalization of property is always a risk, too, but
the oil producers are counting on their control of crude
production to prevent any
retaliation for the seizure of
western-owned facilities in
their countries.
Moreover, it is their practice to maintain a low profile. Investments in stocks
, and bonds, Wall Streetecs
:
say, are made via the
untra-secret Swiss through
select New York banks.
PARTICIPANTS in the
few real estate deals which
have' surfaced indicate
there may be many better
camouflaged investments
underway.
"If anyone else is talking
with the Arabs, they're
doing it in secret," real estate operative Hollingsworth said. " I t makes
sense. Publicity about Arab
money brings everybody




Initial investment counts
else into your area. Its'
as an inflow, but as profits
happened here already."
Investment in the United are taken back by the invesStates isn't confined to the tor, it results in a cadi outArabs or Japanese. In these flow from the United States.
"Over the long term, forunsettled economic times,
the U.S has become a havea eign direct investment will
for nervous money. Just have a negative effect on
last Week, a New York the balance of payments
banker reported that a West and result in a dollar outGerman group was pre- flow," a staff report for the
pared to pour up to $100 mil- House banking subcommitlion into U.S. real estate. tee on international finance
They are particularly inter- concluded last year.
A NUMBER of bills have
ested' in shopping centers,
he said .
v been introduced to control
Direct foreign investment foreign investment in the
in the United States—a United States including one
category which does not in- by Rep. John H. Dent, Dclude stocks and bonds- Pa., which would bar nonhas soared from less than citizens from buying more
$500 million in 1971 to an than 5 percent of the voting
estimated $2 ft billion last stock of any publicly-traded
s
corporation.
year.
A series ot Key Hearings
The influx, which is expected to accelerate, has wi the entire issue of forprompted a growing debate eign investment in the
on its effect on the U.S. United States are planned
for April and May by subeconomy.
committees headed by
ON ONE SIDE are U.S. Reps. Henry Reuss, Dbusiness interests which Wisc., Henry B. Gonzales,
are fearful about the mud) D-Texas and Rep. John E.
larger U.S. investment Moss, D-Calif., > himself
overseas ($94 billion com- sponsor erf proposed restricpared to about $16.5 billion tive legislation.
owned by foreigners here.)
On the other is the concern of some elected officials that foreign interests
could take over key sectors
of the economy and that
ultimately their investments could worsen the balance of payments.

176
THE.

N&W

V®^

AID TO POOR LANDS
URGED BYEXPERTS
$3-Biltior> From

Industrial

and Oil Nations Asked
By EDWIN L. DALE Jr.

S c U t T e Nw Y r T M
p c l o h e ok l
m

WASHINGTON, June 9 — A
Report prepared by three economic experts proposes that the
industrial nations of Europe,
North America and Japan join
the oil-producing nations in
contributing $3-billion to aid
kome 30 poor countries that
have been hard hit by higher
oil and food prices.
• Under the proposal, the
emergency relief would be provided in 1974 and 1975, with
the oil-producing nations giv)ng half the aid and the industrial nations the other half. The
kid could be in money or food
or, from the oil countries, in
the form<of easy credit terms
tor oil sales.
J The proposal is the highlight
of a 23-page report prepared
for the Trilateral Commission,
I n organization established last
5ear of leading citizens and
Some government officeholders
from Europe, North America
fmd Japan. The report, which
Vas made available to /pie
W
York Times, was wntten
&y Richard N. Gardner of the
United States, Saburo Olota of
Japan and B. J. Udink of the
Netherlands. All have held government positions and have
otherwise been involved m international economic affairs.
'Fourth World'
The report says: "The plight
of the 'fourth world' countries
cannot wait for a general restructuring of the international economic order—a task that
may take years. Without emergency measures in the next few
months, the shortage of food,
energy and other essential supplies will bring mass starvation, unemployment and increased hardship for millions
already at the economic margin."




I

The report refers to the inbOStrial countries of Europe,
North America and Japan as
the "trilateral world" and says:
"W« must not allow the plight
of the non-oil-producing developing countries to worsen while
the trilateral world and the
[oil-producing] countries argue
about who is to blame for the
present crisis, nor will anything be gained by controversies about what is a 'fair* price
for oil."
Urging an "extraordinary act
of cooperation" that would not
strain the finances of either the
trilateral world or the oil countries, the report says'.
"Time is now of the essence.
The full impact of the plight
of the developing countries has
not registered so far because
financial settlements for oil are
made quarterly and bills for
oil shipped at the new high
prices are only just coming
due. .
'Crunch' This Summer
i - "The 'crunch' will come this
summer when accounts for the
second quarter of the year have
tp be settled," the report says.
• The report suggests that the
industrial countries divide their
$1.5-billion contribution according to the formula of their
Shares in the World Bank's International Development Association. This would mean onefftird for the United States, or
i500-million. No specific suggestion was made as to how
the oil-producing countries
Should share their $1.5-billion
«ontribution.
; The 50-50 sharing of responsibility "should be accepted as
fin ad hoc measure appropriate
only to the present emergency
and without prejudice to burclen-sharing arrangements for
{he longer term, the report-says.

T»wtes

177

lUashinaton StarHems
SATURDAY, MAY 11,1974

Plan for Petroleum
A sense of utmost urgency is reflected in a new British proposal for getting some kind of control over oil
pHces and putting some order into the
anarchic conditions that prevail today
in the world oil and money markets.
The problem, as the British government sees it, must be dealt with immediately if the world is to avoid a
possible collapse of the West's financial system before the end of the year
on the same proportions as that which
followed the stock market crash in
1928. Especially among the developing
poorer countries such as India, it is
believed that bankruptcy is a real
possibility in a matter of weeks. And
the industrialized nations would feel
the crunch soon thereafter
The British plan — still not formally
approved by the Wilson government —
is being outlined to administration
officials here by Harold Lever, a
minister without portfolio and financial adviser in fhe Labor cabinet. It is
being billed as the first European response to Secretary of State Henry
Kissinger's plea for cooperation between oil producers and consumers in
meeting the crisis precipitated by the
skyrocketing price of crude.




It proposes a collective effort by the
major oil consuming states in dealing
with the producers. The six major consumers (the United States, Britain,
France, West Germany, Italy and
Japan) would bargain collectively
with the major producers for most of
the world's oil production. They would
then resell the oil to consuming countries at cost, plus a small surcharge.
The main idea is not to force down
the price of crude by hard collective
bargaining, but rather to put an end to
unrestrained competition among consumers for oil and credits that
promises to force prices even higher.
The surcharge on the huge cash turnover would be used to offset the price
increases by loans or outright gifts to
the poorer countries. The producers,
furthermore, would be encouraged to
take in cash only what they can usefully use to buy commodities and increase their reserves — perhaps about
$15 billion. The balance — about $50
' billion — would be deposited with the
six-nation agency to be loaned out as
needed to cover deficits among consuming nations, rich and poor. All
payments and deposits would be tied
to the export commodities index,

insuring against devaluation through
inflation.
It is a bold and imaginative scheme
and it just might work. The objections,
of course, are largely political,— the
suspicion of the producers that the
West is ganging up on them in forming
a consumers' cartel — the tendency of
some countries, notably France, to go
it alone in such matters — the fact
that the scheme is certain to require
an enormous amount of American dollars, a preferred currency.
Still, if .the situation is anything like
as critical as it appears to be, with all
that is implied in terms of economic
and social dislocation among the oil
consuming nations, there is no time to
be lost. Certainly the British proposal
deserves the most prompt, careful and
sympathetic consideration by administration experts.

178
T H E WASHINGTON POST

A p r i l 8, 1974

Expert Urges ILS. to Adopt
New Oil Import Quota Setup
By Daniel Q. Haney
Ausclated Pr«M

CAMBRIDGE, Mass., April
7—The United States should
start a new oil import quota
system to. make it easy for
members of the international Oil monopoly to cheat on
ea<^h other, says a world oil
expert.
Such a policy could lead
to the downfall of the Organization of Petroleum Exporting Countries, the cartel that has quadrupled the
price of foreign oil in the
past year, says Maurice A.
Adelman, an economist at
Massachusetts Institute of
Technology.
But before this can happen, American foreign policy makers must acknowledge tjiat the oil cartel isr
bad for American interests,
says Adelman, whose views
on OPEC often run opposite to fellow oil economists
and N i x o n administration
policy.
OPEC is made up of 11 of
the 12 biggest oil exporting
countries in the world and
controls m o r e t h a n twothirds of the world's known
oil'reserves. The most important members a r e t h e
Persian Gulf countries which
inblude Saudi Arabia, the
world's largest producer of
oil after the United Statfes.
Also included In the membership are all the major
Arab oil-producing s t a t e s
which only recently lifted
an embargo on oil shipments
to the United States. Canada is not a member of
OPEC.

*

M. A. ADELMAN.
, < . * way to cheat

a controversial, but #}dely
respected authority on the
international oil market.
M
My suggestion is that we
put this limit in the form of
a quota and that we put
parts of the quota up for
sale by direct, sealed competitive bids," he says. "The
higher the price, the more
profitable it is to export oil
into the United States.
"Anyone w i t h potential
oil knows lie can find a
home for it in the U.S.A. All
you require of a bidder is
that he plunk down some
good, hard cash" for oil-selling licenses:
This system would magnify the tensions that already
exist Among OPEC countries( he says. Some of them
want to sell as much oil as
possible now so that they
can invest the profits, while
The OPEC countries deothers want to hang onto
cide among themselves how
their oil to keep prices up.
much oil they will sell and
how much they will charge
This way, any government
for it. Their goal is to sell as
that wants to do some chiselmuch oil as possible without
ing has a perfect vehicle for
creating a s u rp 1 u s that it," Adelman says. No counwould drive down prices, try would know how much
Adelman says.
its colleagues were selling
to the Americans, he says.
"There is no question that
"This mould shake the caroil imports into the United
States are going to be limit- tel," he says. "It means you
ed" as the nation moves to- cannot make any kind of
ward its goal of energy inagreement to keep the price
dependence, says Adelman, at a certain level, because




you can't control the people It vastly enriches the Arab
who are going to cheat,
, nations and makes it easier,
' "If it works well ip the for them to impose future
Unitecl States, other counembargoes, he says. It alio
tries wiU try it, and that will
makes a scramble for j&l
be the end of the cartel.
This would bring oil prices that creates hard feelings
baek down. How far, I dont - between the United States
and its allies in Europe and
know, but there's lots of
Asia. (
room to go down."
The price of oil produced
Adelman maintains thatby the Cartel now . hovers U.S. foreign policy os pararound $8 a barrel, and
tially to blame for the curOPEC says this price will be
rent Strength of OPEC. He
maintained until June when says that because of fears in
it will meet again to con-' thcf 1850s that the Soviet Unsider adjustments. .
ion would gain too much inThere is no wbrldwide oil
fluence with Arab oil-producshortage, pqly a market artiing states, the United States
ficially controlled by the
embarked on a policy of
cartel, Adeftnan says.
Arab appeasement. One of
Iran, Iraq, Saudi Arabia, the results of this policy was
Kuwait and Abu Dhabi the development of a system
"have a huge excess of po- whereby American oil comtential production capacity
panies can deduct , from
which can be made into ac- their U.S. incom® tax royaltual capacity in a relatively
ties paid on oil from OPEC
short time.
c o u n t r i e s . OPEC w a s
"Always the problem has
founded in 19(J0 with the enbeen how do you keep up
couragement of the U.S.
the price by containing this
government, Adelman says.
potential and not letting it
Adelman's
view
that
become actual?"
. OPEC should be actively opAnd herein lie the seeds
posed by the United States
of disagreement that could
a n d o t h e r oil-consuming
lead to the cartel's downfall,
countries has been heavily
Adelman says.
criticized by some of his fel"There are some countries
low economists. The Nixon
—Iran is the most important
administration itself seems
—with fairly sizable populadisinclined to take an advertions, Water and natural resary posture agrtist OPEC.
sources who can put -tb very
The U.S. oU import quota
„ profitable use all of the rev- law, in effect since the Eisenues they can get, building
enhower administration, was
the infrastructure of a civilifted last year Ijy the Presilized society," he says. "Foi
dent as oil shortages began
every dollar they .invest,
to appear. There have been
they can probably get a reno indications that the quoturn of 20 per cent a year if
tas will be reinstated in the
it's done sensibly.
near future.
"Other countries, such as
The Nixon administration
Abu Dhabi, have to invest in
has called for consumingthe international financial
country unity in the face of
market. They cannot hope
OPEC price increases, but
to get any such high rate of
with little success. The
return. Between those counAmerican government £as
tries who want to make
repeatedly warned its Euromoney as fast as possible
pean allies not to make
and those who don't, there
country-to-country deals for
is a big difference of opinoil. But several European
ion."
countries are in the midst of
The cartel is bad for
negotiating separate deals
American interests, because
for oil with OPEC countries.

179
THE WALL STREET JOURNAL,
W«dne»dmy, M»y 8, 1974




Britain Leaning to Oil Purchases, Sales
By IMF to Attack World Monetary Woes
B y RICHARD F . JANSSEN
Staff Reporter of THE WALL STREET JOURNAL

Fear that the world's banking system
will break down by year-end is impelling
British government officials to broach a
drastic new approach to the oil money prob7
lem.
The idea surfacing in the Labor Party
government's highest circles is that the International Monetary Fund should swiftly be
empowered to buy oil from producer "nations
and resell it to consumer countries to assure
that both oil prices and currency flows are
kept under orderly multilateral control.
Top U.S. officials are sure to be sounded
out on the British thinking this week,when
Harold Lever, special economic and financial adviser to Prime Minister Harold Wilson, is on a mission to Washington. In London, it is hoped he may find some supporters in incoming Treasury Secretary William
Simon and in Chairman Arthur Burns of the
Federal Reserve Board.
Earlier this week, the IMF's managing
director, Johannes Witteveen, described a
plan for his agency to borrow funds to relend to oil-consuming countries. The British
idea, being described as a brainchild of Mr.
Lever rather than official government policy, goes further by suggesting that the IMF
purchase the oil outright. The two ideas, In
the British view, aren't incompatible.
British officials privy to the plan concede
it sounds incredibly ambitious, but some of
them, at least, contend that continuation of
current uncertainties about currency movements and values poses the gravest risk to
the Western world's financial stability since
World War n , and with economic consequences that could be comparable to the depression that followed the 1929 financial
crash.
Basically, the worriers reason that
nearly all the extra $50 billion that oil-producing nations are apt to receive this year
due to higher prices will be placed in the
commercial banks of the U.S., Britain and
other industrial countries. The deposits, and
the need to find lending opportunities for
them quickly, will Increase far faster than
the underlying capital of the banks, they figure. This is a concern that some other
sources separately attribute to the Fed, as
well.
The banking system's soundness could
succumb more swiftly, the reasoning goes,
if some of the non-oil poor countries and
some of the hardest-hit industrial countries,
such as Italy, launch dollar borrowings outside the U.S.'that flop. Attempts by major
banks to call existing debts of such countries for immediate repayment would fail,
too, it's figured, possibly triggering a panicky chain reaction of financial collapses of
governments and banks alike.

Cooperation by the U.S. would be crucial
to preventing or arresting such a process,
British strategists say, if the idea spreads
that dollars aren't safe to hold outside the
U.S. Theyvcould imagine a drain from the
London-centered market in Eurodollars (dollars on deposit in banks anywhere outside
the U.S.) and back to New York. That would
mean that the countries hi direct needf of
Eurodollar credits to offset their enlarged
oil bills wouldn't b* getting them.
The consequences, sources who couldn't:
be quoted directly say, would be akin to
those afflicting the secondary or fringe
banks in Britain, which have suffered runs
by major creditors. The rescue operations
that central banks and governments would
have to mount on a global scale would be so
va?t and so sensitive, they warn, that mishandling could easily cause results ranging
from a major mishap to catastrophic economic slumps in major nations.
Whether the IMF's Committee of 20 deputies will discuss the British ideas during
their meeting this week in Paris remains to
| be seen. The deputies already are, b « g diverted from their once-ambitious long-range
planning for a new monetary system to
doing some Interim patching up and to preparing standby plans that may need a shelf
life of some years before conditions become
calm enough to try putting stabler exchange
rates into being.
It is conceivable, though, some Paris
participants say, that the desire of Common
Market finance ministers to make use of
gold reserves at something closer to the
market price, currently $163 an ounce, than
to the nominal official price of $42.22 an
ounce, could lead to a breakthrough on the
long-standing demand of the poorer countries for an extra share of the IMF's "paper
gold," or Special Drawing Rights.
Should it appear that the richer ones are
about to hand themselves a windfall by
roughly quadrupling the worth of their gold
reserves to market levels,, planners worry,
the poorer or developing nations may block
agreement on anything else unless they get
their long-sought "link" between SDRs and
foreign aid. The U.S. and West Germany in
particular are against using SDRs as aid,
preferring to limit them to a reserve asset
function.
The rich countries will be watching the
poor ones for clues during the deputy-level
sessions, so they'll have an idea whether a
ministerial meeting June 12-13 in Washington may get bogged down an the link issue.
If the Europeans feel strongly enough on
making use c^ their gold, though, some Insiders figure it Is possible that a grand-slain
compromise could be worked out, givinff the
rich what amounts to a richer Msard of gold
and giving the poor an extra ration of SDRs.

180
MARCH 21,

1974

Ibe toasijington fwt
AN

INDEPENDENT

NEWSPAPER

Pavlovian Politics and Arab Oil

P

RESIDENT NIXON was evidently caught between
two opposite impulses at his Houston press conference when he talked about the end of the Arab oil embargo. There was the strong temptation to play up the
good news and tell the country that Its oil troubles are
over.. But Mr. Nixon knew, of course* that our oil troubles are anything but over; the Arabs mean to keep the
shipments lower than this country had expected. As it
turned out, Mr. Nixon chose his words skillfully and
managed to harvest several rounds of applause from
Bis audience without giving away any substantial part of
his position. He announced, for example, that he was
rescinding his "order" to close gas stations on Sundays.
But the order was never anything more than a request
for voluntary compliance, and it was being increasingly
Ignored. The important parts of the oil conservation
program all stay in place—the allocations, the low speed
limits, the mandatory savings in industry. Prices will
Continue to rise, the strongest force of all for conservaIt is unpleasant but absolutely necessary to hold
oil consumption. In view of the Arabs' public statements, this country has no reason whatever to rely on
the continuity of their future oil shipments to us.
The Arab oil producers now say that they are going to end their embargo against the United States
temporarily, depending upon our good behavior. Dr.
PaVlov rings the bell, and the dog salivates. In order
to keep the dog salivating on signal, it is necessary
to give him a morsel from time to time. In the same
orderly and scientific spirit, the Arabs evidently intend to train us to identify our interests with their
purposes. When we are obedient, the oil will flow.
When we are refractory, the oil will stop.' But if the
oil is stopped too long, there is a danger—from the
Arabs' point of view—that Americans will learn to
live without the embargoed oil. It follows that the
canny Arabs do not intend to leave the oil turned off
Indefinitely, even though progress toward a firm peace
in the Mideast continues to 'be very slow. But to underline their intention, the ministers mean to meet again
on June 1, less than three months from now, to "review" the decision on the embargo.
- The Pavlovian politics of oil requires not only continuous uncertainty regarding the embargo but, much
more important, a lower flow of oil than the world was
expecting. Saudi Arabia has said that It will ship 1 million barrels a day to the United States, an amount not
quite sufficient to bring our oil imports back up to
the level of last fall. Until last fall, American oil
policy assumed relatively low prices and a massive
increase in oil consumption. Most of that increase was
to come from abroad and, specifically, from' Saudi
Arabia. The Arab exporters are now offering us the




opportunity to end our present discomfort by re-establishing our dependence on them.
Everything comes down to Saudi Arabia and its
position. The Saudis command vastly the largest and
most accessible oil reserves in the world. It is not
really a matter of a cartel, because very little depends
on what the other Arab producers choose to do. Saudi
Arabia is by itself a large enough element in world
oil trade that when it holds, down production there is
a worldwide shortage, and if it pumps to capacity
there will be a worldwide glut. A lot of oil exporting
countries are going to be pressing the Saudis to restrict
shipments in order to keep up the prices for everybody
else. More dangerous, every setback in the Arabs'
negotiations with Israel will immediately bring an outcry from other Arab governments and political movements to invoke the oil weapon again. With every rise
in their level of frustration, and with every rebuff to
the Palestinian cause, the more militant and radical
Arabs will begin to lean on the Saudis to turn off the
oil; Saudi Arabia, a small country in terms of population and military strength, is in no position to stand up
to unlimited pressure from its neighbors. That truth
needs to be kept very much in mind by Americans as
they consider the stability of our future oil supplies.
Now that the Saudis are going to ship to us again,
for the time being, what ought we do? First of all, we
need to keep the present conservation rules in force.
If we drop these precautions, after having been plainly
warned that the Arab oil ministers are taking up the
embargo question again in June, we are foolish to the
point of negligence. Next, we ought to store at least
some proportion of the new imports. Building oil storage capacity is expensive, but it is not as expensive as
the anxieties and uncertainties of recent months.
The oil weapon has been a great success in terms
of raising prices, dismaying consumers and disrupting
economies in the industrial countries. But it has had no
visible effect on .the pace or direction of the peace
negotiations between Israel and its Arab neighbors.
The United States is trying earnestly to assist the
negotiations and speed both sides toward a stable
peace agreement. But it has been slow work, and it
will continue to be slow work. The oil weapon has been
effective for everything except the one purpose fpr
which it was evoked. The United States can readily
agree to continue to deal with both sides in good
faith, but it cannot promise rapid or dramatic results.
We must assume that the oil embargo may flicker on
and off over the months to come. If it catches us unprepared a second time, we shall have no one to blame
but ourselves.

181
Address Co N a t i o n a l Press Club, Washington, D. C . , Thursday Hay 9 t h , 1 P.M.
COPING WITH THE OIL CARTEL
M. A . Adelman
M.I.T.
I am honored t o address the N a t i o n a l Press Club, a l s o g r a t e f u l .

The

press has created the p u b l i c record o f the w o r l d 611 market, d i r e c t l y and
i n d i r e c t l y , o f t e n i n t e r a c t i n g w i t h Congress.

I f i t were not f o r you,

academic i n d u s t r y study would be i m p o s s i b l e , which some people t h i n k would
not be a bad i d e a .
1974 may be the year o f r e t u r n i n g s a n i t y .

There seems a t l e a s t the

beginning of understanding t h a t surging demand pushing us a g a i n s t l i m i t e d
resources i s a f a n t a s y .

World o i l remains i n huge p o t e n t i a l s u r p l u s , as i t

has been f o r a t l e a s t 50 y e a r s .
how t o c o n t a i n t h a t s u r p l u s .

The problem f o r the i n d u s t r y has always been

Before the g r e a t turbulence began i n 1970-71,

the Persian Gulf p r i c e was about $1.20 per b a r r e l .

There was a chronic

s u r p l u s , w i t h more o i l a v a i l a b l e than demanded, because a t t h a t p r i c e i t was
enormously p r o f i t a b l e t o expand p r o d u c t i o n by d r i l l i n g new w e l l s .

Now t h a t

the p r i c e has been m u l t i p l i e d by a f a c t o r of 7 or 8 , t h e r e i s a f a r bigger
p o t e n t i a l s u r p l u s , but a l s o a much stronger b a r r i e r t o h o l d i t back, namely,
the c a r t e l of the producing n a t i o n s , the members o f OPEC.
A good p i c t u r e of the market f i v e years ago i s the memorandum released by
Senator Church's subcommittee, w r i t t e n i n December 1968 f o r the top management
o f the Standard O i l Company of C a l i f o r n i a , which f o r some obscure reason
t r y i n g t o b e l i t t l e i t and shove i t under the r u g .

is

I t confirms o t h e r evidence,

o f people doing t h e i r best t o c o n t a i n the surplus b u t unable t o p r a c t i c e
c o l l u s i o n w i t h the other companies.

From 1947 t o 1969 the Persian G u l f p r i c e

came down, i n r e a l terms, by about 65 p e r c e n t .

The o i l companies were beating

a 8low but long r e t r e a t . The c u r r e n t f u r o r against the o i l i n d u s t r y d i s t r a c t s
our a t t e n t i o n w h i l e the c a r t e l nations l i f t $100 b i l l i o n every y e a r .




182
- 2 -

The b i g change since 1969 I s t h a t a group o f governments have taken over
from the companies the j o b o f c o n t a i n i n g the s u r p l u s .
r e a l l y new.

This i s something

A p r i v a t e monopoly can r e s t r i c t output and r a i s e p r i c e s , but

o n l y w i t h i n l i m i t s p e r m i t t e d by the coercive power of government.
may l o s e t h e i r monopoly, o r go t o j a i l .
do as they please.

Monopolists

But a group of sovereign s t a t e s can

There i s nobody t o stop them from charging what the

t r a f f i c w i l l b e a r , which i s the cost o f the cheapest a l t e r n a t i v e .
When somebody says

i n defense, i n a c c u s a t i o n , o r as a simple f a c t - t h a t

oil

producers set a p r i c e equal t o the " r e a l v a l u e " o f t h e i r p r o d u c t , as s e t by
competing products, he i s saying t h a t they are monopolists.

I f the farmers

could m a i n t a i n a monopoly, they would charge us whatever we were w i l l i n g t o
pay f o r the p r i v i l e g e o f e a t i n g .

The p r i n c i p l e i s :

w h a t ' s i t worth t o you?

The man who p o i n t s a gun i n d says "Your money or your l i f e " i s a l s o g i v i n g us
a lesson i n monopoly p r i c i n g .
Right now the governments a t the Persian Gulf are t a k i n g between $7 t o
$11, and p r i c e s range from $8 to $12.

I w i l l not waste your time I n t r y i n g

t o d i s t i n g u i s h between taxes and r o y a l t i e s and buybacks and d i r e c t s a l e s , nor
about ownership and p a r t i c i p a t i o n 4nd j u s t compensation.

The

governments are completely I n charge, but they have not y e t s e t t l e d the p r i c e
a t which they convey the o i l t o the companies who do the a c t u a l work o f
f i n d i n g , developing, and producing.
tQj&7 than $11,




The average w i l l probably s e t t l e out c l o s e r

183
-3-

Today producing capacity a t the Persian Gulf i s already 20 percent
above p r o d u c t i o n .

As f o r the years t o 1980, a number o f people are now

doing a few sums.

They use v a r i o u s methods, and come out w i t h v a r i o u s

answers.

But estimates o f consumption and p r o d u c t i o n i n consuming c o u n t r i e s

suggest t h a t the demand f o r o i l from the OPEC c o u n t r i e s w i l l not be much
l a r g e r i n 1980 than i t was l a s t y e a r .

Among the OPEC n a t i o n s some are

d r i v i n g as hard as they can f o r g r e a t e r o u t p u t .

In*prudence, count o n l y

the announced p r o d u c t i o n p l a n s , n e a r l y a l l f o r 1976, which have not been
c r i t i c i z e d as i m p r a c t i c a l .

This assumes no Increase a t a l l f o r A l g e r i a ;

and i t assumes t h a t I r a n , Indonesia, and N i g e r i a , w i l l take seven years
to expand as much as they have i n the past t h r e e .
and Abu Dhabi are assumed unchanged.

Venezuela, L i b y a , Kuwait,

What's l e f t f o r Saudi Arabia i s l e s s

than what they a c t u a l l y produced l a s t year*

There I s even a good chance

t h a t i f a l l the OPEC nations but Saudi Arabia produced a t r a t e s which they
can e a s i l y reach before 1980, t h a t country could shut down completely, and
y e t the amount supplied would equal the amount demanded a t c u r r e n t o r l e s s
than c u r r e n t p r i c e s .
Of course, Saudi Arabia i s not going t o shut down.

Nor w i l l they be

content w i t h 5 m i l l i o n b a r r e l s d a l l y when t h e i r capacity i s already twice t h a t
and growing.

Of course, we have heard from Americans and Saudis t h a t Saudi

Arabia i s producing f a r more than I s i n t h e i r economic I n t e r e s t - t h a t they
are s a c r i f i c i n g , producing f o r sweet c h a r i t y .
anything.

Some people w i l l b e l i e v e

The p o i n t i s , Saudi Arabia cannot by i t s e l f c o n t a i n the surplus

by r e l a t i v e l y s m a l l and manageable cutbacks.
must share the burden o f r e s t r a i n t .
their differences.

Therefore other OPEC nations

The nations must n e g o t i a t e , and compose

The only argument any w i l l heed i s the t h r e a t o f damage.

The best way t o make t h r e a t s c r e d i b l e i s t o b u i l d excess c a p a c i t y i n case o f
a fight.




184
-4-

I w i l l not guess how much excess capacity w i l l a c t u a l l y accumulate
by 1976 o r 1980.

But assume the Investment needed f o r one b a r r e l per day

added c a p a c i t y stays around 1972 l e v e l s .

For a Persian Gulf country which

enjoys average costs - n o t the lowest l e v e l - one d a l l y b a r r e l o f o i l s o l d
a t $8 a b a r r e l pays back the Investment I n 16 days.
per year p r o f i t on Investment.)
32 days (only 14,000 p e r c e n t . )

(This i s 23,000 percent

I f the p r i c e has dropped t o $5, i t

takes

I f there i s any chance o f ever f i n d i n g a

market, the excess capacity I s w e l l w o r t h b u i l d i n g and s i t t i n g on.
The c a r t e l w i l l t h e r e f o r e b u i l d a l o t o f a c t u a l excess c a p a c i t y .

The

sooner the governments r e a a l y n a t i o n a l i z e and take over the investment
d e c i s i o n s , the f a s t e r the b u i l d u p o f excess c a p a c i t y .
probably not c o l l a p s e by i t s e l f .
easily.

But the c a r t e l w i l l

The gains are too enormous t o g i v e up

One must i n common prudence assume the OPEC nations w i l l h o l d

t o g e t h e r ; i f they q u a r r e l they can r e c o n s t i t u t e the scheme.
What the surplus does promise i s a great t.emptatlon on each o f them
t o c h i s e l and cheat, t o make Incremental sales a t lower p r i c e s t o get
additional p r o f i t .

This i s the t r a d i t i o n a l nemesis o f c a r t e l s .

When

producing nations b u i l d r e f i n e r i e s and buy t a n k e r s , there w i l l be many
more o p p o r t u n i t i e s to shade p r i c e s .

And the Impulse i s i r r e s i s t i b l e when

f e a r r e i n f o r c e s hope - the f e a r t h a t others are p r o f i t i n g by your s c r u p l e s .
D i s t r u s t melts the glue t h a t holds the monopolists t o g e t h e r ; each can
reflect:

When you have a f r i e n d t r i e d and t r u e , do him q u i c k before he

does you.
The temptation to c h i s e l and cheat i s a l l the s t r o n g e r when t h e r e e x i s t s
a very l a r g e market which any producing n a t i o n can hope t o p e n e t r a t e , t o get
l a r g e blocks of a d d i t i o n a l business by rebates which do not a f f e c t p r i c e s
elsewhere.

This i s the t r a d i t i o n a l r o l e of the l a r g e b u y e r , which the U n i t e d

States can play i f I t so d e s i r e s .




185
-5-

Zero Imports f o r the United States are a mirage.

There w i l l be Imports,

and those Imports must be l i m i t e d f o r the sake o f n a t i o n a l s e c u r i t y .

A tariff

w i l l not do because one cannot p r e d i c t I n advance how much I t w i l l reduce
Imports.

Domestic producers w i l l have no f i r m ideai of how much they can s e l l .

Hence there must be an absolute Import l i m i t .

The t o t a l o f p e r m i t t e d Imports

must be d i v i d e d up and a l l o c a t e d somehow.
Consider a t i c k e t which permits the holder t o import a given amount o f
oil.

The value o f the t i c k e t i s the d i f f e r e n c e between the United States p r i c e

of o i l , on the one hand, and the cost o f o b t a i n i n g and t r a n s p o r t i n g o i l on the
other.

Producing governments can b i d several d o l l a r s per b a r r e l , i n f a c t t h e i r

l i m i t i s t h e i r take.
Import quota t i c k e t s are e x a c t l y l i k e other valuable r i g h t s , l i k e leases
to produce.

They should be awarded i n e x a c t l y the same way?

for

flexibility

they should be s o l d i n assortments:, from 3 months t o perhaps three y e a r s .
Anybody a t a l l ought t o be permitted to b i d , the only requirement being a
c a s h i e r ' s check f o r the amount b i d .
up the money.

Nobody need know who was p u t t i n g

Resale o f quota t i c k e t s should be p e r m i t t e d .

:

v

I n t h i s way, any

government which wanted sales i n the United States could have them, by r e b a t i n g
p a r t o f i t s gains t o the United States Treasury.

They would have t o f u r n i s h

t i c k e t s to the producing companies who otherwise could not import here.

We

could o f f e r a home f o r o i l a l l over the w o r l d , and an i n c e n t i v e t o expand
output.

Since our imports would be a minor f r a c t i o n of world p r o d u c t i o n ,

it

would take only a small m i n o r i t y , under cover o f anonymity, t o b i d f o r a l l the
tickets offered.
get the business.




Those who put p r o f i t s higher than l o y a l t y t o the c a r t e l would

186
- 6 -

Thia scheme would n o t a f f e c t t h e domestic p r i c e of o i l , which w i l l

for

t h e foreseeable f u t u r e be f a r above p r o d u c t i o n costs a l l over the w o r l d , and
much higher than a t any time since World War. I I .

The sooner we face t h i s ,

the b e t t e r ; b u t i t i s an issue separate from our a p p r o p r i a t i n g a s l i c e o f the
monopoly g a i n s .

The consumer i s n e i t h e r helped nor h u r t - as a consumer -

because t h i s scheme has no e f f e c t on the domestic p r i c e .

The consumer

b e n e f i t s as a taxpayer.
The immediate reward t o t h i s country o f a quota t i c k e t system would be
a l a r g e r e d u c t i o n i n the economic burden of o i l i m p o r t s .

A l s o , we would

s t a r t the war o f a l l against a l l and put the c a r t e l on the s l i p p e r y s l o p e .
Once i t b e g i n s , the s l i d e can a c c e l e r a t e .
Those OPEC nations which c u r t a i l p r o d u c t i o n can only a f f o r d t o do so
because o f the h i g h p r i c e s they r e c e i v e .

Hence a r e d u c t i o n i n p r i c e s i s

t w i c e blessed f o r us and o t h e r consuming c o u n t r i e s .

I t reduces the burden

and i t a l s o makes the producers w i l l i n g o r anxious t o expand o u t p u t .
This idea i s p r a c t i c a l but t h a t does not n e c e s s a r i l y make i t good.
we want the c a r t e l to f l o u r i s h or fade?

My own o p i n i o n i s t h a t w h a t ' s bad

f o r the c a r t e l i s good f o r the United S t a t e s .

The burden o f paying f o r

imports has been much exaggerated b u t i s s t i l l very g r e a t .
underdeveloped c o u n t r i e s , i t i s r u i n o u s .
we w i l l need t o b a i l them o u t .

Do

oil

For most o f the

There i s no way they can pay, and

We are embroiled w i t h our f r i e n d s and t r a d i n g

p a r t n e r s i n attempts to shove the burden o f higher p r i c e on each o t h e r .

Our

government denounces the b i l a t e r a l deals o f armaments o r other goods f o r

oil,

tfille

we ourselves n e g o t i a t e the b i g g e s t b i l a t e r a l deal o f




all.

187
-7-

The c a r t e l I s a l s o making the w o r l d a much more dangerous p l a c e .
arms b u i l d u p i s j u s t beginning a t the Persian G u l f .

A vast

Every l i t t l e patch o f

barren ground i s worth f i g h t i n g over because of i t s p o t e n t i a l w e a l t h .

The

Arabs w i l l be out o f the c o n t r o l of e i t h e r the Soviet Union or the United
States because they can buy arms from a l l the w o r l d .

When Saudi Arabian

revenues were o n l y $4.5 b i l l i o n per y e a r , i n 1973, we got one shooting war
and one economic war. Imagine what we w i l l get when t h e i r revenues are m u l t i p l i e d .
U n l i m i t e d arms, plus the " o i l weapon" which made the consuming c o u n t r i e s
shake liKje j e l l y , do not add up t o peace.
O i l supply i s very Insecure because the producing nations are saving so
much money t h a t they can a f f o r d t o c u t back p r o d u c t i o n and pass up the revenues
f o r a t i m e , i n order to i n f l i c t damage on consuming n a t i o n s .
A l l of these dangers and burdens are simply unneccessary.
do not r e s u l t from s c a r c i t y , imposed by n a t u r e .

High p r i c e s o f

Men have made them and other

men can un-make them.
I t w i l l not be easy or quick work to remove t h i s t h r e a t .

I t w i l l be

years before the c a r t e l can be pronounced w e l l and t r u l y dead, because the OPEC
nations have learned the enormous rewards of a successful monopoly.

They w i l l

not soon g i v e up, and they are encouraged today as they have been f o r years
by consuming country governments' t a l k o f

"cooperation".

The producing c o u n t r i e s are amused not Impressed by American warnings
t h a t they may go too f a r .

n h e i r experience has been t h a t they can go as f a r

as they please and they w i l l get nothing but meek deference from the United
States whose p o l i c y I s t o see, hear and speak no e v i l o f them.
Any move t o i n j e c t competition i n t o the w o r l d market w i l l of course
s t i r b i t t e r complaints:
himself!




What a v i c i o u s animal!

When a t t a c k e d , he defends

oil

188
- 8 -

Our government seems t o have I n mind some vague grand design f o r a w o r l d
commodity agreement t o f i x what Mr. K i s s i n g e r c a l l s "a j u s t p r i c e , " whatever
t h a t means.
street.

Such an agreement would be a f l o o r b u t not a c e i l i n g , a one way

The Persian Gulf n a t i o n s have a clean r e c o r d ; they have never y e t

f a i l e d t o v i o l a t e an agreement on o i l .

I f they can r i g the p r i c e h i g h e r , up

i t w i l l go; the agreement w i l l merely keep us from t a k i n g defensive a c t i o n .
I n 1971, the State Department r i g h t l y claimed c r e d i t f o r the T r i p o l i and
Tehran s o - c a l l e d "agreements", which they t o l d us would b r i n g " s t a b i l i t y " and
"durability".

Those wonderful people who brought you the f i r s t Tehran are

now preparing a super-Tehran which w i l l freeze a dismal present i n t o the
indefinite

future.

I t h i n k we can do much b e t t e r ; i t ' s hard t o see how we can do any worse.
Thank you.




189
The Washington Post
May

3,

Indeed, after New York it becomes a
real question whether there is much
advantage for the poor in coming together in a big political forum such asthe United Natidns and trying to get
, the rich to agree to come across on dovelopment financing, trade, food, energy, emergency aid, and > so on.'Nothing useful can happen in a political forurri on such issues unless there is a
consensus, and there is no consensus.

1974

—

;

;i

Stephen S. Rosenfeld

j

Aiding

Algeria's President
Boumediene,
opening the session, cited the postwar
Marshall Plan for Europe as a hopeful
model. But, as Secretary of State, Kissinger replied, "then tfce driving force
was a shared' sense of' purpose, of values and of destination. As yet, we lack
a comparable sense of purpose with respect to development."

Developing
Nations

He could have added that the stirrings of detente have rendered anticommunism inoperative as a source of

The special session of the United Nations General Assembly on the world
economy has dealt a heavy blow to the
enlightened "liberal" notion of economic interdependence—the notion
that we're all in the same basket and
that we therefore must Cooperate for
our common good.

"Partisans of interdependence warn that the
alternative is confrontation.

For what the session seems to have
demonstrated is that some nations, es- peciallj poor ones, are more in that
basket than other nations; that what
economic interdependence there is is
not matched by a corresponding recognition of political interdependence;
and that the organized international
community is not likely to act significantly to ease the critical condition
brought to some 40 of the poorest
countries by, principally, the massive
price increases laid down last winter
by the oil cartel.

The warning is fair*'

such a sense of purpose. Oil inflation,
turning publics and governments inward, has nipped even more cruelly
that common sense. So has the Western
public's keen awareness that the .Mideast oil states have billions of dollars
rattling around in their bank accounts
that they have no conceivable way to
put to rational use now at home.
These are the political realities which
crush worthy appeals to interdependence.

A member of that cartel, Algeria, .
took the lead in calling the special session, apparently for the purpose of diverting oppobrium and responsibility
for the new misery from the oil cartel
to/the good old "imperialists."

Partisans of interdependence warn
that the alternative is confrontation.
The warning is fair. No one can say
just who will be the target but it
seems to me inconceivable that countries like India, Pakistan or Bangladesh, to cite three of those worst hit,
will sink meekly into deep public catastrophe without blaming someone and
perhaps wildly casting about.

I t is not yet clear who will be
blamed for the limp and inadequate
steps actually taken at the special session but it is clear that very little benefit has been gained by what the
United Nations calls the "MSA" countries, those "most seriously affected"
by the higher energy costs. Something
like a billion people live in those countries.
To some goodwilled observers, the
result—indeed, the
general reluctance of old rich and new rich alike
to do much more than make speeches
for the poor—reflects a shortfall not
only of moral values but of an understanding of the close link between the
economic and political fortunes of rich
and poor. This is the interdependence
argument: the rich, needing the resources, markets and investment opportunities of the poor, should help
them. Thus is self-interest hitched to
internationalism and human dignity.

3 7 - 2 1 1 O - 74 - 13




A second alternative to recognition
of interdependence will surely be mass
suffering on a scale heretofore unimagined. I t becomes even more tGfficult to see how millions of people are
going to avoid dying by starvation and
associated causes, soon.

,
j

The best available answer is simple.
The newly rich oil states should take
their excess billions and apply' them
immediately to the relief of the.
world's poor. Then and only then will
it be possible for all nations to apply
the mbral and political dictates for interdependence and to fnove forward on
real development.

|

1

j
j
i
i

190

BUSINESSWEEK: May 11. W *

cope w i t h the huge funds we w i l l
have." UBAF is expected to attract a
substantial share of the $50-billion in
annual Arab oil earnings that will result from oil price hikes last October
and December.
A cool billion. The UBAF group, established in 1970, is 40% owned by the
French banks Credit Lyonnais and
Banque Francaise du Commerce Exterieur. The rest is held by 25 Arab
banks and governments, of which the

Abushadi: The New York
market 'can cope with the
huge funds we will have'

An Arab bank shops
, for a New York off ice
-

1

One of the Arab world's newest and
most aggressive banking groups, the
Union des Banques Arabes et Francaises (UBAF), is wrapping up negotiations this month to open its first New
York operation-a joint venture w i t h at
least two U. S. banks.
Significantly, the Paris-based bank
is 60% owned by Arab governments
and banks, many of which are scrambling to find places to invest the fiow of
new oil money into their coffers. The
new office would give them a window
into the U. S. capital and money markets.
"There's a great deal of enthusiasm
on the Arab side, and the Americans
seem quite receptive, too," says Mohamed Abushadi, the Egyptian chairman of UBAF. "We expect to file for a
New York license in June." Six months
later the bank could be in business.
E x p l a i n i n g the New York penetration, Abushadi says: "There has
recently been great improvement in relations between Arab countries and the
United States. So the flow of trade justifies i t . " Abushadi says the New York
financial market is best suited to the
Arabs' needs " i n the sense that it can




main shareholders are the Arab Bank
(Jordan), the Banque E x t e r i e u r
d'Algerie, the Commercial Bank of
Syria, the Libyan Arab Foreign Bank,
the Rafidain Bank (Iraq), the Central
Bank of Egypt, and the Arab African
Bank (mainly Kuwaiti and Egyptian
interests). Total deposits, mostly in
short and medium-term funds, are
about $l-billion.
Abushadi, former chairman of the
National Bank of Egypt, says he has
already launched a search for New
York office space on F i f t h Avenue and
in the Wall Street area. He is also looking into salary levels and personnel
availability. And while he declines to
name the U. S. banks he is negotiating
with, banking sources in Paris say
Bankers Trust, Irving Trust, and First
National Bank of Chicago are among
them.
"We need qualified Arabs to share in
the management of our operations," he
says. "They are very hard to get. And
we don't want to operate under a false
Arab image, with Arabs playing no effective role in management."
Fast expansion. Abushadi plans UBAF affiliates
in India, Latin America,
Greece, and Spain. "We will go wherever there is a great need for credit
and project financing," he says, UBAF
has a joint venture in Germany with
Commerzbank and Bayerische Vereinsbank, in Britain with Midland Bank,
Ltd., and in Rome with Banco di Roma
and Banca Nazionale del Lavoro. Total
deposited funds of all three ventures
come to about $730-million.
Some recent UBAF major deals range
from co-management of a $1.5-billion
Eurodollar loan to the Italian government, to a $200-million loan to Algeria's national shipping company for
building liquefied natural gas tankers.
The UBAF-American venture also will
keep its activities diversified. Besides
recycling Arab dollars back to the
Middle East and Europe, i t will probably invest in U. S. securities and real
estate. " I t ' s in both our interests to go
ahead w i t h our New York operation,"
says Abushadi. " I t is essential to attract Arab funds to the U. S."
•

191
OIL MONEY AND THE

POOR

HON. HENRYITGONZALEZ
OP TEXAS
I N T H E HOUSE OP REPRESENTATIVES
Wednesday,
May
8, 1974
M r . G O N Z A L E Z . M r . Speaker, everyone I n this c o u n t r y realizes t h e awesome
i m p a c t of oil price increases imposed by
t h e O r g a n i z a t i o n of P e t r o l e u m E x p o r t i n g
C o u n t r i e s o n o u r o w n e c o n o m y . Less w e l l
r e c o g n i z e d is h o w m u c h t h e poor c o u n tries h a v e been a n d will be affected by
t h e oil price hikes. W e h e a r m u c h about
w h a t t h e exporting countries m i g h t do
I n b e h a l f of t h e poor, b u t one l i t m u s test
o f t h e i r r e a l i n t e n t i o n s is w h a t t h e A r a b
n a t i o n s a r e doing for their t r u l y desperate Moslem brothers in the
subS a h a r a regions of A f r i c a w h e r e mass
s t a r v a t i o n is n o t m e r e l y a t h r e a t b u t a
d a i l y f a c t . H e r e is a r e g i o n w h e r e t h e
wealthy M o s l e m countries m i g h t
well
show t h e i r c o n c e r n f o r t h e f a t e of t h e
poor a n d helpless.
B u t as a r e c e n t a r t i c l e i n t h e N e w Y o r k
T i m e s points out, little or n o t h i n g h a s
been f o r t h c o m i n g f r o m the oil w e a l t h y
6tates to relieve the e x t r a o r d i n a r y a n d
t e r r i f y i n g disaster t h a t has o v e r t a k e n
t h e S a h e l a r e a of Africa. I f t h e A r a b
n a t i o n s h a v e d o n e so l i t t l e f o r t h e i r M o s l e m brothers, I can only wonder how
sincere t h e y are i n their proclamations
of willingness to help other poor countries meet the extraordinary
demands
placed on t h e m by t h e O P E C increases
to p e t r o l e u m p r i c e s .
T h e article follows:
[ F r o m t h e N e w Y o r k T i m e s , A p r . 3, 1974]
On,

BILLIONS

FOR

THE FEW—SAND
STABVXNQ

POE

THE

( B y Chester L . C o o p e r )
WASHINGTON.—By t h e grace o f A l l a h , a
f e w M i d d l e E a s t e r n n a t i o n s h a r e become r i c h
b e y o n d even t h e w i l d e s t d r e a m s of t h e f a b l e d p o t e n t a t e s of a n c i e n t A r a b y . T h r o u g h
l i t t l e effort of t h e i r o w n , 65 m i l l i o n p e o p l e —
or, m o r e a c c u r a t e l y , t h e i r l e a d e r s — o f S a u d i
Arabia, K u w a i t , I r a n , Iraq, A b u Dhabi, Q a t a r a n d L i b y a "earned" '$16 b i l l i o n I n 1973 a n d
are expected t o " e a r n " a l m o s t $65 b i l l i o n
t h i s year. T h e spice t r a d e was b u t salt a n d
pepper c o m p a r e d w i t h c o m m e r c e i n b l a c k
gold.
T h e roll of t h e dice a n d t h e leaders' greed
h a v e c o m b i n e d t o raise Havoc w i t h t h e e n e r g y - i n t e n s i v e , i n t e r d e p e n d e n t economies of
Western Europe. J a p a n a n d the U n i t e d States
a n d t o Jeopardize t h e d e v e l o p m e n t prospects
of scores of countries I n A f r i c a , L a t i n A m e r ica a n d Asia. Because o f q u a n t u m Jumps i n
oil prices, w o r l d w i d e i n f l a t i o n la s h a r p l y accelerating. I n t e r n a t i o n a l m o n e t a r y arrangem e n t s , c h r o n i c a l l y f r a g i l e i n t h e m o s t stable
o f times, are u n d e r severe stress. T h e specter
of a w o r l d w i d e depression is b e c o m i n g a l l t o o
real.
M e a n w h i l e , l i f e goes on, a t least f o r s o m o —
t h e l u c k y ones whose o n l y u r g e n t need la o i l .
B u t m i l l i o n s of A f r i c a n s are f a c i n g a n o t h e r ,
m o r e t e r r i f y i n g crisis. T h e y a r e d y i n g of
thirst and hunger. U n k n o w n thousands have
p e r i s h e d over t h e last year a n d scores o f
t h o u s a n d s h a v e fled f r o m b a k e d fields a n d
destroyed h e r d s t o r o t slowly a w a y i n u n f a m i l i a r , f r i g h t e n i n g cities.




O n hie r e t u r n recently f r o m t h e subS a h a r a r e g i o n of A f r i c a , S e c r e t a r y - G e n e r a l
W a l d h e l m o f t h e U n i t e d N a t i o n s was a g h a s t
a t w h a t he h a d witnessed, "peoples a n d
c o u n t r i e s c o u l d disappear f r o m t h e face o f
t h e m a p , " h e said. " T h i s r e g i o n h a s n o t seen
s u c h a disaster i n t w o c e n t u r i e s . "
T h e international c o m m u n i t y , or rather a
p a r t of i t h a s n o t r e m a i n e d u n c o n c e r n e d .
A p p r o x i m a t e l y $350 m i l l i o n i n a i d — f o o d ,
m o n e y a n d services ( n o t i n c l u d i n g a i r l i f t s ) —
h a v e b e e n c o n t r i b u t e d to t h e s t r i c k e n c o u n t r i e s of Senegal, M a l l , M a u r i t a n i a , C h a d ,
Niger a n d Upper Volte. O f this, t h e U n i t e d
S t a t e s , despite d o m e s t i c p r o b l e m s , h a s c o n tributed more t h a n a third. T h e European
Economic C o m m u n i t y , racked by balance-ofp a y m e n t problems a n d Inflation, has cont r i b u t e d s l i g h t l y less t h a n a t h i r d .
T h e U n i t e d N a t i o n s a n d i t s subsidiaries,
n o t including t h e Food a n d Agriculture
• O r g a n i z a t i o n , h a s given a p p r o x i m a t e l y 7
p e r cent. T h e F A . O . has p r o v i d e d separate
assistance, l a r g e l y f r o m A m e r i c a n a n d E u r o pean contributions. France, West Germany,
Canada, C h i n a , Nigeria and t h e Soviet U n i o n
have made up t h e remainder.
O n r e r e a d i n g t h e roster o f c o n t r i b u t o r s ,
one h a s t h e f e e l i n g t h a t i t m u s t be i n c o m plete. A r e t h e r e n o t some c o u n t r i e s missing?
Some of t h e v e r y r i c h pertiaps? Some M o s l e m oountrlee, since m o s t of t h e s t r i c k e n
people s o u t h o f t h e S a h a r a are also Moslems?
Some f e l l o w A f r i c a n countries, possibly? W e
h a d b e t t e r r e v i e w t h e official d a t a .
Strictly speaking, three countries were
overlooked: L i b y a c o n t r i b u t e d $7 «0,000—
f r o m t h e $2 SI b l U l o n I t collected i n o i l r e v e n u e s last year. K u w a i t c o n t r i b u t e d $300,000—

f r o m t h e $2,130 b l U l o n of its o i l e a r n i n g s i n
1973. B u t w h a t of S a u d i A r a b i a , w h i c h e a r n e d
t w i c e as m u c h as L i b y a ? N o t a d o l l a r I n 1973,
a n d o n l y $2 m i l l i o n so f a r t h i s year.
A n d I r a q , w h i c h e a r n e d as m u c h as
K u w a i t ? Not a penny. A b u Dhabi, which
e a r n e d over $7 b i l l i o n , or a b o u t $23,000 f o r
every o n e of i t s i n h a b i t a n t s ? N o t h i n g . A n d
Q a t a r , w h i c h e a r n e d a l m o s t $400 m i l l i o n , or
about
p e r c a p i t a ? Zero. B a h r a i n ? Zero.
Algeria? A n o t h e r z e r o A n d w h a t of I r a n , w i t h
a l m o s t $4 b i l l i o n i n o i l revenues i n 1973 a n d
$15 b i l l i o n p r o j e c t e d f o r t h i s year? A f u r t h e r
zero.
Altogether, t h e n , t h e Middle Eastern olle x p o r t l n g n a t i o n s h a v e c o n t r i b u t e d less t h a n
l per c e n t of t h e t o t a l a i d t o t h e s t a r v i n g
people s o u t h of t h e S a h a r a .
T h i s is n o t t o say t h a t t h e y r e m a i n e d e n t i r e l y aloof. N o t a t all. T h e y raised t h e price
of oil, n o t o n l y f o r t h e r i c h I n d u s t r i a l c o u n t r i e s b u t f o r t h e desperately poor ones as
weU. As a consequence, v i r t u a l l y aU of t h e
A m e r i c a n financial assistance t o t h e s t r i c k e n
c o u n t r i e s of s u b - S a h a r a A f r i c a w i l l be a b sorbed b y t h e Increased cost of t h e i r oil I m p o r t s — a " c o n t r i b u t i o n " b y t h e oU exporters
t o t h e needy t h a t s h o u l d n o t go u n n o t i c e d .
T o be sure, t h e A r a b League, w i t h a l l d e l i b e r a t e speed, has b e e n discussing easing t h e
b o r r o w i n g t e r m s a n d d o u b l i n g t o a b o u t $400
m i l l i o n , t h e c a p i t a l of t h e A r a b B a n k f o r E c o n o m i c D e v e l o p m e n t I n A f r i c a . A n d t h e r e has
been t a l k of p r e f e r e n t i a l o i l prices f o r some
of t h e d e v e l o p i n g c o u n t r i e s a n d some desult o r y discussion o f e v e n t u a l l y d o i n g somet h i n g a b o u t t h e f a m i n e . B u t , m e a n w h i l e , by
t h e grace of A l l a h , t h e o i l flows o u t a n d t h e
billions flow in. A n d l i f e goes on, f o r some.

$3,600




192
T H E WALL STtiEET JOURNAL
Monday. M . y 6, 1974

Oil-Rich Nations
Slate $2.76 Billion
For IMF Aid Fund
.
By a W A L L STREET JOURNAL Staff

"

i

Reporter

WASHINGTON - Oil-producing nations
have offered to lend $2.76 billion to a special,
International Monetary Fund pool of currencies to be lent to nations that need help in
paying their increased oil-import bills, the
I M F disclosed.
Ever since the skyrocketing of world oil
prices began to threaten international financial trouble for many oil-importing nations,
I M F Managing Director H. J. Witteveen has
been trying to drum up support for & special
oil fund that would lend money to nations in
need. He has sought funds from five oil-rich
Middle East and African nations and this
week will travel to Venezuela on a similar
mission.
Reporting results of the effort so far, the
I M F said the oil-exporting nations have offered to lend to the I M F the equivalent of
$2.76 billion for the oil fund. I t said Saudi
Arabia offered the equivalent of $1.2 billion,
Iran' $720 million and other unidentified nations a total of $840 million. "Additional
amounts may be forthcoming from other
oil-exporting countries," the 126-nation organization said.
The I M F chief called the results of the
fund-raising effort "satisfactory and encouraging." Member nations would be entitled
to borrow from the special fund an amount
about equal to the increase in the oil-import
bill resulting from the quadrupling of world
oil prices since last fall. The special oil ftind
is expected to begin lending after midyear.

193
THE WASHINGTON

POST

M a y 5,

1974

Courting The Arabs
Inter-American Development
Seeks New Investors,

Bank

ras, With Venezuela lending 50' per- 1
However, the& sources allege, West
cent of the capital to Honduras and
Germany backed off from its key comthe four other countries of the. Central ; hutment on the $asis that the A&ehde
This hemisphere's principal developexperience indicated excessive U.S..
American; common market.
ment lending insitution is seeking to
control oyer the, bank. With that, Euroattract Arab investors and thereby reEcuador, another oil exporter, along
pean membership was put off if not.
duce the influence of its main source
With Argentina and Mexico would lend j precluded altogether.
of funds until now, the United States,
the other 50 per cent and aksure the
Some isolated European and JapaSuccessful attraction of the Arab
Hohdurans of markets for the paper.
nese investments have been negotifunds would accelerate a drastic transated, and the proposed Common MarFrom Honduras's earnings, it would
formation of the institution, the Interket memberships rehiain a goal of the
pay back Venezuela, which would thus
American Development Bank, which
bank, but Ortiz Mena indicates that
receive a return far into the future on
began with a decision by Venezuela to
the Arabs' booming oil profits are now
underwrite major bank programs.
its present sales of the non-renewable
looked upon as a more effective route
Venezuela has teamed its fcommitpetroleum. Honduras, he "said, would
to diversifying the bank's lending portment of a reputed $1 biHion in oil exfolio.
'
gain the biggest paper industry in
port earnings witih a call for reducing
Latin America, capable of exporting
In his talk, Ortiz Mena made no crit.US. influence in the bank. The United
icism of the U.S. role in the bank or in
elsewhere as welL
States is frequently accused of domihemispheric development. Indeed, he
The Honduran government recently
nating the institution, which has its
said, despite all of the talk of failure
decreed1 nationalization of foreign
headquarters in Washington.
surrounding the Alliance for Progress,
(largely American) lumbering interests
Mexican Antonio Ortiz Mena, presi"the '60s saw substantial change in
in preparation for state takeover ef
dent of the 24-nation bank, announced
Latin America."
forest industry.
to the staff that Arab funds will be
Venezuela's offer to help finance
welcomed on the pme terms as those
bank programs was made last month
of Venezuela and will be used to fiat the bank's annual meeting in Santinance giant industrial projects;
ago, Chile. Details of the proposed
Ortiz Mena had just returned from
trust fund are yet to be negotiated, but.
exploratory talks at the Beirut meetVenezuela made clear, that some of the
ing of the Arab ,Economic and Social
funds would be provided at concesDevelopment Fund. He also visited
sional interest rates.
Tehran to sound out Iran on possible
The Venezuelans have also indicated
investment of oil profits in the bank.
that they will not accept mortf than a
Praising the Venezuelan committoken U.S. role in administration of
ment, Ortiz Mena said the conditions
these funds." They have urged
that make investment in the bank de"Latinization" of the bank and have
sirable far this hemisphere's main oil
hinted that its headquarters might bet
producer are equally valid for the
ter be located in Caracas than in
Arabs. He did not specify any Arab
Washington.
commitments, but his words to the
The main accusation of U.S. domibank staff implied confidence that such
nance turns on the pressures successinvestments would be orthcoming.
fully mounted against loans by the
• Ortiz Mena indicated that bank
bank to the government of the late
would borrow from the oil producers
Chilean President Salvador Allende.
at commercial rates, offering them a
Critics say the failure to lend to
return more than offsetting inflation.
Chile, a member 'in good standing,
The 'bank's,role, he said, was to offer
made the bank a tool of U.S. foreign
'^assurance to the investor of the qualpolicy. Since Allende was ousted by a
ity of the projects."
bi)/<£tJ
military coup last "September, the bank
'. The bank has lent $6 million over its • has lent almost $100 million for two
14-year "history, but is often accused of
Chilean projects.
approaching Latin America's developAccording to sources within the
ment t6o timidly: "We are now in a
bank critical of its response to U.S.
moment when the size of our projects
pressures, the failure to lend to Al-should riot frighten us," 'he said.
lende cost }he bank another non-hemis, The onetime finance minister of
pheric sourfce of funds—Europe.
Mexico said the bank must help Latin
The bank had proposed to bring EuAhierica to be in the forefront of nuropean Common Market members into
clear energy exploitation and to dethe bank on the pattern of the recent
velop "the world's biggest food producrecruitment of Canada. They were to
tion reserves,," But his main emphasis
pledge $500 million in development
was on industry, and he described a
project for "the first Latin American^ funds for the bank, again with an unstated purpose of ^diluting U.S. influtrans-national corporation." .
ence.
As explained < y Ortiz, Mena, the
b
bank would oversee creation of a huge
cellulose and paper industry in Hondu-

By Lewis H.

Duiguid

Washington Post St&fr Writer




194
T H E MONEY MANAGER

M a y 6, 1974

Swiss Central Bank President Sees Oil Deficits
As the Biggest Obstacle to Monetary Reform
The efforts toward international
monetary reform will be complicated
by a problem far more serious than
the once-chronic United States balance of payments deficits, according
to Edwin Stopper, the president of
the Swiss National Bank.
^thisproblem is the massive balance
of payments deficits resulting from
the massive escalation in the price of
crude oil by the oil-producing and exporting nations last year, he said.
Mr. Stopper, who retired at the end
-*of April, told the recent anual meeting of the Swiss central bank that it
is assumed that oil-exporting "nations
will accumulate balance of payments
surpluses during the next five-to-ten
years at a rate starting at $60 billion
annually.
Only a few countries would be able
to finance their balance of paymentsdeficits arising from crude .oil purchases for some years through the
depletion of their foreign exchange
reserves. One of these countries, Mr.
Stopper said, was probably Switzerland.
The other nations would be forced,
as many are now, to borrow heavily to
finance payment of their balance of
payments deficits. Among these nations are now the United Kingdom,
France, Italy and others. In later
years the interest payments on these




debts will represent another outflow,
and thus burden, On these' nations'
balance of payments.
Mr. Stopper urged international cooperation which would plso help oilproducing countries. This cooperation
could justify a reduction in petroleum,
prices, which has b e n requested by
the United States. A price cut has
also been favored by Saudi Arabia;
however, it is opposed by other members of the Organization of Petroleum
Exporting Countries.
However, some oil analysts fear
that a lowering of imported oil prices
may not be desireable over the longterm for national security reasons. A
lower impdrted oil price would increase consumption of imported oil
and -discourage investment to develop'
domestic petroleum and non-petroleum sources of energy they contend.
Lulled into a' false sense of security,
the United States, Western Europe
and Japan would be even more vulnerable to an Arab oil .embargo such
as the one embarked oftQast October.
As for the world's financial system, Mr. Stopper said that the United
States' warning that the balance of
payments problems could become unmanageable should be taken very
seriously..
Furthermore, the developments unby the crude ofl price in-

creases make an early restoration of
fixed exchange rates ' doubtful, /he.
added. But private industry
least in the. intermediate-term, more
exchange rate stability than the floating rate system has brought, Mr.
Stopper asserted.
A restoration of the fixed rate system could only be achieved by international cooperation to fight inflation,
which he called Switzerland's'greatest problem, and by r&luctions of
sudden and substantial exchange fates
fluctuations, he said. Mr. Stopper
added that the. hopes placed on the
systems of floating currency rates
had not at all, or only partly been
realized.
Mr. Stopper also urged careful
examination into the possibility of
commercial banks voluntarily aligning
the credit policies and techniques to
the system of credit growth limits.
The alternative to this cooperation
would be for the central banks to obtain authority to institute restrictions on bank credit expansion, he
contended.
Mr. Stopper added that he hopes
that gold wilT again one day resume
its place as basis for a new international monetary system. He added
while raising the official price of gold
would not solve the problem of inflation it would solve a let of other
problems.

195
EUROPEAN COMMUNITY APRIL 1974

Oil Price Rises Hit International Monetary System

The shock from rising oil prices has been felt in the economies
of the entire world. The International Monetary Fund (IMF) has
calculated that the "western" industrialized countries will have
to pay $50-60 billion more for their oil imports in 1974. For the
nine EC countries, the figure is estimated at $23 billion.
Such a large capital hemorrhage will further aggravate the
economic problems already facing the Community. Taking into
account the price rises in manufactured and agricultural goods
due to the petroleum product price rises, inflation will exceed 8
per cent annually. In addition, the dearth of supply will probably
accentuate the slowdown of economic activity and will raise unemployment.
Finally, the accrued cost of oil will probably cause a deficit in
the European balance of payments and seriously threaten the
still embryonic system of the Community "snake." The French
decision to float the franc is a concrete consequence of the oil
crisis' influence on monetary affairs [see page 1 7 ] ,
DISASTER FOR THE THIRD W O R L D
Even if the developed countries' strong economies can weather
the crisis without long-term catastrophic consequences, the
"Third World" countries present a different case. Many developing countries are threatened with economic disaster by the oil
price rises. The present increase in prices has already neutralized United Nations (UN) aid given to these countries. (UN aid
equals one-fourth of the total aid they receive.)
The developing countries import less than one-fifth of the total
oil imported by the industrialized countries. But the majority of
the developing countries' imports are used in vital sectors,
which leaves a narrow margin of maneuver in efforts to economize energy consumption. In addition, the general price rise on
the international scale will make developing countries' other imports more expensive. Most other imported products are as vital
to these countries as oil.
Some developing countries could compensate for these difficulties by increasing prices of their raw material exports. But
I
the slowdown of world industrial activity will reduce the demand
for raw materials, leading to a decline rather than an increase in
prices.
Other Third World countries which lack raw materials are on
the edge of ruin. India, for example, strongly depends on advanced technological industries, especially the petro-chemical
industry. But, with its international credits already pushed to the
limit, India cannot pay for the crude oil for its refineries. The
world cannot ignore this crisis which affects hundreds of millions of people.
H O W TO USE THE NEW M O N E T A R Y SURPLUS
The Arab world's new position presents the international monetary system with problems it is not equipped to face. In the last
20 years, monetary disequilibrium (payments deficits in certain
countries, excesses in others) was corrected by the system of
Special Drawing Rights (SDR's) or by bilateral loans between
central banks.




The Arab oil weapon has turned the situation around. In the
last three years, Saudi Arabia has seen its reserves rise from
$670 million to $3.7 billion. The World Bank estimates that, by
1980, the Persian Gulf oil-producing states will have reserves of
$280 billion, 70 per cent of world reserves.
What is to be done with all this money? The economies of
these countries, primitive and concentrated on one product, can
only absorb a small part of their revenues.
It is here that a ray of hope for monetary stability resides.
These monetary surpluses could be reemployed in the economies of developed and developing oil-consuming countries.
[For an example of such reemployment, see page 18.]
The IMF and the World Bank could perfect a system to channel
the money toward the developing countries and to the Western
markets. At the same time, a short-term stability could be assured by financing national purchases of oil through the sale of
gold reserves at market price.
These two plans were proposed at the meeting of the finance
ministers of the IMF in Rome in January. There is no evidence,
however, that the Arab states would approve these proposals,
especially since they have had nothing to do with IMF affairs in
the past.
A WORLD-SCALE CRISIS
In any event, the EC member countries should prepare for serious monetary problems.
Some EC countries will be able to balance the political capital
exit caused by oil price increases—Great Britain, for example,
can attract considerable investments and thus find itself in a
paradoxical situation of a record commercial balance deficit on
one hand and a pound reinforced by monetary reserve increases
on the other. Thus, Great Britain may be able to support itself
until it has developed its own oil resources (North Sea) in about
10 years.
Other Community countries, like Belgium or France, which do
not have this capital market capacity, will be worse off. Their
balance of payments could feel a chronic deficit that they could
not resolve alone. In fact, it appears that even the most favored
nations cannot expect to find individual solutions. The monetary
crisis is the last in a long list of common problems that demands
common policies and international solutions.

196
THE WASHINGTON

POST

May

10,

1974

Saudis t o K e e p O i l M o n e y

Yamani Rejects IMF Plan
By Bernard D. Nossiter
Washtofton Post Foreign Service

LONDON, May 9 —Saudi
Arabian minister, Sheikh Zaki
Yamani, has rejected—at least
for now—a plan by the International- Monetary Fund to
protect the world's economy
from currency disorders.
Since the fund scheme depends heavily on the cooperation of Saudi Arahi? and other
oil states with htige revenue
surpluses, Yamani's cool response at a press conference
here today has placed the plan
in jeopardy. The IMF plan
would recycle some of 1 this
Surplus to developing and industrialized countries hard hit
by the nearly fourfold increase
in oil prices.
The Arab minister told* reporters that Western ext>erts
were exaggerating the problem, that oil states would have
"much less" than the estimated $50 billion-in extra revenues this year. Later, he said
he thought oil state surpluses
would qot reach $25 billion.
In addition, he said, he did
not like the idea of the oil
states losing control over their
surplus revenues by lending
them to an international agency controlled by the West
Iran, however, has come out
strongly in support of the IMF
plan.
Above all, Yamani express-1
ed concern over the erosion
that Arab loans to the IMF
might suffer because of the
rapid rate, of inflation in the
West.
"For the time being," he
said, "you do not need" the
IMF plan. "We will absorb a
large part of the surplus we
realize," he said.




"We wont be amenable to
letting that money recycle to
the Western economy for the
sake of the Western economy
as such," he said. However, tej
added, "That does not mean
we will never do it."
Yamani's position is in sharp
contrast to the optimism voiced just last Monday in Detroit
by Johannes Witteveen, IMF
managing director. Witteveen
said that oil exporting states
"have taken a very positive
attitude to s^v initiative" an<J
that he was "hopeful" that the
fund scheme would be set up
before June 30.
Yamani did leave the door
open, however, to a modified
version of the Witteveen plan.
If the IMF would tie loans
from oil states to the consumer price index in the United
. States, Saudi Arabia-might be
interested, he said.
The Saudi oil minister dismissed out of hand the moreJ
ambitious proposal for monetary and oil price stability!
, now being discussed in Washington by Harold Lever, the
British Cabinet minister and
financial advisor to Prime
Minister Harold Wilson.
' Lever prpposes that the
United States and five other
industrial nations collectively
buy and distribute oil- and
then serve as a lending agency
financed by the surplus of
producer states.

197
"I have had a chance to look
fears that the ' purchasing
at the inside stprf" Yamani
power of such credits would
said, "and I don't think the
be eroded by price inflation in
consumers -will adopt ]this
the West. •
plan."
-,
' That is j why he said he
He declined to explain furmight be more "amenable" to
ther. But he apparently meant
an IMF scheme linking • oil
that American opposition hias .
' state credits to the American
already killed the Lever plan
price index. In other words,
even before it got off the
the Saudis might lend the
ground.
IMF facility $5 billion if every
10 per cent rise in U.S. prices
The one cheerful piece of
increased the Saudi investnews that the Harvard-trained
ment by $500 million. '
oil minister offered - tyas Ms
- The oil minister, whose trim
view that crude prices ire ttifo'
goatpe' and mustache are now
high. The Saudis, the world's
internationally known tradelargest oil producers outside
marks, Said he expected to nethe United States, had already
gotiate a new deal this sumbrought the price of oil down
mer with the four American
from $17 a barrel to about $10,
companies exploiting Saudi
SHEIKH ZAKl YAMANI
he claimed.
Arabia's oil. They are Exxon,
*n% should he a Wit lovtfej\": <*, - - problem exaggerated jMobil, Stfirtdard of California
' * •r '
'
h,e said. "I think,it will go furand Texagp. Their joint Saudi
ther downr^Bat he declined to todeai-wfth the-currency dis- concern is Aramco in which
spell out how. this would be locations threatened by the the Saudis already have 25 per
achieved.
surpluses the Arabs and other cent interest.
Here Yamani runs into op- -oil states are now earning beYamani ,said that the existposition from the shah of Ir$n, cause of the; lfap in; oil prices.
who has sought to push oil Western pffieials Have esti- ing deal is : "out of date" and
the
Saudis
need
prices. The Saudis, however, mated that the 'oil states, this that
f
Could force prices down' by yearwill earn $5Q bUl)oii more "completely different arranfeemenls." Oil industry execuopening their taps and in- than thiey cfn |nyest in their
tives think he will seek anycreasing sharply their current own^upttfes or ,use to buy
wfrwse from 75 to 100 per cent
output of about 8,5 million arms, good^and services from of«Aramco in the next few
the West,
,%
barrels daily.
i ea4.
Witteveen' ha^ proposed creYamani said his country
would not increase production ating k "special facility?' or
to the 10 million barfel-a-day temporary loan, agency in the Venezuela Pledges
level planned before the Octo- IMF. I t would make sevenber war until the Arab-Israel year loani ,tp .Italy, Britain Money to IMF Plan
conflict is settled. But he did, and othjer countries now runReutet
hint at an increase above cur- ning big payments deficits be» CARACAS, May 9-Venerent production as one means cause of sharply increased oil ruela has pledged $540 million
of further reducing the price. - -costs. "
<
to the IMF to help countries
Funds for this "facility' whose balance of payments
Yamani was talking about
the "realized" or actual sell- would, under Witteveen's plan, have been seriously affected
ing price of oil in the Persian come in part from the oil by the higher price of oil, cenGulf as opposed to the "posted states with big surpluses. tral bank governor Alfredo
price" used for fixing royal- Thus the IMF would recycle Laffee said today.
ties and taxes. It is now money that Arabs and othei$ Laffee said at a news conaround $11.65 for Persian Gulf can't absorb to countries"%ith ference' that Venezuela's conemergency needs.
. • ,r,
low-sulphur crude.
tribution to the IMF's oil-loan
yamani has been in Ldndon -The Saudis, .YamanT sa^d, fund was made on the condioutlets for their tion that it be used preferenprimarily to see financial and wojild
lending to the tially to help developing counindustrial leaders whom he •urpjuj
hopes to enlist for the rapid Wotld Bari|c, a new Arab-Afri- tries, especially in Latin
industrialization of Saudi Ara- efn/bank ,and financing tuf» America.
bia. At a closed meeting of tffep t^ewer Saudi develop- The offer was made during
a meeting here with IMF manabdut 50 persons yesterday, he ment loan program.
also voiced his coolttass to- .\AWrt frdtn losing political aging director Johannes Witteward the IMF plan. 1
* " coritrol over oil money loaned veen who was present at the
, The meeting was proposed t& fcn IMF facility, Yamani press conference.




198
Hobart

Rdwen

THE WASHINGTON POST

Ttffi END of , the Arab oil embargo still leaves
the industrial world with a terrible dilemma and the
poor countries facing a disaster of unmanageable
proportions.
Although it has become fashionable in banking circles
to suggest that financial gimmicks of one sort or another can "solVe" the problem, it is important for the
public to keep in mind that loans and investments—
while great for the banking business—solve neither
the difficulty of growing trade deficits nor the loss
of purchasing power due to the higher price of oiL
There are two facts that should be
remembered when anyone tells you that
the energy i crisis is over because the
Arab oil embargo has been lifted:
First, despite some easing in the auction price for oil in the Persian Gulf, the
"mainstream" of supplies, as oil consultant Walter Levy points out, still
ranges upward of $7 a barrel, compared
to $3 as recently as October 1973, $1.25
in 1971 and 90 cents before that. Thus,
the world oil bill for 1974 is something like $65 to $75
billion higher than last year's.
Moreover, the secretary general of the Organization
of Petroleum Exporting Countries, Dr. Abderramman
Khene, forecast on Wednesday that the cartel will boost
prices after the current freeze expires in July. Oil
prices are "artificially low," Dr. Khene alleges. The
OPEC governments, Watching the rate of inflation
around the world climb, are talking of a "take" in
taxes and royalties that will yield them about $12
a barrel instead of the present average of $7.50.
Second, as George W. Ball cautions, the end of the
embargo "must still be regarded as provisional—for
the embargo cannon will continue to be loaded and
ready for firing until the Arab-Israeli dispute is finally
settled which—even if we are lucky—is not likely to
occur for another two to three years."
SO, EVEN with the oil embargo lifted, the oil problem
remains. For the less-developed countries which last
year had a combined trade deficit of $11 billion, the
staggering oil price increase means that th^y will wind
up with a deficit of $20 to $25 billion in 1974.
For the industrial nations, as West German central
banker Otmar Emminger pointed out here the other
day, the situation varies. But even the supposedly
wealthy United States faces an Arab oil "tax" which
wilj cut consumer purchasing power by perhaps $15
billion this year. And if prices go up, the situation
Will be worse.
Sorope and Japan are feeling pressure to boost
exports to earn more foreign exchange. Former Com-




March 31,1974

merce Secretary Peter Petersoft, now head of Lehman
Brothers, says that this "may wipfe out thp advantage
the United States increasingly enjoyed during 1973
from an under value dollar and restore roughly the
same condtions that existed prior to Aug. 15, 1971,
when American goods encountered serious problems
of price competition ip world markets."
Emminger, it should be said, thinks that the major
nations will not engage in a cutthroat competition for
export markets typifie*) by exchan|e-rat# wars or
"beggar-thy-neighbor" pilicies.
But Japan—which xqftift import virtually 100 per
cent of its oil—already Jhas indicated that it will, junk
the plans oace made to improve the standard of
living at home and return to the old emphasis of an,
export economy to improve its foreign exchange earn-;
ings. That can'only mean a return to the bitter fights'
among Japanese, American and European manufacturers to obtain and secure outlets for their goods.
Where does all of this leave ug? First of alj, we must
ignore the advice of such as Roy Ash, h$ad of,the Office
of Management and Budget, that a& allocation controls
should be dropped once imports reach last August's
levels. That would be stupid and short-sighted. We
must accept as reality that the Arb oil.weapon has not
been discarded, only temporarily suspended.
Second, we have to make Project Independence be-

Economic

Impact

lievable, rather than something—as Peterson says—
"which currently suffers from a credibility gap."
The United States government, if it truly believes
that price is the real problem, can bring pressure on
the Arab monopolists only by setting specific production schedules and goals for oil shale, tar sands, offshore oil, solar energy, and so on, that will diminish
our dependence on Arab oil.
If we yield to the temptation suggested by Ash
to believe that the energy crisis is over, all necessary
effors to achieve major conservation in the use of oil
will go down the drain.
'
IN A NEW analysis called "Implications of World
Oil Austerity" which is gaining wide attention in Washington circles, Levy comes to the conclusion that there
must be a substantial cut in world oil consumption
until the latter part of he 1970s, witty the burden of
reduced production falling on Saudi Arabia, Kuwait
and Abu Dhabi.
Those are the countries in the cartel which are

199
Hobart

Rowen

Will Worldwide Oil Austerity Continue?
under the least pressure to generate increased revenue
and also the ones least able—because of their small
populations—to absorb added goods and services from
the Western World in exchange for the^r oil.
Whether these qguntries would agtee to reduce*
output while Iran, Iraq and others are expanding is
an unanswered question. But high oil prices unquestionably will force some kind of austerity in oil consumption on the'West,
Economic Coiincil Chairman Herbert Stein, in a
thoughtful speech on Project Independence, said this
past week t£at "we will find it prudent to hold oil im-




ports to a lower level than a free market woulcj
bring about and to try to avoid an increase in the import share of our energy supply."
This is necessary not only because we no longer
, can afford all of the oil we, would like to use, tyit
because the cartel has demonstrated it is an unreliable
source.
This will require some new disciplines. It means
smaller and more economical cars—by legislative order
if necessary-—and a conservation program to cut
, energy wastage of the same order of urgency that
once was the accepted ethic in wartime.

200

PETROLEUM

PRICES

Imports*

Consumer pricest

(Dollars per barrel)

(Cents per gallon)

Crude

1973-Jan

Gasoline

Distillat

3.92
6.16

2.46
2.76

Feb

2.75
2.73

March

2.82

5.53

2.98

April

2.84

May
June

2.90

2.84
2.77

3.05

6.25
7.05
7.64

July

3.15

7.32

Aug

3.25

6.87

3.39
3.39

3.38

7.58
8.39

4.21

Sept.
Oct. . .
Nov

: ...

3.81

9.09

The

Morgan
Guaranty
Survev
monthly

by

Morgan Guaranty
Trust Company
of New

York

© 1974 Morgan Guaranty Trust Company of New York

MAY

1974




11.84
13.23
17.02

11.08

Feb
March

8.52

5.28
6.71

Dec
1974-Jan

published

3.54

17.99

2.90

3.52
6.80
7.76
1 1.95
9.35
13.76

201

T o e oil d fct —
h s
ei is
pick a number

M . S.

MOIKICISOIUI

Latest official and semi-official calculations on just how the oil deficit will
be shared out are, if anything, even more frightening than the total numbers involved.
Here is a framework for readers to make their own calculations.

T

rying to forecast this year's oil deficits has become
all the rage, and the Bank of England streaked in
with its contribution on 15 March, when it published its
latest Quarterly Bulletin.
An attraction of this game is that the guesses can be
amended from month to month to keep speculation on
the boil. But although there is nothing certain about
the numbers (except that they are going to be very large),
there have been very important changes recently in the
underlying assumptions that are being made. One of
them is the official recognition that developing Countries
will be unable to secure the financing they would need
to maintain investment, output and employment; and
another is that the industrial countries will therefore
face deficits even bigger than those previously predicted.
The details of the way that official estimates have
changed and some of the ways in which they differ from
each other are summarized in the tables at the end of
this article. It will be seen that the financt ministers
of the I M F accepted as a basis for discussion, in Rome in
January, an OECD guesstimate that OPEC might run a
current surplus of about $55 billion this year offset
by current deficits of about $32 billion for OECD and




about S23 billion for the oil-importing developing
countries.
However, these and subsequent official estimates are
not forecasts in the ordinary way. They are simply
suggestions of what might happen in given circumstances,
and these assumptions include a good deal of polite
diplomatic fiction. One such assumption is that it may
prove possible to maintain January's oil price levels
throughout the year while at the same time maintaining
the growth of real output in the industrial world at
between 3 and 4%. It is improbable that both these
conditions can be satisfied at the same time, and if one
of them is not, then the size of OPEC's suggested current
surplus would shrink.

Impact on the LDCs
Another polite fiction was that oil-importing developing countries might somehow be able to find around
$23 billion to finance their projected current deficit
this year, but that fiction, at least, was dropped by the
time that OECD's Working Party I I I met in Paris in
mid-February. Dr Otmar Emminger, the chairman of
the OECD group, disclosed merely that the industrial
countries' anticipated deficit was expected to be about
$40 billion rather than about S32 billion, but he declined to go into the embarrassing details of what this
implied.
What it implied, first, was the official acceptance that
the oil-importing LDCs would probably be unable to
secure more than about S15 billion for thefinancingof
their current deficits this year, and that they therefore
face a considerable risk of recession and political instability.
The second implication was not merely that the industrial countries faced an even bigger deficit than originally guessed, but that most of them face larger deficits
even than is being officially conceded now. This is
because the February estimates retained, among other
diplomatic fictions, the one that the US might be running a current deficit of around $4 billion this year.
But if the US current account ends in approximate
balance, as seems more likely, then the other industrial
countries would face between them a combined current
deficit of close to $45 billion, or about 50% more than
the combined current deficit being predicted for them




202

only a month earlier in Rome. No wonder that the
Jeluils were not emphasized, and no wonder either that
t-rance, Italy and the UK have been so quick to rush
- into the front of the queue for large Eurocurrency borrowings (not to mention lesser fry like Greece, which
secured 5250 million in March, equivalent, on foreign
exchange earnings, to a single S2-5 billion borrowing
hy a country like the UK).
The forecasts of oil deficits will no doubt be changed
again, or several times, over the course of this year,
and it will be interesting to compare the results when
they are known with the guesses that were made. But
some assumptions seem reasonably safe:
1. That there may either be some fall in oil prices or
else a greater fall in oil imports than now being
estimated, and that OPEC's current surplus may
therefore prove somewhat less than the $60 billion
being suggested by the Bank of England or even the
$55 billion suggested by OECD, although that surplus
will still be very big;
2. That oil importing developing countries may go
short of oil,'or finance, or both; and
3. That the brunt of whatever the world's oil deficit
turns out to be will probably fall on the industrial
countries other than the US and Canada even more
heavily than most public statements have so far
suggested.
The tables below allowreadersto join the game with
their own guesstimates:

C a r a t payaaeate, 1974
$ billion
at Jan.
at Sept.
1974
1973
prices
prices*
US
-It
Omada
balance
- i
Japan
-6
1*
France
-31
*
Germany
2*
Italy
balance
-31
UK.
-3*
-7*
10
OECD
-32
non-oil LDCs -15
-23
5
55
OPEC

at Jan.
1974
prices
balance
balance
-8
-3J

-6
-8/9
-40f
-15
55f

•Official Rome estimates, January,
i Official Paris estimates, February.

Possible impact of higher o0 prim, 1974
(rise in cost of oil imports at 1973 volumes)
$ billion
OECD
Bank of England
US
9-4
8i
UK
4-3
4*
Japan
8-3
7J
5-4
Germany
4|
France
4-6
4J
Italy
4-7
3|
OPEC surplus

55

60

203
NEW YORK TIMES
April

3,

197^

O I L BILLIONS FOR THE FEW - SAND FOR THE STARVING
By:

Chester L.

Cooper

WASHINGTON - - By t h e g r a c e o f A l l a h , a f e w M i d d l e
E a s t e r n n a t i o n s h a v e become r i c h beyond, e v e n t h e w i l d e s t
dreams o f t h e f a b l e d p o t e n t a t e s o f a n c i e n t A r a b y .
Through
l i t t l e e f f o r t o f t h e i r own, 55 m i l l i o n p e o p l e - - o r , more
a c c u r a t e l y , t h e i r leaders - - of Saudi A r a b i a , Kuwait, I r a n ,
I r a q , Abu D h a b i , Q a t a r a n d L i b y a " e a r n e d " $16 b i l l i o n i n
a l m o s t $65 b i l l i o n t h i s
1973 a n d a r e e x p e c t e d t o " e a r n
year.
The s p i c e t r a d e was b u t s a l t a n d p e p p e r compared,
w i t h commerce i n b l a c k g o l d .
The r o l l o f t h e d i c e a n d t h e l e a d e r s 1 greed, h a v e
combined t o r a i s e h a v o c w i t h t h e e n e r g y - i n t e n s i v e ,
interdependent economies o f W e s t e r n E u r o p e , Japan and t h e U n i t e d
S t a t e s and t o j e o p a r d i z e t h e d e v e l o p m e n t p r o s p e c t s o f s c o r e s
o f c o u n t r i e s i n A f r i c a , L a t i n A m e r i c a and A s i a .
Because o f
q u a n t u m jumps i n o i l p r i c e s , w o r l d w i d e i n f l a t i o n i s s h a r p l y
accelerating.
I n t e r n a t i o n a l monetary arrangements, c h r o n i c a l l y
f r a g i l e i n t h e most s t a b l e o f t i m e s , a r e u n d e r s e v e r e s t r e s s .
The s p e c t e r o f a w o r l d w i d e d e p r e s s i o n I s b e c o m i n g a l l t o o r e a l .
M e a n w h i l e , l i f e goes o n , a t l e a s t f o r some - - t h e l u c k y
ones whose o n l y u r g e n t n e e d i s o i l .
But m i l l i o n s o f A f r i c a n s
a r e f a c i n g a n o t h e r , more t e r r i f y i n g c r i s i s .
They a r e d y i n g
o f t h i r s t and h u n g e r .
Unknown t h o u s a n d s have p e r i s h e d o v e r
t h e l a s t y e a r and s c o r e s o f t h o u s a n d s h a v e f l e d f r o m b a k e d
f i e l d s a n d d e s t r o y e d h e r d s t o r o t s l o w l y away i n u n f a m i l i a r ,
frightening cities.
On h i s r e t u r n r e c e n t l y f r o m t h e s u b - S a h a r a r e g i o n o f
A f r i c a , S e c r e t a r y - G e n e r a l W a l d h e i m o f t h e U n i t e d . N a t i o n s was
a g h a s t a t w h a t he h a d w i t n e s s e d .
" P e o p l e s and c o u n t r i e s c o u l d
d i s a p p e a r f r o m t h e f a c e o f t h e m a p , " he s a i d .
" T h i s r e g i o n has
n o t seen such a d i s a s t e r i n two c e n t u r i e s . "
The i n t e r n a t i o n a l c o m m u n i t y , o r r a t h e r a p a r t o f I t , has
n o t remained unconcerned..
A p p r o x i m a t e l y $350 m i l l i o n i n a i d - f o o d , money a n d s e r v i c e s ( n o t i n c l u d i n g a i r l i f t s ) - - h a v e b e e n
contributed, t o the s t r i c k e n c o u n t r i e s of Senegal, M a l i , Maurit a n i a , Chad, N i g e r and. U p p e r V o l t a .
Of t h i s , t h e U n i t e d S t a t e s ,




204

- 2 -

d e s p i t e d o m e s t i c p r o b l e m s , has c o n t r i b u t e d more t h a n
a third.
The E u r o p e a n Economic C o m m u n i t y , r a c k e d b y
b a l a n c e - o f - p a y m e n t p r o b l e m s a n d i n f l a t i o n , has c o n t r i b u t e d s l i g h t l y less than a t h i r d .
The U n i t e d N a t i o n s a n d i t s s u b s i d i a r i e s , n o t
i n c l u d i n g t h e Food a n d A g r i c u l t u r e O r g a n i z a t i o n , has
g i v e n approximately 7 per c e n t .
The F . A . O . has p r o v i d e d ,
s e p a r a t e a s s i s t a n c e , l a r g e l y f r o m A m e r i c a n and European
contributions.
F r a n c e , West Germany, Canada, C h i n a ,
N i g e r i a a n d t h e S o v i e t U n i o n have made up t h e r e m a i n d e r .
On r e r e a d i n g t h e r o s t e r o f c o n t r i b u t o r s i one has t h e
f e e l i n g t h a t i t m u s t be i n c o m p l e t e .
A r e t h e r e n o t some
Some
countries missing?
Some o f t h e v e r y r i c h , p e r h a p s ?
Moslem c o u n t r i e s , s i n c e m o s t o f t h e s t r i c k e n p e o p l e s o u t h
o f t h e S a h a r a a r e a l s o Moslems?
Some f e l l o w A f r i c a n c o u n t r i e s , possibly?
We had. b e t t e r r e v i e w t h e o f f i c i a l d a t a .
S t r i c t l y s p e a k i n g , t h r e e c o u n t r i e s were o v e r l o o k e d :
Libya c o n t r i b u t e d $760,000 - - from the $2.2 b i l l i o n i t c o l l e c t e d i n o i l revenues l a s t y e a r .
Kuwait c o n t r i b u t e d
$300,000 - - from the $2,130 b i l l i o n of i t s o i l earnings i n
1973.
But w h a t o f S a u d i A r a b i a , w h i c h e a r n e d t w i c e as much
as L i b y a ?
Not a d o l l a r i n 1973? and. o n l y $2 m i l l i o n so f a r
this year.
A n d I r a q , w h i c h e a r n e d as much as K u w a i t ?
Not a p e n n y .
Abu D h a b i , w h i c h e a r n e d o v e r $7 b i l l i o n , o r a b o u t $23., 000
f o r e v e r y one o f i t s i n h a b i t a n t s ?
Nothing.
And. Q a t a r , w h i c h
earned, a l m o s t $400 m i l l i o n , o r a b o u t $ 2 , 6 0 0 p e r c a p i t a ?
Zero.
Bahrain?
Zero.
Algeria?
Another zero.
And w h a t o f I r a n , w i t h
a l m o s t $4 b i l l i o n i n o i l r e v e n u e s i n 1973 and. $15 b i l l i o n p r o jected. f o r t h i s year?
A f u r t h e r zero.
A l t o g e t h e r , then, the Middle Eastern o i l - e x p o r t i n g nations
have c o n t r i b u t e d , l e s s t h a n 1 per cent o f t h e t o t a l a i d t o t h e
s t a r v i n g people south of the Sahara.
T h i s i s n o t t o s a y t h a t t h e y remained, e n t i r e l y a l o o f .
Not a t a l l .
They r a i s e d , t h e p r i c e o f o i l , n o t o n l y f o r t h e
r i c h i n d u s t r i a l c o u n t r i e s b u t f o r t h e d e s p e r a t e l y p o o r ones
as w e l l .
As a c o n s e q u e n c e , v i r t u a l l y a l l o f t h e A m e r i c a n




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- 3 -

f i n a n c i a l assistance t o the s t r i c k e n countries of subSahara A f r i c a w i l l be absorbed, by t h e increased, c o s t o f
t h e i r o i l i m p o r t s - - a " c o n t r i b u t i o n " by t h e o i l e x p o r t e r s
t o t h e n e e d y t h a t should, n o t go u n n o t i c e d .
To be s u r e , , t h e A r a b League,, w i t h a l l d e l i b e r a t e s p e e d y
has been d i s c u s s i n g e a s i n g t h e b o r r o w i n g t e r m s and d o u b l i n g
t o a b o u t $400 m i l l i o n , , t h e c a p i t a l o f t h e A r a b Bank f o r
Economic Development i n A f r i c a .
And. t h e r e h a s b e e n t a l k o f
p r e f e r e n t i a l o i l p r i c e s f o r some o f t h e d e v e l o p i n g c o u n t r i e s
and. some d e s u l t o r y d i s c u s s i o n o f e v e n t u a l l y d o i n g s o m e t h i n g
about the famine.
But,, meanwhile., b y t h e g r a c e o f A l l a h , ,
t h e o i l f l o w s o u t and. t h e b i l l i o n s f l o w i n .
And l i f e goes
orij f o r some.

THE WASHINGTON POST
April

3,

1974

VENEZUELA PLEDGES DEVELOPMENT A I D
V e n e z u e l a ^ whose c o f f e r s have been s w e l l i n g b e c a u s e
of higher o i l prices., yesterday told, the Inter-American
D e v e l o p m e n t Bank m e e t i n g i n S a n t i a g o t h a t i t w o u l d g i v e a t
l e a s t $ 1 . 2 b i l l i o n t o b e used, t o s e t up a t r u s t f u n d , t o
f i n a n c e development p r o j e c t s I n L a t i n America.
A t t h e same t i m e . , V e n e z u e l a a n d P e r u c r i t i c i z e d t h e
U n i t e d S t a t e s ' dominant r o l e i n the bank's a f f a i r s
Agence
France Presse r e p o r t e d .
Venezuelan Finance M i n i s t e r Hector Hurtado t o l d the
b a n k m e e t i n g t h a t when L a t i n A m e r i c a n c o u n t r i e s
contribute
more o f t h e b a n k ' s c a p i t a l . , "no c o u n t r y i s g o i n g t o be a b l e
t o c l a i m f o r I t s e l f the r o l e of leader or o v e r s e e r . "
The
U n i t e d . S t a t e s c o n t r o l s more t h a n 40 p e r c e n t o f t h e b a n k ' s

3 7 - 2 1 1 O - 74 - 14




206
-2-

board of governors, w i t h the remaining votes
22 L a t i n A m e r i c a n c o u n t r i e s and Canada.

s h a r e d by

U . S . T r e a s u r y S e c r e t a r y George P. S h u l t z t o l d , t h e
m e e t i n g t h a t t h e U n i t e d S t a t e s welcomed " t h e i n i t i a l
p o s i t i v e response o f t h e o i l p r o d u c e r s o f t h i s h e m i s p h e r e
and i n p a r t i c u l a r V e n e z u e l a - - who have announced t h e i r
i n t e n t i o n s t o provide major help t o s i s t e r nations.11

--

S h u l t z s a i d t h a t because o f h i g h e r e n e r g y p r i c e s , t h e
I n t e r - A m e r i c a n Development Bank, w h i c h makes development
l o a n s t o L a t i n A m e r i c a , must "husband t h e s c a r c e c o n c e s s i o n a r y funds . . . f o r t h e p o o r e s t . "
The IDB a l s o
s h o u l d p u t g r e a t e r emphasis i n i t s l e n d i n g on e n e r g y p r o j e c t s
and. member c o u n t r i e s a l s o s h o u l d a l l o c a t e more o f t h e i r own
i n t e r n a l i n v e s t m e n t funds t o w a r d e n e r g y , he s a i d .
S h u l t z a l s o v o i c e d c o n c e r n t h a t t h e w o r l d ' s raw m a t e r i a l s
producers might form c a r t e l s t o a r t i f i c i a l l y r a i s e the p r i c e s
of t h e i r exports.
He a l s o c i t e d , " e x p o r t t a x e s and. o t h e r
r e s t r i c t i o n s aimed a t i n s u l a t i n g d o m e s t i c m a r k e t s f r o m t h e
g e n e r a l upward t r e n d o f p r i m a r y - p r o d u c t p r i c e s . "
He n o t e d t h a t r i s i n g f o o d p r i c e s i n t h e U n i t e d S t a t e s
have t r i g g e r e d s t r o n g s e n t i m e n t s t o w a r d i s o l a t i n g t h e U . S .
economy f r o m t h e r e s t o f t h e world..

THE WASHINGTON POST
March 1 4 ,
By:

197^

James L . Rowe,

Jr.

MORE DEVELOPMENT A I D ASKED OF O I L COUNTRIES
The heads o f t h e f i v e m a j o r i n t e r n a t i o n a l f i n a n c i a l
o r g a n i z a t i o n s y e s t e r d a y s a i d t h e i r o r g a n i z a t i o n s need some
of the "increased f i n a n c i a l assets of the o i l - e x p o r t i n g
c o u n t r i e s " t o h e l p d e v e l o p i n g c o u n t r i e s pay t h e i r h i g h e r
energy b i l l s .
The heads o f t h e o r g a n i z a t i o n s ,




.including the

Inter-

207
-2-

n a t i o n a l M o n e t a r y Fund. and. t h e World. Bank, n o t e d t h a t t h e
h i g h e r energy b i l l s not o n l y t h r e a t e n t h e balance of payments s i t u a t i o n s o f t h e d e v e l o p i n g c o u n t r i e s , b u t a l s o
j e o p a r d i z e " t h e o r d e r l y e x e c u t i o n of development programs
and t h e g r o w t h p r o s p e c t s o f t h e i r e c o n o m i e s . "
L a s t month, I r a n announced, t h a t i t would, make a v a i l a b l e
$ 1 b i l l i o n o f i t s s u r p l u s o i l revenues t o a s p e c i a l IMF-World.
Bank f u n d w h i c h would, h e l p c o u n t r i e s pay t h e i r h i g h e r o i l
bills.
However, r e p o r t s f r o m T e h r a n s a i d t h e I r a n i a n i n v e s t ment would be made a t a c o m m e r c i a l r e t u r n of 7 t o 8 p e r c e n t .
The agency c h i e f s s a i d y e s t e r d a y t h a t a c o n s i d e r a b l e
p o r t i o n o f b o t h t h e l o n g - t e r m and s h o r t - t e r m a i d t h e d e v e l o p i n g c o u n t r i e s w i l l need, "should, be made a v a i l a b l e on concessional terms."
They emphasized t h a t "advanced, c o u n t r i e s have a c o n t i n u i n g
r e s p o n s i b i l i t y for providing aid resources."
They p o i n t e d out
t h a t " t h e o i l - e x p o r t i n g c o u n t r i e s now have a g r e a t e r c a p a b i l i t y
t o share t h e burden of the a d d i t i o n a l i n t e r n a t i o n a l a i d e f f o r t ,
b o t h t h r o u g h t h e i r own c h a n n e l s and t h r o u g h c o o p e r a t i o n w i t h
existing institutions."
B e s i d e s IMF d i r e c t o r Johannes W i t t e v e e n and W o r l d Bank
P r e s i d e n t R o b e r t S. McNamara, A n t o n i o O r t i z Mena o f t h e I n t e r A m e r i c a n Development Bank, Abdelwahab L a b i d i o f t h e A f r i c a n
Development Bank and S h i r o I n o u e o f t h e A s i a n Development Bank
met March 12 " t o assess t h e i m p a c t o f t h e c u r r e n t i n t e r n a t i o n a l
e n e r g y s i t u a t i o n on t h e d e v e l o p i n g member c o u n t r i e s o f t h o s e
institutions."
The I n t e r - A m e r i c a n Development Bank issued, a
on t h a t m e e t i n g y e s t e r d a y .

statement

The f i v e e x e c u t i v e s a g r e e d t h a t " i n t h e l i g h t o f t h e
e x p e r t i s e and e x p e r i e n c e o f t h e i r r e s p e c t i v e i n s t i t u t i o n s i n
e f f e c t i v e l y channeling resources t o the developing w o r l d , t h e y
have t h e c a p a c i t y t o p l a y an i m p o r t a n t and t i m e l y r o l e i n t h e
international aid effort.
"To p e r f o r m t h i s f u n c t i o n , a d d i t i o n a l funds a r e r e q u i r e d
by t h e s e I n s t i t u t i o n s and a s p e c i a l e f f o r t s h o u l d be made t o
m o b i l i z e such r e s o u r c e s f r o m t h e i n c r e a s e d f i n a n c i a l a s s e t s
of the o i l - e x p o r t i n g c o u n t r i e s , " i t s a i d .




208

Financing the oil deficits

V*
II. Johanna Wiilcvwn
Managing director, International Monetary Fund, Washington D.C.

The enormous deficits of the western industrial world could lead to savagely nationalistic
reactions. It is to help try and avoid these that the managing director of the Fund has
devised the new special drawing facility to help countries through this period. Here he
describes the plan and its aims, and he sounds a warning.

U

ncertainty and change, it is a truism to say, are no
strangers to the international monetary system. In
recent years, however, and more particularly in recent
months, the pace of changc has accelerated. There have
been large movements in the relative value of major
currencies and a general departure from the system of
fixed exchange rates that has prevailed since the war.
Gold has ceased to be bought and sold at its official
price, and gold priccs in the free market have reached
levels that would have seemed unthinkable even two
years ago. Now the dramatic developments in the energy
situation have introduced new elements of uncertainty
and the prospect of substantial changes in economic
relationships.

The enormous increase in oil prices presents countries
with many difficult decisions, both in their domestic
and in their external policies. Besides imparting an additional push in the direction of cost inflation, increased
energy costs will have a deflationary effect on real
demand.
Externally they will give rise to a substantial disequilibrium in the global balance of payments. This
combination of circumstances will place strains on the
monetary system far in excess of any that have been
experienced since the war. To withstand these strains
with a minimum adverse impact on economic trade and
growth requires close co-opcration between governments
and a willingness to subordinate short-term national
interests to the longer-term general good. To help
achieve this the International Monetary Fund must
provide its member countries with guidance and support
—to help ensure that appropriate policies are adopted
and, where necessary, to assist in financing structural
adjustment.
Undoubtedly, inflation will' continue to be a major
problem in the year ahead. Even before the increase in
oil prices, inflation was running at an unacceptably high
level in the developed countries. Now the prospect is for
rates of price increase in doublefiguresfor many, perhaps
most, of them, in the developing world the situation is
similar and for some countries worse. Even in those
countries which have pursued reasonably sound domestic
policies imported inflation has pushed the price level up at
historically high rates. There has thus been a dangerous
acceleration of inflation throughout the world, which at
the present time shows no signs of abating.
W

Enromoney April 1974




How much deflation?
It is, of course, much easier to inveigh against inflation
than to suggest effective and workable policies to control
it. At the present time policy choice is particularly
difficult because of the deflationary effect on real demand
of the new oil prices. These prices will bring about a
substantial transfer of purchasing power from oilimporting countries to oil exporters. Since the spending
capacity of the latter is much less than that of the former,
at least in the short term, the result will be marked contraction in real demand. In its economic effect, therefore,
the oil-price increase is similar to a tax increase or a
sudden growth in savings. How large this deflationary
effect will be depends on a number of factors: the extent
to which the labour force seeks and obtains compensating
increases in wages; the size of the consequential change in
business profits; the scope for reduction in consumers'
savings; the speed with which oil-producing countries
expand their imports; the extent to which increased
saving in the oil-producing countries can be channelled
into higher investment in the consuming countries and
so on.
Within limits, a measure of deflation may be welcome
in reducing excess demand; but where the deflationary
impact of high oil prices is more than is needed to remove
existing pressures on resources governments may need to
take some offsetting action. The task of domestic management will be, as always, to strike the right balance
between stimulation and restraint. Policy choice is even
more difficult at the present time because of the considerable uncertainty concerning the magnitude of the
'oil factor' on demand. Furthermore, since rates of
inflation are already high, and confidence is brittle, the
penalties for miscalculation are probably greater than
usual.
Apart from posing difficult domestic policy choices, the
oil-price increases also create a need for balance-ofpayments adjustment, an area which is a particular
concern of the Fund. If oil prices remain at the levels
established last December, the combined current surpluses of the oil-exporting countries could, in 1974,
be as high as S65 billion. These surpluses will have to be
matched by deficits of equivalent amounts for the oilimporting countries taken as a group. The developing
countries alone face an additional import bill approaching $10 billion, afigureroughly equivalent to their total

209

receipts of official development assistance.
Faced with these deficits, there is a danger that the
external policies of the oil-importing countries may come
into conflict with each other. It would be inappropriate
for the oil-importing countries to use deflationary demand policies to try to eliminate the additional current
deficit caused by the rise in oil prices. Such policies
would only shift the balance-of-payments problem from
one oil-importing country to another and might have
cumulative depressing effects on the world economy.
Equally unfortunate would be an attempt to solve
balance-of-payments problems by import restrictions.
This would not only, again, shift the problem from one
oil-importing country to another, but would also give
rise to serious trade conflicts and reduce the flow of international trade in a most harmful manner. Of course,
the presentflexibilityof exchange rates should be used to
facilitate adjustment. But if a number of large countries
were to try by this means to reduce their current account
deficits to an extent that was inconsistent with the unavoidable total deficit of oil-importing countries, the
outcome might be a return to beggar-my-neighbour
policies. It is gratifying that the Committee of Twenty
at its Rome meeting showed itself to be fully aware of
these dangers.
In the present situationfloatinghas several advantages
and is probably unavoidable. But given the volatility of
exchange markets, and the need for many countries to
accept large deficits on current account, there is a clear
need for constructive management of thefloatingregime.
Whatever happens, there are bound to be strains on the
mcchanisms whereby offsetting capitalflowsare induced
tofinancethe enormous current account in balances to be
expected this year. The Eurocurrency market will have an
extremely important role to play in attracting surplus
funds from oil-producing countries and lending them to
countries in deficit. However, in view of the preference
of oil-producing countries for short-term deposits, and
the need of deficit countries for at least medium-term
loans, there will be a very heavy burden on this market,
about which there is already some concern. It seems improbable, therefore, that all deficit countries will find it
possible to borrow from the market to the required extent
and on reasonable terms. It is to meet these unfilled
needs that I have proposed a special new facility, limited
in time, and related to the higher costs of imported oil.
Avoiding economic nationalism
The facility would be designed to deal with an emergency
situation and would not be a permanent feature of the
Fund. It is proposed that the facility should be related to
higher oil costs incurred in 1974 and 1975, taking into
account the relative ability of countries tofinancetheir
current account deficits by net capital imports, or by
reducing the level of their net international reserves. The
maximum amounts drawable in the first year would
constitute, within limits related to quotas, an important
proportion of the impact effect of oil-price increases, but
this proportion would decline in 1975.
The conditions for use of the facility would be specific
to the drawings under it. Countries would be expected to
undertake the following policies, for example, in regard to
the exchange rate and incentives for capital inflows that
would facilitate the appropriate adjustment. It should be
possible to use the text of the Committee of Twenty
communique as a basis for reaching agreement on




conditions to be applied to drawings. The relevant part
of this reads as follows:
'In these difficult circumstances the Committee agreed
that in managing their international payments countries
must not adopt policies which would merely aggravate
the problems of other countries. Accordingly, they
stressed the importance of avoiding competitive depreciation and the escalation of restrictions on trade and
payments. They further resolved to pursue policies that
would sustain appropriate levels of economic activity and
employment, while minimizing inflation. They recognized
that serious difficulties would be created for many developing countries and that their needs forfinancialresources will be greatly increased; and they urged all
countries with available resources to make every effort
to supply these needs on appropriate terms'.
To an important extent the fund will be able to finance
drawings under a new facility from its existing resources.
Hoover* if there is a heavy demand to draw, the Fund
will need to supplement these by borrowing. Although
one would naturally think in this connection of borrowing frbm the oil-exporting countries, funds could also be
obtained from those oil-importing countries which
receive a large capital flow and which are relatively less
affected by oil price increases.
A breathing space
The purpose of the new facility is not to obviate the
need for adjustment, but to provide a breathing space
which will enable countries to avoid inappropriate adjustment policies. This breathing space should be used for
consultations on the nature of the needed long-run adjustment and to cover the transitional period during
which the necessary policies are put into effect. To the
extent that the current account deficit should be financed,
the Fund should encourage its members to adopt policies
that will help attract the necessary capital inflows. To the
extent that some improvement in the current account is
necessary, the Fund should endeavour to see that this
is not achieved through excessive currency depreciation
or unjustified exchange restrictions.
There will, of course, be difficult policy decisions involved in the adjustment process—not only concerning
the nature of the policies that are applied, but also concerning the extent. Both under-adjustment and overadjustment carry their different dangers. The task of the
Fund must be to try and help its member countries to
chart this difficult middle course. The dangers of a failure
to chart such a course are recession on the one hand and
a worsening of inflation on the other. The dancers are
the perpetual Scylla and Charybdis of economic policy;
but on this occasion the whirlpool and the rock seem to
be uncomfortably close together.

210
T H E WASHINGTON POST

April

12,

1974

Joseph Alsop

From Energy Crisis to Dpllar Crisis
NEW YORK—Maybe it is a bad mistake to come up here to $sk the insiders on the money market about the future effects of the miscalled "energy
crisis." It makes you feel that the
Watergate-besotted political community in Washington resembles nothing
so much as a party of drunkards in a
graveyard, boozing away among the
corpses.
The reason for this dire, perhaps extreme sensation is really pretty simple.
The wisest and most conservative ipen
in the economic andfinancialcommunities have begun to talk helplessly
about the threat of an onrushing,
Worldwide financial calamity in many
respects as serious as the Great Depression of the '30s.
If these apprehensions have any
Inundation, the! leaders of both politicil parties and all other memben of
the political community ought to begin
worrying, too, along with the Insiders
on the money market. The worst of it
is that by any logical test, the apprehensions of threatened calamity appear to be well founded.
, Here one mptt, begin by noting that
the "energy #isis!' is miscalled, because It is a apohey crisis rather than
an energy crislfc^t results exclusively




from the enohnous increase- in the .'(fyclng eountrlea, there ii a rather gen*
era! tendency to argue>that "tne sysprice of crude oil in recent months.
This has created an entirely new situa- tem can take it."
tion for all of the world's leading fiIn this respect, David Rockefeller,
nancial-industrial powers, including
head of the Chase Manhattan Bank,
the U.S., since these are also the big
stands almost alone. This is because he
oil-importing powers.
has been saying forthrightly, albeit privately, tha} he cannot see how the exBy the beat estimates of the leading
isting financial system can possibly
expert in the field, Walter J. Levy, the
stand the double strain ahead.
oil-importing countries will end this
' The first pert of the double strain
year owing the oil-producing countries
no less than $50 billion. This will be will be inability to pay their bills, and
therefore the continuously increasing
net debt, please remember, after subtracting the costs of everything kthe oil indebtedness of the U.S., Japan and
the other leading financial-industrial
importing countries can persuadaythe
oil producera to buy from them, ajl'the ' nations in Western Europe. The second
part of the double strain will be the
way from perfumes to bomber plane*.
immensity of the sums owed to the oil
producing countries—tens of billions
As stated in t M previous report In
this apace, all the tigns further suggest upon tens of billions, In fact, all sluicthianet debt will be In the nature of a ing about in search of Investments.

added to it in 1075—and so on Indefinitely, unlets tomathlng gives* way
somewhere with a rending crash.
On this matter of aometbint giving
way somewhere, there la a, dmsioq. of
opinion. Among the greii American
banks, whoae deposits may be vastly
and profitably awollen by the evermounting funds owed to the oil pro-

The pptimists suggest that a way out
" will be found by selling the oil producing countries large chunks of the economies of the big oil importing countries. This raises an interesting policy
question, to begin with. Fat do we really want great numbera of the prlp**
pal financial and industrial«
In the U.S. to be owned by 4
Iranians?
But aside from the policy question,
the eptimists' way out also raises a
practical question. On their system,
the oil producing countries will makf
overseas investments in jusjt
yaari,
1974 and 1975, ^n amounts abotft $10*
billion higher than
>va|M
of all the overseaf
mulated by the U»S. sine* I t ^ f t i e pH'
p roducert'JotfeJgn K ^ n g a $y tifc and

But no one makfa investment* overseas or*
"without jgxpfebtiog*
reasonable return.
a return Is
now thought to be aPc^ng: 10 par cent
per annum. At the
of 1&76,
therefore, the c4 importing fcOtmtriftB
will have to face another yearot going
into debt fif fehergyty tfyt (funount of
$50 billion. And tfay will jUaofwe the
oil producers'" k^Mx*
Mk* $10
billion In intrnmt-ltywmiHmtial The year following,
oCinterest and/or dividends w£H then rise to
btiltai. And S It will irtarrily cono
at leajt in thecfl^rButin practice»4t cannot possibly c o o k i e ihtbis
^amfar. Unless oil prices edme down
draattoaUy, eomethinc really wi^l give
way aotnewhere.

211
FROM FINANCE MAGAZINE, JUNE 1974

Arab Lands Amm) in Cast?
Quadrupling of price of oil begins to flood Middle East with Incredible Riches.
The recipients' initial reaction has been to seek refuge in traditional shortterm money markets, juicy real estate deals in New York and Paris. But the
sheiks will wind up holding so many chips, the world financial system could
be ruined unless they unbend and lend at longer term, meeting maturity needs
of deficit oil-consuming lands. In due course, the Arabs might even develop
an appetite for common stocks, but that could still be a long time off.
By H. LEE SILBERMAN
4 6 / ^ N E THING you can be sure about
V - J the Saudi Arabians. They have
no intention of being a patsy for
anybody, aimlessly sloshing money
around the world."
Speaking is a Wall Street financial
executive, recently returned from a
trip to Jeddah, the financial center of
the huge Moslem land. He might just
as well have been speaking for all of
the soon-to-be incredibly wealthy
Middle Eastern oil producing countries.
Since the Arab oil producing countries quadrupled the price of oil last
fall, the annual cash flow to that part
of the world has swelled by over
$100 billion. Of that, the countries
are expected to wind up with an
estimated $60 billion after paying all
of their bills this year, up from a $4
billion surplus by the same lands in
1973.
By 1975, however—just one year
later—total monetary reserves of oil
producing nations, including such
other oil-rich Arab lands as Iran,
Kuwait, Iraq, United Arab Emirates and Libya, are likely to exceed
$145 billion—and $210 billion by
the end of 1976. These are mindboggling amounts, expected to mate44




rialize in only three years. Saudi
Arabia alone is likely to accumulate
at least $50 billion over the three
years.
With oil-payment checks reflecting
the higher prices recently starting to
pour into Arab coffers in some volume, the Middle Eastern countries
are now having to make increasingly
difficult decisions concerning the disposition of their embarrassment of
riches. " A r a b oil money historically
has been invested at short term in
Treasury bills in the U.S., in sterling
or i n the E u r o d o l l a r and E u r o currency in markets abroad," says
the Wall Street financial man. "That
was no sweat because the amounts
were modest—on the order of $10
billion or so. But now with their cash
flow starting to pile up," he continued, "concentrations in the short end
could be self-limiting, forcing down
rates. That means we can expect
some lengthening of maturities,
though they will still probably stay
relatively short, at least for starters."
The maturity preferences of Arab
investors are actually a matter of
considerable concern to international
bankers and monetary officials. The
reason is that as countries that buy

the oil began to run up sizable
balance-of-payment deficits because
of the higher oil prices and funding
most of these bills through the international banking system, that mechanism itself is in jeopardy of a
breakdown. The problem, David
Rockefeller, chairman of Chase
Manhattan Corp., and its subsidiary
Chase Manhattan Bank recently
explained, is that "banks have
been taking this short maturity
money and relending it to oil-consuming nations for periods of five to
seven years." Such a process "obviously makes a very unbalanced
and precarious maturity structure,"
M r . Rockefeller warned in a recent
address to the Spring meeting of the

212
prestigious U.S. Business Council.
The Chase chief executive emphasized ihe need to develop mechanisms whereby the "huge surpluses of
the oil producers can be recycled
back to deficit oil consumers." He
expressed the hope that "countries in
the Middle East, as they become
more familiar with the recycling
process, will at least agree to place
funds at longer maturity."
Other solutions for resolving the
problems outside the banking system have been proposed. Johannes
Witteveen, managing director of the
International Monetary Fund, for
example, has called on the oilproducing countries to advance some
$2.7 billion to a special new "oil
window" at the IMF which in turn
would lend the funds to the deficit
ridden oil-importing lands.
Chase Manhattan itself has become increasingly involved in the
Middle East. The global banking or-




ganization is setting up a merchant
bank to manage securities underwritings in Saudi Arabia and a commercial bank in Iran — both jointly
owned with local participants; Chase
has also established branches in
Egypt, the United Arab Emirates
and elsewhere. It has a long way to
go, however, to catch up with its
New York archrival, First National
City Bank, which has long operated
branches both in Jeddah and Riyadh,
capital of Saudi Arabia as well as in
Abu Dhabi. Bahrain and Qatar
among other places in the Middle
East.
The more recent inundation of the
area with a rising tide of oil money
has triggered a rush to those Arab
lands by major banks from the U.S.,
France, Japan and elsewhere. In recent months, First National Bank of
Chicago announced opening a branch
in Dubai while its hometown competitor, Continental Bank of Illinois,
was buying into a Bahrain Bank. But
the most concerted activity is taking
place in Beirut, the Arab world's traditional financial center. Prominent
U.S. banks that now hold important

interests in Beirut banks are New
York's Chemical Bank and Fidelity
Bank of Philadelphia. The Lebanese
capital is also the center for the creation of merchant banks, in which
Western banks are playing a role as
partners or advisors. One such
bank is Arab Finance Corp., which
while 56% Arab owned, also has
New York's Manufacturers Hanover
Trust Co. and banks in Tokyo and
Paris as partners.
It is only a matter of time in the
view of U.S. investment experts, before many of the Arab countries
direct a significant portion of their
newly gained oil billions into medium and longer term investments.
Recent experience in Saudi Arabia
shows that such direct investments
are initially made at home — for
schools, government buildings,
roads, hotels, office buildings, apartment houses and the like. But because countries like Saudi, Kuwait
and Iran are underdeveloped industrially, there is a limit as to the longterm financing they can absorb. The
ultimate aim of each country's planners, according to a well posted New

213
Y o r k banker, is to accumulate
enough profitable investments outside its borders that will yield sufficient income to replace its oil revenues as they run out.
While still on a modest scale, longterm foreign investments by Middle
Eastern countries are beginning to
build up, in real estate, selected securities and some direct investments
in industry. Newspaper financial
pages in recent months have headlined such developments as the purchase of a large office building on
Fifth Avenue, New York, by Shah
Mohammed Riza Pahlevi of Iran; a
$27 million investment by a group
of Kuwaitis in a planned luxury office and bank building on the Champs
Elysees in Paris, to be called the
House of Kuwait; and the acquisition of about $1 million in raw land
for development in California by
Adnan M . Kashoggi, a Beirut-based
Saudi Arabian, who also purchased
two California banks.
Other major deals involving pooling investments and businesses
are in the works. It is reported, for
example, that the Saudi Arabian
Government has talked to Chase
Manhattan about the possibility of
Chase managing a pool of $200 million in Saudi Government funds for
investment in Saudi business and in
joint ventures with foreign partners
whom Chase would find. Earlier this
year the Kuwait Investment Co., one
of several owned jointly by the Kuwait Government and individual Kuwait investors, bought Kiawak Island off Charleston, S.C., for a reputed $17 million in cash; the company plans to spend more than $100
million developing it as a residential
resort over the next 15 years.
The Arabs' emphasis on real
estate is understandable because it is
visible and tangible, attributes cautious investors can readily appreciate. Arab investors, moreover,
have been realizing a fabulous return on real estate investments at
home: real estate in the center of
Jeddah is said to have trebled in
value over the past 12 months alone.
As a result of this kind of appreciation, a lot of oil money is being
sunk right into the land at home. A
Saudi student, temporarily in the




U.S. relates, admiringly, a personal
encounter in a surburban area on the
outskirts of Jeddah. " I had long
known the section to be sparsely settled and consisting of older scattered
residences, but I had not been out
that way for six months or so. Imagine my surprise to discover the area
completely transformed into a modern planned neighborhood, with wide
paved streets, shops and homes. I
frankly didn't recognize the place, in
a city where I have lived all my life!"
Experiences like these buoy the
sense of pride and mission of the
Saudis and add to their zeal to put
their newly earned billions to good
use. "When I see something like
this," the Saudi continues, " I am
overcome by the conviction that we
will play a catalytic role not only
in the Arab world but in the world
of finance as well. There are many
things we will want to do as our planning evolves; a few years from now,

£
...

we will see Arab money
move into quality stocks,
when conditions in the U.S.
economy and markets
become more promising.

I look for considerable emphasis in
joint ventures abroad — many of
them, I expect, in the United States.
We will approach these opportunities, I am sure, with the concept of
having a benevolent and stabilizing
effect on world finance.
For the time being, the major focus of Saudi investment planners is
on the country's infra-structure as
well as that of the Middle East in
general. The emphasis thus is on
such fundamentals as roads, power
generation and transmission, schools
and the like. The government at the
same time has begun to lay the
groundwork for the development of
industry that, it is believed, will benefit the country most. This is the building of a full-fledged petrochemical
industry to refine the crude after it is
brought to the surface, thereby enabling the country to expand its export earnings even more significantly
through the shipment of the more

valuable finished products instead
just the oil itself.
Next to its own infra-structure, the
Saudis are increasingly involved in
strengthening the basic economic underpinnings of its Arab neighbors.
Toward this end the government is
setting up its own Islamic Bank with
no less than $1 billion capital for aid
to the Arab world. It is also sponsoring a Cairo-headquartered Arab
African Bank, which will channel
Arab funds to African countries. In
these efforts Saudi Arabia and Egypt
have drawn closer together in a combination harnessing Saudi's financial
resources and pioneering zest and
Egypt's more mature economic and
social structure; Egypt itself produces no oil. The relationship is
made even more secure because of
Saudi's reliance on the fertile Egyptian Sudan as the country's breadbasket, a tie it recently knotted with
the guarantee of a $2.5 billion loan
to Cairo.
As the Arab world begins to flex
its new-found oil wealth, major international banks have come conspicuously to the fore to join with
Arab banking interests, to help
smooth their path in the world. Investment banking houses based in
the U.S. and elsewhere are not quite
as much in evidence in this process,
at least at the time being, probably
because of the Arab countries' predeliction at this stage in their financial evolution to invest their surplus
oil funds mainly through the banking system. There seems to be little
doubt, however, that the securities
industry, both in New York and
London, will bulk larger in the picture as the Arab investors grow more
comfortable with longer-term debt
and equity investments.
" I am quite confident that we will
see Arab money move into quality
stocks, when conditions in the U.S.
economy and markets become more
promising," says the Wall Street financial executive. "Right now, the
tendency is for Arab investors to
carefully assess equity opportunities
and the market process, while their
general approach toward the stock
market is one of considerable caution."
Then again, whose isn't?
•

214
T H E WASHINGTON POST

M a r c h 31, 1974

Hobart Rowen

T h e Oil Crisis Will Continue'
The Arab oil weapon has temporar- , that "Israel alone" will bear the reily been laid on the shelf, within easy
sponsibility for "more severe oil measreach by the managers of the export*
ures, in addition to the other varipus
ers' cartel. It has not been abandoned,
resources which the Arab world can
and it would be a mistake, ior the
master in order to join the battle of
American public to delude Itself into destiny."
thinking that the Vienna announce- '
Plainly, this is a threat to use not
ment of the lifted embargo has more
only oil itself, but oil money, as it piles
than marginal meaning.
up, as a bludgeon over the West By
So long as prices for oil remain skymoving large blocks of capital in and
high-^triple what they were prior to
out of money markets, for example, a
the embargo-—and so long as producconcerted drive by the oil cartel countion levels are carefully controlled by tries could shake Western currency
the oil-producing states, the oil crisis
markets. Demand for payment in gold,
will continue.
from those who have limited supplies
of gold, could also weaken the finanOf course, it will be difficult to suscial underpinnings of the West. And
tain public concern about the oil crisis
large-scale industrial and commercial
if gasoline becomes somewhat more
investments in industrialized countries
readily available—albeit at prices
could provide the Arab nations with a
nudging 70 cents a gallon in the East
degree of leverage over economic
But the most difficult problem cre- prospects and Job opportunities.
ated by higb oil prices—the potential
It is not at all far-fetched to visualfor economic recession in the industriize a scenario in which the embargo
alized world—remains unsolved.
might be threatened again unless the
As much as $50 billion to $60 billion
industrialized countries step up their
must be transferred from the oil-conaid programs for the hard-pressed Afsuming nations to the oil cartel this rican countries who have given the
year to pay for the increased costs of
Arabs political support.
i oil—a sum which threatens vast discloFaced with the Arab nations' clearcations here and abroad.
cut success in the initial round of the
v
No one has yet figured out how the
oil war, it is disconcerting to see the
consuming nations will pay the bill—
potential for joint actioii by the conor how the exporting nations will use
suming nations fade away in a welter
or invest the vast sums they receiveof acrimonious debate between Presionce they're paid over.
dent Nixoh and Europe.
But the terms of the lifted embargo,
Europe—dominated by France—
as made public in Vienna, carefully esseems determined to pursue bilateral
chew any guarantee of increased prodeals with the Arab nations. If the
duction which would tend to assure a
United States were to sacrifice princisoftening in price. Iran and Algeria, to
ple to be assured of a steady flow of
the contrary, have been arguing loudly
Arab oil, it could elbow the French
for yet another increase in price.
and British or anyone else out of the
The remaining potency of the oil
way, especially with Iran and Saudi
weapon, moreover, should be seen
Arabia, offering them as much money
from the Arab statement which wqrns
and technology and certainly more se-




curity than any combination of K i r * I
pean nations.,
Because it has not succumbed to
blackmail, the United States has so far
not chosen this course. Hopefully, the
Nixon administration will not b* vkA
icked by the new harsh language i§.
the cartel's Vienna announcement, o*
by a political need for some new dlplo*
matic "success" to .offset Watergate
troubles.
f
We can anticipate a flood of faifljr
optimistic assessments from the majofr
banks and the big oil companies wha
are heavily engaged with the produc
ing countries in oil and money .matters. It isn't reasonable to Iodic' 16
bankers or oil presidents for a re-state*
ment of the need for independence
frofll Arab oil.
i.
But if that crucial drive gets lost lnf
a misplaced euphoria over a slight jig.
gle in the use of the Arab oil weapon,'
it will be a shame. They have the abft*
ity to turn the oil supply valves on attt
off at will. They make no pretense o{
their willingness to use their oil an$
new found wealth as political black*
maiL A policy that doesn't recognize
this as a fact is suicidal.
/
We hardly needed to be told that t h *
embargo will be "reviewed" June 1;
Only a year ago, Saudi Arabian Minister Zaki Yamani was saying that oil,
would never be used as a political
weapon Now, we know (or should"
know) that no assurance from the
Mideast exporting countries means anything.
, ..
The oil cartel has created a vast uncertainty over a vital supply, with thW
combination of oil and money forgfetf
into a devastating weapon. So far, th»
Western World has evolved no efffo*
tive response.

215

Oil-Cash Recycling Plans Vary
I T CLYDE H. FARNSWORTH
iptotel to The New York Tbnc*

, PARIS—The quadrupling of
-oil prices at the end of last
year has caused economic
< and financial upheaval in the
world. The petroleum-exporting nations are accumulating
money at a rate that has been
put at $6-billion a month.
A number of plans have
been offered to "recycle"
surplus funds of the oii-exporting nations into productive uses to avoid reductions
in consumption and even a
' world recession.
The two plans most widely
discussed have been formulated by H. J. Witteveen,
managing director of the
International Monetary Fund,
and Harold Lever, a Cabinet
Minister and financial adviser
to Prime Minister Wilson of
Britain. Another has been advanced by David T. Kleinman,
professor of finance at Fordham University.
Discussions Planned
Some of the plans for recycling money will be discussed in Washington next
Tuesday at a meeting of the
Group of Ten, a forum of
the 10 leading industrial
powers that has been resurrected to deal with , the oil' financing crisis. The Group
of Ten was disbanded in
- March, 1973, when the world
monetary system went into
a pattern of floating rates.
The proposal by . Mr.
-Witteveen, a former Dutch
Finance Minister, seeks to
persuade Middle East states
to lend some of their oil earnings directly to his institution, the International Monetary . Fund, which would
xelend to countries in need.
On a recent tour of the
oil states he was able to get
•subscriptions for only $2.8inillion, a, minor amount in
.relation to the magnitude of
the oil countries' income.
* American officials are convinced that given the right
interest rates and the right
exchange rate guarantees,
the Witteveen plan could become an important recycling
vehicle in, the. future.
Mr. Lever proposed a mechanism for collective purchases of Middle East oil by
the industrialized nations of
the West. His pjan envisages
an agency that would buy
the oil at a negotiated price
and sell just about at cost to
the main consuming nations.
Revenues from a surcharge
on these resales would b
. lent or given to developing
countris.




The mechanism'was described in British circles as
an alternative to the Witteveen plan. The British think
it might prove more acceptable because of certain technical features having to do
with the role of the monetary asset known as Special
Drawing Rights.
However, Sheik Ahmed
Zaki al-Yamani, Oil Minister
of Spudl Arabia, has warned
that any efforts to purchase
oil collectively could result
in .further increases in prices.
The oil states have been cool
to both the Witteveen and
Lever ideas because they in-,
volve a loss of Control over
the countries' money.
While some of the oil nations' new wealth is used to
buy goods in the West and
for investment in Europe and
the United States, most goes
into the money markets,
which means that it is placed
in short-term securities at
relatively high interest rates.
It is highly volatile money.
Until now commercial
banks have been the chief recyclers, borrowing the shortterm funds and lending them
out at longer term for productive use by business. The
volatility of the money, however, creates unusual risks.
David Rockefeller, for one,
chairman of the Chase Manhattan Bank, warns that
commercial banks were not
equipped to handle the recycling job.
Plan by Kleinman
The latest plan was offered
by Professor Kleinman, who
presented his ideas in Paris
last month at a meeting of
the Young Presidents Organization.
Professor Kleinman, who
as a consultant, to the United
States Agency for International Development worked
out a plan for restructuring
Brazil's capital market in
1967, believes the problems
can be solved by giving free
rein* to market forces. He
proposes to create capital
markets in developing countries to attract surplus funds
of oil-producing states, stimulate more rapid economic
growth of the poor countries
and increase exports of industrial nations.
Mr. Kleinman claims the
plan would promote the rapid
economic development of the
Third World, establish a new
monetary equilibrium and
generate enormous demand
for capital and other goods
from the industrialized world.
He envisages development
of financial institutions such

as Those created in Brazil
In the late nineteen-sixties.
Credits on liberal terms
would be provided for underwriters and market makers
in each country, as well as
for entire regions.
Monetary Correction System
Debt securities providing a
"real" interest rate after
cost-of-living increases are
taken into account would be
offered. This monetary correction system, which was included in Professor Kleinman's program for Brazil in
1967, is the key to attracting
surplus oil funds.
Oil money that is now being invested may get what is
known as a negative interest
rate if market rates are less
than inflation rates. So with
a higher rate of return, there
would be an incentive for oil
states to shift their funds to
the developing countries' financial centers.
The securities that are is- J
sued—both debt and equity
—would finance newly or- I
ganized public and private
enterprises in participating |
countries and would be traded on local and regional
stock exchanges.




216
FROM THE NEW YORK TIMES, MARCH 2 0 ,

1974

Arab Oil Strategy
Economics, Business and Politics
Mixed in Aiming at Embargo Goals
By LEONARD SILK
Some day the Arab oil em- to do this, you should have to
bargo, which now has been give us some powerful incenlargely suspended against the tives."
United States, will make a great Although the embargo case is
case at the Harvard Business far from complete, here is a preSchool. It could break new liminary version of how it looks.
ground in that Situation: You are a leading
largely unexplored Arab oil-producing state and a
Economic no - man's - land member of the international
AnalysU where economics, cartel, the Organization of Pebusiness and poli- troleum Exporting Countries.
tics meet. The es- With your fellow Arabs, you
sence of the case was stated by have been embargoing oil shipan Arab oil sheik to Peter G. ments to ,the United States, the
Peterson, the former Secretary Netherlands and other countries
of Commerce who is now chair- that, you assert, have aided Isman of Lehman Brothers, the rael against the Arabs.
With your fellow
big New York investment bank- the Organization ofmembers of
Petroleum
ing house. "You taught us in Exporting Countries you have
your business schools," said the quadrupled oil prices. To make
Arab sheik, "that we should the embargo and price increase
maximize our profits. Do you stick, you had cut oil producwant us now to repeal the laws tion back by about 15 per cent.
of supply demand? If we are Now, in response to American
efforts to work out peace terms
with Israel, you have lifted the
embargo against the United
States. You must now think
through your broad future
strategy.
Lasting Development
Objectives: Your major objectives are: to maximize profits, maximize capital accumulation, recapture territory from
the Israelis, and to maintain
your security against internal
and external Arab radicals,
against Western imperialists,
against Soviet Communists. Finally, you want to achieve
lasting economic development
of your country.
Customers: Your principal
customers are the United States
Western Europe, Japan and a
crowd of energy-poor, less developed countries.
The United States has enormous military power Europe
not much, the less developed
countries still less. But the
Soviet Union also has military
power — air force, missiles,
tank — not to mention their
ships and submarines in the
Indian Ocean.
The United States has a good
relations with Israel, the Soviets bad. The United States
has Henry Kissinger. The United States is freer to wheel
and deal between Arabs and
Israelis than the Russians are.
Problem: How much oil
should you produce and how
much should you charge for
it? These are interdependent
questions. If you go back to
producing as much oil as you
did before the October war,
you could break the present oil
price, and maybe break up the
cartel.
As it is, the price of crude

217
oil has been softening. The
posted price is $11.65. At the
peak of the oil scare, prices
in the Middle East got up toj
$22 a barrel. Until recently,;
light Arabian crude had been
going for $9 to $11. Now some
independent oil importers say
they are abfe to buy at $8.
How can you keep prices from
falling too much?
Proposal: Restrict production
below the October level. Do
this by maintaining your embargo against tihe Netherlands,
Denmark, Portugal, South Africa and Rhodesia, charging
that they are all unfriendly to
the Arab cause against Israel.:
This will justify the hold-downs
on total production and help
maintain the price of crude.!
It may also yield political benefits, since the industrialized
countri) s seem to put economic
needs above all else.
Problem, What if W t i r ' M j
low cartel members fncre^fee1
production in order to ' maximize profits, letting you carryl
the burden ot cutbacks?
proposal: Threaten to increase your own production,
which would break the price.
Alternatively, threaten to make
a political deal with the United
States at the expense of your
colleagues.
Problem: The industrialized
countries claim they can't pay
the huge oil bills. They assert
that high oil prices are worsening their inflation, which reduces your real gain.
Proposal: Warn them that
you will raise the price of oil
still higher unless they get inflation under control. Tell them
that they can't cheat you out of
your just price.
Problem: But they may be
unable to control inflation, and
if inflation gets out of hand,
the money they owe yo will be
worthless.
Proposal: Buy gold.
Will Gold Really Help?
Problem: But what if you get
all the gold? Actually, you can
afford it. The artel's oil revenues will go up by $65-billion
to $75-billion just this year,
and keep on climbing.
But does it make any sense
just to bid up the price of
gold higher and higher? Will
that really help your economic
development?
Your gross national product
is growing fast. The combined
G.N.P. of all the Arab countries is going up from $36-biIlion in 1973 to $74-billion in
1974. In Qatar, per-capital
G.N.P. will soar from $5,800
Jast year to $17,400 this year.
In Abu Dhabi, it will hit $45,000 per person this year —
compared to a mere $6,127 in
the United States. But what
happens to your G.N.P. when
the oil runs out?
Proposal: Invest your petrodollars in income-earning assets
You can absorb only so much
breed galloping inflation and
corrupt or ruin the working!
class. Invest more money
abroad.
'




Problem: What if foreigners
nationalize your investments?
Proposal: As one wise old
sheik said, "The most illiquid
investment is a demand deposit
at the Bank of America."
Your dollar holdings can
not only be blocked but the
purchasing value of the dollar
will surely decline over time.
Therefore, consider a range
of alternatives: Diffusing your
money through Arab-controlledl
banks in the Vest, recycling
petrodollars,
tnrough
an
"International
Petrorevenue'
Fund," financing economic de-

velopment in the poor countries
of Africa or Asia through an
oil exporters'
International
Bank for Development. You
don't need to use the Western
world's International Monetary
Fund or World Bank.
Problem: But recycling or
running an aid program sounds
terribly complicated and risky.
The West never did it very
well. Why should we now carry
the burdens and risks of soft
aid? Isn't there a safer way to
stay rich and further our own
development?
Proposal: Improve relations
with the United States and
other industrialized countries.
Relax the embargo. Set up joint
Government and business development programs in such
kreas as food, education, housing, desalinization, as Peter
Peterson and George Ball, the
former United States Under
Secretary of State, have proposed.
Negotiate tax treaties, mutual investment guarantees.
Build programs for long-term
development of energy, shale,
soiar power, etc., for the time
when your petroleum runs out.
Work out pricing and production policies that will serve
the interests of both oil-exporting and oil-importing countries.
World inflation and world recession or depression, combined
with breakdown of trade and
hostility among nations, won't
do the West or you any good.
Problem: You sound too rational. But if we had been rational, we would never have got
where we are today. How can
we trust the West, those neocolonialists who never did anything for anybody but themselves?
Proposal: Hang on to the oil
weapon. Threaten to reimpose
the embargo if necessary, and
use it ad lib for either economic or politcial purposes, or
' both. Keep the oil price high
enough to keep profits flowing
in, but not so high as to accelerate shifting to other energy
sources.
Hold the cartel together at
all cost. If the industrialized
countries show serious signs of
conserving on oil and substituting other high-cost technologies too soon, step up your
oil production and cut the
price.
Make them come across politically. Insist on military protection.
Keep cool. Remember what
you have achieved so far. And
remember what the great German strategist, Karl von Klausewitz, virtually said:
"War and business are not
merely political acts, but also
political instruments, a continuation of political relations, a
striving for the same ends by
other means."

218
T H E NEW YORK TIMES A p r i l 8, 1974

M M FAIL
TO AGREE OH AID

1

importers ^Decide to Set Up
' FundforPoorer Countries
; • bat Differ on Donations
My JUAN *

ONIS

/kMt^tDTtMNWTottTlaM*
OCNEV^ April 7~Tbe oil
' jortingbountries decided to*
set Upaepoc^l fund *>

•"ponir devetop&g

ut they failed to tfl
r jpouch money t# ;
He program.
flrWletfeda*
1H-natfcn T
Vweziielaand Aigefirmly spoosofad the fund,
Saudi -Arabia,.Kuwait and
Arab members resi*t6d'a
firm decision.,
Jamahid Amdutgar, Iran's
Ifinistet of Finance said that
fctt couhtry Was ready to give
tfre fund SlSO-milHqn as an
Initial contribution, but He said
Out the organization'* ntfjois' terial meeting here today had
; kft all contributions voluntary.
NO $*dflc Aid Offer
An official statement said
that the fund wtyHd not go
i$to operation until seven member countries had ratified the
articles governing its establishment and operation.
Cotfqfende sources said that
only Iran, Venezuela, Algeria
and Libya had clearly indicated
that they were' ready to ratify
the agreement. As a result, the
oil exporting countries will be
going to . the special .session of
$be United Nations General
Assembly that opens Tuesday
in New York to discuss raw
material and industrial inflation without a concrete offer
of aid for the developing
nations.
President Houari Boumedfene




fund for the developing counof Algeria, who has been the tries.
principal sponsor of the special The dispute between Saudi
don, had been interested in Arabia and Iran shows up in
ngthening the third world policy debates over oil pricing.
by spreading some of the The Saudi Arabian position Is
that prices now are too high
wealth of the oil export
and that the best contribution
among the poorer members.
Large developing countries the producers could make to the
such as
rwngltdwht welfare of developing and inZaire and Brazil, ancT many dustrial countries would be to
other smaller countries that do reduce prices.
not have oil, have been hurt Iran has been among the majority of oil exporters that opby the shop
crease in oil prices that Is the poses any lowering of prices.
source of new wealth for the These countries note that Saudi
•it
~
Arabia has not taken any iodiThe Arab producers of the gdusOstejM to lower the prices
Persian Gulf region are the major recipients of increased in- Among the non-Arab memcome, particularly Saudi Arabia, bers of the Organization of Oil
world's laignt oil exporter. Exporting Countries, little enBut Saudi Arabian sources thusiasm for the fund was
said that Sheik Ahmed Zaki shown by Indonesia, a countiy
al-Yamani, Saudi Arabia's Min- of 120 million people, as many
ister of Petroleum, had made as the total of all the Arab
no commitment on any con- members. Indonesia exports
tribution to the new fund dur- 1.4 million barrels a day comingtoday'sfour-hour meeting. pared with Saudi Arabia's 8.5
There is a strong ritalry be- million barrels, and members
tween Saudi Arabia and Iran, of the Indonesian delegation
Shall Mohammed said that all the earnings from
initially proposed Indonesian oil exports could be
pent of i special utilized yithin ,|he cfcmtyT 7

219
BUSINESSWEEK: March 16.1974

Middle East
The banking scramble
for Arab dollars
The flood of oil dollars into the Middle
East is bringing with it a matching influx of Western bankers, financial advisers, and just plain promoters-all eager to help the Arabs invest and
manage their Croesus-like wealth.
U. S. bankers are combing the area
so intensively for business that they
are practically bumping into each
other. A few weeks ago, when a senior
vice-president of New York's Chemical
Bank took a swing through Middle
East capitals, he reportedly found prospects waiting for Chase Manhattan's
Chairman David Rockefeller, who was
just a few days behind him on the same
circuit.
U . S. banks a r e o p e n i n g new
branches in the area and buying into
local commercial banks, and they are
setting up joint-venture merchant
banks with Arab partners as well.
Bank bids. Beirut, the Arab world's traditional financial center, is attracting
much of the attention. Philadelphia's
Fidelity Bank recently bought 80% of
Banque de la Mediterange, Beirut's
largest, and is selling off all but 20% to
Arab investors. Chemical Bank last
year bought 80% of Beirut's Rubiya
Bank, and Irving Trust is negotiating
to take over a bank there.
The banking boom is also spilling
over to Persian Gulf sheikdoms that
were little more than sleepy sandpiles
a few years ago. First National City
Bank of New York has branches in
Bahrain, Dubai, Abu Dhabi, and Qatar,
and two in Saudi Arabia-the only U. S.
bank branches allowed in that country
so far. Continental Bank of Illinois is
about to buy into a Bahrain bank, and
First National Bank of Chicago will
soon open a branch in Dubai—as will
France's Paribas, and a flock of Japanese banks. Kuwait bars foreign-controlled banking operations, but is getting a merchant bank with minority
American and European shareholdings
(page 61). Even Egypt, which nationalized its banking system years ago, is
allowing Chase Manhattan to set up a
representative office and eventually,
branches.
Bank of America, which has had a
branch in Beirut for years, is expanding in the Middle East mainly through
its 30% share in the Bank of Credit &
Commerce International, which it set
up in Luxembourg two years ago with
Arab partners. The venture has 10
branches in the Persian Gulf emirates,




owns an interest in the national bank
of Oman, and recently bought 80% of
Lebanon's Bank Chartouni.
These and other banks in the area
are bracing for the huge surge of payments for oil that is about to hit the
Middle East, reflecting last December's
sharp increase in oil prices. At the outset, most of the money will bypass
Middle East banks, both locally owned
and foreign, which operate mainly in
local currencies. Instead, Arab governments are expected to "recycle" the
bulk of their dollar earnings directly
into deposits and short-term investments in London, Zurich, New York,
and markets (page 42).
Fueling a boom. Gradually, though, local
economies will feel the effects of
stepped-iip spending by Arab governments. That, in turn, will fuel the biggest business boom the Middle East
has ever seen, and local commercial
banks will reap a bonanza of deposits
and loan business with Arab individuals, importers, contractors, government agencies, and other customers.
Although Lebanon has no oil, Beirut
will get its share. Says Bankers Trust
representative Muhammed Saleem:
"Beirut bankers have a saying: The
flow of money to Beirut will be like
opening a can of beer. We will get only
the foam, but the foam will be enough
to keep us working full time."
The Lebanese capital is a center for
the latest development on the Middle
East financial scene-the creation of
merchant banks designed to tap Arab
funds for medium- and long-term lending and equity investments, with
Western banks playing a role as partners or advisors. Several such banks
are sprouting in Beirut:
• Arab Finance Corp., 56% Arabowned. I t will have as partners Kuwait
Investment Co.; Credit Libonaise, a
Lebanese bank; the Beirut-Riyadh
Bank, with mixed Lebanese-Saudi
o w n e r s h i p ; the B a n k of Tokyo;
France's Banque de l'Union Europeene; and Manufacturers Hanover Trust
Co., with an 18% share.
• Investment & Finance Bank, owned
by Britain's Hambros Bank, France's
Renault, and Japan's Mitsui Bank and
Nomura Securities.
• American Express Middle East Development Co., set up by American Express Co. six months ago. I t has already
helped a British insurance broker,
Bland, Welch & Co., buy a stake in a
Middle East insurance company owned
by Saudi Arabian construction tycoon
Suliman Olayan, and aided in the financing of construction equipment for
Saudi Arabian operations of San Francisco constructor Bechtel Corp.

Now, American Express and two
other banks—one American and one
Japanese-are joining with Olayan in
trying to set up a merchant bank in
Saudi Arabia to concentrate primarily
on financing business ventures and "infrastructure" projects, such as petrochemical plants.
Still another vehicle for mobilizing
Arab investment money-this one entirely Arab-owned-is First Arabian
Corp., incorporated in Luxembourg
with a $10-million initial capital by a
group of Arab banks. New York's Kidder, Peabody Co. has played an advisory role at the outset.
Finding projects. The Beirut-based Arab
Finance Corp. will be headed by Dr.
Chafic Akhras, a Syrian who worked
with the United Nations and set up his
own consulting firm staffed with economists, engineers, and technicians. Part
of that staff will move over to the new
merchant bank to help in identifying
investment projects. The bank's first
venture, according to Michael C. Bouteneff, Manufacturers Hanover vicepresident, will be a syndicated medium-term financing for a project in an
Arab country. But the bank also expects to channel Arab money into ventures outside the area. "There are not
too many opportunities in the Arab
world," explains Bouteneff. "There are
plenty in other developing countries,
but at present the Arabs are not ready
to take the risks. So initially most of
the money will go to the industrial
world. But the return there is relatively low, so gradually they will move
into developing areas as they gain
more experience, in order to gain a
much higher return."
Despite the Middle East's big potential as a source of investment capital,
the new financial institutions will have
to move cautiously in testing the capacity of fledgling markets. A warning
occurred last year when Renault
floated a bond issue, denominated in
Lebanese pounds, in Beirut and soaked
up all the available funds. Recalls
Mehli Mistri, manager of the Beirut
branch of First National City Bank of
New York: "The interbank rate shot up
to 33% almost overnight, and only now
is it settling down to 11% or 12%."
•

220
TIME

M a r c h 4,

1974

INVESTMENT

The Arabs Are Coming
An embargo may still be keeping
Arab oil out of the U .S.—but not the gigantic amounts of investment capital
that the Arab countries are accumulating by selling that oil elsewhere. Over
the years, the Arabs have piled up
American holdings estimated to be $10
billion to $15 billion. Now such thinly
populated countries as Kuwait, Saudi
Arabia and the Persian Gulf sheikdoms
are pulling in more money through oilprice boosts than they can possibly absorb at home, and are channeling still
more cash into the U S.
The money is being placed discreetly, without publicity, in outlets that draw
little attention—chiefly bank deposits
and blue-chip real estate. There are two
reasons. One is simply that Arabs tend
to be ultra-conservative investors who
are fearful of being cheated if they venture into anything the letst bit speculative. Also, the Arabs are well aware
of the political climate in the U.S., and
so the Arabs are determined to maintain a low investment profile.
Still, the pickup in Arab investment
has been noticeable. "Every day we
get offered vast sums, like $200 mil-




lion at a time, to be invested in things
like Treasury bills," says a California
banker. Adnan Kahsoggi, a Saudi, has
moved beyond U.S. bank deposits to
buy U.S. banks. Over the past two years,
he has purchased controlling interests
in two headquartered in Walnut Creek,
Calif.: Security National, which has assets of $115 million, and the Bank of
Contra Costa, with assets of $22.8
million.
In the real estate field, the mixed
public-private Kuwait Investment Co.
last year committed itself to put up $10
million, half the equity of a $100 million urban complex in downtown Atlanta, two blocks from Peachtree Street.
The project will include a Hilton hotel,
offices and a shopping mall. Kuwait Investment reportedly has also bought a
South Carolina island intending to build
a luxury resort.
Best Addresses. Kuwaitis and
Saudis are also buying feed lots, agricultural land and New York City office
buildings, almost all at the best addresses in town, such as Wall Street and Fifth
Avenue. Raymond Jallow, chief economist of the United California Bank and
himself an Iraqi, says he knows of several shopping centers and office buildings that Arabs have bought in California, ranging in price from $1 million to
$10 million. Dr. Jallow expects such investment to increase "twentyfold in the
next two years."
Most experts are convinced that the
Arabs will eventually move beyond such
cautious investments to ones that have
more political clout. One reason: they
genuinel>, though wrongly, believe that
U.S. support for Israel stems partly from
a Zionist hammerlock on U.S. business,
and are eager to break it. One industrial area that the Arabs are certain to
aim at is so-called "downstream" oil activity—refining and marketing in consuming nations. Kuwait is already considering buying a large chunk of Gulf
Oil stock (from whom is not clear).
The pacesetter for Arab investment
is likely to be the "First Arabian Corp.,"
an Arab version of First Boston Corp.
that was organized by Roger Tamraz,
Middle East representative of the U.S.
investment firm of Kidder, Peabody.
First Arabian will soon open offices on
Park Avenue expressly to channel Arab
funds into the U.S. Tamraz says that he
plans to take over an American bank
(one just below the big ten) on behalf of
his clients, then bid for an industrial firm
that he will not identify beyond saying
that its brand name is a household word.
He sees these moves as test cases that
he will stage-manage carefully, probably
clearing every step with Secretary of
State Henry Kissinger and Treasury
Secretary George Shultz.
The Arabs will get further help in locating U.S. investments from American
banks that are setting up throughout the
Middle East. I n the past six months,
Americans have bought controlling interest in three banks, and bought into
three others in Beirut alone. The U.S.

bankers believe, in the words of one, that
"the only thing worse than the Arabs investing in America is the Arabs deciding not to." His point: a vast mass of
Arab capital pitching aimlessly from
country to country and industry to industry could disrupt economies and
financial markets throughout the West.
In order to avoid that, stable, long-term
investments must be found for the Arabs, and the best are in the U.S.

221
T H E W A S H I N G T O N POST

A p r i l 10,

1974

Joseph Alsop

A 'RiVer of Money'
NEW YORK—In March-April, the insiders on the money market tell you
that $10 billion of oil-producing governments' profits will be looking for
ihvestment opportunities around the,
world.

"The oil producers9
total profits for the first
12 months of the new

higher prices are estimated
The people who are searching for
places to put this vast amount of
at about $100 billion
,money are the major oil companies,
.like Exxon in this country and Royal
Dutch Shell abroad. Initially} most
"probably, they will select short-term needed American money to finance
'obligations. Eventually, something a their courageous effort to .withstand
Adolf Hitler alone. In short, insiders
f bit more solid and more permanent
. on the money market, pale-faced and
.mil be wanted.
' Rudyard Kipling once wrote an en- confused, are mumbling about a
jtire poem about the unseen, worldwide wholly new situation.
<fl9ws of money as an underground
The figures already cited, moreover,
river more powerful than the Amazon,
are only a beginning. By the best estithe Mississippi or the Nile. What we
mates available, the oil-producing
are now seeing, in Kipling's terms, is
the first great flood of high water on countries will need to find places to i»>
tlje underground river, resulting from" vest about $50 billion before 12 months
have passed.
the miscalled "energy crisis." •
To give an idea of the extent of the
high water, you have to bear in mind
that the value of all the overseas investments of the United States is currently estimated at about $90 billion.
In just two months, therefore, a small
number of oil-producing governments
will invest one-ninth of the amount
that thousands of immensely rich
American individuals and corporations
have invested abroad over a period of
about three-quarters of a century.
The comparison is almost ludicrous
• 3»iith the British overseas investments
,at the beginning of World War II,
•.when the British so desperately

37-211 O - 74 - 15




In other words, the high water on
the underground river is going to continue. The $50 billion is net, too. It is
the,amount, in fact, that the Persian
Gulf countries and other oil producers
will have left over after they've spent
every cent they can think of spending,
on everything from private luxury to
national defense.
The oil producers' total profits for
the first 12 months of the new higher
oil pric.es are estimated at about $100
billion. Given their small average populations and their real needs, it is

probably optimistic to suppose that
they can find ways of spending half
' this amount on goods and services provided by the big oil importers like the
United States, the Western Europeans
and Japan. But suppose the hopeful
forecast is correct. The current value
of the Mellon-controlled Gulf Oil Co.,
for' instance, is no more than $5 to $6
billion. That means, for instance, that
every que of the major U.S. oil pompanieacan be legitimately purchased by
just one year of the oil producers' newstyle profits. Or look at it another way,
on the simple assumption that the oil
producers will want their profits to
earn a currently normal return.
On this assumption, the big oil comsumers like the United States will'
have to find $4.5 billion—additional to
what they will need to pay for new oil
—in Order to give the oil producers the
money that their first year's investments ought to earn. And next year's
net profits for the oil producers are
again forecast to be around $50 billion,
since there is no foreseeable end to
the high water on the underground
river.
No wonder, therefore, that the older
insiders on the money market have begun
to
whisper
the
najne
"Kreditanstalt." The Kreditanstalt was
the great Austrian bank whose failure
lead to the collapse of the old world
monetary system and thus to the second and worst phase of' the Great Depression nearly 50 years ago. Besides
Watergate, in short, we have some
other things to worry about!

222
Channels for Oil Money Flows to Developing Countries

February 1974

Introduction
The huge s i z e o f o i l r e v e n u e s h a s l e d t o i n c r e a s e d
i n t e r e s t i n the i n s t i t u t i o n a l arrangements a v a i l a b l e t o channel
o i l revenues i n t o development.
The p r e s e n t p a p e r r e v i e w s
a v a i l a b l e i n f o r m a t i o n a b o u t a i d e f f o r t s o f some o i l p r o d u c e r s
a n d d e s c r i b e s t h e i n s t i t u t i o n s w h i c h e x i s t o r have b e e n p r o p o s e d
t o c h a n n e l f l o w s o f o i l money i n t o t h e d e v e l o p i n g w o r l d .
I n c o n s i d e r i n g t h i s q u e s t i o n , i t may be w o r t h w h i l e
r e c a l l i n g t h a t the o i l producing c o u n t r i e s represent r a t h e r
s m a l l economies i n s p i t e o f t h e l a r g e o i l r e v e n u e s .
Even i f
t h e y a l l were t o p r o v i d e f i n a n c i a l f l o w s t o d e v e l o p i n g c o u n t r i e s
o f 1 p e r c e n t o f t h e i r G-NP i n 1 9 7 4 , t h i s w o u l d amount t o t h e
r e l a t i v e l y m o d e s t amount o f $ 1 . 5 b i l l i o n .
A n o t h e r p o i n t t o be k e p t i n m i n d i s t h a t some o f t h e s e
c o u n t r i e s a r e r a p i d l y e x h a u s t i n g t h e i r o n l y known n a t u r a l
resources.
I t i s t h e r e f o r e i m p e r a t i v e f o r them t o i n v e s t t h e
o i l r e v e n u e s i n s u c h a way t h a t t h e y w i l l p r o v i d e i n c o m e when
o i l i s no l o n g e r a v a i l a b l e .
One may t h e r e f o r e e x p e c t f l o w s a t
commercial terms, i . e . OOF-like f l o w s or p r i v a t e investment to
p l a y a s u b s t a n t i a l r o l e i n t h e f i n a n c i a l f l o w s f r o m some o i l
producers to the developing c o u n t r i e s .
The p r e s e n t p a p e r d e a l s w i t h t h e s u b j e c t u n d e r
f o l l o w i n g headings:
1. A c t u a l f i n a n c i a l

flows

2 . Funds a n d o t h e r O D A - t y p e
3 . OOF-type f i n a n c i a l
4. P r i v a t e
1.

financial

Actual financial

the

institutions

institutions
institutions.

flows

The a i d programmes o f E g y p t , K u w a i t , L i b y a a n d S a u d i
A r a b i a have been d e s c r i b e d i n t h e " F l o w s o f Resources t o
Developing Countries, 1973".
The p r e s e n t n o t e i s , t h e r e f o r e ,
l i m i t e d t o a d d i t i o n a l , most r e c e n t i n f o r m a t i o n .
(i)

Kuwait

I n O c t o b e r 1973 K u w a i t d e c i d e d t o resume i t s f i n a n c i a l
a i d t o J o r d a n w h i c h had been i n t e r r u p t e d i n September 1970.
T h i s h a s a m o u n t e d i n t h e p a s t t o £16 m i l l i o n ( $ 4 0 m . ) a n n u a l l y
and i s e x p e c t e d t o c o n t i n u e a t t h i s l e v e l .




223
I t i s r e c a l l e d t h a t f o l l o w i n g the d e c i s i o n taken a t the
Arab Summit M e e t i n g i n Khartoum i n Autumn 1967 K u w a i t has u n d e r t a k e n t o p r o v i d e a n n u a l l y KD47.5 m i l l i o n ($160 m i l l i o n a t t h e
1973 exchange r a t e ) t o Arab c o u n t r i e s w h i c h had s u f f e r e d f r o m
t h e war w i t h I s r a e l .
A l r e a d y b e f o r e t h a t d a t e K u w a i t had been
p r o v i d i n g s u b s t a n t i a l amounts t o o t h e r Arab c o u n t r i e s i n t h e
f o r m o f d i r e c t government l o a n s ( i n d e p e n d e n t o f t h e l o a n s t h r o u g h
the Kuwait Fund),
These l o a n s amounted t o KD120 m i l l i o n ($405 m . )
"by t h e end o f 1968.
B u t no such l o a n was e x t e n d e d i n 1969 and
1970 and t h e r e i s no e v i d e n c e t h a t any has been made i n r e c e n t
years.
I n 1973 K u w a i t has p r o v i d e d some r e l i e f a s s i s t a n c e t o
Niger ($0.35 m . ) .
A t t h e end o f 1973 t h e IBRD r a i s e d a n o t h e r
KD25 m i l l i o n ($85 m . ) i n K u w a i t i n t h e f o r m o f a p u b l i c bond i s s u e .
The bonds have a l i f e o f 15 y e a r s and an i n t e r e s t r a t e o f 7 i p e r
cent.
I t was t h e 6 t h bond i s s u e by t h e IBRD i n K u w a i t w h i c h i n c r e a s e s t h e t o t a l amount r a i s e d i n t h a t c o u n t r y by t h e IBRD t o
$439 m i l l i o n .
Kuwait thus remained the f i f t h l a r g e s t purchaser
o f W o r l d Bank b o n d s .
(ii)

Lebanon

B e i r u t i s p l a y i n g an i n c r e a s i n g r o l e as an i n t e r n a t i o n a l
financial centre.
The Lebanese a u t h o r i t i e s have encouraged bond
i s s u e s by f o r e i g n b o r r o w e r s i n Lebanese c u r r e n c y .
I n 1973 f o r e i g n
bond i s s u e s r e a c h e d a t l e a s t LL 250 m i l l i o n ($100 m . ) o f w h i c h
LL 50 m i l l i o n ($20 m . ) were r a i s e d by t h e European I n v e s t m e n t
Bank, A l g e r i a b e i n g a n o t h e r b o r r o w e r .
W o r l d Bank bonds i n
Lebanese pounds have r e a c h e d t h e v a l u e o f $30 m i l l i o n .
(iii)

Libya

W i t h a c a p i t a l s u b s c r i p t i o n o f 15 m i l l i o n u n i t s o f a c c o u n t
($18 m . ) L i b y a i s t o g e t h e r w i t h E g y p t t h e l a r g e s t c o n t r i b u t o r
t o t h e A f r i c a n Development Bank.
I n 1973 i t p r o v i d e d a $8 m i l l i o n
g r a n t f o r v a r i o u s p r o j e c t s i n Chad ( i m p r o v e m e n t o f a s l a u g h t e r h o u s e
i n S a h r , c o n s t r u c t i o n of a h o s p i t a l i n P o r t Lamy and a n o t h e r one
i n Mao, c o l l e g e s i n t h e c a p i t a l and i n L a r g e a u ) and c l o s e t o $2
m i l l i o n f o r f a m i n e - s t r i c k e n c o u n t r i e s i n A f r i c a (Upper V o l t a
$ 0 . 7 m . , Chad, M a l i and M a u r i t a n i a $0.35m. e a c h ) .
L i b y a has
r e c e n t l y a g r e e d t o p a r t i c i p a t e i n t h e c o n s t r u c t i o n o f a number
o f f a c t o r i e s and an o i l r e f i n e r y i n Togo.
L i b y a has p a r t i c i p a t e d i n t h e c r e a t i o n o f t h e M a l t a Dev e l o p m e n t C o r p o r a t i o n t h r o u g h i t s N a t i o n a l I n v e s t m e n t Company.
A l g e r i a was a u t h o r i s e d i n 1973 t o r a i s e $51 m i l l i o n i n t h e f o r m
o f L i b y a n D i n a r bonds.
(iv)

Saudi Arabia

W i t h f o r e i g n exchange r e s e r v e s i n 1973 a m o u n t i n g t o some
$5 b i l l i o n and e x p e c t e d f o r e i g n c u r r e n c y e a r n i n g s i n 1974 i n
t h e n e i g h b o u r h o o d o f $20 b i l l i o n S a u d i A r a b i a i s becoming a m a j o r
f i n a n c i a l power.
S i n c e 1967 S a u d i A r a b i a has p r o v i d e d a n n u a l l y
an amount o f r i y a l s 662 m i l l i o n ( a t p r e s e n t exchange r a t e s $186m.)
t o E g y p t , J o r d a n and S y r i a .
The same amount i s i n c l u d e d i n t h e
1973/74 budget.
However, a c c o r d i n g t o t h e p r e s s , Kin,-; F a i s a l i s




224
" b e l i e v e d t o have d e c i d e d t o p r o v i d e $ 1 " b i l l i o n as
a i d t o E g y p t and S y r i a . ( l )
(v)

reconstruction

Iran

F o l l o w i n g e a r l i e r p r o p o s a l s t h e Shah o f I r a n i n F e b r u a r y
1974 p l e d g e d a b o u t $ 1 b i l l i o n t o r e l i e v e b a l a n c e - o f - p a y m e n t s
problems o f d e v e l o p i n g o i l - i m p o r t e r s .
His proposal contains
three elements:
- a $2-3 b i l l i o n fund w i t h p a r t i c i p a t i o n o f o i l
e x p o r t e r s and m a j o r i n d u s t r i a l i s e d c o u n t r i e s t o
be managed i n c l o s e c o - o p e r a t i o n w i t h IBRD and
IMF.
T h i s p r o p o s a l w i l l be d i s c u s s e d a t t h e
OPEC m e e t i n g i n J u n e ;
- p u r c h a s e b y I r a n o f IBRD b o n d s ;
- a l o a n t o I M F ' s p r o p o s e d new l e n d i n g

facility.

I n a d d i t i o n I r a n has a g r e e d t o s e l l o i l t o I n d i a on c r e d i t
to invest i n j o i n t ventures i n India.
2.

Funds and o t h e r QDA-type

and

institutions

S e v e r a l o i l p r o d u c e r s have e s t a b l i s h e d o r a r e i n t h e
p r o c e s s o f e s t a b l i s h i n g f i n a n c i a l i n s t i t u t i o n s aimed a t p r o v i d i n g concessional aid to developing countries.
They a r e
described i n the f o l l o w i n g paragraphs.
A.

Bilateral aid
(i)

institutions

K u w a i t Fund f o r Arab Economic Development

(KFAED)

The K u w a i t Fund, t h e f i r s t d e v e l o p m e n t f u n d i n t h e A r a b
W o r l d , was c r e a t e d i n December 1 9 6 1 as an autonomous agency o f
t h e K u w a i t Government.
I t s p u r p o s e i s t o a s s i s t Arab s t a t e s t o
d e v e l o p t h e i r economies b y p r o v i d i n g f i n a n c i a l a n d , t o a l e s s e r
extent, technical assistance.
The F u n d ' s p o l i c y i s t o p r o v i d e
loans a t concessional terms t o s p e c i f i c p r o j e c t s which are
l i k e l y t o have a f a v o u r a b l e i m p a c t on t h e b o r r o w e r ' s economic
d e v e l o p m e n t and p r o m i s e a s a t i s f a c t o r y r a t e o f f i n a n c i a l r e t u r n .
( 1 ) S a u d i A r a b i a and o t h e r o i l p r o d u c i n g c o u n t r i e s a l s o
s u p p o r t e d the E g y p t i a n war e f f o r t w i t h s u b s t a n t i a l
amounts.
A l o n e i n t h e f i r s t h a l f o f O c t o b e r 1973
$920 m i l l i o n was made a v a i l a b l e o f w h i c h S a u d i A r a b i a
p r o v i d e d $300 m i l l i o n , K u w a i t 250 m . , L i b y a 170 m . ,
Q a t a r and Abu D h a b i 100 m i l l i o n each.
I n F e b r u a r y 1974
S a u d i A r a b i a a l s o p r o v i d e d a $16 m i l l i o n g r a n t f o r m i l i t a r y
a s s i s t a n c e t o Uganda.




225
The s t a t u t o r y c a p i t a l o f t h e Fund i s K u w a i t D i n a r 200
m i l l i o n ($676 m. a t t h e 1973 exchange r a t e ) o f w h i c h 101 m i l l i o n
has been p a i d i n .
By March 1973, i . e . a t t h e end o f i t s
e l e v e n t h f i n a n c i a l y e a r , t h e KFAED had c o m m i t t e d 39 l o a n s
a m o u n t i n g t o KD103 m i l l i o n ($348 m . ) t o 12 r e c i p i e n t c o u n t r i e s
and 10 g r a n t s t o t a l l i n g KD&76 m i l l i o n ( $ 2 . 6 m . ) .
Cumulative
l o a n d i s b u r s e m e n t s had r e a c h e d KD74.7 m i l l i o n ($252 m . ) by
t h a t t i m e and r e p a y m e n t s KD18.9 m i l l i o n ($64 m . ) .
The m a i n
r e c i p i e n t s o f l o a n s have been Sudan ( 1 5 $ ) , T u n i s i a ( 1 4 $ ) ,
E g y p t ( 1 3 $ ) , M o r o c c o , J o r d a n and A l g e r i a w i t h a b o u t 10$ each.
The d i s t r i b u t i o n by s e c t o r s shows a s t r o n g c o n c e n t r a t i o n on
t r a n s p o r t a t i o n and s t o r a g e ( 3 9 $ ) , f o l l o w e d by a g r i c u l t u r e
( 2 8 $ ) , power ( 2 0 $ ) and i n d u s t r y ( 1 3 $ ) .
The g r a n t e l e m e n t o f
l o a n s ( c a l c u l a t e d w i t h a 10$ d i s c o u n t r a t e ) v a r i e s a c c o r d i n g
t o t h e r e c i p i e n t and t h e s e c t o r .
I t i s highest i n agriculture
w i t h a w e i g h t e d a v e r a g e o f 48 p e r c e n t and l o w e s t i n i n d u s t r y
(29$ g r a n t e l e m e n t ) .
Some p r o j e c t s have been j o i n t l y f i n a n c e d
w i t h t h e W o r l d Bank Group.
S i n c e 1963 t h e D i r e c t o r - G e n e r a l o f t h e K u w a i t Fund has
been M r . A b d e l a t i f Y. Al-Hamad.
M r . Al-Hamad i s a l s o Managing
D i r e c t o r o f t h e K u w a i t I n v e s t m e n t Company (see b e l o w ) , Chairman
o f t h e Compagnie Arabe e t I n t e r n a t i o n a l e d ! I n v e s t i s s e m e n t
(see b e l o w ^ , and on t h e Board o f D i r e c t o r s o f t h e A r a b Fund
(see b e l o w ) .
D u r i n g 1 9 7 1 / 7 2 , t h e K u w a i t Fund managed t h e
a d m i n i s t r a t i v e and f i n a n c i a l a f f a i r s o f t h e n e w l y c r e a t e d Arab
Fund.
(ii)

K u w a i t Development Fund f o r n o n - a l i g n e d

countries

A c c o r d i n g t o an o f f i c i a l announcement o f 1 s t O c t o b e r 1973
t h e K u w a i t Government has d e c i d e d t o s e t up a Development Fund
No f u r t h e r d e t a i l s have been
f o r the non-aligned c o u n t r i e s .
made p u b l i c .
(iii)

Abu D h a b i Fund

I n e a r l y 1973 Abu D h a b i s t a r t e d t o s e t up a Fund w i t h an
i n i t i a l amount o f D i n a r 8 m i l l i o n ($27 m . ) .
Total authorised
c a p i t a l i s D i n a r 50 m i l l i o n ($169 m . ) .
Yemen ( A . R . ) , S y r i a ,
I n the beginning
T u n i s i a and Sudan w i l l be t h e f i r s t r e c i p i e n t s .
l o a n s s h a l l be e x t e n d e d f o r 7 t o 10 y e a r s a t an i n t e r e s t r a t e
o f 3.5 to 4.5 per c e n t .
The Fund i s i n t e r e s t e d i n j o i n t o p e r a t i o n s w i t h t h e W o r l d Bank Group.
Managing D i r e c t o r i s M r . Hassan Abbas Z a k i , a f o r m e r
E g y p t i a n M i n i s t e r o f Economics, who has been p r i n c i p a l f i n a n c i a l
a d v i s o r t o S h a i k h Zayed, r u l e r o f Abu D h a b i , s i n c e 1970.




226
B.

Multilateral
(i)

institutions

A r a b Fund f o r Economic and S o c i a l

Development

The agreement e s t a b l i s h i n g t h i s Fund was r e a c h e d i n May
1968 b u t t h e f i r s t m e e t i n g o f t h e b o a r d t o o k p l a c e o n l y i n
November 1972.
The Fund i s a j o i n t A r a b f i n a n c i a l i n s t i t u t i o n
w i t h headquarters i n Kuwait.
Managing D i r e c t o r i s M r . Saeb
J a r o u d i , f o r m e r M i n i s t e r o f Economic Development i n t h e Lebanon
and b e f o r e t h a t c h i e f e c o n o m i s t o f t h e K u w a i t Fund.
The Members h i p o f t h e Fund i s composed o f A r a b League c o u n t r i e s ( * ) .
The A r a b Fund has a c a p i t a l o f KD100 m i l l i o n ($338 m . )
and a b o r r o w i n g a u t h o r i t y o f KD200 m i l l i o n ($678 m . ) .
The m a i n
c o n t r i b u t o r s a r e K u w a i t ($101 m . ) and L i b y a ($41 m . ) .
Saudi
A r a b i a has s t a t e d i t s i n t e n t i o n t o j o i n b u t has n o t y e t c o n tributed.
The Fund i s i n t e n d e d t o o p e r a t e i n Member c o u n t r i e s
o f t h e A r a b League o n l y and i n p a r t i c u l a r t o ( a ) f i n a n c e p r o d u c t i v e i n v e s t m e n t on s o f t t e r m s ( w h i c h may v a r y a c c o r d i n g t o
( b ) encourage p r i v a t e and
t h e p r o j e c t and t h e r i s k i n v o l v e d ) ;
p u b l i c i n v e s t m e n t and ( c ) p r o v i d e t e c h n i c a l a s s i s t a n c e and
expertise.
As o f J a n u a r y 1974, KD20 m i l l i o n ($68 m . ) had been
committed.
I n p a r t i c u l a r , t h e Fund has r e c e n t l y a g r e e d t o l e n d
A l g e r i a $50 m i l l i o n ( a t 2 . 5 p e r c e n t i n t e r e s t o v e r 30 y e a r s )
t o b u i l d an o i l - l o a d i n g t e r m i n a l a t A r z e w .
This p r o j e c t i s .
a l s o s u p p o r t e d b y Germany and t h e ' W o r l d Bank.
(ii)

S p e c i a l A r a b Fund f o r

Africa

I n J a n u a r y 1974 t h e A r a b c o u n t r i e s d e c i d e d t o c r e a t e a
$200 m i l l i o n S p e c i a l Fund f o r A f r i c a .
The Fund i s t o be
e s t a b l i s h e d i n March 1974 t o s u p p o r t t h e p u r c h a s e o f o i l by
A f r i c a n c o u n t r i e s and t o d e v e l o p o i l r e s o u r c e s i n A f r i c a .
A n o t h e r s t a t e d p u r p o s e o f t h e Fund i s t o compensate A f r i c a n
c o u n t r i e s f o r t h e economic l o s s t h e y have s u f f e r e d f r o m b r e a k i n g
off relations with Israel.
The m a i n c o n t r i b u t o r s t o t h e S p e c i a l
Fund w i l l be S a u d i A r a b i a ($25 m i l l i o n ) , K u w a i t ( * * ) and A l g e r i a
($20 m i l l i o n e a c h ) .
The U n i t e d A r a b E m i r a t e s and Q a t a r w i l l pay
$10 m i l l i o n e a c h , Lebanon p l a n s t o c o n t r i b u t e $ 1 . 5 m . , and E g y p t ,
S y r i a and B a h r e i n $1 m. e a c h .
The L i b y a n c o n t r i b u t i o n , i f a n y ,
i s n o t known.
Loans o u t o f t h e S p e c i a l Fund a r e t o have t h e
following conditions:
1$ i n t e r e s t r a t e , 3 y e a r s g r a c e , 5 y e a r s
repayment.
Loan r e c i p i e n t s w i l l be s e l e c t e d by t h e OUA i n c o n s u l t a t i o n w i t h t h e A r a b League.
The Fund m i g h t be u l t i m a t e l y
l i n k e d t o t h e A r a b Bank f o r A f r i c a (see b e l o w ) .

(*)

A l g e r i a , B a h r e i n , E g y p t , I r a q , J o r d a n , K u w a i t , Lebanon,
L i b y a , M a u r i t a n i a , M o r o c c o , Oman, Q a t a r , S a u d i A r a b i a ,
S o m a l i a , Sudan, S y r i a , T u n i s i a , U n i t e d A r a b E m i r a t e s
( i n c l . Abu D h a b i ) , Yemen A . R . , Yemen P . D . R .

(**)

I n F e b r u a r y 1974 K u w a i t announced t h a t i t w o u l d i n c r e a s e
i t s c o n t r i b u t i o n t o t h e S p e c i a l Fund f r o m $20 m. t o $30 m.




227
(iii)

A r a b T e c h n i c a l A s s i s t a n c e Fund f o r

Africa

A t t h e same m e e t i n g i n J a n u a r y 1974, t h e A r a b c o u n t r i e s
d e c i d e d t o s e t up a $15 m i l l i o n T e c h n i c a l A s s i s t a n c e Fund.
I n a d d i t i o n t o t h e above f u n d s w h i c h a r e c l e a r l y i n t e n d e d
t o p r o v i d e ODA-type f l o w s , a number o f development banks a r e
a t v a r i o u s stages o f c r e a t i o n .
I t i s n o t known t o what e x t e n t
t h e s e i n s t i t u t i o n s w i l l c o n c e n t r a t e on l e n d i n g a t m a r k e t r a t e s
(IBRD s t y l e ) as opposed t o c o n c e s s i o n a l l e n d i n g (IDA s t y l e ) .
Somewhat a r b i t r a r i l y t h e y have been i n c l u d e d i n t h i s s e c t i o n
r a t h e r t h a n u n d e r OOF-type i n s t i t u t i o n s b e l o w .
( i v ) A r a b Bank f o r I n d u s t r i a l and A g r i c u l t u r a l
ment i n A f r i c a

Develop-

The c r e a t i o n o f t h i s Bank was d e c i d e d upon a t t h e 6 t h
Arab Summit M e e t i n g i n A l g i e r s i n 1973 on t h e i n i t i a t i v e o f
Kuwait.
A c c o r d i n g t o an announcement c a p i t a l s u b s c r i p t i o n s
have a l r e a d y begun a l t h o u g h t h e s t a t u t e s o f t h e Bank have n o t
y e t been drawn u p .
The c a p i t a l o f t h e Bank w h i c h had been v a r i o u s s t a t e d as $125 m . , $195 m. and $500 m. was f i n a l l y f i x e d a t $206 m.
a t t h e C a i r o M e e t i n g o f Arab F i n a n c e M i n i s t e r s i n M i d - F e b r u a r y 1SP4.
A c c o r d i n g t o t h e I r a q Mews Agency, I r a q had d e c i d e d t o make t h e
l a r g e s t c o n t r i b u t i o n w i t h $30 ra. f o l l o w e d by S a u d i A r a b i a w i t h
$25 m i l l i o n , K u w a i t ( * ) , A l g e r i a , and t h e U n i t e d Arab E m i r a t e s
each w i t h $20 m i l l i o n .
Other Arab s t a t e s are p a r t i c i p a t i n g
w i t h sums r a n g i n g f r o m $2 m i l l i o n t o $10 m i l l i o n ,
( v ) A r a b Bank f o r Development i n

Asia

A p r o p o s a l t o e s t a b l i s h a s i m i l a r bank f o r A s i a
r e p o r t e d l y under c o n s i d e r a t i o n .
(vi)

is

I s l a m i c Development Bank

I n December 1973, 25 I s l a m i c s t a t e s s i g n e d an agreement
t o e s t a b l i s h an I s l a m i c Development Bank w i t h a c a p i t a l o f
$1 b i l l i o n .
The c r e a t i o n o f t h e Bank whose head o f f i c e w i l l
be Jedda was l a r g e l y due t o S a u d i A r a b i a n i n i t i a t i v e and a
s p e c i a l c o m m i t t e e has been f o r m e d f o r t h i s p u r p o s e u n d e r t h e
S e c r e t a r y - G e n e r a l o f t h e S a u d i A r a b i a n based I s l a m i c C o n g r e s s ,
M r . Tanku A b d u l Rahman.
S u b s c r i p t i o n s have been announced so
f a r by Q a t a r ($20 m . ) , Lebanon ($5 m . ) and J o r d a n ( $ 1 . 2 m . ) .

(*)

I n F e b r u a r y 1974 K u w a i t announced t h a t i t w o u l d i n c r e a s e
i t s c o n t r i b u t i o n t o t h e A r a b Bank f r o m $20 m. t o $50 m.




228
(vii)

OPEC Development Bank

A p r o p o s a l t o e s t a b l i s h an OPEC Development Bank w i l l be
d i s c u s s e d a t Q u i t o , E c u a d o r , on June 10, 1974.
The c a p i t a l o f
Members
t h e p r o p o s e d bank has been r e p o r t e d as $1 o r 2 b i l l i o n .
w o u l d be t h e OPEC members:
I r a n , K u w a i t , Saudi A r a b i a , L i b y a ,
Abu D h a b i , A l g e r i a , I n d o n e s i a , V e n e z u e l a , N i g e r i a , I r a q , Q a t a r ,
E c u a d o r , Gabon.
3.

OOF-type f i n a n c i a l

institutions

A number o f i n s t i t u t i o n s have been c r e a t e d t o i n v e s t
p u b l i c funds from the o i l - p r o d u c i n g c o u n t r i e s abroad a t commercial
t e r m s and l a r g e l y u s i n g t h e methods o f p r i v a t e i n v e s t m e n t f l o w s .
A l i s t o f such i n s t i t u t i o n s w h i c h have come t o t h e a t t e n t i o n o f
the D i r e c t o r a t e i s given below.
A r a b A f r i c a n Bank

(a)

Head O f f i c e

Cairo

Established

1964

Capital

£ 1 0 , 0 0 0 , 0 0 0 ($25 m . )

Shareholders

(Egypt)

Kuwait
M i n i s t r y o f Finance and I n d u s t r y
E g y p t i a n P u b l i c O r g a n i s a t i o n o f Banks
P u b l i c and p r i v a t e i n t e r e s t s f r o m
o t h e r A r a b and A f r i c a n c o u n t r i e s

S p e c i a l E g y p t i a n l e g i s l a t i o n g i v e s t h i s bank t h e
status
o f an i n t e r n a t i o n a l o r g a n i s a t i o n .

tb,

L i b y a n A r a b F o r e i g n Bank
Head O f f i c e
Established

Tripoli
?

Capital

LD 20 m i l l i o n

Shareholders

($68

million)

L i b y a n Government

T h i s bank p a r t i c i p a t e s i n f i n a n c i a l i n s t i t u t i o n s
Uganda, Chad, M a u r i t a n i a , Lebanon and E g y p t .

in

K u w a i t I n v e s t m e n t Company Group

(c)
(i)

K u w a i t I n v e s t m e n t Company
Head O f f i c e

'

Established

Kuwait
?

Capital

KD 7 . 5 m i l l i o n

Shareholders

($25

million)

K u w a i t Government
Other Kuwait i n t e r e s t s

A p p a r e n t l y t h i s company has e n t e r e d i n t o a c o o p e r a t i o n agreement w i t h A m e r i c a n E x p r e s s .




50?o

34%
33f°
331°

229
(ii)

Banque S e n e g a l o i C u w a i t i e n n e
Head

Office

Established

1974

Capital

1 billion

Shareholders

(d)

afInvestissement

Dakar
F CFA ( $ 4

million)
50$
25$
25$

K u w a i t I n v e s t m e n t Company
Government o f S e n e g a l
P r i v a t e Senegal i n t e r e s t s

A r a b I n v e s t m e n t Company
( S o c i e t e Arabe d ' I n v e s t i s s e m e n t s )
Head

Office

Established

d e c i s i o n December

Capital

£100 m i l l i o n

Shareholders

1973

($250 m.)

Egypt
Saudi A r a b i a
Kuwait
Abu D h a b i
Qatar
Sudan

I n v e s t m e n t s t o be c o n c e n t r a t e d on a g r i c u l t u r e a n d
Shipping;
t h e company w i l l be open t o p r i v a t e A r a b
investors wishing to r e p a t r i a t e c a p i t a l .
(e)

Arab I n t e r n a t i o n a l
(i)

Established
Capital

Joint

($75 m . )

Egyptian interests
Libyan i n t e r e s t s

Company b e t w e e n L o n r h o and A r a b I n t e r n a t i o n a l

Head o f f i c e :
Established

?
1973

Capital
Shareholders

(f)

Inter-

1973
£30 m i l l i o n

Shareholders
(ii)

Bank Group

I n t e r n a t i o n a l A r a b Bank p r e v i o u s l y t h e E g y p t i a n
n a t i o n a l Bank f o r F o r e i g n T r a d e a n d D e v e l o p m e n t
Head O f f i c e
Cairo

Lonrho
I n t e r n a t i o n a l A r a b Bank

Banque L i b a n o B r £ s i l i e n n e
Head

office

Established
Capital
Shareholders




Beirut

SAL

Bank

230
Private financial

institutions

The f o l l o w i n g ( i n c o m p l e t e ) l i s t d e s c r i b e s a number o f
p r i v a t e j o i n t f i n a n c i a l i n s t i t u t i o n s w h i c h have been e s t a b l i s h e d
l a r g e l y t o c h a n n e l o i l money i n t o p r o d u c t i v e i n v e s t m e n t s i n
both developed.and developing c o u n t r i e s .

1.

UBAF Group

(a)

U n i o n de Banques A r a b e s e t F r a n g a i s e s
Head O f f i c e

(UBAF)

Paris

Established

1970

Capital

FF.100,000.000

Shareholders




C r e d i t Lyonnais
Banque F r a n g a i s e du Commerce
Ext^rieur
P r i v a t e French i n t e r e s t s
S u b - t o t a l European

interests

31.98$

8.00$
0.02$
40.00$

A r a b Bank ( J o r d a n )
Banque E x t e r i e u r e d ' A l g ^ r i e
Commercial Bank o f S y r i a
L i b y a n A r a b F o r e i g n Bank
R a f i d a i n Bank ( I r a q )
C e n t r a l Bank o f E g y p t
A r a b A f r i c a n Bark ( A r a b m u l t i national )
Banque du Maroc
A l a h l i Bank o f K u w a i t
R i y a d Bank ( S a u d i A r a b i a )
Bank o f J o r d a n
Sudan Commercial Bank
Banque N a t i o n a l e de T u n i s i e
J o r d a n N a t i o n a l Bank
S o c i £ t £ T u n i s i e n n e de Banque
Banque A u d i S . A . L . (Lebanon)
Banque G. T r a d ( C r e d i t L y o n n a i s )
(Lebanon)
A l a h l i Bank L i m i t e d ( D u b a i )
Bank o f B a h r e i n and K u w a i t
C e n t r a l Bank o f Yemen (Sanaa/Yemen
Arab R e p u b l i c
N a t i o n a l Bank o f Yemen ( P e o p l e ' s
D e m o c r a t i c R e p u b l i c o f Yemen)

6.2$

3.8?0
1.9$
1.9$

1.1$

0.8$
0.6$

0.61o
0,6$

•. • .
0 3$
0.5$

o,-;$
0.1 $
0.1$
0.1$

231
Yemen Bank f o r R e c o n s t r u c t i o n
and D e v e l o p m e n t (Sanaa/Yemen
Arab R e p u b l i c )
Banque A r a b e L i b y e n n e M a u r i t a n i e n n e
p o u r l e Commerce E x t £ r i e u r e t l e
D^veloppement ( M a u r i t a n i a )
P r i v a t e Arab I n t e r e s t s
S u b - t o t a l Arab

office

1972

Capital

£2,000,000

Shareholders

£5,000,000)

( t o be r a i s e d

to

UBAF P a r i s
L i b y a n A rra b F o r e i g n Bank
A a
Midla
""•.lan d" " "
Bank

50%
25%

U n i o n e d i Banche A r a b e ed E u r o p e e - UBAE
Head o f f i c e :

Rome

Established

1972

Capital

L.15

Shareholders

(a)

-

London

Established

(o)

0.1$

0.001%

interests

U n i o n de banques a r a b e s e t F r a n g a i s e s
UBAF L i m i t e d
Head

0.1

billions

U n i o n de Banques A r a b e s e t
Frangaises - U.B.A.F.
Banco d i Roma
Banca N a z i o n a l e d e l L a v o r o
Societa Finanziaria Telefonica
p e r A z i o n i - STET
I s t i t u t o Ligure Interessenze
I n d u s t r i a l i e C o m m e r c i a l i SpA
(Finsider)
Societa I t a l i a n a per Condotte
dfAcqua
I s t i t u t o d i C r e d i t o per l e Imprese
di Pubblica U t i l i t a - I . C . I . P . U .

51%
9.5
9.5
6%

U n i o n de Banques A r a b e s e t E u r o p ^ e n n e s UBAE
Head

office

Luxembourg ( b r a n c h i n

Establsshed
Capital

Franfurt)

1973
DM.30,000,000

Shareholders




A r a b Bank L i m i t e d
)
A r a b Bank O v e r s e a s L t d . )
Bayerische Vereinsbank
Commerzbank A . G .
Commerzbank I n t e r n a t i o n a l S . A .
Westdeutsche Landesbank
Girozentrale
U n i o n de Banques A r a b e s e t
Frangaises - U.B.A.F.

33 1/3%

33 1/3%

33 1/3%

232
(e)

U n i o n de Banques A r a b e s e t Nippones - UBAN
Head o f f i c e

Tokyo and Hong Kong

Established

1973-1974

Capital

$25,000,000

Shareholders

Bank o f Tokyo
Long Term C r e d i t Bank o f Japan
M i t s u i Bank
Nomura S e c u r i t i e s
Sanwa Bank
UBAF P a r i s
5 A r a b Banks

2.

FRAB Group

(a)

F r e n c h - A r a b Bank f o r I n t e r n a t i o n a l I n v e s t m e n t s
(Banque F r a n c o Arabe d ' I n v e s t i s s e m e n t s I n t e r n a t i o n a u x ) (FRAB Bank I n t e r n a t i o n a l )
Head o f f i c e
Established
Capital
Shareholders




Paris
1970
F F . 5 0 , 0 0 0 , 0 0 0 ( t o be r a i s e d
FF.100,000,000)

to

Societe G^nerale (France)
S o c i e t y G ^ n ^ r a l e de Banque
(Belgium)
Swiss Bank C o r p o r a t i o n ( S o c i £ t £
de Banque S u i s s e )
Banco U r q i n j o ( S p a i n )

36%

S u b - t o t a l European S h a r e h o l d e r s

50$

7%
6%
1%

FRAB-Trading and C o n t r a c t i n g Company
7.7$
K u w a i t I n v e s t m e n t Company
4%
Kuwait Foreign Trading Contracting
and I n v e s t m e n t Company
4$
N a t i o n a l Bank o f K u w a i t
1.595
A1 Sagar and B r o s .
1.14%
P r i v a t e I n t e r e s t s , A1 Sagar Group
3.30%
Other Kuwait F i n a n c i a l I n s t i t u t i o n s
( i n c l . K u w a i t I n s u r a n c e Company
Commercial Bank o f K u w a i t )
2.60%
Other p r i v a t e Kuwait i n t e r e s t s
12.16%
S u b - t o t a l Kuwait I n t e r e s t s

36.40%

233
2.2%
1.2 fo

Bahrein
Abu D h a b i
Dubai
Sharjah

1.8%
UOfo

S u b - T o t a l o t h e r Arab G u l f

Interests

6.21o

L i b y a (Sahara Bank, L i b y a
I n s u r a n c e Company)
Bank o f T u n i s i a
Societe Nationale d 1 I n v e s t i s s e ments ( T u n i s i a )

0>)

European Arab

Holding

Head

Luxembourg

office

Established

1972

Capital

L.Frs.

Shareholders




1 billion

A m s t e r d a m - R o t t e r d a m Bank N . V .
Amsterdam;
C r e d i t e n s t a l t Bankverein, Vienna;
D e u t s c h e Bank A . G . , F r a n k f u r t am-Main;
M i d l a n d Bank L i m i t e d , L o n d o n ;
S o c i e t e G e n e r a l e de Banque,
Brussels;
Societe Generale, P a r i s ;
S u b - t o t a l E u r o p e a n Bank
I n t e r n a t i o n a l Company

45%

E g y p t i a n N a t i o n a l Bank o f
F o r e i g n T r a d e and D e v e l o p m e n t
Abu D h a b i Fund f o r A r a b Economic
Development,
Banque N a t i o n a l e d ' A l g e r i e ,
N a t i o n a l Bank o f E g y p t ;
n a t i o n a l B a n k - o f 10 j ••.-.• t ,
L i b a n a i s v ;:> /.• I s Commerce,
I:-," ;
H i s r , L e - ••,. ;
(
Llbanai;
J", . . a n o n ;
Ilrt:
a l Commercial Bank, L i b y a ;
M a r o c a i n e du Commerce
Byterieur,
N a L i o n e l C o m m o r c i a l Bank, S s . u l i

Aivbia^,

S u b - t o t a l Arab
FRAB-Bank

Shareholders

International

45%

234
European Ara"b Bank
Head o f f i c e

Brussels

Established
Capital
Shareholders

European A r a b H o l d i n g
Others

E u r o p S i s c h e A r a b i s c h e Bank
Head o f f i c e

Frankfurt

Established
Capital
Shareholders

European A r a b
Others

Holding

C A I I Group
Compagnie Arabe e t I n t e r n a t i o m l e
Society Holding
Head o f f i c e :

d'Investissements

Luxembourg

Established
Capital
Shareholders




US$30,000,000
D r e s d n e r Bank A . G . (W. Germany)
O s t e r r e i c h i s c h e LSnderbank ( A u s t r i a )
Banque de B r u x e l l e s ( B e l g i u m )
Banco do B r a s i l ( B r a z i l )
Canadian I m p e r i a l Bank o f Commerce
Banco C e n t r a l ( S p a i n )
Bank o f A m e r i c a (USA)
Banque N a t i o n a l e de P a r i s ( F r a n c e )
Banque N a t i o n a l e de P a r i s I n t e r c o n t i n e n t a l (France)
Algemene Bank N e d e r l a n d EV
Banca N a z i o n a l e d e l L a v o r o ( I t a l y )
Sumitomo Bank ( J a p a n )
S o c i 6 t £ F i n a n c i f e r e Europeenne
(Luxembourg)
B a r c l a y s Bank LTD.
U n i o n de Banques S u i s s e s
Government o f Abu D h a b i
N a t i o n a l Commercial Bank ( S a u d i
Arabia)
Bank o f K u w a i t and t h e M i d d l e E a s t
(Kuwait)
G u l f Bank ( K u w a i t )
K u w a i t I n v e s t m e n t Company

235
Banque du L i t a n e t d ' o u t r e m e r
N a t i o n a l I n v e s t m e n t Company ( L i b y a )
Banque C e n t r a l e P o p u l a i r e ( M a r o c )
Banque M a r o c a i n e p o u r l e Commerce
1'Industrie
Banque N a t i o n a l e p o u r l e L e v e l o p p e m e n t
economique (Maroc)
Q a t a r N a t i o n a l Bank
Banque N a t i o n a l e de T u n i s i e
U n i o n B a n c a i r e p o u r l e Commerce e t
1'Industrie (Tunisie)
(b)

Banque A r a b e d ' I n v e s t i s s e m e n t s
Head o f f i c e :
Established:
:

FF.50,000,000

Shareholders

:

CAII
99.9%
Banco C e n t r a l ( S p a i n )
Banque du L i b a n e t d ' o u t r e m e r ( L e b a n o n )
Banque N a t i o n a l e de P a r i s ( F r a n c e )
Banque N a t i o n a l e de P a r i s i n t e r continentale
Banque N a t i o n a l e de T u n i s i e
Banco de B r a s i l .
Bank o f K u w a i t and t h e M i d d l e E a s t KSG
C a n a d i a n I m p e r i a l Bank o f Commerce
S o c i e t e F i n a n c i & r e Europeenne
S t a t e o f Abu D h a b i
K u w a i t I n v e s t m e n t Company
S a u d i N a t i o n a l C o m m e r c i a l Bank
N a t i o n a l I n v e s t m e n t Company
O s t e r r e i c h i s c h e LSnderbank
U n i o n B a n c a i r e p o u r l e Commerce
et 1'Industrie
U n i o n de Banques S u i s s e s
Inter£ts prives particuliers

I t i s i n t e n d e d t o o b t a i n more
by Arab f i n a n c i a l I n s t i t u t i o n s .
4.

BAII

1973

Capital

Internationaux

Paris

participations

I n v e s t m e n t a n d F i n a n c e Bank ( I N F I )
(Banque d 1 I n v e s t i s s e m e n t e t de f i n a n c e m e n t
Head

office

SAL)

Beirut

Established

1974

Capital

£Lib

Shareholders




1,500,000

Banque A u d i SAL
C a i s s e C e n t r a l e de Banques P o p u l a i r e s
Hambros Bank L i m i t e d
M i t s u i Bank L i m i t e d
Nomura S e c u r i t i e s Co. L i m i t e d
G-roupe R e n a u l t
P r i v a t e Arab i n t e r e s t s

35%
8%
8%
8%
8%
8%
25%

236
T H E NEW YORK T I M E S

M a r c h 13,

1974

The Petrodollar Flow
Kuwait and Abu Dhabi, appear
to recognize this.
j
professor at Georgetown Uni-j
versity in Washington, notes j Professor Oweiss- noted that
that the Arabs have already; Saudi Arabia has proposed to
reduce the current price ofj
sit up four major financial con-i Persian Gulf oil "once justi-1
sortia in collaboration withj fiable political and economic j
By LEONARD SILK
American and European inter- demands of Arab countries are I
There is a school of eco-i tries pay out to the oil-producmet and once rich oil-consumnomics whose fundamental :ing countries, because the ests.
—
ittenet is that everything happens money will flow back to the
One is the Union des Banques iing countries pursue a policy!
1
for the best Among the his- oil-consuming countries as in- et Frangaise (U.B.A.F.), estab-l of genuine cooperation with the
toric claims for this principle vestments or to pay for good&ti lished in Paris in 19709 with developing countries."
are the following:
flit doesn't matter if the. out- jmOre than $700-million in asfllf the taxes of flow of money to pay for oil sets. This is 40- per cent owned He added that Tit is not m j
„
, the rich are cut, causes a temporary cut in con- by Credit Lyonnais the big the economic interest ot oil*
,benefits will sumption in the oil-consuming French bank, but it is controlled exporting countries to push
Economic ^
Analysis
^ J m m ^ countries, because this will con- by 14 Arab banks. U.B.A.F. has the price of oil beyond the interval in which demand is institute a form of saving, and
larly, if the rich the "petrodollars" will then in- subsidiaries in London, Rome, elastic."
or the jniddle class build more crease the world's stock of Frankfurt, Luxembourg and ' The_ sharp increases in oil
new houses, this will benefit capital, furthering growth and Tokyo; partners of these sub- prices will mean a huge transsidiaries include several big fer of real income and wealth
the poor, because the standing damping down inflation.
4
European banks and the Bank] from the West—a real lowering
stock of existing houses will
Volume to Be Great
of living standards. .
trickle down to the poor. (The However, the volume of pet-1 of Tokyo.
trickle-down theory is one of rodollars may be too great for
The three other consortia! As economists of the First [
the major contributions of this the world monetary system to' [are:
National City Bank put it, "The
school of Panglossian eco- handle. The whole system could
flTfte Banque Franc-Arabe) discomfort of facing up to this
nomics.)
d'lnvestissement
Internation- harsh truth has engendered ilbreak down.
1
<1A fall in output, income
aux (E.R.A.B.), chartered in lusions—notably that, for conand employment is good be- J. Carlin Englert of New York Paris in 1969 by the Kuwait suming countries, the adjustcause it will restore the econ- University has made fresh esti- Investment Company in part- ment can be eased by more
mates of the money flows from nership with the French SoctetS rapid inflation' or by governomy to a sound basis.
11 major industrialized nations
flFor every seller of stock, to defray the costs of higher- Gten6rale and the Society de ment intervention in the marketplace."
I there is a buyer. Strong hands priced petroleum and petroleum I Banque Suisse; .
flThe European Arab Bank, But the real transfers of in^
[will take over the assets once products this year. He found,
started in 1972, with headquar- come and the potential 'dis-l
'held by the week.
that the United States, Canada,
' ^Equilibrium is the law of Japan, West Germany, France, *. ters in Luxembourg, which is ruption of the world economv
[economic life. If people spend Britain and five other European made up of 16 Arab financial threaten to exacerbate bOtn|
more money for food, they will countries would see their oil institutions (including E.R.A.B.) global inflation and recession.
Hopes for Price Cuts
have less to spend for "other bills increase from $42.6-billion and seven European banks;
things, so inflation will not re- in 1973 to $108.7-billion in,
flAnd la Compagnie Arabe It is the belated recognition
sult. If one nation loses mone- 1974.
et Internationale d'lnvestisse- of the gravity of these dangers
reserves, another nation
ment, incorporated in Luxem- —not only to the industrialized
[will gain them, so the world What will the Arab oil states' bourg in January, 1973, which nations but to the oil-producing
monetaiy system will not suffer do with their money? Much, of - (is owned by 24 Arab and other states as well—that has given
^ ibraks, including the Bank of rise to hopes that the Arab
[from either inflation or defla- it will indeed flow west.
America,
West
German, states rtieeting hi Tripoli today
Ibrahim M. Oweiss, a
tion.
Italian, Japanese and French may be ready to lift the oil
To those principles of sym- of Egypt who is an.
[institutions.
[embargo and expand produc-!
metry, balance and divine autojtion. The Western nations and
maticity, the oontemporary folArab Business Sought
Japan are also hoping for some
lowers of Dr. Pangloss (Voltaire
In addition to these major price cuts.
named him "Professor of MetaArab combines, many Western The United States has pressed
physico - Theologio - Cosmobanks and brokers are compet- hard for such concessions -to
lonigology") have added the
ing for Arab business, led by the Western nations, while
following doctrines:
the First National City Bank France has been following a
flit doesn't matter how much;
of New York, with branches go-it-alone line, seeking to
money the oil-consuming coun-|
in Beirut, Saudi Arabia, Bahrain make her own deals with fhfe
and Dubai, and the Chase Man- Arabs.
hattan Bank, with bran-hes Jh Even if the Arabs end the
Beirut and Bahrain. Chase embargo, however, the threat
(Manhattan and the Morgan to the world economy will not
Guaranty Trust Company of evaporate over night. Inflation
New York are the largest hold- is raging, and the Western poers of Saudi Arabian Govern- litital and economic alliance is
ment deposits.
severely strained — possibly
But the flow of capital from' ^ T h e deciples of Dr. Pangloss
the oil-consuming to the oii-j'should remember that their
producing countries is so huge'(shattered.
las to threaten hyperinflation master barely missed losing his
I in the Western economies.
head in the Inquisition and
I The, more moderate Arab wound up living humbly on
[countries, such as Saudi Arabia, the farm of Candlde.

If the Theory of Panglossian Economics
Is Right—and It's Not—All Is Well




237
9l|t Journal of {Bommmr
APR 4

1374

Euromarket Challenge:
Recycling Arab Funds
By ALENA WELS
Journal of Coinmercc Staff
(First of a Series)
LONDON — Johannes Witteveen, the managing director of the International Monetary Fund, is currently touring the Middle East oil producing countries with
the hope of enlisting their support in helping the world
deal with sharply higher energy costs. The Shah of
Iran has already pledged some support.
But officials and bankers here are well aware that
the main job of recycling the $35 billion to $60 billion
in excess oil revenues this year will fall on the banking community.
The opportunities for profit to the "City," London's
financial district, are huge and banks here are carefully cultivating their already extensive ties with the
Arab world. There are, however, serious pitfalls for
financial institutions of which even the most euphoric
and confident bankers are acutely aware.
A. T. Mitchell and P. C. Day. assistant general
managers of Barclays Bank, expressed their serious
concern in an interview that the banking system just
wasn't geared to handle the influx of Arab money. A
lot of banks with balance sheets under pressure will
face the exposure of borrowing short-term Arab funds
to lend on longer and longer terms. These funds, they
cautioned, could be pulled out and, if the worst came
to the worst, the Arabs could bypass the banking system altogether.
Britain. France, Italy, Denmark, Austria and various other countries are already tapping the Eurodollar market for bUlions of dollars at a time when Arab

3 7 - 2 1 1 O - 74 - 16




oil revenues are only beginning to flow. Heaven knows
where interest rates would be.
bankers here say, if very considerable funds weren't coming into the market, primarily
to the three largest U. S.
banks.
City Delighted
The City is deligjitetf with
the speed and secrecy with
which the $2.5 billion clearing
bank loan to the British Government was carried off. It
epitomizes to hankers here the
strength and flexibility of the
London money market, supported as it is by a flexible
Treasury and a cooperative
central bank. There was tremendous interest, they said,
from Japanese as weti as
A m e r i c a n banks. What's
more, they insisted, broken
arms weren't as nearly in evidence in London as they were
in Paris after the $1.5 billion
loan to the French Government.
Be that as it may. the" Bar
clays spokesmen believe that
rhe nationalized French banks
could be in a better position in
the future than Hie private
British institutions when the
crunch comes.
They say, however, that resistance to taking deposits en
sfcort-tetm wiH grow and will
force a lot of money into lonrger term. It could be that the
Arabs in time will have to deposit their funds for-as much
as seven years in order to get
a quote at all.
David Montagu, chairman
and chief executive officer ot
the consortium bank Orion,
which participated in die British government loan through
its ties with National Westminister, conceded that the
banking system wiH have a iot
of adapting to do to meet the
"unbelievable" demand for
long-term tunds. If exchange
rates continue to float, raising
substantial risks in individual
currencies, there wilt fee tremendous room for multicurrency financing.
Orher bankers predicted

that simplified multicurrency
units will be developed that
could be a great inducement
to Arab investors and could be
a sizable factor in reducing
uncertainty and, as a result,
inflation. They view the
Rothschild composite unit,
known as Eurca, as far too
complicated. Two Eurco bond
issues were launched last year
with very disappointing results. The unit is composed of
nine currencies weighted by
gross national product and adjustable daily.
Questioned as to what would
happen if the Arabs were to
withdraw their Xunds from
London ai some future date,
Mr. Montagu said that there
are very few places where
such sums can be invested
and that they are bound to return to the "melting pot" in
some form or fashion.
It is his impression that the
fculk of the Arab funds wiU be
going into the Eurocurrency
markets and that the oil pro-duceis wiU be coming to 4he
consortia for longer-term financing.
David Benson, the director
in charge of corporate finance
for Kleinwort, Benson Ltd.
points out that •the banking
end of the Euromarket lias
been operating well in the face
of a very large demand lor
funds.
The Arabs are handling
themselves "in a mature
way," he indicated, and are
aware that they must Insure
themselves against being victims ot their own success.
They are particularly concerned to form relationships
with banking institutions of
"undoubted
quality"
and
aren't in any particular hurry
to consolidate relationships.
This leaves room for every
kind of tie with the Arab
world, he said.
Orion, like e\ ervone else, is
looking closely at the Arab
countries. A • personal" tie
doesn't seem necessary, Mr.
Montagu explained, because
most of Orion's shareholders
have their own presence in the
Arab countries.

238
T H E WASHINGTON POST

Hvbart

J a n u a r y 20,

1974

Rawen

Oil, Gold, the Dollar
I N THE LAST 10 weeks, the major European currencies have plummeted about 13 per cent in value
against the dollar, which now is within hailing distance
of the foreign exchange levels set by the Smithsonian
Agreement of December 1971.
Excluding the British pound (which is in a seriously
weakened condition), the dollar, is within about 5 per
cent of the levels set at the Smithsonian for major
currencies. (Including Britain, the dollar is withm 1.65
per cent of the Smithsonian averages.)
Or, to pUt i t another way: the dollar has totally recovered from what Georges Pompidou called the "third
devaluation"—the panicky erosion of last spring and
summer—and about half of the 10 per cent devaluation
of February 1973.
Meanwhile, the price of gold has skyrocketed to a
record $136 an ounce, and it would surprise no one
if it goes even higher.
I n both cases, we are witnessing a dramatic response
to the energy crisis, which threatens the oil-importing
world with a financial upheaval. The
United States, as the Chase Manhattan
Bank points out, looks like such a "safe
haven" compared with Europe and Japan that the dollar has gained in value
even faster than it dropped during the
crisis i n confidence in 1973.
Moreover, European bankers who
who were worrying about a massive
"dollar overhang" around $90 billion
last year have just quit talking about it: they win neea
every one of those dollars—and more—to pay the massive oil bill that the cartel of producing nations has
' laid on their doorsteps.
The dollar problem, i n effect, has taken a 180-degree
turn: there is no longer a deadly surplus, but a prospective shortage. Central bankers, meeting for the past
x
few days in Rome, are arguing not about propping up
the dollar—but how most efficiently to keep it from
going too high.
These same forces explain the stunning advances in
the gold market. Once upon a time, when gold was'
going up, the dollar would be going down, and vice
versa.
But the dimensions of oil price escalation forced on
the consuming countries by the producer cartel could
point to a new role for gold in providing additional
resources necessary to foot the oil bill.
IN THE SPACE of just two years—from 1972 to
1974, the world is faced with an oil bill rising from




$21.6 billion to something just short of $100 billion.
Of the latter figure, Europe, Japan and the United
States would have to shell out $87 billion at current
prices, assuming consumption at 1972 levels.
As Treasury Secretary George Shultz said in Rome
on Thursday, it is impossible for such a "staggering"
result to take place. vAt current prices, oil imports and
consumption will fall. New sources ,of energy will be
developed. But there will remain, nevertheless,- a huge
bill to pay, and serfous secondary effects, Shultz
warned, on the supply of products' ordinarily derived
from petroleum, such as fertilizer. Beyond that, there
lies great uncertainty about what happens to trade,
money flbws and balance of payments positions.
"We must be realistic," Shultz said, "and recognize
that the present problem is literally unmanageable for
many countries."
Unless the problem is made manageable—and that
means a rollback of-the cartel-ordained prices—the
world could ^encpunter a wave of devaluations in an
effort to cope with the enormous oil costs.
As former Federal Reserve Board economist Daniel

Economic Impact
H. Brill put it, "If major oil-importing countries try to
cover their soaring fuel bills by competitive devaluations to get a little larger share of a diminishing world
trade market, we could be in for a repetition of the
Thirties."
WHERE DOES GOLD come in? If major currencies
are devalued, the oil cartel countries might respond
, by insisting on exchange rate "guarantees, or payment
/•in gold. Already, Europe is full of talk of an official
$150 gold price as part of a "package" plan to expand
world liquidity.
'
t
Since the present, theoeretical official price is only
$42.22 an ounce, those countries "with substantial
gold reserves would triple the resources available to
pay their future bills for imported energy, i
The American dollar, ,of course, had been enjoying
steady gains before the energy crisis broke into full
view as a result of great improvement in the U.S.
balance of trade and balance of payments accounts.
In turn, that improvement was due to the better
competitive edge given to American exports by the
double devaluation of the dollar, plus a much better
See IMPACT,




239
Hobart

Rawen

Oil, Gold, Dollar
IMPACT,•core on Inflation at home than recorded in most
other industrialized countries.
The oil crisis—although it causes discomfort and
higher prices here—simply Underscores the strength of
the U.S. economy relative to the rest of the world.
Since we are dependent on Imported oil for only a
fraction of our needs, higher oil costs will worsen our
balance of trade to a lesser degree than Japan's or
I that of any country in Europe.
Beyond that, while the real growth of the U.S.
economy may be sliced to a small figure (or even tp
zero), the degree of recession here is likely to be much
less severe than in Japan and Europe. The contrast
With the catastrophe in Britain is stark.
THEREFORE, the prospect—ivow ironic for Arab
policy-makers!—is that surplus revenues built up by
the oil-producing nations will flow mostly back to the
United States, seeking safe investment, directly or
through the Eurodollar market.
There is not a little bitterness in Europe over the
way things seem to be working oyt. A few have wondered, -seeng the relatively insulated American position, whether the U.S. government is hot secretly content with a situation which shows Europe helpless and
dtartraught, the Common Market a shambles, while
the U.S. dollar regains its former prestige.
It is certainly true that the United States stands
to come off best of any major country, regardless
of the future Arab squeeze and what it may portend.
But officials here know that the United States can
not prosper in the midst of a world depression.
They take seriously IMF Managing Director H.
Johannes Witteveen's warning, like Brill's, that failure
to fiiKj common approaches could bring the world to
the kind of disaster that befell it in the 1930s, with
the less developed countries suffering the most.
It would be illusory for anyone to think that because the dollar is strong in exchange markets, the
U.S. will be home free. It won't.
© 1974, -Ru Washington Post Co

240
T H E W A L L STREET JOURNAL

February

11, 1974

Arab Oil and the Currency Crisis
B y W I L L I A M C . CATES

When a Secretary of the United States
Treasury finds it necessary to characterize an
International monetary development as "literally unmanageable" for many countries, as
Secretary Shultz did in Rome on Jan. 17,
things must be pretty bad. They are.
By most estimates the gap between exports and imports of Saudi Arabia, Kuwait
and the other Persian Gulf sheikdoms alone,
which had already swelled to some $10 billion
last year, will shoot up to $50 billion in 1974,
against a trade deficit of about the same
amount facing Western Europe and Japan. If
left unchecked, or uncompensated by a counterflow of loans or investments, this transfer
of over $4 billion a month could clean out all
of the monetary reserves of Europe and
Japan within 23 months. Even if the gold
component of these reserves were re-prlqed
at $120 an ounce, they would last for but 33
months.
The crisis that looms so directly ahead differs from those of the past three years in
more than just direction and degree. So long
as the United States was running the deficit
and others the surpluses, we could in a pinch,
and we did, stop paying out reserves and simply let other countries accumulate dollars or
revalue their currencies or both. Looking
back, despite hard feelings among finance
ministers, remarkably little harm was done
to world trade. I n other words, because the
U.S. dollar was both a reserve currency and
the standard denominator for world trade, we
could cover our sins or misfortunes by supplying more dollars.
This is not the case when the shoe is on the
other foot. With European and Japanese currencies weakening, exporters to those countries, including oil exporters, will demand and
receive dollars, for which the suppliers of last
resort are the European and Japanese central
banks. Since these dollars come from finite
reserves, the present crisis is unique not only
for its magnitude but also for the fact that it
cannot be papered over. It is unique as well
for its suddenness. Given time, economies,
like people, can adjust to almost anything,
and had the oil price increase come upon us
in 50 cents a barrel increments over the past
decade, national economies as well as the
world's trade and payments system could
have taken it in stride. As is, automatic market forces will not have time to perform their
function, and agonizing decisions will have to
be made rapidly.

Reality and Illusion
For this reason it is worthwhile to try to
sort illusion from reality in the proposals and
prognostications that have already been put
forth.
ILLUSION: An International body, be it
the I M F , the OECD, the Common Market or a
meeting of oil-consuming nations, later joined
by oil-producing nations in Washington can
set up a nice system to handle the problem.
R E A L I T Y : While it is sometimes easy to
organize a grand coalition of nations to fight
fascism, communism, capitalism, papism or
Zionism, when it comes to jobs and money,
international agreement is well nigh Impossible. A modern day exception was the Smithsonian Agreement on new currency parities
reached in December 1971, and there, not
only were the nations represented manageable in number and the sacrifices required
marginal, but we had the benefit of Secretary
Conhally, whose "tough" tactics have ever




since been lambasted by well meaning people.
ILLUSION: Floating exchange rates will
take care of the problem, providing they do
not constitute competitive devaluation. (The
distinction Is becoming hard to discern, but
we know the first is good and the second is
bad.)
R E A L I T Y : Floating rates, the New Testament of the free market economists, can cope

The

Western

world

to-

gether with Japan face a trade
and monetary crisis of serious
proportions within a matter oi
months. No assemblage oi nations will find, let alone agree
upon a solution. ^
very nicely with modest marginal changes In
a nation's trading position, but not with a deluge. For one thing, the favorable trade effects
of devaluation can take as long as two years
to become evident. For another, as Arthur
Laffer pointed out on these pages Jan. 10, any
benefits of devaluation are largely offset by
inflation in the devaluing country.
ILLUSION: The oil crisis demonstrates
and enhances the need for meaningful trade
negotiations.
R E A L I T Y : The administration first proposed trade negotiations when the U.S. balance of trade was in terrible shape, allegedly
due to Japanese aggressiveness and European protectionism. Now it Is the Europeans
and Japanese who face bankruptcy. Is now
the time to tell the former to dismantle their
Common Agricultural Policy and regional
preferences and the latter not to Invade our
markets but pick on the Europeans instead?
Apparently it is, and in addition, according to
our trade negotiators, it is time to start working on rules which would prevent nations, including presumably the U.S. and Canada,
from limiting their exports of oil, wheat, soybeans, or whatever else gets scarce. I n today's crisis atmosphere such an ambitious
round of trade negotiations would at best be a
failure and at worst result in the hardening of
national positions to the ultimate detriment of
free trade.
To summarize: The Western world together with Japan face a trade and monetary
crisis of serious proportions within a matter
of months. No assemblage of nations will find,
let alone agree upon, a solution. Nor can we
expect the "market mechanism" to cope with
an adjustment of this velocity and magnitude.
In such a climate the free trade platitudes of
yesteryear will provoke at best derision, at
worst reaction.
But no crisis arises without providing the
opportunity for leadership, and this opportunity is knocking, however quietly, at the door
of the U.S. government. Logically the problem would resolve itself if the Arab governments were willing to hold and then use European and Japanese currencies in payment for
their oil. However, this is unlikely, given the
immediate prospects for these currencies on
the exchange markets, and it would be foolhardy to ask any favors from the Arabs.
What is needed, therefore, is a financial in-

termediary. The U.S. alone can fulfill this
function. If our government declares itself
willing to accumulate substantial amounts of
European and Japanese currencies, thus stabilizing their values at levels which, before
the oil crisis, we regarded as quite reasonable, the Arabs would receive dollars, the Europeans and Japanese would be spared loss of
their reserves and ultimate bankruptcy, and
world trade could continue to function
smoothly.
Though this sounds simple, if not simplistic, such a policy is fraught with technical
and political difficulties; for example, does
the U.S. support the pound or lire on the eve
of a British or Italian election which may result in a Socialist or Communist government?
The difficulties being endless, an intervention
policy will not be popular with those who have
to administer it (although our currency
"swap" network with other central banks already totals $18.98 billion). But, at present
levels, the yen and most European currencies
are a businessman's risk, and even If we sustained book losses on a few, much as other
countries lost for a time on their holdings of
' our dollars, the effect on the American taxpayer would not be noticeable, certainly not
in comparison with the consequences of the
rapid shrinkage of world trade which faces us
today.
In return we can insist on a few important
quid pro quos, among them no arms deals
with the Arabs and no imposition of quotas or
other serious trade restraints.

Careful Explanation Needed
Obviously such a course of action can be
undertaken only after the most careful explanation to Congress, as the opportunity for
demagogic attack in this complex area is unlimited. One can almost hear the epithet
"Marshall Plan" reverberating in the Senate
chamber. At the same time steps must be
taken, including removal of withholding taxes
and provision of ironclad guarantees against
expropriation of foreign investors, to ensure
that the American capital market can play its
essential role in the overall financial intermediation.
Assumption by the United States of positive leadership and specifically a financial intermediary role would not only avoid or mitigate an immediate currency crisis, it would
expedite the necessary adjustment to a new
pattern of trade and investment flows. Such a
pattern will entail vastly Increased investment in countries which can in turn purchase
products made in the U.S., Europe and
Japan. This probably means Eastern Europe
and Russia, plus any developing countries
viable and stable enough to absorb and utilize
substantial outside investment. Thus, the reduction in consumption by the wealthy industrialized nations, brought about through the
oil price increases, can become investable
funds which, properly handled, will be a boon
to all concerned.
While the execution is far more complex
than the recipe, failure by the United States
to grasp this nettle of economic, and with it
strategic, leadership could indeed result in
"unmanageable" consequences for the trading world, including ourselves.
Mr. Cates, an economic consultant, was
Deputy Assistant Secretary of the Treasury
during the first Nixon administration. An
editorial related to this subject appears
'today.

241
FROM THE NEW YORK TIMES, MARCH 7 ,

1974

IKuwait to Invest Riches in Arab Channels
used to ease balance of payBy JUAN de ONIS
ments deficits arising from
Spttltl to Th* »nr York Times
higher oil prices.
j
KUWAIT, M^rch 6—Kuwait
Neither the Special Developintends to deploy h6r oil riches
ment Fund nor the financing
primarily through channels
by the I.M.F. of oil deficits
under Arab control and will
from oil-producer loans waa
not contribute to special funds
viewed with favor by Mr.
proposed by the Shah pf Iran
AtSd, whose country Is a major
and the International Monetary
financial power in the Arab
Fund to meet the. world's oil
world.
payments crisis.
He said that Kuwait was|
"We will make our own conparticipating in discuss!
tribution to the world, big or
among member countries of
small, through our own instithe Organization of Petroleum
tutions," $aid Abdel-Rahman
Exporting Countries on the
Salem al-Atiki, Kuwait's Mincreation of a bank to make
ister of Finance and Oil, in
development loans, and he said
an interview.
Kuwait was prepared to join
Last month, the Shah of Irah
In a four-point, $5-bllllon reproposed that the 12 major
plenishment of the funds of the
International Development Asoil exporting countries and 12
sociation, an affiliate of the
large industrial countries, inWorld Bank.
cluding the United States, set
up a special development fund,
But the major part of
receiving $2-billkm to $3-biliion
Kuwait's international finana year, to make loans on "soft" . . . .
„ am«r. Pr»« cial . aid will be put at the
terms to poorer countries.
Abdel-rahman Salem al-Atild .service of Arab countries, and
The proposal was hailed, byto assist other Moslem counRobert S. McNamara, president! The shah said Iran was pre- tries, particularly in Africa,
!of the World Bank, and H. pared to provide $l-billion, part Mr. Atiki said.
Johannes Witteveen, managing of which would go to the "Nobody looked at the
director. of the International proposed fund, while the Arabs before," Mr. Atiki said
Monetary Fund, as a proposal j rest would be used to buy "why does everybody expect
of "great vision." Both institu- World Bank development bonds us now to be the godfather?,
tions offered to manage the] and make a $700-million loan
to tft* fJJf.F., which could be Continued i







242

Kuwait to Invest Her Oil Wealth
lh Channels Under Arab Control
possed to be too highly priced?'
We will not accept instructions he asked.
from anybody on how we use "Oil is a commodity affected
by th$ law of supply and deour money."
"This part of the world has mand, and its prices should be
been neglected for centuries equitably matched with the cost
and its wealth has been car- of equivalent commodities that
ried away by foreigners with- produce energy," he said.
out giving it a hand for de- Earlier than most other oil
velopment," he said. Mr. Atiki exporting countries, Kuwait
faced in the early nineteenadded:
' I f there seems to be a sixties the build-up of oil incapital surplus now, it Is' not come to levels above domestic
beonjpe we have more than development and welfare needs,
we need, but it is because we which are budgeted" at about
lack 'the ability to consume $1.5-billion.
these;, amounts so quickly In a With an outward looking
policy, Kuwait has been a
very short period."
Kuwait's estimated oil reve- leader among the Arab counnues this year, at current oil tries in establishing Investment
prices, ape $9-biHion to $10- institutions designed to put
Dillion for a country of 850,000 Kuwaiti funds to work abroad.
people, with oil as the only These institutions, both proflargB domestic resource.
it making and for development
•fro* massive revenue, re- lending, include the Kuwait
flecting an increase of more Fund for Arab Economic Dethan 300 per cent in oil prices, velopment, the Kuwait Investmay rise further when Kuwait ment Company, and the Kuwait
acquires,. as is planned, a 60 Foreign Trading, Contracting
per cent equity in the ]Kuwait and Investment Company. They
Oil 'Company, now owned joint- have made loans and investly by Gulf Oil and British Pe- ments of more than $500*million abroad.
troleum.
Mr. Atiki said that he conKuwait has been the movii
sidered the present level of force in the establishment
government take from taxes the Arab Fund for Economic
and t royalties of $6.96 a barrel and Social Development, a sort
for Kuwaiti crude oil as "still of regional development bank,
which made Its first three loans
too low."
He said that Kuwait Is pre- last year, totaling $30-million.
sd to market directly her New loans to Egypt and Alper cent share of oil pro- geria totaling $200-<nillion will
duction from the Kuwait Oil be announced this month.
Company, which was three mil- Kuwait has pushed the crealion barrels a day until pro- tion of an Arab-African Bank
duction was cut back after the that was set up with a $200OctQfcr Middle East war, if the milHon* capital in Cairo in
foreign partners do not meet January, and is planning to
Kuwait'* terms for "buy back" oin in major investments in
pricgfL
Sgypt and the Sudan for projThese demands were be- ects ranging from oil pipelines
lieves to be in the vicinity of to highways and major agri$10
barrel. The companies cultural and livestock development.
havCpffered $8.50.
"I-think oil prices on the
"It is going to take a lot of
world market should go even money to get this part of the
world to stand on its feet," said
higher," said Mr. Atiki.
"tpay $21 for a Swiss-made Mr. Atiki, whose combined role
shirt and $90 a sack for im- as Finance and Oil Ministef
ported rice. So why is my bar- puts him at the center of
rel of oil the only thing sup- Kuwait's financial management.

r

!

243

BUSINESS WEEK. February 16, 11

Money: Where the Arabs will
invest their new oil wealth
" I t ' s going to be a helluva task but an
interesting one, if you are in international banking," says Richard Vokey, vice-chairman of London merchant banker H i l l Samuel & Co., Ltd.
Hill Samuel's "task" is the awesome
but potentially lucrative one of helping
recycle an estimated $50-billion a year
of surplus A r a b oil revenues back
through the world's capital markets to
the nations that consume oil. Not surprisingly, H i l l Samuel will have considerable competition. Commercial and
merchant banks from the U. S., Britain, the Continent, and Japan are rushing to get a piece of the action.
There will be plenty of it. The oil-exporting countries will be able to spend
less than half of their fabulous earnings, expected to total around $90-billion this year, for imports of capital
equipment and consumer goods. Libya,
Saudi Arabia, and the Persian Gulf
sheikdoms, which will pile up the biggest surpluses, have not even decided
what to do w i t h the remaining unspent
funds, according to Beirut bankers.
But for lack of other profitable alternatives, it is virtually certain that
they will have to deposit, lend, or invest a good part of the money in the
major Western capital markets. Says
banker Vokey: "They will put their
money where they get the best deal."
Oil consumers, in their turn, will
have to borrow in these very capital
markets to help finance their purchases
of Arab oil. Thus, France is swinging a
$1.5-billion medium-term credit line in




the Eurodollar market via a consortium
of banks headed by France's Societ6
G6n6rale. The French will draw on the
money when needed to offset a projected $3.7-billion balance-of-trade deficit that will be created largely by soaring oil-import costs.
The Arabs w i l l supply some of the
money that the French need. Says an
official of the Paris-based Union des
Banques Arabes et Francaises (UBAF),
jointly owned by Arab and French
banks: "We are bound to subscribe to
this loan, and thus we will serve as a
conduit for Arab funds finding their
way back into European hands."
Via Now York. I n addition to the Eurodollar market, some Arab funds will
flow to national money markets on the
Continent and in Britain through the
purchase of such securities as British
Treasury bonds. Eventually, a big
share probably will surge into the New
York money market because the U. S.
economy, less affected by the energy
crisis than most, looks like the safest
haven for investors.
To keep the Arab dollars circulati n g - a n d give American bankers a
larger role in handling them-Washington last month lifted U. S. restrictions on capital outflows.
The French already are tapping New
Y o r k . The F r e n c h n a t i o n a l telecommunications agency plans to float a
$75-million bond issue in the U. S. I n
the next few months, says a French Finance Ministry official: " I think you
will see a whole lot of French com-

panies making loans of this kind." The
Arabs also are expected to step up the
real-estate investments they have been
making in the industrialized nations,
and some Arab money w i l l probably go
into corporate stocks.
Economic effect. The reverse flows of
money from the Arabs to the world's
capital markets w i l l go a long way
toward offsetting the deflationary impact that the oil-payment deficits
would otherwise have on the economies
of the consuming countries. Still, the
sloshing of huge amounts of Arab
money through financial markets may
make the job of managing the world's
economies a rough one. Explains a top
economist of the Organization for Economic Cooperation & Development: " I f
Italy and France don't attract Arab
funds to compensate for their oil bills,
they are going to have to mount an expansionary monetary and fiscal policy.
And i f the U. S. attracts more than its
share, it w i l l have to adopt a restrictive
policy." To ease such problems, French
Foreign Minister Michel Jobert reportedly proposed to Arab governments
that part of the payments they receive
for oil be left on deposit in banks of
consuming countries.
Tragically, the developing countries,
w i t h gloomy economic prospects and
thin capital markets, have little hope of
attracting Arab funds. And they lack
the credit to borrow in the major capital markets or the ability to pay commercial interest rates. Managing Director Johannes Witteveen of the
International Monetary Fund (IMF)
proposes to help them w i t h an expanded credit facility that would be financed mainly by Arab funds.
Meantime, Saudi Arabia is setting
up its own Islamic Bank w i t h $l-billion

244
capital for aid to the Arab world, and a
Cairo-headquartered A r a b A f r i c a n
Bank will channel Arab funds to A f r i can countries.
Actually, the recycling of Arab funds
is not yet into top gear because there is
a two-month lag between the loading
of tankers in the Persian Gulf and the
flow of tax and royalty revenues into
Arab coffers. The big bulge of revenues
from the Dec. 23 oil-price hike will
start pouring into Arab treasuries next
month.
Lota to learn. Investing huge chunks of
that money will be no easy task. "The
Arabs are terribly worried about their
money and what they can do w i t h it,"
says Burhan Dhajani, who heads the
Beirut-based Union of Arab Chambers
of Commerce.
Traditionally, the Arabs have been
very cautious with their funds-investing heavily i n short-term instruments. Their natural caution has been
buttressed by a number of sobering financial experiences, including heavy
losses in the debacle of U. S. offshore
mutual funds. Arab investors "have
been had in the past," notes William
Higman, a director of a newly-formed
London bank, the Arab & Morgan
Grenfell Finance Co., which is jointly
owned by Jordan's Arab Bank and
London's Morgan Grenfell & Co. But,




notes Higman, "they have learned a
lot."
W i t h the assistance of countless eager financiers, they w i l l learn a lot
more. Vokey of Hill, Samuel notes that
the Arabs generally have bought Eurobonds in the relatively safe secondary
market. Now, he says, "a lot of bankers
are hoping they will get active in the
primary market" as original lenders-

A lot of bankers are hoping
the Arabs will get
active in the primary market
an activity that involves considerably
more sophistication. Indeed, the Kuwait Investment Co., owned by the Kuwaiti government and private shareholders, already is active as a comanager of new Eurobond issues.
New partners. Europeans and Americans
are setting up merchant banks in Beir u t to tap Arab money nearer its
source, while Western and Japanese
commercial banks are flocking into the
gulf states. And bankers from all parts
of the world also are jostling each other
in their rush to set up joint-venture financial houses with the Arabs, headquartered in such European money
centers as Paris and Brussels.
The Union des Banques Arabes et
Francaises, which opened its doors on

Rue Ancelle in the Paris suburb of
Neuilly i n 1970, has assets of more than
$l-billion. Arab participants, including
banks from Kuwait, Bahrain, Oman,
Libya, and Tunisia, own 60% of the
shares, and France's Credit Lyonnaise
and Banque Francaise de Commerce
Exterieur hold the rest, UBAF operates
branches in London, Frankfurt, and
Rome, is opening another in Hong
Kong w i t h Japanese banks, and is considering yet another in New York.
Other such joint ventures include
Frabank International in Paris, European Arab Bank in Brussels, and Cie.
Arabe et I n t e r n a t i o n a l de Investissement in Luxembourg, in which
Bank of America has a holding.
Says an UBAF official: " A t the summit meeting in Algiers last December,
the Economic Council of the A r a b
League called for Arabs to withdraw
funds gradually from Western banks.
This won't happen overnight, but in a
year I think you will see a change in
the flow of funds to Arab affiliated
banks." And Suliman Olayan, a Saudi
Arabian entrepreneur w i t h interests in
construction and oilfield contracting,
explains why such joint ventures will
also attract private Arab business.
"When I go to see these people, they
speak my language, they know who I
am. I can get in to see the president." •

245

THE WALL

Arab

STREET

Investors

As O i l Money Pours in,
Mideast Lands .Search
For Places to Put I t
While Much. Is Still Banked,
States Now Seek to Invest
I n Real Estate, Businesses
E x i t Gnomes, Enter Sheikhs
B y PRISCILLA S . M E Y E R
of T H E W A L L STREET JOURNAL

Staff Reporter

The flow of oil money into A r a b lands is be' coming a flood as the oil-producing nations collect their windfall profits f r o m the most recent
doubling, on Jan. 1, of the price they charge for
oil.
Last year, Middle E a s t oil revenues r a n
about $22 billion. M u c h of the profit was invested domestically. This year, w i t h revenues
running anywhere between $80 billion and $110
billion, a n estimated $<f0 billion to $90 billidn
should spill into the international-money m a r kets. Over the longer t e r m — b y 1980, according
to an estimate by Chase M a n h a t t a n B a n k - A r a b
I foreign reserves should swell to more than $400
billion f r o m a meager $5 billion, as estimated
by the World Bank, in 1970. That compare*
with total foreign investments of U.S. corporations of $145 billion at the end of 1972.
The big question is how the Arabs will invest all this money. F o r the immediate future,
it appears, most)of it w i l l continue to go into
bank deposits and in government securities
like U.S. Treasury bills. But the potential dem a n d for such funds is limited. And already
there a r e solid indications that the Arabs a r e
starting to change their traditionally ul.traconfiervative investment policy to take the plunge
I into more profitable ventures. A r a b institutions
1
are buying r e a l estate i n the U.S. and elsewhere—hotels, apartments and office build,ings. A r a b institutions and p r i v a t e . investors
are buying and attempting to buy interests i n
U.S. banks. A n d negotiations are starting for
joint ventures, mainly i n oil, petrochemical
and other energy-related projects, i n the U.S.
An A r a b Landlord on F i f t h Avenue
P a r t l y for political reasons, and also because they haven't yet developed a big force of
investment professionals and business manage d , the A r a b nations are unlikely to m a k e a
run on the U.S. stock m a r k e t or acquire big
publicly held companies anytime soon. I r a n , i t
is true, has indicated that it plans eventually to
invest hdavily i n "blue chip" U.S. securities,
-and it already has agreed to a joint venture
w i t h Ashland Oil i n the U.S. Individuals i n the
Middle East, too, m a y
buying U.S. securities. " D o n ' t be surprised if A r a b interests already have a significant participation i n A m e r ican companies," Joseph A . El-Khoury, director general of the Banque de l a Mediterranee
of Lebanon, said during a recent visit to N e w
fork.




M a r c h 5,

1974

[
But these kinds of developments now seem
I more typical:
—Shah M o h a m m e d Riza Pahlevi of I r a n has
bought, through his Pahlevi Foundation, a
large office building, which he's remodeling, a t
642 F i f t h Avenue i n N e w Y o r k .
—A group of Kuwaitis recently paid about
$27 million for property along the Champs
Elysees in P a r i s for a luxury office and bank
building to be called the House of K u w a i t .
—A group of A r a b banks is setting up F i r s t
Arabian Bank and F i r s t Arabian Corp. as vehicles for pumping funds—Including money to
buy ownership interests in U.S. banks—into the
U.S.
Sudanese i n California
—Adnan M . Khashoggi, a Beirut-based
Saudi Arabian who acquired 50% of the stock
of Security Capital Corp. last September, and
who has purchased two California banks, also
has acquired about $1 million i n r a w land* for
development in California. H e plans to bring
some 40 young business trainees f r o m the
Sudan to California to learn how to use vehture
capital and develop r e a l estate.
—The Saudi Arabian government has talked
to Chase M a n h a t t a n bank about the possibility
of Chase managing a pool of $200 million i n .
Saudi government funds for investment in
Saudi business and in joint ventures w i t h foreign partners whom Chase would find.
—Libya has established an investment bank
in Buenos Aires. Abu D h a b i and £ a u d i A r a b i a
are discussing building a large oil refinery, i n
partnership with a N e w York-based f i r m , i n
Puerto Rico. And the Saudi Arabians a r e investigating the possibility of a refinery and petrochemical complex in the Philippines.
—Kuwait, a small" nation with inordinately
large oil revenues and relatively solid experience in investment, also is buying U.S. r e a l estate. The Kuwait Investment Co., one of several owned jointly by the K u w a i t government
and individual Kuwait investors, this month
bought K i a w a h Island off Charleston, S.C., for $17.4 million in cash. The company plans to
spend more than $100 million developing it as a
residential resort over the next 15 years. The
same company put up $10 million, or half the
equity funds, for a project in downtown Atlanta
that includes the new Atlanta Hilton hotel.
Once Stung, Doubly Cautious
— A n executive with a m a j o r U.S. bank estimates that in the past few months up to $400
million has been lent directly to U . 6 . borrowers
by A r a b investors. Enck, Hollingsworth &
> Reveau, a Louisville real estate f i r m , says it
has agreed in principle to borrow $150 million
f r o m Persian Gulf investors for the purchase of
U.S. real estate. Wooten & Associates, a Dallas builder and developer, says it has got about
$200 million in Middle p a s t financing for a n
apartment development in St. Louis.
—Najeeb Halaby, former chairman of P a n
American World Airways, has assembled $100
million in real estate he hopes to sell to private
Saudi Arabian investors.
Arabs like real estate because it's "tangible," M r . H a l a b y says. "They've seen prices of
their own r e a l estate rise faster than other investments," he adds. D a v i d Toufic Mizrahi, editor of a N e w York-based newsletter called the
M i d E a s t Report, says some land in the H a r a
, district of Beirut has doubled in six months.
E v e n so, some bankers say, the Arabs appear to have rejected most of the deals offered
them by "the flocks of investment men who
have been giving them pitches in recent

246

Arab Investors: as Wealth Pours in,
Mideast Lands Seek Places to Put I t
Continued From Page One
months. This may partly reflect some unhappy
past experiences. Arab investors were hurt by
the collapse of Bernard Cornf eld's I.O.S. Ltd.,
which sold many mutual-fund shares in the
Middle East. Some Arab investors still haven't
received full repayment from the collapse of a
major Mideast baqk, Intra-Bank, eight years
ago.
That kind of experience explains the Arab
desire to enter joint ventures with experienced,
reputable partners, says Benjamin V. Lambert, president of Easdil Realty Inc., an affiliate of Blyth Eastman Dillon & Co. that is planning & nUxed pool of Arab and other investors'
funds. The Arabs, he says, have been "stung
and double-stung."
M r . Lambert thinks the AOddle East oil nations will invest around $1 billion in U.S. real
estate in the next two years. Other observers
think it might amount to five or 10 times that.
Mr. Lambert Is conservative because, he
thinks, investment may be limited by the supply ot "good" investment property and by political considerations. The Saudi Arabians, for
example, apparently fear that a worsening in
relations with the U.S. might persuade the U.S.
to freeze Arab funds in U.S. banks. The Arabs
are aware that Congress has been making fretful noises over the prospect of massive Arab
Investment in the U.S., and they are aware oi
the controversy in Hawaii over Japanese investment in the tourist Industry.
!
Some bankers, however, see a masSive flow
of Arab money into foreign real estate and Industrial development as a near-inevitable development over the long term. Derick Richardson, Chase Manhattan's group executive for
the Middle East and Africa, doubts that money
markets alone can absorb all the new Arab
wealth.'"Looking at the capacity of markets to
cope with the accumulating dollars," he says,
"unless there are structural changes in the nature of institutional markets there will be severe difficulties two years but." Specifically,
he says, the market for Eurodollars, or dollar
deposits held outside the U.S., will become
"saturated."
Alternative Energy Sources
Other big U.S. Wanks have discussed alternatives, to money-piarket Investment at considerable length with Arab financial officials.
Chase seems more willing to talk about these
discussions than its competitors. Chase says
for example, that Chairman David Rockefeller




and Mr. Richardson have encouraged Saudi
Arabian officials to establish a large pool of
Arab money for investment in energy respirch
and development—partly because Arab oil
eventually will run out. •
Many international banks and brokerage
houses are buying into Arab institutions and
forming new ones in the Middle East to influence and exploit the Arab desire for new investment. Most of theoe efforts are thinly
veiled attempts to Import surplus Arab dollars'
and shore up financial markets here and in Europe, though the financial men usually describe
their efforts as "harnessing Arab funds for
Arab investment."
. i
Though internal investment has top priority
in most Arab countries, even ambitious projects, given the relatively small populations and
capital needs, aren't likely to drain off much of
the cash flowing into Arab treasuries. Not even
the $3 billion fund for loans to underdeveloped
countries proposed by the shah of I r a n
amounts to more than a tiny fraction of Arab
funds that will become available for, investment over the next six years or so.
A Place In Financial Folklore
Their vastly increased wealth has earned
Arab investors a certain notoriety in some financial markets—and the Arabs are displeased. " 'Arab sheikhs' have now replaced in
financial folklore the notorious 'gnomes of Zurich' of the '60s," Abdlatif Y . Al-Hamad, director general of the Kuwait Fund for Arab Economic Development, complained recently at a
meeting in Luxembourg. Arabs,, he says, have
"played virtually-no role" in recent foreign-exchange and commodities-market gyrations, he
says.
Some international bankers say that although Arab governments may not be very active in those, markets, private Arab institutions
and investors are. The oil-generated profits of
Arab contractors, business consultants, private
banks and others on the fringes of the oil business are financing foreign-exchange and commodities speculation, they say.
At the same time, some Western "ihoney
brokers" are trying to exploit awareness of the
Arabs' new riches by collecting feeB from U.S.
firms for arranging loans from Arab investors,
and then disappearing. Offers to arrange such
loans have proliferated since last fall. M r . Halaby, proprietor of his -own investment company, says he has checked out many of these
brokers and found them to be "phonies."

247

Opening the Arab well
I to money-dry nations
The oil-producing countries have the
money and the oil-consuming countries
need i t - m o s t of all the developing
lands with only limited access to the
world's capital markets.
So World Bank President Robert S.
McNamara was in Algeria this week,
Treasury Secretary George T. Shultz
was in Caracas, and Managing Director Hendrikus Johannes Witteveen of
the I n t e r n a t i o n a l Monetary Fund
leaves Tuesday on a six-week swing
through oil-producing nations from
Iraq to Venezuela. Each man hopes to
open a conduit through which the billions of dollars being paid for oil today
will flow to nations that face bankruptcy because of soaring fuel bills.
The financing of oil costs through
borrowings in international markets
has worked well enough for someBritain this week announced a $2.5-biIlion commercial bank standby f a c i l i t y but countries w i t h doubtful credit ratings need more foreign exchange than
the market will give them.
So far, oil-producing countries talk in
generalities about plans for officially
recycling funds to the hardship cases
the markets turn down. But they are
not plunking down much hard money.
Says McNamara, whose agency so far
has had only $200-million from Iran
and $27-million in commitments from
Venezuela: "No doubt other funds will
come forward. The question is whether
they will be soon enough, and in the
proper amounts."
Eurodollar*. The pinch would be worse if
the Eurodollar market were not so fertile in providing financing. Britain,
France, and Italy have put their stateowned companies to work borrowing at
a great rate. Japan has directed its private banks and corporations to seek out
Eurodollar resources.
Even Britain and Italy would like to
supplement what the market is willing
to lend them with official credits, provided they could be had without the
strings the IMF attaches to all the ordinary credits it gives. Among the
poorer countries, India was able to borrow $62-million from the IMF a few
weeks ago, but the increase in its oil
bill this year over 1973 is estimated at
$900-million-which it cannot pay.
Meanwhile, the schemes for using the
oil money are focusing on development
of the oil regions first. This leaves little
for other less developed countries.
Already in the Arab world, there are
no fewer than five local development




BUSINESSWEEK March 30 1974

funds-the Kuwait Fund for Arab Economic Development, the Abu Dhabi
Fund for Arab Economic Development,
the Islamic Bank, the African Fund for
A g r i c u l t u r a l & I n d u s t r i a l Development, and the Arab-African Bank. The
latest talk is that the Islamic Bank, set
up to help Islamic nations w i t h the important patronage of Saudi Arabia,
will see its resources doubled to $2.8billion.
Venezuela seems likely to dispense
oil money in a similar regional pattern.
I t is negotiating with the Inter-American Development Bank to set up a
$250-million fiduciary fund. And a national investment fund, which will collect an estimated $5-billion in oil revenues, will be used partly to finance
Latin American development projects.
One project is for an oil refines^.in
Costa Rica to supply Central America.
Gaps to fill. With the increase in the
world's total oil bill estimated at $50billion and up, this leaves a lot of financing gaps for McNamara and Witteveen to fill. Witteveen's contacts
with the oil countries will make or
break his proposal to set up a special
"oil window" at the IMF where governments can borrow w i t h relative ease.
Says a fund official: "Without oil
money, the window would have to be so
severely scaled down, there is doubt it
would be possible."
I t does not help that the Arabs are
apathetic and the U. S. hostile to the
Witteveen proposal. No oil money has
been committed since Witteveen first
proposed it in January, except for $700million that Iran may place with the
fund. Says University of Colorado Professor Ragaei El Mallakh, who does
consulting work for the oil govern-

ments: "He doesn't really have much of
a chance to get Arab countries to subscribe heavily to the IMF. They want to
invest unilaterally."
As for the U. S. viewpoint, a Treasury official says: " W i t h the embargo
off, the oil price must come down. Why
institutionalize high money costs and
give the oil countries guarantees? I f
you go to them on bended knees and
ask for money, the terms will not be
very generous." For this year, at least,
the U. S. feels the market can do the
job for developed countries that can afford to borrow at all. By next year,
though, financial officialdom may find
itself giving guarantees to commercial
bank loan officers i f the oil financing
problem does not wane.
Still, Witteveen in the 127-member
IMF has a wider constituency than the
industrialized nations. Furthermore,
aides say preliminary contacts with the
oil countries about putting money into
the IMF are not so negative as to keep
the managing director from making
the trip. And, they add, not only does
the IMF chief expect to bring back some
commitments, but he also feels there is
a "good chance" to get them at interest
rates below going market yields.
•

248
T H E WASHINGTON POST

M a r c h 1,

1974

Iran's Proposals for the World Economy
RAN HAS MADE a far-reaching proposal to cope with
some of the acute dislocations caused in the world
economy by the oil cartel's quadrupling of prices two
months ago. To help poor countries hit by the increases
to maintain the momentum of development, Iran would
have 12 oil exporters and 12 industrialized countries put
up $150 million each a year (a total of $3 billion) in a
new soft-loan fund, to be run by donors and recipients
on "non-political" lines and to be serviced by the World
Bank and the International Monetary Fund. To help oil
importers absorb the severe balance-of-payments impact
of the new prices, Iran will lend perhaps $700 million (at
commercial rates) to the IMF, to be recycled to importers. Iran also will buy (at commercial rates) some $200
million in ordinary World Bank bonds. The Shah has
committed his country to put, up $1 billion for these
three uses this year. He hopes his initiative will be joined
and supported by other states.
The Shah's proposal is, first, a major political move
reflecting an Iranian bid for global political stature. It
goes well beyond the bilateral oil arrangements which
the Shah is quietly and simultaneously making with
countries of his region. It makes Iran the first member
(of OPEC, the oil cartel, to offer a comprehensive adjustment plan for the world economy. It puts Iran in the
prestigious position of using the great international financial institutions, the World Bank and IMF, as instruments of Iranian policy to a considerable extent. Indeed,
these institutions, by accepting the Shah's initiative, have
in effect endorsed his grand strategy of reshaping the
world economy to pay the new high prices of the oil
cartel; it is the American grand strategy, of course, to
lower the prices. And no matter what comes of the proposed new soft-loan fund, the Shah will make a good
return on funds invested * n the IMF and the World
Bank's hard-loan branch.
The soft-loan fund idea is especially interesting because of the poor countries' desperation. The oil export-

I




ers have sound moral and political reason to come to
the aid of, their price-stricken third-world brothers. To
be candid, however, $150 million a year per donor is not
much; for Iran, it's only one per cent of the increment
of its oil. revenues. Then, there are differences between
Iran's aid proposal and the evident aid proclivities of
OPEC's Arab members. Iran and Saudi Arabia are
political rivals; whether the Saudis will wish to support
an Iranian proposal, one which they were not invited
to help shape, remains to be seen. Iran wants aid to be
nonpolitical but the Arabs avowedly want to use oil as
a political weapon. The Arabs may not be as ready as
Iran to use the services of the World Bank and IMF. So
far only Venezuela, another non-Arab OPEC member,
has indicated support for the Iranian proposal. There is
always the prospect, however, that if the Arabs do not
choose to join Iran on this fund, they will create their
own separate and larger one. The need is there.
The $700 million which Iran plans to loan to the IMF
will help it serve better the swollen liquidity requirements of the oil-importing nations. There is no particular
political reason why the Arabs in OPEC should not follow suit, and there is good economic reason why they
should: the IMF is a good safe place to invest some of
their surplus funds. Recycling oil revenues to consumers
should quiet their nerves, at least in the short run. Just
how consumers are to earn the money to pay back the
IMF, and their other creditors, is necessarily a longerterm problem running beyond the writ of the IMF.
Needless to say, the Shah's initiative is not the last
word, or perhaps even his last word. But he has put into
circulation serious proposals to deal with some of the
basic new conditions of the world economy. Moreover,
he is treating the world economy as the integrated interdependent entity which it is. If there is a tight strand
of Iranian self-interest in what the Shah of Iran suggests, then the rest of us should not be put off. We
should test his ideas to see which of them may work.

249
BUSINESS W E E K

M a r c h 2,

1 ( 174

RNANCE

How to handle $50-billion in Arab oil money
n o r m a l I . S. c e i l i n g s o n d e p o s i t
y i e l d s , so loni_r as t h e v w e r e u s i n g
onlv Eurodollar monev.
But the i m p l e m e n t a t i o n
would
h a v e t o be d o n e h v t h e F e d . A n d
central
bank
officials
are
very
s k i t t i s h a b o u t t h e i r c a p a c i t y t o police b a n k s here to p r e v e n t t h e m
from using their
unregulated
E u r o d o l l a r f u n d s l o r m a k i n g domestic loans c o n t r a r y to m o n e t a r y
policy.
^ ou d need e x c h a n g e controls to insulate t h a t
Eurodollar
window
o n . o t f i . i i l obs< , \ t s
S E C problem. I lie > o c u n t i e s iV E x change ( omirussion laces a different d i l e m m a . A year ago. the SECt o h e l p t h e b a l a n c e ot p a y m e n t s b y
g e t t i n g I . S. b u s i n e s s t o f i n a n c e
overseas i n v e s t m e n t s w i t h overthat securities
: h a v e t o be r e g mmission.

Surplus A r a b oil m o n e y , the s t r e n g t h e n i n g o f t h e d o l l a r , a n d t h e e n d o f U . S.
a n d f o r e i g n capital controls are comb i n i n g to create a vast, i n t e g r a t e d international capital market. But just
how the g o v e r n m e n t will permit private i n s t i t u t i o n s to o p e r a t e in the n e w
environment
has r e g u l a t o r s '
phones
r i n g i n g all over W a s h i n g t o n .
T h e E u r o d o l l a r m a r k e t is as n o t o r ious!}" u n r e g u l a t e d as d o m e s t i c E . S. f i nancial m a r k e t s are t i g h t l y controlled.
Y e t both are expected to share in the
e x t r a $oO-billion that
oil
producing
countries will have for i n v e s t m e n t this
year.
T h e I ' . S. w a n t s i t s m a r k e t s
free
e n o u g h to recycle c a p i t a l i n f l o w s of oil
m o n e y in excess of w h a t it needs t o
balance its o w n i n t e r n a t i o n a l
Ixioks.
A n d it w a n t s a f r e e c a p i t a l m a r k e t t o
encourage inflo
; t h a t t h e c; p i t a l <

Thi

t r o l s t h a t er i d e d o n .Jan. 29
nly
one of the m a n y g o v e r n m .
regi•egism e n s r u l i n g U . S. m a r k e t s , f
t r a t i o n of securities to reserve r e q u i r e m e n t s on b a n k s . O n e of tin- h o t t e s t
issues c o n c e r n e d t h e b i g - l o a n business
t h a t IJ. S. b a n k s h a d d o n e i n t h e L o n don E u r o d o l l a r m a r k e t d u r i n g the era
of the controls.
Reserve rule. I n 1969 t h e F e d e r a l Reserve imposed special reserve r e q u i r e m e n t s o n a n y l o a n s by t h e E u r o d o l l a r
b r a n c h o f a E . S. b a n k t o c o r p o r a t i o n s
r e s i d e n t in this c o u n t r y . T h e idea was
t o close a l o o p h o l e i n t h e c r e d i t c r u n c h
then p r e v a i l i n g by s t o p p i n g
E.S.
banks from siphoning Eurodollar market funds. To oblige the capital controls
p r o g r a m , however, the Fed
had
e x e m p t e d loans to A m e r i c a n s by t h e
f o r e i g n b r a n c h e s o f E . S. b a n k s i f t h e
A m e r i c a n b o r r o w e r s p l e d g e d t o use
t h a t money to pay for the factories
t h e y b o u g h t or b u i l t overseas.
Idle s u d d e n e n d of c a p i t a l controls in
J a n u a r y made bankers fear that the
e x e m p t i o n f r o m E u r o d o l l a r r e s e r v e req u i r e m e n t s w o u l d be c u t o f f . A n d it
w a s , at least on n e w loans, e v e n t h o u g h
Fed governor
Andrew
F.
Brimmer
heard t h e i r protests t h a t t h i s was unf a i r in the n e w i n t e g r a t e d m a r k e t .
Says D a v i d D e v l i n , vice-president of
First National City Bank: " T h e probl e m is t h a t f o r e i g n - o w n e d E u r o d o l l a r
b a n k s c a n l e n d t o E . S. f i r m s h e r e a n d




( nts

t r\ (

Investors look for
guidance in the new, vast
international market

|

Th<
•

B r i m m e r : 'If the p r o b l e m is f o r e i g n
banks, the Fed will not s t a n d by helpless.
t h e y are not subject to reserve r e q u i r e ments. Subjecting our London branch
to reserve r e q u i r e m e n t s for the same
l o a n , " he a r g u e s , w o u l d i n c r e a s e t h e n costs a n d m a k e t h e i r l o a n r a t e s to prospective borrowers uncompetitive.
So f a r , f o r e i g n b a n k s a r e n o t l e n d i n g
t o E . S. c o m p a n i e s o n a n y scale. I n t h e
f u t u r e , " says B r i m m e r , " i f the p r o b l e m
is f o r e i g n b a n k s , t h e F e d w o u l d n o t
s t a n d b y a n d be h e l p l e s s . " A l t h o u g h

One Presidential plan would
repatriate the Eurodollar
operations of U. S. banks
t h e F e d has no w a y to put r e s e r v e req u i r e m e n t s on f o r e i g n banks abroad,
w i t h a c h a n g e i n l a w , it m i g h t d o w h a t
G e r m a n y d i d i n 1972. T o k e e p E u r o d o l lar m a r k e t b o r r o w i n g s f r o m ballooning
the d o m e s t i c money supply, G e r m a n
a u t h o r i t i e s put reserve
requirements
d i r e c t l y on G e r m a n c o r p o r a t i o n s w h e n
t h e y b o r r o w e d a b r o a d in d e f i a n c e of
anti-intlation restraints.
Nixon's proposal. T h e F e d a l s o is n o t r e s p o n d i n g too w a r m l y to a N i x o n A d d i t i o n p r o p o s a l t h a t it f e l t h a d
1
implications. The international
eport of the P r e s i d e n t u r g e d
t h a t E u r o d o l l a r m a r k e t o p e r a t i o n s ot
E . S. b a n k s be b r o u g h t h o m e . I f d o n u s
t i c b a n k s k e p t a s e p a r a t e set o f b o o k s ,
t h e y c o u l d be e x e m p t e d f r o m d o m . sti<

"

SH

w is

tw

iit

of th.

d tn-

*

impanv might nomic a p i t a l issues t o f o r m d arrange tor the
d i s t r i b u t i o n t o lie r e r o u t e d b a c k t o
retail customers inside the I . S . - a
v i o l a t i o n ot r e g i s t r a t i o n r e q u i r e m e n t s .
H o w t * e r s o l m i g is t h . mt< n ^ . q u i l r i t i o n t i \ »11 I I \
i n « If. < t t h . < \ t r I
cost i t i m p o s e d o n A m e r i c a n s p u r c h a s inis s e c u r i t i e s f r o m f o r e i g n e r s g a v e e f fective insurance that this danger
w o u l d not m a t e r i a l i z e . N o w t h a t the
1 F:T IS g o n e a n d A m e r i c a n c o r p o r a t i o n s
are no l o n g e r r e q u i r e d to e m p l o y foreign m o n e v to finance overseas c a m t a l
s p e n d i n g , t h e sEc savs t h a t w e h a v e t o
w o r k u p a set of g u i d e l i n e s t h a t w i l l
keep the stufi t r u m c o m i n g back.
S i m i l a r l y , tne T r e a s u r y D e p t . had
been, m effect. w a i v i n g I .
withh o l d i n g tax on A m e r i c a n - s o u r c e i n t e r est a n d d i v i d e n d i n c o m e p a i d t o f o r e i g n e r s so l o n t r as t h e s e c u r i t i e s m
question came under the IEI. Like the
F e d a n d t h e SEC. it d i d so t o g e t I . S.
corporations to finance abroad.
I he I r e a s u r v n o w s a v s it w o u l d l i k e
t o tret r i d o l t h e w i t h h o l d i n g t a x a l t o g e t h e r . T h e a r g u m e n t for a b o l i s h i n g it,
h o w e v e r , goes s t r a i g h t back t o t h e dil e m m a ol the new i n t e g r a t e d capital
m a r k e t . The people overseas who are
p o t e n t i a l b u v e r s of A m e r i c a n
securities. i n c l u d i n g the A r a b i a n oil sheiks,
are n o t a p t to t o u c h a n y issue w i t h a
w i t h h o l d i n g tax. T h e r e are p l e n t y of
i n v e s t m e n t s a r o u n d w i t h o u t it. A n d
some investors fear thev risk exposure
at h o m e f o r t a x e v a s i o n it U . S. t a x collectors get d a t a on t h e i r incomes.
•




250
THE

NEW

YORK

TIMES,

THURSDAY,

APRlf,

25, 1974

Arabs Starting to Invest
New Oil Money in West
By LEONARD SILK
A large amount of Arab oil But the truly massive flows are
revenues has begun to flow yet to come.
West, including about $l-billion Among the projects that have
to the United States—a small come to light so far are these:
but significant part of the vastly f A Louisville, Ky., real
Increased revenues the Persian estate and finance comGulf states are obtaining for pany, Enck, Hoilingsworth &
Reveaux, will invest an initial
their oil.
Only limited amounts have $50-million of Kuwaiti and
surfaced as direct investments Lebanese money in American
in the West, so far. Some of it real estate, backed by a $200is going into real estate—raw million line of credit Ultiland, hotels, apartment houses, mately, the company claims,
office buildings, including one the investment will reach $250on Fifth Avenue and one on the million.
Champs Elysees in Paris.
qWooten
k
Associates,
An unknown amount is flow- Dallas builders and developers,
ing indirectly to Moscow, in say they have $200-million ofi
payment for arms, and may be Middle Eastfinancingfor apartflowing back to the United ment house development in
States in payment for wheat. St Louis.
fThe Shah of Iran, through
his Pahlevi Foundation, has

251

ment, if relations with the Arab is all the Arab oil money going? construction and development
For the fact is that most pf it projects in Saudi Arabia, inworld deteriorate.
flAdnan M. Khashoggi, a rich seems remarkably invisible. cluding petrochemical plants.
bought 642 fifth Avenue in
Lehman Brothers, the big
New York City. The Pahlevi Saudi Arabian based in Beirut, Rudyard Kipling wrote a poem
about hte unseen flow of
Foundation purchased the for- has bought raw land in Cali- money as an underground river New York investment banking
house, .with former Commerce|
fornia for development. He has
mer DePinna Building on the also acquired •controlling inter- more powerful than the Ama- Secretary Peter G. Peterson
southwest corner of Fifth Ave- est in the Security Capital Cor- zon. But the Arabs and Iranians and former Under Secretary of
nue and 52d Street last August poration with assets of $115- are sending forth their money State George Ball leading the
for $8.6-million from Sam Min- million, and in the Bank of not in a mighty river but in way, is seeking to interest the
skoff & Sons, the building Contra Costa, Calif., with as- hundreds and thousands of Arabs in a broad range of derivulets.
velopment projects and to get
organization, Lehman Brothers sets of $22.8-million.
American bankers and finan- the United States Government
Fall-Out Still Evident
and the Cust6m Shop ShirtSix months after the Arabs cal advisers are in ardent pur- to support the joint developmakers. The foundation is
suit of Arab money. David ment of the Middle East in
based in Iran and is named deployed their "oil weapon' Rockefeller, chairman of the such areas as food, education,
against the West; in the course
after the Shah, Mohammed Riza 0 f the October'war against Chase Manhattan Bank, has housing, and desalinization.
On their side, the Arabs have
Pahlevi. 'Demolition of the Israel, the fall-out from the in- concluded a deal with the
buildingn was recently begun duced energy crisis is still strik- Saudis in which Chase will set up their own banks and
manage $200-million in Gov- joint ventures, especially with
to clear the site for the con- ing the world economy.
ernment funds for investment. the French, and are using them
The quadrupling of oil prices
struction of a 34-story multiThe Philadelphia Fidelity Bank as a vehicle to move part of
use tower that will include an by the Organization of Petro- has bought 80 per cent of their funds West.
Iranian cultural and commer- leum Exporting Countries has Lebanon's largest bank, the
Hundreds of foreign banking,
cial center. The tower project hurt a broad range of industries Banque de la Mediterran£e;
brokerage and investment inhad been originally planned by from autos to air lines to pub- Irving Trust is taking over an- stitutions in financial centers
lic utilities.
. .
the former owners who had
other.
all over the world are waiting
abandoned it when the office Worldwide inflation has been The First National City Bank for the truly massive flows of
intensified. An enormous transspace market in the city be- fer of wealth to the Middle East of Chicago is opening a branch petrodollars to come, but so far
came glutted.
in Dubai, and the Continental the flows of Arab money have
has begun—the equivalent of a
^Several Kuwaitis paid $27- massive tax increase on tihe Bank of Illinois reportedly is been less than expected.
million for a large property on rest of the world. Interest rates about to buy a Bahraini instiA Lag In Payments
"the' Champs Elysees in Paris, have been forced to record tution.
One reason for this is that
where they will build a large levels, everywhere, squeezing The First National City Bank
luxury office and bank building Stock brokers and investors, of New York — which ranks the payments for oil from the
to be called the House of and threatening the solvency of with Chase Manhattan and big international oil companies
many busineses dependent on Morgan Guaranty as the big- have not yet been reaching the
.Kuwait.
gest American holders of Arab Middle Eastern oil-produting
f i n early March, 1974, in ready credit.
The combination of soaring Government funds — already states in sizable amounts.
H one of the moves that has most,
^caught public attention, the oil bills, inflation and huge has branches in Bahrain, Dubai, Major oil companies such as
^Kuwait Investment Company shifts of funds jeopardizes the Abu Dhabi and Quatar. and is EXxon, Mobil and Gulf norbought Kiawah Island, 15 miles balance of payments and cur- the only foreign bank in Saudi mally pay their bills with lags
'South of Charleston, S.C., for rehcy of many countries—in- Arabia. Chase is setting up a of three to sue months. The
»$17.4-million in cash and are cluding some of the poorest, branch in Egypt—in Aswan, of Persian Gulf producers have
-planning to develop a $100- such as India and Pakistan—of all places—despite the coun- not been pressing for early pay! million residential resort there. many countries and endangers try's nationalized banking sys- ment. For the moment, thereThe same company put up $10- the stability of the entire world tem. Manufacturers Hanover fore, their funds are still piling
\!million, half the equity, for a monetary system.
Trust of New York has an 18 up in the oil-companies' own acj-downtown Atlanta center that
The quest is on for monetary per cent interest in Beirut's counts. Bigger transfers will
will include a Hilton Hotel and security—in the oil-producing Arab Finance Company, which come within the next few
[•a. shopping mall.
states as well as among the oil is 56 per cent Arab owned. months.
" f Many other real estate con- consumers. The use of the oil The Bank of America is exA second reason for the
• cerns are looking for Arab weapon by the Arabs, far from panding in the Middle East, limited visibility of the Arabs'
money. Benjamin V. Lambert, causing a counterattack by the with a 30 per cent share in new wealth so far is that a
president of Easdil Realty, an Western powers, has set off a the Bank of Credit and Com- great deal of Arab money has
affiliate of Wall Street's Blyth, race in business, financial and merce International, set up in been flowing to the Soviet
Eastman Dillon, says he thinks government circles for access Luxembourg in 1972 with Arab Union, in payment for armaMiddle East oil states will put to the billions of "petrodollars"
ment furnished to Egypt and
about $l-billion into American flowing to the Middle East. That partners.
Syria for the war against IsThe American Express
properties in the next two flow has been estimated as
rael. The Arabs — especially
years. But he disputes claims likely to exceed $80-billion in die East Development Company the Saudis — bankrolled the
that the Arabs may invest five 1974 alone and to reach a cu- which helped a large British Egyptians and Syrians,-and are
to ten times as much, asserting mulative total by 1980 of half insurance brokerage company still paying off their arms bills.
that they are nervous about a trillion dollars in investible buy into a Saudi Arahian in- The Russians have been eager
surance company, is joining
exposing themselves too much funds.
with Japanese and other Amer- to get dollars to meet their own
. and having their assets frozen
Yet one of the critical mys- ican institutions to set up a' external obligations—especially
by the United States Governteries of the moment is where merchant bank to invest in to the Americans for the huge




252

Meanwhile, they are eagerly ernments
1973 wheat deal.
in the Eurodollar a timely adjustment will take
Thus, Soviet supplies of trying to screen the vast num- market this year will reach place.
weapons to Egypt and Syria ber or projects, at home as well about $30-billion. Britain has economists as Prof. Richard
announced that it intends to Cooper of Yale and Prof. Sidwere essentially paid for by as abroad, open to them.
higher oil prices charged in the The greatest single share of borrow $2.5-billion to help
ney Rolfe of Long Island UniWest by the Arabs. The Saudis, Arab money seems to be going cover its oil deficits. Italy will versity feel, the world needs
Kuwaitis, and Libyans have into the Eurodollar market — be after $2.2-billion—if lenders an international central bank
been shipping money to the dollar deposits in banks abroad are willing to give the shaky to serve as a lender of last
Soviet, who transhipped some —and into foreign exchange, Italy Government that much. resort, should some major naof it back to the United States. especially West German marks, France is expected to borrow
tional
financial
institution
European sources estimate that which helps to account for the $2.3-billion. The Philippines,
the Arab payments to the Rus- superstrength of the mark.
Spain, and Denmark are ex- crack. The danger is that, if
sians have amounted to nearly For the time being, the Arabs pected to borrow nearly half a there is no prompt bail-out,
$5*billion.
are staying' liquid. Such long- billion dollars each, and a siz- there could be an extinguishment of money and credit that
Middle Eastern money is term investing as they have able group of other countries ptfrkf^bring depression in its
also being used in growing done in Europe has gone into will seek smaller amounts.
amounts to increase imports gilt-edged securities in London Including both prmrte I
from Western Europe and and into West German bonds mblic borrewfegSjiJEaHtiSollar Others believe that such
Japan. In Europe, West Ger- and they have reportedly been oans thi^yeir-are forecast to fears are exaggerated, and that
many appears to be reaping buyers tjf gold. They have also total $40-bilHon—about double the highly developed internathe biggest gains in trade with panted millions in longer-term last year.
tional money markets will au- '
the Araos.
time deposits, rangingfromthyae ''" The resource-poor developing tomatically take care of the
Much oil money is likely to to 10 years. New Yorfcjttdfces countries, such as India, Bang- recycling of excess funds flowgo for increasing imports of say they have stayed out of ladesh and Pakistan, have been ing to the Middle Eastern states
armament.
United Stater "Treasiiry bills. thrown into desperate straits back into the normal channels
Iran has spent about $4- Howeveft Venezuela—a benefi- by the increased oil price, and
billion in the last half dozen ciaiy of the quadrupled oil price regard increased loans or aid of the world monetary system.
years, especially on American —has been a heavy buyer of from abroad as a life-and-death If these moves are not
enough to bring the extraordiaircraft and British tanks. Brit- United States Treasuries.
matter.
ish tanks have also been going The Arabs, American observ- Economists of the World nary new situation down to
to Saudi Arabia, Iraq and the ers agree, are nervous about Bank have estimated that, on manageable proportions, there
Gulf States. The French have jutting too much of their hold- the basis of an $8.65 price per are also the possibilities that
been selling aircraft and sur- ngs into dollars. They have barrel of oil, the poor develop- the Arabs will make matters
face-to-air missiles to Libya >een asking Washington for ing countries will require an easier themselves — by lowerand Kuwait, and have re- guarantees against further de- additional $9.4-billion in capi- ing prices, or increasing their
portedly just agreed to sell valuations, but the Treasury h tal to cover their external pay- imports and their foreign aid
$150-million worth of missiles, refused to give such guarantees. ments gap. The Arabs and — or the countries that conmortars, ammunition and other Some critics feel that the Unite Iranians have indicated that sume oil will move to buy less,
from
producing
equipment to seven Arab coun- States should be prepared to they will cover some fraction especially
countries that will not use the
tries. The Soviet Union has
of this but are ambiguous on money productively.
been the big supplier of mili- sell bonds to the Arabs, de- how much.
Or the West might seek actary goods to Egypt and Syria, nominated in riyals or othe
but the Egyptians are in Middle Eastern currencies, And, overwhelmingly, it is commodation with the Arab oil
process of switching to United which would assure repayment Arab money that these borrow- producers on thefr own politiStates and other Western without loss of value. This has ers will be taking. As one New cal terms. Says Professor
been done in the past, but only York banker puts it, "all the Oweiss: "The United States
sources.
longer-term money in the Euro- should take another look at its
with major currencies.
Thus far, the Arabs are takdollar market is from the Mid- foreign policy and at the right
Dollars Still Dominant
ing their time in making longdle East."
of Arabs in the area. It should
Even without guarantees,
range investment commitments.
Immediately,
relaProf. Ibrahim M. Oweiss of much of the Arab money going tively moderategiven the Arab also take another look at its
flow of
Georgetown University says into the Eurodollar market is oil money into capital markets, true economic interests. If the
that they "are studying all likely to find its way to the the heavy demands of govern- United States and the Arabs
prospects, and seeking to find United States anyway — direct- ments, caught in a balance-of- can build up cooperation and
mutual respect, then Arab
on their own what investment ly from the Middle East or in- payments
and of private
demands are open, to them." directly via Europe — given the borrowers, bind,by inflation and money will flow into the United
hit
Somee outsiders criticize them still dominant international role urgent cash needs, interest States for investment."
for having no "system" for of the dollar and the size of rates are being forced up to Some- observers feel this is
a more subtle and dangerous
evaluating investment projects; the American capital market.
cent and higher,
All countries that purchase 10 per Europe, although a here form of blackmail than the oil
they are short of expert anin
bigalysts, economists and plan- oil are strapped for funds to and flow of Arab money into embargo, one that poses serious
pay the bill this year. The oil ger capital markets in coming danger for the survival of Isners.
the
Professor Oweis£ a native of squeeze is intensifying the de- months is expected to ease in- rael Others think, however,
Egypt, feels that the Arabs are mand for Eurodollars on the terest rates next summer and that in the long run improved
in no hurry because of the lag part of nations threatened with prvent the situation from be- relations between the Arab
world and the United States
in collecting the oH funds due unpayable balance-of-payments coming critically tight.
are a precondition both of
them; he suggests that the lajg deficits.
will last another »ix or seven Financial experts estimate However, not all money-mar- world political and economic
'
months, stretching into 1975. that total borrowings by gov- ket experts are confident that stability.




wk*
ae

i

253
EUROMONEY

A p r i l 1974

Oil money and tlie markets

W as» month the markets started to ice the l i m early
of what the new oil surpluses might mean.
We don't know whether it was a switch of oil funds out
of the dollar that triggered off the currency's weakness
towards the end of the mortth; but we can be pretty
M R tint it was a flow of oil funds into sterling that
brought the rate from S2-I6 to $2-36 between midJanuary and late March. Certainly it was not confidence
in the economy that did this.
There is some debate whether the flow of funds into
sterling was mainly oil companies buying the currency
in Older to pay their royalties (much Middle East oil is
still invoiced in sterling), with these funds not being
switched out of sterling by the new holders; or whether
the flow was more a straightforward placement of royalties previously earned. It must be a bit of both; the
question is one of degree.
But we do know that there has been steady buying of
gilts since mid-January by Middle Eastern interests,
sometimes on a very big scale. On two days towards the
end of last month £80 million was bought, while total
purchases of U K Government securities by oil producers
this year may already have reached £500 million. The
gilt purchases are the main example seen in London of
the producers investing medium-term—in this instance
mainly in five- to seven-year maturities. Elsewhere
shorter maturities seem to have been favoured, with
some funds (apparently from private Middle Eastern
investors) being placed in CDs.
Evidently, too, substantial funds have been placed in
US Treasury bills by the New York Fed, acting for
Middle Eastern government agencies like the Saudi
Arabian Monetary Agency.
Aside from some publicized properly purchases—
for example, by Kuwait on rhc Champs-£lysees—that is
about all that is known. There has not been much longterm placement of funds, there has been virtually no
investment in equities, hardly any direct investment.
The Arab funds coming into the Euromarket have been
largely from Arab banks (in the medium-term market)
and private individuals (in the Eurobond market), not
from official sources.
So it means the pressure is still on the producers
to do something other than pile up short-term paper,
which offers them no real return at current inflation rates.
What docs it mean?
This is pretty thin evidence to start drawing conclusions about the implications for the financial world of the
oil revenues, hut it does seem worth making a few points,
if only because of the scale of the funds in question and
the fact that these will be a major (if not the major)
influence on exchange and interest rates for several
years. Besides, no better guideline of what will happen
exists.
First the parochial part. As far as Britain is con-

cerned there are, m fact, very dear lessons. The breadth
of the London market gives the country a real advantage
in attracting Arab funds to tide her over until she becomes a major oil producer herself. London, New York
and perhaps Paris ire the only markets where funds
on the scale accruing to the oil producers can be placed
without sending the market through the roof. Secondly,
the guarantees now given to official holders of sterling
make sterling, in effect, a secure currency. The fact that
this country may see a steady (and perhaps embarrassing)
rise in>the currency coinciding with a continued awful
current account deficit has been pointed out already.
It may even be that Britain will be able to cover the nor.*
oil—as well as the oil—deficit from capital inflows
without needing the official $2-5 billion borrowings now
negotiated and the others in the pipeline.
For the world as a whole the lessons are less bbvious.
Certainly the influence on exchange rates will be massive
if the impact on sterling is anything to go by. There is
no evidence that the oil producers will use their currency
holdings as a potential weapon; nor even is there any
evidence that they will pursue an active foreign exchange
policy, switching between currencies to try to maximize
their return. Not only do they not need to play this
game; they probably could not, as there would be no
one playing against them on the other side. Since'central
banks can sit out the dance by floating their currencies
the days of the one-way bet on the exchanges are now
over.
But even the oil producers'straightforward investment
policies are bound to distort currencies. It would be
extraordinary if their investments tallied precisely—
currency by currency—with their earnings. For this to
happen, countries which were more successful at exporting to the oil producers would have to take a smaller
share of the producers' investment funds. This, seems most
unlikely. If anything, the reverse will happen, with
countries with close political ties with the producers,
or which are particularly successful at exporting, getting
more than their share of investment funds. We have
just seen how one currency—sterling—can move i r
quite the opposite direction to what might be expected
on economic and political grounds. Such movements
are bound to be repeated by other currencies, with the
French franc as an obvious candidate.
If this is correct, the idea of centrally planned distribution of the oil revenues, via the IMF. lakes on further
attractions. The cynical view of the Fund's plan is that
it puts the Fund back in business alter floating rates had
reduced the need for its services. This is true enough, if
unkind. But the Fund's plan docs provide the muchneeded mechanism through which the distortions
of the market's redistribution of oil revenues can be
counterbalanced. This job hus to he done; and no one
has yet come up with a better way of doing it.
Euromoocy April 1974

3 7 - 2 1 1 O - 74 - 17




TK: American
KCOIKMUIC

PAPERS A N D

Rev1CW

PROCEEDINGS
OF

TT1 F

F.i rh: >-(/x: i Annua!
OF

AMERICAN




THF

I ( ( ) \ ( >\1 K

MAY

Meeting

VFl

ASSOCIATION

255

Politics, Economics, and World Oil
By M . A . A D E L M A N *

Zen Buddhist monks used to torment
novices by asking: "What is the sound of
one hand dapping?" That sound has become deafening in recent years: the official
predictions that because world oil consumption will increase, oil must grow more
scarce and the price must increase. But
scarcity is the pressure of demand upon
supply. To omit either element is nonsense. They are united in the true measure
of scarcity, long-run marginal cost. The
only relevant question is whether, as consumption grows, society must keep putting
more or less into the ground to get out
another barrel.
Long-run marginal cost is mostly the
return on the investment needed to develop additional capacity. Failure to discover new flush reservoirs means ever
more intensive development of old fields,
hence rising development investment and
cost per unit, and rising prices. Anticipated price-cost increases delay development of some deposits, forcing more intensive work on the remaining ones, hence
higher costs. Thereby a development cost
increase serves as a distant early warning
signal of future scarcity, bringing it into
the present. Conversely, a stable (or declining) marginal cost means no greater
scarcity, and this is the actual case. For
the Persian Gulf, or even for the whole
world outside North America, real costs
have been sharply declining, and even if
they were now to reverse course and climb,
as is always possible, they would be a
negligible fraction of price. The current
flood of projections from here to eternity

is a pitiful and futile attempt to replace
the price-cost thermometer-thermostat,
but they are official truth. One projects
"needs" and "amounts available" to And
a "surplus" or "deficit" regardless of elasticities ol demand or supply.1
A Royal Dutch Shell executive sums up
the world oil market: "The underlying
situation of supply and demand remains
one of potential surplus. Yet the producing
countries manage to reap the rewards of a
sellers' market by creating a producer's
monopoly" (Geoffrey Chandler).

* Massachusetts Institute of Technology. I wish to
thank Harry J. Colish, Richard L. Gordon, Richard B.
Mancke, and Joseph L. Yager for comments on an earlier draft; errors are my own.

1
Elementary economics is ignored in grain as in oil:
the Department of Agriculture's Economic Research
Service was never consulted on the notorious 1972
wheat sale to Soviet Russia (A7 I T , Oct. 7,1973).




I. Monopoly
The multinational oil companies are not
junior partners but rather agents of that
monopoly, the members of the Organization of Petroleum Exporting Countries
(OPEC) (but not OPEC itself). Aside from
short-termflights,the price is now around
$8 and (probably) close to the long-run
profit-maximizing level set by the competition of substitute energy sources, as the
Shah of Iran has stated (New York Times
[Arrr], Dec. 24, 1973). The official truth
stated by Secretary of State Henry
Kissinger, that prices haverisenbecause
of a surge of demand against inelastic supply (NYT, Dec. 12, 1973), is in utter conflict with the fact of enormous supply
elasticity at cost of at most one-fortieth of
the current price.
The popular slogan "avoid overbidding"
suggests that oil prices have been bid up by
demand exceeding supply, which is untrue, and also betrays a misunderstanding

256
INTERNATiONAL ENERGY SUPPLY

pitulation—and ceased upon his request;
of what has been happening in 1972-73.
see M. A. Adelman (1973). He later exCurrent supply-demand fluctuated, with
plained that the threats had been made
occasional excess capacity. But the demand for crude for later delivery was in- privately (James Akins). This evades the
issue; threats are made in private so that
satiable because buyers knew prices were
going to be raised. Buyers had littk down- they may be denied, reinterpreted, or repudiated. And to say that the threats
side risk. If the producing countries delivered at the contract price, buyers would ceased is completely false in die light of the
numerous public statements which culmimake a speculative gain; if they delivered
nated in a formal OPEC resolution, issued
at the expected higher prices little would
just before the Tehran agreements, threatbe lost. Whereupon the OPEC countries
ening "total embargo"—and equally nuturned around and cited the rising conmerous threats since.
tract prices as a reason for raising their
taxes~-thereby putting a firm tax floor
The first triumph of blackmail anunder the higher prices and validating the
nounced more to come—as some were then
expectations. "Reasons" are as plentiful as denounced for saying. Our government
blackberries; what matters is the power to
"expected the previously turbulent world
raise the price of oil dose to the cost of
oil situation to calm down following the
(expensive) substitutes.
new agreement." In fact, the five-year
Tehran agreement lasted four months, and
Monopoly means control of supply,
after several "revisions" was pronounced
hence power to stop It, hence dependence
and insecurity. Food is more essential than "dead" vst fall when the Persian Gulf nations unilaterally raised prices. Perhaps
fuel, yet nobody is "dependent" on any
farmer or on all farmers together, because they were bored with what an oilman
farmers cannot act together to control and called "the charade of negotiations."
(NYTt Oct. 19, 1973.) But the American
if need be withhold their production. Our
policy maker may be right in claiming that
"dependence" on imports exists only bethe Tehran agreements "worked well"
cause of the cartel and (in the short run)
(Akins)—from his point of view. So also
the Arab majority bloc. Its history is exwith the proposal for preferential entry
tremely important: "those who ignore the
past are condemned to repeat it," and we into the United States for Saudi Arabian
oil—the most insecure source conceivable.
have already repeated it once. The key
words in that history are threats by the The State Department was "enthusiastic"
producers, and collaboration by the con- (Oil and Gas Journal [OGS], Oct. 9,1972),
for reasons not explained. Nobody can
suming nations, especially the United
States. The threat of an embargo gave the doubt that its "exaggerated talk of an
energy crisis greatly strengthened the barcartel its first triumph: the Tehran
gaining power of the Arab states" (Petro"agreements" of February 1971, whose
leum Press Service [PPSJ Nov. 1973).
expected and actual effect was to raise
prices at a time of slack demand. The
II. Shooting War and Economic War
documented record of the 1970-71 events
Middle East politics, specifically the
shows that only after American-sponsored
Arab-Israel tension, have had no effect on
capitulation to producing country dethe price, and a Middle East settlement
mands in January did anyone dare voice
public threats. The American policy maker will do nothing at all'to keep the price
did not blush to tell a Senate committee
from increasing to the monopoly level.
that threats had been made be/ore the ca- The producing nations will take what they




257
AMERICAN ECONOMIC ASSOCIATION

"much" too high for Saudi Arabia's good,
can get. The monopoly revenues make
twenty MBD is catastrophically too high,
peace unlikely. (See below.)
and we will owe them three times as much
The shooting war and economic war
or more in 1980 than we do now. To keep
waged by a subgroup of the cartel—the
the oil lowing, we will impose a just peace
Arab oil producers—were invited by rein the Middle East this year. Next year it
peated American statements, of which the
will have to be even more just, and the
public record is probably only the tip of
year after t h a t . . . and so on.
the iceberg, and whose complete exploration would richly repay a Congressional
This official truth about needing to do
inquiry. The Saudis were told they were
something for Saudi Arabia, because it is
the last best hope of civilization, we had
not worth their while to expand output, is
to have their oil, and would they not
all implicit, never set down for analysis.
please produce it, even though it was not
But it appears to rest on two assungytkMss.
(we said) in their economic interest to do
(a) "Oil in the ground appreciates faster
so? No revenues were high enough to inthan money in the hank/' abbreviated
duce the Saudi government to agree to big OGMB. It is often embellished by saying
production increases; something extra
that the dollar has depreciated, and prices
must be done for them. (Wall Street on the New York Stock Exchange have
Journal [WSJ], Aug. 15, 1973; OGJ,
gone to pot, ergo, there is no place to
Sept. 10, 1973.) This was a self-fulfilling
invest. In fact the dollar may be an underprophecy. For if we believe it and are
valued currency, or payment may be in
willing to do something extra for the
another, and in any case the annual volSaudis, they are glad to demand it.
ume of capital formation in the developed
world (not to mention the total stock of
The buyer is asking to be had who tells
a seller, " I know you don't want any more existing purchasable assets) is many times
business but please just to do me a favor "the future revenues of even Saudi Arabia.
But let that go: OGMB is at best meaningwon't you sell me something?" There are
less without specific numbers. The current
few such buyers because they don't stay
price of Persian Gulf oil is about $8. If 8
in business very long. Not so in governpercent is a safe interest rate, then a barment.
Sheik Yamani, the Saudi Arabian petro- rel is worth holding) instead of a corporate
bond, for four years for an expected price
leum minister, recently asserted that berise to $11, and for nine years for an exfore the recent cutbacks, when Saudi
Arabia was producing eight million barrels pected price of $16. The price is not going
to appreciate indefinitely at 8 percent per
per day (MBD), "we were producing at a
much higher rate than what we should for year: it is not going to $32 in eighteen
our economy (Meet the Press [MP], Dec. years, nor to $64 in twenty-seven years.
But Saudi Arabian crude reserves are fifty
9, 1973). And that was a sacrifice on our
times current output, and can be greatly
part" It amounted to "losing money."
increased at negligible cost. They are held
Sheik Yamani says, without a smile, that
back in order not to wreck prices. OGMB
his government has been producing not
is an irrelevance in a noncompetitive marfor its benefit but for sweet charity. He
ket.
speaks as a man who expects to be be(b) Saudi Arabia (and others) will limit
lieved. But that's no wonder, for the
United States Government was saying this their oil revenues to what they "need."
This means—if it means anything—that
publicly before he was.
they will hold back output short of the
But if eight MBD is a production rate




258
INTEXNATiONAl ENERGY SUPPLY

monopoly optimum, Le., the point where
it maximizes the present worth of their
assets. I t is an odd assumption, to say the
least, and quite unsupported. If King
Faisal acts like a true dynast to serve his
successors, family, retainers, friends, etc.,
the best way to insure this is to maximize
present worth.
We are better off with less talk of "need"
and a little thought about economics.
Saudi Arabia, like the U.S. Steel Corporation or the Texas Railroad Commission in
other days, has the usual problem of Mr.
Big in a cartel: find the combination of
price and quantity which will maximize
group profits—or more generally, best
serve the economic interests of the producers. They can fix the price and let the
price determine quantity ; or fix the quantity and let it determine price, but these
are only two routes to the same goal. No
blandishments will make them expand
output; anyone who thinks he can persuade them is merely stroking his ego and
reminding us howrightwas a Scottish professor of moral philosophy who Warned
against the "overweening conceit" of men
"in their own abilities." Repeated assurances of how badly we need them are simply taken as evidence of inelastic demand
and signal the monopolist that there is
greater profit in even greater restriction.
The drift of American policy was visible
in these statements that we owed Saudi
Arabia, to whom we sent as ambassador
the principal architect and defender of the
Tehran "agreements." His earlier statement that "a seller's market arrived in
June 1967" disregards three years' price
decline but reveals his belief that the
Six-Day War was a calamity to be reversed. He "think(s) the OPEC countries
should be granted substantial increases,"
in order to induce alternative energy
sources needed "to avoid an energy crisis
in the 1980's, or 1990's," a "crisis" again
assumed, never explained. Also, "price in-




creases will hurt America's commercial
competitors Europe and Japan," and
Saudi Arabian revenues would mostly be
invested in the United States (Economist
[Ec. J, Nov. 26, 1973).
Saudi Arabia "planned the Arab strategy for the [tm] Middle East War/'
both shooting war and economic war
(LeMonde \LMJ, Oct. 9, 1973; NYT
News of the Week in Review [NWR], Oct.
14,1973; OGJt Oct. IS, 1973; NYT, Nov.
10, 1973; see also NYT Mag., Nov. 18,
1973). King Faisal and Prince Saud
al-Faisal had stated they needed to put
pressure on the United States. But "the
US. can get along without Arab oil until
the end of the decade" (OGJ, Sept. 12,
1973). Therefore it was necessary to reduce total production deeply and deprive
others of more oil in order to deprive the
United States of less. A selective embargo
was taken seriously by our principal policy
maker but by nobody else (Akins 1973).
III. Surrender Without a Fight
The cutbacks have been a great political
success. We are right back to the 1930%
when European nations looked for a deal
with the aggressor in the hope he would go
jump on somebody else, and when German
generals opposed to aggression were discredited by the willingness of the Western
powers to give away other people's lands
and lives; so too the moderates among the
Arabs. For, confronted with the cutbacks,
the Europeans and Japanese stood clear
of the Americans, however dangerous that
was for them. More important, in my
opinion, was their inaction at home: oil
stocks were not spread over time by rationing, i.e., not used as a defensive
weapon to gain time wherein to carry out a
plan, but as a means of putting off the unpopular decisions to curtail demand. Most
important was European eagerness to collaborate with the Arabs rather than each
other. "Arabs don't have to police their

259
AMEMKAN ECONOMIC ASBOCtATfON

own boycotts. Sycophant nations are
doing it for them" (WSJ, Nov. 6, 1973).
The Common Market countries refused to
ship or pool oil resources, as requested by
the Dutch who had been picked out as a
special victim. Apparently the Dutch are
getting some covert help—but only after
they threatened to cut off natural gas deliveries to France and other nearby countries.
Japan had been more pro-Arab than any
large country but France, and had stood
aloof from other consuming nations, lest
they offend (Petroleum Intelligence Week!y
[PIW\, May 14,1971), only to find itself
accused of "odious neutrality" (NYT,
Oct. 18, 1973). Saudi Arabia was ready to
make new demands "because of their success in recent yean in enforcing a boycott . . ( W S J , Nov. 7,1973; NYT, Nov.
9, 1973).
A cut in British deliveries " . . . is dearly
causing embarrassment to the government,
which . . . had received assurances [sk]
from Arab countries.. . " (Piatt's Oilgram [POPS], Nov. 20, 1973). The
French government is embarrassed ova*
reduced supplies (NYT, Nov. 20, 1973).
Such governments are especially reluctant
to begin rationing because it would be an
"admission of failure," i.e., groveling did
not insure oil supply (PIW, Nov. 19,
1973; LM, Nov. 23, 1973).
The servility of consuming governments, playing the Abbe Alberoni to the
Arabs' Due de Venddme (see Luigi
Barztni), has made the original Arab demands of no importance. A weapon which
makes consumer nations shake like jelly
cannot be contained by a scrap of paper
enumerating Israeli security or Palestinians' rights, etc.—there are far bigger objectives now to be considered. Moreover,
Saudi money, to be multiplied many fold,
can procure more arms from many sources,
freeing the Arabs from whatever control
the Soviet Union might exercise. This




makes fresh wars likely if not inevitable,
especially when the Saudis begin shopping
for the nuclear weapons they can weH
afford. Already there is a semiofficial
Egyptian call for nuclear weapons, which
would cost only an estimated t l billion,
stimulated by "a high-level Washington
visitor" to Cairo (NYT, Nov. 24,1973).
IV. Economic Failure, Political Success
Yet the cutback failed badly to reduce
American supply. At its maximum (as of
December) it amounted to 4.7 MBD,
about 14 percent of aU oil moving in international trade. Hence had there been just
enough leakage and diversion to put us as
well off as oil importers generally, our import loss would have been about 14 percent. Now, for the four week* ending
November 16, our combined imports of
crude and products averaged 6J5 MBD.
Since the boycott date was October 17,
and Persian Gulf—U. S. transit time is
about a month, this amount measures the
pieboycott level of shipments. For the
next four weeks, through December 14, the
average was 6.10 MBD, indicating a loss
of about 450 thousand barrels daily, 7 percent of imports, about 2.4 percent of total
supply. The truly vulnerable place was the
East Coast's heavy reliance on residual
fuel oil, much from Caribbean and Canadian refineries which also ran some Arab
crude oil and might therefore be forced to
stop all shipments to this country in order
not to lose some supply. An Arab resolution of November 26 to cut off the Caribbean and other transshipment centers
(OGJ, Dec. 10, 1973) shows that by midNovember the Arabs realised their failure
and their resolve to damage this country
where they could. Yet on November 8 our
ambassador to Saudi Arabia had warned
that the plight of the East Coast would be
"critical" if Arab oil supplies were not increased "in a matter of days" (sic) (NYT,
Nov. 10,1973). This was wildly untrue.

260
tNTMMNATtQNAL MNUtQT SOFTLY

The Arabs' 25 percent cu^ack in their
production was scheduled originally to
keep increasing 5 percent per month until
Israel withdrew to her 1967 boundaries
and "the legal righto ol the Palestinian
people" were restored. But the Arab ofl
exporters1 meeting of December 26 reduced the cutback to IS percent, ignored
the two conditions, and let it be understood that the cutback would be cancelled
upon Israeli withdrawal from the west
bank of the Suez Canal (NYT, Nov. 26,
1973). Furthermore, the "friendly" nations (Britain, France) were guaranteed
Arab oil even in excess of the base amount
(September 1973), which means that their
previous imports of non-Arab oil are completely freed for the not-so-friendly (Japan) or the unfriendly nations (United
States, Netherlands).
To what extent this failure of the production cutback to reduce US. supply is
due to cheating by the Arab producers
and to diversion of non-Arab oil is as yet
impossible to say.
V. Monopoly Harmful to
Consuming Nations
Relief at this failure should not obscure
the fact that the oil cartel is very harmful
to American interests, (a) In 1974 customers, including us, will be paying out
well over |100 billion, and over 1972-30
cumulative the transfer to the producing
countries wiU be several times that. The
richer these nations are, the better they
can maintain an embargo to make supply
yet more insecure—as the Arab production
cutbacks remind us, (b) The world monetary system will be harmed by huge
amounts of liquid funds ready to move at
a moment's notice, not to serve the
holders' malice (the usual straw man) but
for self-protection. Controls on capital
movements to prevent this danger will in
themselves be harmful (c) Restrictions on
American imports, because of the expected




oil deficit, have already embroiled us with
our main trading partners in Europe and
Asia, not only because of John Connally's
bluster and bullying but also over the substance of our demand to get more than we
give (NYT, May 1G, 1973).
(d) The risk of mineral exploitation in
less-developed countries is much greater ;
concessions and contracts are now worthless. (e) The hope of a rule of law for the
world's oceans has gone by the board because of the hugely inflated artificial
value of any possibility of oil. (f) A vast
arms buildup is just beginning in the
Persian Gulf. Producers have billions
available and every little patch of barren
ground or barren seawater is actually or
potentially worthfightingover.
The arms buildup reminds us that although the oil monopoly will cost us dear,
there will be gains for exporters and for
contractors for construction, investment
management, public relations, etc. There
will be plums for many in the industrialised nations and crumbs for less-developed
countries. Those "working for the petrodollar,11 paid or enriched by the monopoly,
are highly influential. Moreover, each industrialized nation can hope that the burden will be borne by them in proportion to
their oil consumption, but that they will
get a disproportionate shaie of export and
investment business. M. Pompidou appears to have talked to King Faisal of little
else but French exports during their May
1973 meeting (LMt May 15, 1973); he is
now "shocked" that anyone thinks exports
have much to do with his Middle East
policy (LAf, Nov. 19,1973).
VI. Implicsrions for Policy
Only in the long run can we get the
cartel off our backs, and it will not be easy,
quick, or cheap. I t is necessary but no
longer sufficient to stop the oil producing
companies from being the vehicle for the
price-fixing agreement of the producing

261
AMS*KAN ECONOMIC ASSOCIATION

governments. (1) Expelling the companies
and losing their know-how would be a huge
waste of resources, harmful to all. But if
they simply produced (and developed and
explored) and were paid in money or a
modest share of the oil, the producing
countries would have to do their own selling and monitor thousands of transactions
all over the world. The companies have
managed the difficult task of determining
output shares because they have sold the
bulk of the final product; the producer
nations would inherit the task without
the means. Nothing in the history of the
trade suggests they would succeed; even
the tight cartel of the 1930's was eroded,
and it never faced an independent refining
industry.
A managing director of Royal Dutch
Shell has well said that in buying from producing countries the multinational oil
companies "have formidable advantages."
(See G. A. Wagner and A. Glimmerveen.)
Once they become "formidable" buyers of
crude oil rather than tax collecting agents,
the market will look considerably different from what it does today. The oil companies are a big gun pointing toward the
consuming countries, which ought to be
pointed the other way. Hence real nationalization is greatly to the advantage of
the consuming countries.
The producing countries may yet oblige
us, as did Algeria and Iraq, byfirstexpelling the companies and then inviting them
back as contractors or by doing their own
selling of most of their oil as "participation." This is good for the individual
country in the short run and bad for the
group in the longer run—the classic cartel
dilemma. It is imprudent to assume they
will be so helpful, but the chances of this
happening look better in late 1973 than I
expected a year earlier; see Adelman
(1973). Perhaps such prophecies will be
realized as those of Thomas R. Stauffer in
1970: "We conclude . . . that prices will




probably sink below the $1.15 level and
t h a t . . . non-concessionary oil will drive
out concerniontry oil/' The price-undermining effect of direct sale by the producing countries'natkmalcompanies("nonconcessionary oil") remains a l i y variable if the
consuming countries wanttomake it one*
The American government ought not to
force American companies into being contractors, since they would merely be displaced by European or Asian companies.
It must be done in unison or not at all.
By the time moat consuming nations
see their inteiests a bit more dearer, some
will have taken another step: put oil imports under quota, to sell the tickets on
sealed competitive bids. Any country
which wished to expand or even retain its
market in the United States would have to
share its gains with the Treasury. This
would not reduce the price of oil to the
consumer. There would be in effect a tax
on imported oil which would keep the
domestic price level high also. (In my
opinion a high energy price is desirable to
reduce pollution and congestion. Those
who disagree with this policy judgment
may yet prefer to have the money go to
the American not the Saudi government.)
If the producing countries succeeded in
coHusively fixing quota ticket prices, we
would be no worse off, but chances of success are small because it would not take
much cheating to fill the quota. Detection
of cheating would be difficult and might
be made impossible by Theodore Moran's
suggestion that prices in any given bid be
kept permanently secret. There would be
no way of knowing whether any country's
higher exports were due to its cheating.
The current price level is so much higher
than the cost of producing oil, even in highcost deposits—see Adelman (1972)—that
trickles, then streams of new supply in the
1970's are a foregone conclusion, and they
have been the bane of all cartels. Given
supertankers and superports, a barrel of

262
MTBMMATIONM. MNSMGY SUPPLY

oil anywhere in the world is a barrel everywhere, at a transport cost ol a dollar,
which is little compared to the producing
nation's profit. Only the shortage ol men
and materials keeps this potential from
becoming actual. But even now the producing countries are not deceived about
the "world oil shortage.'1 Saudi Arabia, as
mentioned earlier, tried lor preferential
entry into the United States, which only
makes sense when more people are trying
to enter than there are places to set them.
Venezuela keeps proposing worldwide prorationing. Iraq expelled the Iraq Petroleum Corporation from the largest oilfield
because they refused to expand output,
which under the new regime will have
doubled or tripled from 1972 to 1975.
When the consuming countries want to get
rid of the burden they can; but at present
there is no will, hence no way.
This brings us back to the dismal present and decisions to be made soon. The
Arabs have failed to cripple us; the Administration is trying to snatch defeat from
the jaws of victory to serve some grand
design not yet revealed to us. Our greatest
immediate danger lies in a super-Tehran
agreement for "cooperation" of producing
and consuming states, announced by a
flourish of trumpets on a TV spectacular,
with the same promise made by the same
people who brought us the first Tehran
that this lime "the previously turbulent
world oil situation" will really "quiet
down." The ambassador to Saudi Arabia,
who in 1972 told the Arabs that it was in
their interest to curtail output, told us that
for lack of oil our condition would be
"desperate" by 1976, (Adelman 1973) and
thought the Tehran agreement had worked
well, etc., has suggested a world commodity agreement to set oil prices and ensure
availability (NYT, Apr. 16, 1973). It
would be a one-way street, preventing independent action by consumer states to
promote price reductions. But if the mo-




nopoly holds and the price can be rigged
higher, up it will go. A lew weeks ago, in
proclaiming the Tehran agreements dead,
Sheik Yamani supplied a classic formula:
"We in Saudi Arabia would have liked
to honor and abide by the Tehran agreements, b u t . . . " circumstances had
changed (Middle East Economic Survey
(UEES) Sept. 7, 1973). Sheik Yamani
may one day say that he and his colleagues would have dearly Umd to honor
and abide by the Kissinger agreements,
but. . . circumstances, etc. The supersubtle diplomat is no match for the fellow who grabs what is in his reach, then
asks if you want to fight to get it back.
But it may not even be necessary. For in
waving proudly an "understanding" with
Saudi Arabia to let output increase to 20
MBD or whatever, our government will
not realize that there is no meaning whatever to an agreement which does not
specify both quantity and price. For i!
Saudi Arabia's interests are better served
by producing less, it raises price to where
there is less demanded.
As regards supply outside this country,
a sound world oil policy lor the short run is
to do and say nothing. There are some
virtues in necessity. Without a world
agreement, each producing nation will seek
to maximize its own profit. If Saudi Arabia
will for years play the statesman and hold
back on output expansion, we are no worse
off; if they retaliate against anyrivals,we
have gained enormously. Similarly with
the consuming countries: some of them will
recover from their panic and will begin
inviting producers to make some special
deals for disguised low prices, to put the
cartel on the slippery slope. This country
needs not ordnung but disarray in the
cartel. But we cannot by statesmanlike
action cure the nonexistent world oil
shortage.
However, there are some matters where
action may help. Sheik Yamani warned in

263
AMKJUCAN ECONOMIC ASSOCUTfON

early 1973 that any attempt at consumers'
sell-defense meant "war," and "their
[Le., our] industries and civilization would
collapse" (Piatt's OOgrarn News Service
[PONS], Feb. 22,1973). By November 9,
he and his colleagues "are letting the word
out that the present cutbacks in oil output are the limit." The reasons mentioned
are possible Western responses: food,
manufactures (including armaments), ami
military action (ATF7\ Nov. 10, 1973).
They who had talked ol "war" and suited
the action to the word understand the
language. We had better learn it quickly.
There is as yet no weakening in our infatuation with Saudi Arabia, to whom we
seem resolved to return bounty for evil
done to us. In late November "a very high
official in the Nixon Administration who is
a policy maker in this area" told a reporter
"he feels King Faisal... at the last minute would prevent any serious economic
harm from being done to this country
because he is at heart a friend oI the
% United States" (MP, Nov. 25, 1973).
Meanwhile, King Faisal is "angry with
Mr. Sadat" of Egypt for being too cooperative with the Americans (Ec., Nov. 24,
1973). Without doubt the Saudis feel they
have every right to be hostile to the United
States, and it is not for an American to say
they are wrong. But our safety demands
that we recognize winch way is down.
The Saudi connection, which our government values so highly, is no asset but a
heavy liability. The profits of Aramco,
whose protection is a perfectly legitimate
national objective, will be kept at a level
needed to secure incremental investment,
and can scarcely amount to a billion dol-'
iars annually even if Aramco reaches
20 MBD. If the Saudi investment portfolio reaches $100 billion, a 0.1 percent per
year management fee is the most the management company can reasonably expect.
This is less than the extraordinary expenditures already forced upon us this year by




King Faisal's shooting war, and it is insignificant compared with the losses of national product here and throughout the
world, due to the oil embargo: 1 percent of
GNP lost is $13 billion per year.
In war one seeks not to be strong
everywhere, but only at the stiatqgk
points. For the non-Communist world the
decisive point is the United States. This
country should immediately take steps to
separate itself completely from Arab oil
•aarces.Once we are beyond the reach of
oil cutoffs, they can no longer pressure us.
Then there is no profit in tormenting
Europe and Asia, and risking retaMation,
as an indirect means of pressuring the
United States.
Our overseas imports before the cutback
were about six MBD. Future imports wffl
for a time be larger, but will come nowhere
near the ten or more MBD freely predicted
a short time ago, because of the drive for
greater self-sufficiency. The four largest
non-Arab oil exporters—Iran, Venezuela,
Nigeria, and Indonesia—already produce
thirteen MBD, and their production will
grow substantially, Iran alone being a good
bet for 10 million MBD in a few years,
especially if we act. (Our current ambassador to Saudi Arabia insisted in September
1972 that Iran had been interested in production increases, but no longer (OGJ,
Sept. 25, 1973), which was contradicted
by previous public evidence (OGJ, Aug.
14, 1973, Sept 4, 1973, Sept 13, 1973),
and also the expansion program decided
early in 1973.)
Two routes ought to be examined. One
is to bar or penalize imports from countries
declaring embargoes against us or pressuring third parties to embargo us (see above).
Or the United States could make contracts
with any countries desiring preferential
entry, in return for which they would
guarantee certain minimum amounts. We
would of course have to promise—and
keep our promise—to pay the very high

264
OmUUiAT/ONU

MNMMOY supply

address, Institute of Petroleum, 27, Jan.
1973.
G. F. Keanan, "And Thank You Very Much/'
New York Times, Op. Ed., Dec. 2, 1973.
T. R. Scantier, "Price Formation in the Eastera Hemisphere: Concessionary versus
Non-Concessionary OB," in Zuhayr Ifikdashi, et aln Continuity and Change m the
World OH Industry, Beirut 1970.
G. A. Wagner and A. Gtimmcrreen, Presentation to a meeting offinancialanalysts
in The Hague on Oct. 4,1973.
American Petroleum Institute, Weekly Statist.
Butt. (API).
British Petroleum Statistical Review of tke
World Oil Industry (BP).
Bureau oj Mines, monthly releases (BP).
Economist, London (Be.)
LeMonde (IM).
REFERENCES
Meet tke Press, NBC Television (MP).
ML A. Adelman, The World Petroleum MarMiddle Bast Economic Survey (MEES).
New York Times (NYT).
ket, Baltimore 1972.
"Is the Oil Shortage Red? DO Com- New York Times, News of tke Week in Repanies as OPEC Tax Collectors," Foreign view (NYT NWR).
Policy, 9, Jan. 1973.
OH and Gas J. (OGJ).
J. E. Akios, "THs Time the Wolf is Here,"
Petroleum Intelligence Weekly (PIW).
Foreign Afairs, 51, Apr. 1973.
Petroleum Press Service (PPS).
L. BanM, The Italians, 1964.
Piatt's OOgram News Service (PONS).
G. Chandler, "Some Current Thoughts on the Piatt's OQgrsm Prict Service (POPS).
Oil Industry," Petroleum Rev^ Presidential Watt Street Journal (WSJ).
world prices. But as shown earlier, this
price frill likely be in the neighborhood of
what it would cost us anyway to produce
at home from substitute sources. Richard
Gardner has embarrassed our government
by pointing out that Saudi Arabia has violated their treaty with us providing for
mutual most-favored-nation treatment
(NYT, Dec. 19, 1973). We need only tell
the Saudis their embargo on shipments to
us is henceforth permanent, their status
having been cancelled by their own act.
As George F. Kenaan, a respected
scholar and ex-diplomat, has *e& shown,
in saving ourselves, we save our friends
abroad, by making boycotts against them
unrewarding and therefore unlikely.




265

IMF Survey
March 18,1974




Aid from Oil Producers
Asked for Poor Nations
Fund Managing Director H. Johannes
Witteveen and W o r l d Bank President
Robert S. McNamara met on March 12
with Inter-American Development Bank
(IDB) President Antonio Ortiz
African

Development

Bank

Mena,

President

Abdelwahab Labidi, and Asian Development

Bank President Shiro

Inoue.

The meeting was held at IDB

head-

quarters in Washington to assess the
impact

of

the

current

international

energy situation on the economies of
developing countries and to encourage
a flow of funds from the oil producing
countries to the developing world.
The

participants

recognized

that

sharply higher oil costs represent not
only a heavy drain on the external payments of the developing countries, but
also a threat to the orderly execution
of their development programs and to
their economic growth.
The

developing

countries

urgently

require additional external aid,

both

short-term assistance to avoid harmful
adjustment measures and long-term financing to sustain their development
efforts, and a considerable part of this
assistance should be made available on
concessional
agreed.

terms,

the

participants

They re-emphasized that the

advanced countries have a continuing
responsibility

for

providing

aid

re-

sources. At the same time they pointed
out that the oil exporting

countries

now have a greater capability to share
the burden of the additional aid effort,
both through their o w n channels and
through cooperation with existing international institutions.
The participants indicated that the
expertise and experience of their institutions in channeling resources

to

the developing world give them

the

capacity to play an important role in
the international aid effort.

However,

to

additional

perform

this function,

funds are required, and a special effort
is needed to mobilize such resources
from the increased financial assets of
the oil exporting countries. The heads
of the five organizations agreed to continue to coordinate their actions in light
of the new financial requirements.

266
I

f




r

f

f

c

^

A

p

r

i

l

8,1974

A financial agency to supervise the flow
of Arab funds among the various Arab
countries has been suggested by El Sayed
Hassan Abbas Zaky, Economic Advisor to
the United Arab Emirates. The agency
could help Arab countries cover the deficit in their balance of payments and
could also give long-term facilities to
Arab banks so that they might give
medium-term loans to finance local Arab
schemes* In addition, the agency would
reinforce the potentialities of existing development funds in Abu Dhabi and
Kuwait as well as the Arab Development
Fund by granting loans to these funds.
The Egyptian official said that in spite of
the current large increase in oil revenues,
Arab countries suffered unique problems,
foremost among them being the absence
of machinery for channeling Arab funds
to Arab countries in need of them. He
advocated the establishment of a market
for Arab capital and the early institution
of the Arab Payments Union to serve as
a nucleus for an Arab monetary market.
He added that the idea of issuing an
Arab dinar should be revived, and suggested the dinar be issued initially in
Arab countries on the Persian Gulf, and
then introduced gradually in other Arab
markets.
Egyptian

Gazette,

C a i r o , M a r c h 22

267

T H E OECD OBSERVER

February

1974

CONSEQUENCES OF
THE OIL PRICE RISE:
The Need for International Aetion
Highlights from the speech of OECD's Secretary Generals
Entile van Lennep} to the Consultative Assembly of the Council
of Europe 23rd January 1974.

F

or the OECD countries three main types of problem
result from the very sharp increase in oil prices. One
problem is that a new twist is given to the price-wage
spiral. There is the likelihood that, in the immediate future,
the price increase will rise beyond last year's 10 per cent rate
into the 'teens. The longer that anything like a double-figure
price rise is continued, the greater the danger that inflationary
expectations will become engrained in our thinking and in our
economic behaviour.
This means that a renewed attack on the problem of inflation,
using all the available weapons, must be made by OECD countries acting simultaneously, for when inflation is so widespread
a phenomenon as today, the efforts of individual countries are
bound to be frustrated unless they are matched by equal efforts
on the part of all.
Another problem is the danger of an unwanted contractionary
effect on the general level of economic activity and of employment. Income which would have been spent by OECD residents
is being transferred to oil-producing countries. If they spent
the whole of their increased income on purchases of goods and
services, there could be no threat of recession. But for a
number of them it is certain that, in the short-run, they will
not be able to step up their expenditure in line with their incomes.
Moreover, sharply rising oil prices may cause a general climate
of uncertainty in OECD business circles.
These potential contractionary effects on activity and employment may, at least in part, be offset by other expansionary
elements. The appropriate inter-governmental bodies in OECD
keep the prospects for demand and employment under continuous
review, and discussions in the early weeks of 1974 suggest that
governments are alert to the possible depressive effects of the




energy price rise and to the importance of taking action to
support demand if and when appropriate.
A third problem area concerns the balance-of-payments. Higher
oil prices will raise the import bill of OECD countries: a figure
of around $50 billion—which already allows for some economies
in the use of oil—is an approximation of the higher bill for the
first year. In normal cases, a rise in the bill which an OECD
country has to pay for its imports could be expected, rather
quickly, to be followed by an equivalent rise in export possibilities. But because the oil-producing countries cannot in the
short run be expected to use more than a small fraction of their
additional earnings for stepping-up their own purchases, OECD
countries will be unable, as a group, to raise their exports in
step with their import bills. For this reason, OECD countries,
taken as a whole, are going to have to see their balances of
payments swing from a normal sizeable surplus on current
account to large deficit. For illustrative purposes only, instead
of earning a current account surplus of around $10 billion in
1974, OECD countries taken as a whole could go into deficit to
the tune of $30 billion. If individual countries seek to escape
this swing, it will only mean that the balances of other OECD
countries have to swing further into deficit.
This swing does not, of course, mean that the area will have an
overall deficit on the balance of payments and a net loss of
reserves. The oil-producing countries will certainly in one form
or another, invest their unspent earnings in the money and
capital markets of the OECD area. Nonetheless, a change of
this order of magnitude in the structure of the OECD's balance
of payments can only be digested if governments take a highly
rational and sophisticated view of the position, and convince
markets that this is going to be so. If countries struggle to
offset the impact which higher oil bills have on their current

268
balances, we could witness a spiral of competitive—and mutuallyfrustrating—devaluation, deflation and trade restrictions—the
disastrous spiral which we witnessed between the two World
Wars. Governments could take this path through a simple
failure to accept that, for some time to come, current account
deficits will have to be the order of the day.
More likely, perhaps, will be a fear by individual governments
that they may be unable to attract, to their own shores, a sufficient part of the return flow of capital from oil-producing countries to offset their current account deficits. A further danger
may be that O E C D countries, in the attempt to ensure that they
attract a sufficient share of the return flow of capital, will engage
in a competitive escalation of interest rates that would raise the
cost of credit to levels inappropriate from the point of view of
the general expansion of activity.
To avoid these dangers emanating from the changed balance of
payments situation witt require an important measure of
agreement, inside the OECD, as to the aims which each country
should now set itself on current account. Only thus shall we
escape the danger of seeing OECD countries scrambling, individually, to preserve or create for themselves current account surpluses which the area as a whole cannot, over the next few years,
achieve. The task of seeking agreement on individual balance
of payments aims is not new to OECD. We went through a
very similar experience in 1971, and without the understanding
reached between countries on that occasion, largely through
OECD's Working Party No. 3, I do not think that the Smithsonian exchange rate agreement, and the further devaluation of
the US dollar in 1973, would have been possible.
But the adjustments that now have to be accepted, are far bigger
than the ones we had to negotiate at the time of the Smithsonian
realignment. And in the present case, questions of aims on
current account cannot be discussed without, at the same time,
discussing what is going to happen to the capital which will be
flowing back from the oil-producing countries. For we cannot
expect an individual OECD country to resign itself to a rather
sizeable current account deficit unless it is reasonably confident
that it can obtain a sufficient capital inflow to finance it.
An urgent task is, therefore, to consider what steps need to be
taken to enable the very large amounts of capital that will henceforth be flowing out of oil-producing countries to be made
available in the geographical locations—and in the forms—that
will most facilitate the continued expansion of world trade and
employment. Stable conditions in the international monetary
system—which are in the essential interest of all countries—are
unlikely to prevail unless the vast capital sums flowing from
oil to non-oil countries are invested in a reasonably stable form
and unless they are channelled directly or indirectly—through




the markets or by other means—to recipient countries in rough
proportion to their external financing needs. It is encouraging
that discussions on this problem have already begun.

Immediate Problems
for the Developing Countries
One obviously important group of countries to whom part of
these funds should be channelled are the less-developed countries
who are not, themselves, producers of oil. The facts speak for
themselves—and in an alarming fashion.
These poorer countries are likely, in 1974, to find their oil bills
put up by something near $10 billion as a result of the recent
price rises. This would just about wipe out the whole of the
official development assistance that the OECD area makes
available each year to these countries. For some developing
countries, the higher oil bill will amount to about half their
existing earnings from exports.
The new conditions faced by developing countries call for three
major policy imperatives:
• First, existing official development assistance programmes
must not be slowed down or reduced. This would worsen the
difficulties of developing countries and would only add to our
own problems.
• Secondly, the developing countries that are worst hit will
need special help, largely in the form of cheap loans, to enable
them to adjust their economies and balance of payments to the
additional burden.
• Thirdly, the new problems also present new opportunities.
There is going to be a substantial rise in world savings since
the oil producers will not be able to spend all their extra revenue.
It should be possible to find ways by which part of these savings
can be mobilised to accelerate economic progress throughout
the developing world.
Thus in the present situation, there are clear dangers of
uncoordinated policies which would lead to over-reaction both
to the inflationary and to the recession threats; of isolated moves
to compensate the impact on foreign trade of higher oil prices;
of cutting on development assistance thus aggravating the situation of non-oil producing developing countries; of going to a
sterile confrontation between oil-consuming and oil-producing
countries. Such policies would be both inadequate and self
defeating. What is required, on the contrary, is. increased cooperation at all levels to solve problems common not only to
the industrialised countries but to the international community
as a whole, including in particular the oil producing nations.

269
Longer-Term Problems
of World Energy Supply
The suddenness of the price change over the last few months
should not obscure the fact that both oil producers and oil
consumers have a common interest in a price for oil which
correctly reflects the longer-run supply and demand for oil and
alternative sources of energy.
Looking first at this question from the point of view of the
oil-producing countries, we should recognise that they themselves face difficult problems in the pricing of their oil.
In
particular, it would be wrong to describe recent decisions by the
oil producers as simply the actions of strong monopoly producers
who can fix the level of output or prices of their product without
concern for the future.
• First, the oil producers are having to exploit a depletable
asset. How fast, at any given rate of consumption, their oil
reserves will be depleted varies from country to country—and
this, in itself, may be a source of difficulty for the producers
when they seek a common approach to their problems. The
task of government in any traditional oil-producing country is
to ensure that its oil is traded on optimal terms. On the price
at which they sell their oil will depend their ability to raise the
living standards of their own populations, and diversify their
economies against the day when their oil runs out or is in less
demand. If the price is set too low, their incomes may prove
insufficient for their future needs—and some of them will see
their oil resources disappearing at an alarming rate. If the price
is set too high, they will enjoy great prosperity for a short while
—but the higher the price the shorter the period, because the
faster will be the action which their customers take to economise
on traditional oil sources and to develop alternative energy
supplies.
• A second very real problem for the oil-producing countries
is to find suitable forms in which to hold their earnings until
such time as they wish to use them. It is both in their interest
and that of the rest of the world that these investments should
as far as possible go to increase the productive potential of the
world economy. But at the rate at which these assets seem now
likely to accumulate, this may not be easy to achieve.
Now let us look at these same problems from the point of view
of the industrialised countries.
It should first be noted that
O E C D countries are important producers of energy. Indeed,
in 1971 about two-thirds of the energy consumed in the O E C D
area was produced from indigenous sources. Moreover, there is
much potential for future development. Although O E C D countries account for only some 10-20 per cent of estimated world

3 7 - 2 1 1 O - 74 - 18




reserves of crude oil, their reserves of all fossil fuels, including
coal, shale oil and tar-sands, probably account for the major
part of the world total, sufficient—at a cost—to meet foreseeable
needs.
The main question now before these countries is how fast they
should, in fact, develop alternative sources of energy. This is where
any rational person shou'.d see that the interests of the O P E C
countries and the O E C D countries really coincide. First, because
investment in alternative forms of energy is extremely costly, and
can have extremely damaging effects on the environment. Therefore, it is in the interest of O E C D countries not to move faster
in this direction than they have to. Second, because it is not
in the interests of the OPEC countries if the industrialised
countries were to embark on costly programmes for energy
diversification which might, in time, seriously reduce the earning
power of the O P E C countries before they have had time sufficiently to diversify their own economies.
The speed with which O E C D countries build up alternative
energy supplies will depend, essentially, on the cost of imported
oil in relation to the cost of the alternatives. If the cost, in
O E C D countries, of imported oil is well above the cost of comparable alternative sources of energy (in economic parlance, if
the substitution price is exceeded), a wild and wasteful scramble
for national independence through the exploitation of indigenous
energy resources will be set in motion with all the attendant
disadvantages to O E C D countries and oil-producing countries
alike. If, on the other hand, the price of oil is too low, there
will be a wasteful use of the oil producers' valuable but exhaustible
asset, while in O E C D countries the incentive to invest in alternative energy sources will be insufficient to prevent at some
stage, an energy crisis of far more serious proportions than
today.
This is why I think that the price of oil in the next few years is
going to be a matter of common interest to all countries, an area
in which international consultation can yield important longerterm benefits for all. The issues concerned cannot be limited
simply to the question of oil prices. They cover a wide range
of associated economic questions concerning supply, the development problems of the O P E C countries, investment outlets for
OPEC countries' savings, and (urgently I trust) those developing
countries which are not producers of oil.
All these are questions which can now profitably begin to be
discussed in appropriate broad intergovernmental forums. And,
when they get under way, the discussions will benefit from the
work which, in many of the important areas, has recently been
done inside the O E C D , including, in particular, the Organisation's
comprehensive assessment of long-term energy trends. I hope
we can now carry these discussions forward into the wider intergovernmental arena.

270
THE MONEY MANAGER

MARCH 4. 1974

Money Surges Out
To Meet Oil Costs,
But Only a Trickle
Finds Its Way Back
By ROGER LOVE
A surge of oil payments money from
western countries is flooding into the Middle
East—and apparently staying, there. Reports indicate that thus far this tidal wave
of money, which may reach $50 billion this
year because of the sharp increases in oil
prices decreed by Middle East producers
last year, is not reflowing significantly into
western markets or western corporations,
with the. possible exception of the Swiss
franc.
Observers note* the following recent
development:
• Apparently less than $21 million of
a recent $1.5 billion French Treasury international bond issue was taken up by Arab
banks, despite France's efforts to cultivate a
special relationship with Arab states. This
cultivation included a refusal to join with
other industrial countries at this month's
Washington energy conference in forming
some kind of "united front" of consumers
to deal with producers' claim.
In fact, the bulk of tl>e French bond issue
appeared to be subscribed to by banks in the
industrial countries which France had refused to support. Barring $500 million taken
up by Government-influenced French banks,
the other big subscribers were U.S. banks,
with some $370 million, Canadian banks with
some $117 million and British banks with
so^e $98 million, according to reports from
Paris. ..
• Iran, which triggered the recent oil
crisis through unilateral price increases, has
now agreed to make $1 billion available




through international organizations
and special development funds to
help ease -.the - balance-of-payments
impact of higher oil prices on industrial and underdeveloped countries.
This is about
of the anticipated
rise in all revenues this year and
would be split three ways, between
the ' World Bank, the International
Monetary Fund (IMF), and a special
development fund which would be operated in some fashion jointly by the
two Washington-based institutions.
• Islamic countries, meeting in Lahore, Pakistan, rejected proposals that
Arab oil money should be used to help
all developing countries. Instead, the
meeting called for restrictions on aid
from Arab countries to Moslem countries and also refused to set aside
a specific amount of money for aid.
• Arab oil- countries earlier turned
down a request from African countries
for preferential oil prices. The Arabs
argued inter alia that any attempt to
run a two-tier international oil market would be unworkable. This caused
bitterness in Africa where many countries had gone out of their way to
break diplomatic relations with Israel

Arab interest ki Switzerland
may have been fanned
by last month's decision of
the Swiss Authorities to
remove many of the
restrictions on non-resident
use of the Swiss franc
in making deposits.
ahead of and in the aftermath of the
Middle East war in October last year,
in sympathy with the Arab cause.
• Iran- refused to roll back oil
prices, while pledging some unspecified help to developing countries.-The
Shah did proclaim ' that the United
States was getting "more oil than any
time in the past" in spite of the Arab
embargo, a remark which drew furious
denials from U.S. energy officials.
Iran, in turn, issued a harsh attack
against the United States and other
oil consumers for using the energy
crisis as a "scapegoat" for reducing
aid to developing countries.
• The United States indicated that
it would like to see Arab and other
oil producers pick up the tab for the
estimated increase of some $10 billion
in oil import bills of developing countries. The Arabs and others showed
little inclination even to pick up the
tab for the higher import bills of
developed and industrialized countries
which in their eyes are much better
credit risks.

271
• Various national Governments,
including that of Germany, indicated
that the impact of the «il crisis, on
top of other imponderables like higher
domestic wage, rates, already raging
inflation and a clouded export outlook,
made economic policy decisions increasingly difficult.
Reports that Arab cash to the extent of perhaps
billion had gone
into the Swiss franc in the last few
days were particularly interesting.
The Swiss currency is a traditional
refuge in times of international capital and currency upheavals, even
though the interest rate structure of
the Swiss money market offers little
incentive to investors as compared
with other European countries or
New York.
Arab interest in Switzerland may
have been fanned by last month's decision of the Swiss authorities to remove many of the restrictions on nonresident use of the Swiss franc in making deposits, investments or purchasing for instance real estate. The
presence of such restrictions over the
last year or so did succeed in turning
away some inflationary money inflows, while the lifting of the restrictions has now returned the Swiss
franc to its traditional role, that of
a currency one oan get into or out
of without too many questions being
asked.
However, the apparent Arab opting
for low Swiss returns and a high
degree of guarantee of exchange rate
risks raises some disturbing questions
on the willingness of oil producers to
play the part sketched in for them by
western nations in saving what is left
of the world's monetary system and
economy from total collapse.
The Lahore iconference decision is
perhaps the most disappointing blow
to efforts to get oil producers to accept a ' role in helping developing
countries, most of whom are excluded
from western capital markets by the
shaky conditions of their economies
ar.d by their low credit ratings.
The number of poor Moslem countr'es which would benefit from the
largesse of oil producers under the
Lahore decision is sizable enough. I t
would include Egypt, Syria, Jordan,
Tunisia, Morocco, Sudan, Mauritania,
Mali, Niger, Somalia, both Yemen
rep.blks, Pakistan .and Afghanistan.
I t would, however, exclude India,
Ceylon, Burma, Thailand,
Kenya,
Tanzania, most of southern Black
Africa and all of iLatm America, barring a mass Conversion of these countries to Islam.




I f the Lahore conference decision
is sustained, it would leave a large
numher of non-Moslem
countries
directing their aid attempts even
more clamorously to the fton^Moslem
world, at a time when the industrial
and developed countries are beginning
Seriously to feel the pinch of Arab
and Iranian oil price hikes arid supply cutbacks.
«
Two African countries are a particularly poignant example. The most
heavily ipopulated are not overwhelm-

If friends of the Arabs
can expect such treatment
why should 'enemies'
expect to do any better?
ingly or even in majority Moslem,
and these countries supported the
Arab cause without stint in last year's
confrontation with Israel, losing in
the process considerable Israeli development aid and technical assistance.
The African countries as a group
paid about <$350 million on oil im-r
ports last year at $8.60 a barrel, according to estimates of the Organization of African Unity, headquartered
in Addis Ababa, Ethiopia, but this
bill is likely to rise to at least $1
billion this year. This compares with
total African reserves of some $2.9
billion held by Libya and some $600
million held by Nigeria—.both oil producers.
^
The Arab countries told African
states recently that no concessionary
prices could be granted to Africa or
indeed to other developing countries.
The Arabs did make proposals for the
establishment of an Arab development
bank for Africa, with a capital of
some $500 million and on the establishment of a separate $200 million
fund which African countries could
draw from to help defray the costs
of increased oil.
But African countries were cautious
in the face of these (proposals. Some

of them, Kenya for instance, estimated that the rise in oil prices had
a»de its entire current development
plan unrealistic and estimated that
annual economic growth, currently
running at about 7.5f, could f a l l to
zero within the next 12 to 1ft months.
The African nations, as noted above,
had generally wholeheartedly supported the Arab cause last October
and since.
But if friends of the Arabs can
expect such treatment, why would
"enemies" expect to do any better?
The "enemies" are the industrial
countries iwho seem to be relying on
massive injections of Arab cash into
western money markets, to permit industrial countries to borrow to cover
their balance of (payments deficits,
in effect paying western cash to Arab
and other producers for oil, then borrowing the cash back to cover the
gap caused by the oil payments, then
paying more cash for oil, then borrowing more back to close the gap.
The great .problem with this scenario is that none of the oil .producing
countries has as yet indicated any
eagierness whatsoever to play its part,
whether through normal channels of
the International
Monetary Fund
(mainly for industrial countries) er
through the World Bank (for undesdeveloped countries).
Meanwhile, th*e lines in front of
ticket windows in the international
money markets are. getting longer and
longer. France which ihas already borrowed i$l.S billion in the medium-area
of the Eurodollar market,.is seeking
at least another $1J5 billion to $2
billion through state-owned and statecontrqlled corporations. I t a l y seems
bent on raising as much as possible,
perhaps $4 billion, before its credit
resources run dry. Britain has indicated that it may be seeking as much
as $7 billion internationally this year.
And Japan is seen as a likely candidate either for direct official borrowing, or for government-sponsored corporate borrowing. .
The total of demand in the first
half this year could easily reach $15
billion with little end in sight if other
industrial countries start to join the
scramble. Where the funds to finance
this demand are coming from is unclear, but at the moment it appears
unlikely that it will be from the Arabs
and others.
•

272

London Letter
BY JOE ROEBER

Arab Oil Money and the City of London
A yeat-ago the only people you would expect to find
in the offices of a London merchant bank at 7 AM in the
morning would be the char-ladies. These days it is not
uncommon to find a banker at his desk. In Bahrain it is
10 AM and the working day, which starts at 7 AM, is half
over. London's bankers are only too aware that a few
sacrifices have to be made if they are going to profit
from the Arab's new found wealth.
Britain has always had close ties with the Arab world.
Kuwait, Oman, Qatar and the United Arab Emirates are
all in the Overseas Sterling Area. London, along with
other continental centres such as Paris, Zurich and
Geneva, have been havens for Arab funds for many
years. But only recently these funds were modest. Total
011 revenues of the major Arab oil-producers and Iran
in 1972, amounted to a mere $10 billion. The recent
sharp rise in oil prices has changed all that. At the end
of this year oil revenues could be running at an annual
rate of close to $70 billion.
Saudi Arabia's oil revenues this year will probably be
8 times as high as in 1972. In a 7-month period it can
earn enough, at present oil prices, to cover the entire
cost of its 1970-75 development plan. A similar situation
faces Libya, Kuwait, Abu Dhabi, and Qatar. All are wondering what to do with their new funds.
Petrodollar Tidal Wave
M. Jean Parrey, president of Arab Bank International,
estimated recently that around 60% of these surplus
funds would find its way into international money markets. If true this would amount to more than $30 billion
this year alone. How large this inflow is, can be gauged
from the fact that publicized medium-term credits on
the euromarkets amounted to only $21.6 billion in 1973.
Even before the latest surge in oil revenues London
was attracting a large amount of Arab money both in
sterling and foreign currency. The latest Bank of England statistics, which refer to December 1973, show that
non-sterling liabilities of UK banks to Middle Eastern
countries, not members of the sterling area (such as
Saudi Arabia, Libya and Iran), had risen from $1.7 billion in 1972 to $4.2 billion. The sterling holdings of
Kuwait, Bahrain, Qatar, the UAE and Oman had risen
rather more slowly from $1.3 billion to $1.8 billion.
Until the Bank of England releases fresh statistics in
June it is impossible to gauge the inflow of Arab money
this year. Nevertheless there are signs that it has been
substantial. In the first three months of 1974 sterling
rose 20% against the dollar, a large part of which City
experts ascribe to the inflow of Arab funds.
The inflow has been patchy. Little interest has been

FINANCE MAGAZINE • JUNE 1974




JUNE 1974

shown in the equity market and, even more suprisingly,
in the gold market. Considerable sums, however, have
been invested in UK Government bonds. According to
C. P. Lunn, a general manager of Barclays Bank International, up to £500 million has gone into gilts this year
(on two days alone £80 million is thought to have been
so invested). The bulk of it has gone into 5 to 7 year
maturities. Others pitch their estimates somewhat lower
— but it is generally agreed that the reason why the
1980 Tap stock ran out so quickly was due primarily to
Saudi Arabian demand.
Diversification
A certain amount of money (primarily Kuwaiti) has
been channelled into the UK property market, which is
currently in desperate need of funds, following the
collapse of its primary deposit reservoir, the beleaguered secondary-banking sector. One merchant bank,
which has been busily arranging loans in Kuwaiti dinars
for UK property companies, estimated that up to £70
million might have been invested in this sector. But
despite their shortage of funds many UK companies still
shy away from the exchange risks involved in taking
foreign-currency loans.
The bulk of the surplus oil funds, however, are being
deposited in the eurocurrency market — a large chunk
of which is based in London. Once again estimates of
the Middle East involvement vary considerably. The
Bank for International Settlements estimated almost 12
month ago that $8 billion of Arab money was deposited in the euromarkets. Since then the market has
grown substantially — Morgan Guaranty estimate that
its size in April 1974 was $16 billion. Arab and Iranian
deposits may now amount to $25 billion.
As in the past, much of the money is placed very
short-term and handled by the big American banks,
such as Chase Manhattan, Morgan Guaranty and First
National City Bank, all of which have close links with
the Middle East. Whereas in New York considerable
sums of Saudi Arabian money have been channelled
into Treasury bills, most of the funds moving into London and the euromarkets are from Arab banks and
private individuals.
Just how these funds are managed varies considerably, depending on the expertise of the Arab countries
concerned. Kuwait is probably the most sophisticated.
In London, apart from the United Bank of Kuwait, the
state-run Kuwaiti Investment Office places substantial
official funds in the overnight-market. Another stateowned vehicle, the Kuwait Foreign Trading and Contracting Company, has also been aggressively developing its business. In February it surprised the London

273

London Letter
financial community by appearing as co-manager of a
$34 million loan to the City of Bristol—a novel and welcome departure for an Arab institution. More recently
still it has notched up another first, acting as co-manager of an Arab-currency-related eurobond issue, in
partnership with First Chicago Ltd, European Banking
Company, and Kredietbank Luxembourgeoise.
Short-Term Preferred
KFTC's aggressive approach is exceptional. So far
Arab banks have been noted for their absence in
medium-term lending syndicates — contenting themselves with placing money short-term on the euromarkets, much to the consternation of loan managers
fearful of a liquidity squeeze. Their absence probably
reflects lack of expertise rather than unwillingness to
join in. This is being partially solved by Arab participation in a growing number of consortium banks being
established both here and in the Middle East. (UBAF,
based in London, is a prime example). Another drawback is that a substantial proportion of Arab funds is
controlled by Arab central banks, which are unable to
participate in syndicated loans. The government-owned
Libyan Arab Foreign Bank was formed to get round this
obstacle.
Iranian banks have been more visible — there are 4 in
London in addition to a new consortium bank, the Iran
Overseas Investment Bank. Bank Melli Iran, which has
been in London since 1967, and Bank Saderat Iran, have
underwritten a $200 million loan to the City of Glasgow
and a $500 million loan to the Electricity Council. With
the exception of the Kuwaiti banks, Arab banks have
tended to deal in London at arm's length.
Preferential Prejudices
A considerable amount of business is being put
through a few London merchant banks; most notably
Morgan Grenfell, Kleinwort Benson, Hambros, and to a
lesser extent Robert Fleming. Morgan Grenfell, one of
the most traditional of the Acceptance houses, and a
breeding ground for future governors of the Bank of
England, is typical. Lord Catto, its chairman, stresses
that the bank is particularly strong in the Gulf states
because "we are effectively a non-Jewish bank" and
has emphasized this aspect. At the time of the Yom
Kippur War the bank aroused widespread criticism by
going ahead with a $180 million loan to Abu Dhabi.
Political—or rather religious—considerations rule out
a large number of London's merchant banking elite.
Much of their work is straightforward — dealing in the
foreign exchange market, buying and selling gilts and
equities, and generally advising their Arab customers.
Even if the funds are not deposited in London, the merchant banks often earn commissions for their advice.
With an eye on the day when the Middle East may control two-thirds of the world's monetary reserves (one
source predicted this will happen by 1980) the banks
are consolidating their Middle Eastern ties. Morgan
Grenfell recently took a 50% stake in the Arab and
Morgan Grenfell Finance Company and Hambros has




taken a 20% stake in UBAF Financial Services Ltd. New
York may still attract the bulk of the Arabs' funds but
London is certainly in the running.
The Eurobond Situation
If the one place the Arabs have not been putting their
money is into eurobonds, then who has? In contrast to
New York, where, despite rising interest rates, new issues have been sold in bigger volume than ever before,
this year, issuing activity in the eurobond market has
run to a virtual standstill. In the first four months of this
year less than $700 million has been raised, compared
to $1.64 billion in the same period of last year. With even
tiny issues of $10-$15 million being slow to get away,
issuing houses have had to plumb the depths of inventiveness to interest investors, and one or two novel
issues have been appearing — for instance, one denominated in Canadian instead of US dollars and another
offering an Arab currency option. Mostly, however, underwriting has become such a hazardous affair that
issuing houses are simply telling their clients to stay
away or to turn to the rapidly expanding medium-term
eurodollar bank lending market.

274

I

" F L O A T I N G ON OIL - A W O R L D M O N E Y
THE ECONOMIST
M a r c h 2 3 , 1974

SURVEY"

Without precedent
There will be no agreement between centres in the competition for the most
governments on a grand new monetary sought-after funds of all times.
system by this summer as had been
Every banker naturally thinks he has
scheduled. Instead, the formal debate the edge over the next one, and stands,
on it is about to be wound up. It would therefore, to be disappointed. But it is
probably have never really made the encouraging that the oil problem is now
winning post, anyway. But the decisive widely recognised as one of recycling
point has been that the very framework funds through either private or instiof the debate has been torn apart: every tutional channels and not one to be taken
variant of the system which finance by exchange rates or by domestic deflaministers have been considering—and tions designed to make room for exports.
squabbling over—assumed that the The flexibility provided by floating
major industrial countries would strive exchange rates can help industrialised
to keep their overseas accounts roughly countries adjust among themselves
in balance over a reasonable length of to the differential impact of higher oil
time. That is now neither practical nor prices, but not eliminate it. However
desirable.
cheap industrial goods became, there is
The sudden, sharp rise in the cost a physical limit to how much of them
of imported oil has made it impossible the Arab countries could absorb in the
for the world to maintain a balanced short run. Indeed, the upshot of compattern of payments. Even if oil prices petitive depreciations would probably
fall a little, as seems likely, the sums be to shift the bulk of the aggregate
involved are huge. Whether it turns deficit on to the United States, since
out to be $30 billion or $50 billion, the payments for imported oil are largely
increase in trade payments to a handful made in dollars and therefore countries
of countries this year will be without trying to depreciate their currencies
precedent Only America and Germany would appear in the exchange markets
among the big industrialised countries as buyers of dollars and sellers of their
have any hope of seeing their current own currencies. That sort of beggaroverseas account anywhere near the my-neighbour policy could all too easily
black this year. At a stroke, the oil prob- precipitate a world slump in a year when
lem has altered the whole international the American economy promises at best
industrial and trading scene. It follows to stand still and only France, Italy
that it has also altered the monetary and Canada, among the industrialised
nations, hold out any prospect of decent
system needed behind it.
But in what way? Tke Economist economic growth of 4 or 5 per cent.
has long been on the side of the floaters The problem has been put elegantly
and is more than ever convinced that a by Mr Robert Solomon, a vice-chairman
system offloatingcurrencies is the only of the deputies of the Committee of
one for today's uncharted waters and Twenty; he points out that it is useful
beyond them. But dofinanceministers to visualise the oil price increase as a
and bankers agree with us? At the same large sales tax on the use of petroleum
time, we feel there are parts of the reform products. Internally, that tax has a
under consideration before the oil crisis deflationary effect on demand which is
that should still be brought in piece- likely to require offsetting action to
meal, while others should be adaptoi avoid unemployment. But the proceeds
to the new energy situation. But, again, of the tax are transferred unilaterally
what do the politicians and practitioners to the oil-producing countries who,
think?
unable to increase their imports in the
We have interviewed some of the key short run, cannot avoid lending their
politicians and advisers who have been receipts back to the rest of the world.
leading the official debate in the Com- So the effect of the higher oil prices in
mittee of Twenty and some private terms of absorption of real resources
bankers too, questioning them on the will only be felt in the long run when
solutions they would like or expect, and oil producers are in a position to receive
are grateful for their co-operation. Their repayment, with interest, of their loans
replies arc on pages 12-53, preceded to the industrialised world.
by our summary, of the main points
If only the oil producers were to lend
they make. The rest of this survey re- back to each country exactly what they
ports on the various plans being hatched have levied in the oil tax, there would
in national treasuries and banking par- be no effect on a country's total balance
lours to capture the new Arab oil money of payments in the short run. But, of
and, more specifically, how bankers course, they will not. This survey emrate the chances of individual financial phasises that the United States can




expect to get more than its fair share;
the International Monetary Fund could
counter the effect in part simply by
making more liquidity available all round,
through special issues of SDRs. (For
definition of those unsexy bits of paper,
see glossary, page 16.) However, clearly
some redistribution or recycling of
funds among oil consumers will be
essential
The money may come back from the
oil producers in all sorts of ways: direct
investment in industry or in property,
bank deposits, purchases of equity,
fixed-interest securities or Treasury
bills, gold or commodity purchases,
development loans (such as World Bank
bonds) or loans to a central international
clearing-house. All that can really be
argued about as yet is whether most
of the recycling will, or should, be done
through the Eurocurrency market or
through the IMF.
But since the IMF was not set up to
deal with something like the oil crisis,
it can only play a central role if a special
oil facility is set up, as its managing
director. Mr Johannes Witteveen. is
urging (again, see glossary, page 16).
Countries would be able to draw on this
facility in amounts related to their oilinduced deficits, to the size of their

275
St.'RYl.Y

reserves, nnd lo ihcir quotas in the IMF;
it would be supplementary to their other
access to Fund resources. But. of course,
the schcmc depends on the oil-producing
countries supplying the funds, preferably dircctly. Iran lias indicated it would
play—;at market-related rates. But some
exchange rate guarantee will have to be
given. r.nd will the Arabs like the idea
of that being related to the "basket of
currencies", in which SDRs are to be
defined, as seems to be the idea? Bankers
are dubious: the Arabs have shown no
interest in such abstract concepts in the
past. Only Mr Witteveen. who will tour
the Middle East next month, can hope
to discover the answer. Unfortunately
it looks as if he will not go with the full
blessing of Washington. The Nixon
Administration has reservations about
the plan, both tactical and technical.
But at least some constructive proposals are being made and in the face
of a huge upheaval the monetary system

THE ECONOMIST MARCH 2}. l')74

INTERNATIONAL BANKING

look mini. If a chaotic slip into worldrecession is to be avoided, an unprecedented degree of international cooperation will be needed.
The deputies of the Committee of
Twenty will at least have something to
get their teeth into when they meet in
Washington next week. Not only will
If the committee does spin out its job. its efforts there be the new oil facility to discuss,
will be in danger of being overtaken by one of
but a paper from the I M F which puts
two events. There may be another currency
the emphasis on getting an "interim"
crisis which will reintroduce floating generally
agreement on managed floating—and
. . But even if there is no such crisis, the Com- you can interpret "interim"' as you like.
mittee of Twenty could neverthelessfindthat its
The proposals are basically two: a hefty
reform, if not introduced for another three or
guidebook of rules which, funnily
four years, is out of date. The distribution of
enough, would in some ways give the
power will go on changing: significantly, Japan
I M F more powers than it ever had under
and the Middle East now have 16 per cent of
the old Bretton Woods system; and, by
the free world's reserves, compared with
per
implication, the notion of target values
cent only two years ago.
But it is now essential to set up a top- for exchange rates. Also, a definition of
level decision-making forum for dealing SDRs in terms of a standard basket of
with international money problems. major currencies is spelt out. The quesThe movements of funds round the world tion is whether in the end the politicians
this year will be of a size that will make will be able to swallow it whole.
the operations of the multinationals
is holding up well. No one should mourn
the demise of the Committee of Twenty;
if truth were told, the finance ministers
were glad of an excuse to wind it up.
The writing was on the wall when The
Economist wTOte in September, 1972,
more than a year before the oil crisis
broke:

Figuring out the oil crisis
bined deficit for the industrial countries
importing countries will be less than
On top of all the usual uncertainties
as a group will be at the higher, rather
it would have been in the days of
plaguing payments forecasts, especially
than the lower, end of the range in our
cheap energy, but only to the extent
in a floating world, there are the new
table is quite simply the unhappy likelithat higher prices themselves induce
questionmarks about consumers' ability
hood that the less-developed countries
economies.
to economise on oil. producers' readiness
will not be able to finance a current
to supply it and whether, or for how long, (3) Oil producers will step tip their imaccount deficit of much over $15 billion
present oil price levels will be held.
ports from oil consuming countries,
(see page 73). If they are enabled to do
Nevertheless, the debate about appromore particularly the industrial counso, by increased aid flows or by special
priate policy responses cannot get far in
tries, this year—but not by very
oil-financing schemes, that will help
a vacuum. The world's policymakers
much. The usual range of guessticountries like America, Britain and Japan
have been getting most of the key statismates here varies from a cautious $5
to improve their own current account
tical work—as well as early warnings
billion to an optimistic $10 billion.
performances. If they are not, the burden
about the dangerous implications of the
The best compromise guess is, perof oilfinancing,superimposed on existarithmetic for world growth and trade
haps, that the OECD countries wffl
ing payments imbalances, looks frightenif countries react without regard to the
enjoy a $7 billion boost to their exingly large and lop-sided. Just three
consequences for others—from the
ports. However, against that must
countries—Japan (especially vulnerable
Organisation for Economic Co-operation
be set what they will have to pay out
to the oil crisis itself), Britain and Italy
and Development in Paris. Normally very
in interest on increased Arab invest(both of which have had the bad luck to
little of the OECD's work is made public
ment funds placed in their markets—
be hit by the oil crisis just when their pay—although the Bundesbank's Dr Otmar
a sum that will probably amount to
ments were anyway weak)—could be left
Emminger last month admitted that the
about $2 billion this year (andriseto
carrying well over half of the total current
latest estimates put the likely current
closer to $5 billion next year).
account deficit of the industrialised world.
account deficit of the industrial countries
One reason for thinking that the comin 1974 closer to $40 billion than the
$32 billion that was being bandied about
The current account arithmetic
in January, and more details have since
Reserve
1974 guesstimates
become available.
holdings
Post-oil
Additional
The Economist has attempted its own
end'73
crisis
oil bills
exercise. The key assumptions underforecast*
(inc. = - )
lying the data in our table are:
— ^ to — 3
United States
+1
(1) Oil prices will remain at the levels
-u>i
Canada
implied by today's posted prices
Japan
throughout 1974. If you disagree,
-3.7
— 7-Jto — 9
Britain
make your own corrections; a rough
+ 0.4
France
+3.8
rule of thumb is that every change of
Germany
$1 a barrel in the price adds (or subItaly
Other industrial
tracts) $10 billion from the total oil
countries
bill of the OECD countries.
-33 to-40
139.8
Industrialised world
(2) Actual oil supplies will not fall short
Less developed
of "normal" demand at current prices;
oil importers
that is, straight political rationing will
Opec countries
cease, as now looks on the cards.
s: America's deficit is put at S4 billion.
Column 3 of our table does imply
»l St billion mxacihf.
that the volume of oil consumed by




f?

=a

+H

276
THE ECONOMIST MARCH 23. 1974

INTERNATIONAL BANKING

The forgotten poor
Tha less-developed countries are the real victims of oil
The combined oil bills of the lessdev eloued countries will rise by no more
th in S3 billion—SlO billion in 1974.
This is less than a fifth of the expected
rise in the oil bills of industrial countries
and amounts to no more than a quarter
of the accumulated reserves of a country
like Germany. But those are not the
comparisons that count. Paying up on
oil will mean, in effect, handing over
virtually the whole of the gains of the
poorer countries from the commodity
boom—or, alternatively, the whole of
their normal receipts of aid
The picture is even less pretty when it
is realised how cruelly uneven the impact will be from one country to the next
It is not only such obvious weak brethren
like India who will need rescuing. So will
some high performers like Korea who
have been particularly successful in
building up industry, yet whose income
a head remains vulnerably low. They
have not been the main gainers from the
commodity boom. Far that matter,
it is easy to forget to what extent the
gainers have been the industrial countries
themselves: members of die Organisation
for Economic Co-operation and Development are 80 per cent self-sufficient in
raw materials. On food and fertilisers
alone the terms of trade have swung
against the developing countries to the
tune of $5 billion over the past year.
The World Bank divides the developing countries into three broad groups—
leaving aside those oil-lucky devils like
Nigeria and Indonesia in a league all of
their own. There are those, Eke Ghana,
which have built up their reserves on
the back of the commodity boom (or,
like Turkey, on the backs of their
emigrant workers). Second, there are
those, like Brazil and Mexico, which
have high enough credit ratings to hope
to keep their toeholds in die Eurocurrency markets—though the going
here will be much tougher this year than
last (when publicly-announced mediumterm Eurobank lending to less developed
countries soared to $8 billion) and
relative newcomers to the market, like
Chile, may find themselves pushed to
the very end of the queue, liiird, there
arc those unfortunates with virtually
no reserves, insufficient credit ratings
to tap the private international markets
for funds and yet not much capacity
to reduce imports.
India, of course, is the prime example
in the last group. Its oil bill will rise
this vear by at least $550m-600m, or




maybe, some say. by nearer $1 billion.
At most India can cover about $300m
from its own slim resources—but not
much more and not for long. A modest
$62m drawing from the International
Monetary Fund has pushed the deadline back a shade but before that came,
it looked as if India would be out of
funds entirely by end-May. Other
countries particularly hard-hit by the
oil crisis include the rest of the subcontinent—Bangladesh, Pakistan and
Syr Lanka—and some of the Latin and
central American countries, particularly
Uruguay. Mo&t of these are such obvious
hard-luck cases that, at the crunch, their
very weakness might prove their strength
—the rich are resigned to bailing out
India regularly. But other countries
normally regarded as at least the partial
successes of past aid programmes will
also be in serious trouble, above all
Korea, as we have already said, but also
Taiwan and Thailand.
The need for special outside help to
pay increased oil bills may be held down
this year to perhaps no more than S3
biliion-$4 billion. Current earnings of
key commodity producers are still very
healthy; there is perhaps $3 billion in
developing countries' reserves that can
be used in payments. Another S2 billion
might still be winkled out of the Euromarkets by the creditworthy countries.
But what of next year? The commodity
price boom, already past its peak, will
then have been finally punctured by the
lagged impact of the slowdown in world
growth, and the fat now in countries'
reserves will have been eaten up. Also,
mounting debt burdens and curtailed
export earnings will make the Eurobankers most unreceptive to calls from
the third world. (Obviously the more
you have borrowed the lower your
credit rating goes.) The financing gap
for the less developed countries in 1975
is more likely to be on the order of $7
billion-$9 billion than this year's $3
billion—$4 billion.
Who will fill the gap, and how? The
popular answer—certainly from the
industrial countries facing oil deficits
of their own—is that the money ought
to come from the oil producers themselves. This is fair enough, but nevertheless it will be disastrous if the rich
think they need not play a part. The
oil producers are extremely unlikely
to be willing to lend enough either
direcdy to the less-developed countries
or, at one remove, to the established

intermediaries like the World Bank.
Though some promising noises are
being made from various quarters,
notably Iran, the actual aid effort of
oil-producing countries to date has not
been impressive. Middle East countries
(and particularly Kuwait) have been
lending about $700m-$750m a year to
the World Bank, but such sums amount
to no more than a recycling of the net
aid ($770m in 1972) garnered by the
12 major oil producing countries from
OECD sources in the first place. To the
extent that the oil producers do not
themselves give back to the developing
countries as much as they take from
them on oil, the industrial countries
(which, obviously, will be the net
gainers) will have to bridge the gap
instead.
Which route?
Unfortunately, the industrial countries,
facing payments problems of their own,
will be tempted to reduce, rather than
increase, their own aid programmes.
Indeed, even the relatively well-placed
Americans have been making ominous
noises. Not only has the House of
Representatives baulked at contributing
towards the replenishment of the exhausted resources of the World Bank's
soft-loan agency, the International
Development Association (IDA); the
normally responsible Senator Fulbright
has gone so far as to argue that the
United States should scrap all of its aid
save some modest "compassionate"
programmes. This may be silly as well as
mean—after all, a dollar given to the
less-developed countries *is likely to
come back almost immediately in the
form of an export order and so help
both to sustain growth and to diminish
the current payments imbalance of the
OECD countries as a whole. It is nonetheless a political fact of life.
This danger makes it all the more
important that the major international
T h o oil burden
Estimated increase in 1974 oil b:!ls as % of
1973 exports

Ethiopia

C

Brazil

£

Bangladesh £
Pakistan

£

277
INTERNATIONAL BANKING

organisations, which can act as intermediaries for Arab money, do their jobs
efficiently. Two points follow. First,
the International Monetary Fund will
have to become more of a source of
medium- to long-term general support
aid for the poor—a point already noted
implicitly in the plans of the new
managing director. Mr Johannes Witteveen. for a special oil-financing facility.
Second, the rules of World Bank lending. and the demarcation lines between
the Bank and its affiliate organisation.
I D A , will need a radical rejigging.
Much has been made of the ability
of the World Bank to tap the oil producers' new wealth indirectly, through
the Euromarkets or New York, as well
as directly, through, for example,
Kuwaiti dollar issues. The bank's own
credit rating is excellent, but it does
not have the flexibility to direct its
funds where they are most needed, or
as quickly as they are needed. Because
its loan terms are relatively hard, the
World Bank tends tofinancethe relatively
strong, just those countries which do,
or should, go directly to the commercial
Euromarkets. This February alone the
bank not only lent as much as S2l4m

to Mexico but also S75m to Iran, while
Venezuela obtained S22m the month
before. Also the World Bank, like most
of its regional counterparts, is geared
to financing specific projects; the inevitable time spent finding these, then
vetting and launching them explains
why the bank's disbursements have
lagged so embarrassingly behind its
commitments. There is no quick-footing
here. Nor is that all: although the bank
has made some effort to discriminate
between various categories of borrowers
in the past few years, all too often all
comers, relatively strong and weak alike,
have wound up being subsidised, getting
their money at less than it cost the
bank to acquire the funds.
Probably it would be wrong to argue
that the Work) Bank should drop its
project approach to lending altogether;
the job offindinggeneral balance of payments support (as well as specific
financing for oil) for the poor might be
better left to the I M F . However, it would
clearly be useful if the World Bank
could use its financial muscle more
directly to help beef up the resources of
IDA. Indeed, perhaps the demarcation
lines here should be broken down com-

THE ECONOMIST MARCH 25. 1974

pletely, not only on the fund-raising
but also on the lending side of the
equation, and a single schedule of rules
drawn up to govern which less-developed
country would be allowed to borrow
how much on what terms. Such a
schedule should make the relatively
strong eligible for loans only if alternative finance is not forthcoming from
private market sources and then make
it available only on commercial terms.
The very poor, on the other hand, should
be given particularly concessionary
terms—and the scale of charges in
between judged much more flexibly,
on a case by case basis, than it is now.
Finally, there should be much closer
co-ordination between the I M F on the
one hand and the World Bank group on
the other. It is reassuring that the
staff of the two organisations are already
swapping data and guesstimates on the
impact of oil on their members. It is
less reassuring that their respective
chiefs, Mr Witteveen and Mr Robert
MacNamara, are touring the Middle
East on separate fund-raising missions.
This is a time for a policy of togetherness
in all fields of international finance but,
above all. on development aid.

The gold conundrum
Will gold be mobilised to finance aid?
For nearly two years now, ever since
the free market price of the metal really
took off, no central bank has willingly
parted with gold. The 1.2 billion oz
hoard locked into official vaults does
not bulk large; it could all be jammed
into a short freight train. Yet at today's
rates of output it would take the world's
mines more than three decades to produce. Even at the nominal official price,
of $42.22 an oz, it is worth almost $50
billion—an amount uncannily close to
the windfall oil producers hope to exact
this year through higher oil prices.
Valued at free market prices—say, in
mid-February when gold first burst
through the $ 1 SO an oz barrier in London
—it would be worth roughly $180
billion, an increase that would boost
total world reserves (including the 154m
oz of gold held by the International
Monetary Fund) by two-thirds.

brink of recession. Unlocking gold,
of course, is not the only answer;
emergency issues of SDRs, enlarged
swap lines among central banks and
special I M F facilities are more sophisticated solutions. But gold is familiar
and already at hand, and the advocates
of using it are growing.
Three different approaches suggest
themselves: a straight rise in the official
gold price; the abolition of any official
price; or the funding of national gold
holdings into. say. the I M F (which could
either use the metal as a secondary
asset in effect, as a backing for its own
paper money. SDRs, or could gradually
sell it off on the free market or, perhaps,
directly to Arab oil producers). In The
Economist's view the third choice would
be by far the best. Unfortunately, it is
probably also the least likely, just
because it is the least straightforward
The effective freezing of gold was and time (or, rather, patience) is running
occasionally inconvenient even in the out. By May at the latest the common
days of world boom, dollar glut and market's monetary committee is supcheap energy. It now looks totally, posed to come up with its own proposals
even dangerously, absurd. Resistance for a joint EEC approach. So it is imto using reserves as one option for portant that governments get their
financing oil deficits has obvious dangers thinking clear on the alternatives while
in a world already teetering on the there is still time.




Raise or abolish the official price?
The EEC opts for an increase in the official
price. After all, its members hold nearly
half of the official gold of all industrial
countries combined. From Brussels's
point of view there would be something
to be gained even if such a step were
taken unilaterally—that is, if the gold
price were raised for transactions among
EEC central banks alone—if only
because the move would make it easier
for the present defectors (particularly
France) to rejoin the European snake.
But that would be relatively small beer.
Obviously Brussels would prefer it if a
higher price could be applied in dealings
with other central banks as well—
especially Arab ones.
But the problem of getting everyone,
gold-rich or gold-poor, to agree may
prove difficult enough even within the
common market, let alone on the international plane. Moreover, even if finance
ministers can come to terms, there
remains the time-consuming hurdle of
parliamentary (more especially. American Congressional) assent to clear. Then
there is the question of what price.
The fashionable answer these days
is a "market-related" one. But no one

278
THE ECONOMIST MARCH 13. 1974

has defined precisely what that means:
today's price, an average of the past
six months* prices, the price on settlement day, the market price less, say,
10 per cent or what? Finance ministers
may not simply pull a figure out of a
hat (however market-related at the time)
and then attempt to stick to it come
what may. But even a floating gold
price could prove tricky.
It is easy to forget how thin and volatile the free markets in gold are. A heavy
day's turnover in the London and Zurich
markets combined is only 25 tons or,
even at S150 an oz, only $120m, a ludicrously tiny sum compared with turnover on the world's bourses or foreign
exchanges, t h e price has been known
tofluctuateby 12 per cent in a day.
Moreover, although U is difficult to
put a precise figure to the proportion of
total market demand coming from
"investors" and speculators (because no
one knows how to break down the data
for jewellery), it is obviously very large.
Certainly in recent months the market
has been dominated by wheeler-dealers
rather than firm holders of gold. Betting on the free market price of gold is
likely to prove as wild a ride as betting
on the price of any other commodity.
Although the rules now allow the big
central banks to sell on the free market,
not one has tested the water yet—partly
because the bankers are not sure that
present I M F rules would allow them to
change their minds and repurchase
but also because they are all too well
aware of the depressant factor on the
[Mice of any significant unloading.
In the long ran, no doubt, gold will
continue to appreciate, however dramatic its gyrations along the route. But
that probability is of limited help.
Indeed, if anything, it throws further doubt on the efficacy of the whole
exercise of linking the official price
of the metal to the market price. For
it suggests that central banks might
continue to regard their gold hoards
primarily as an investment not to be
used except as a very last resort.
Finally, there is the old problem of
equity. A rise in the official price of
gold to market-related levels would not,
of itself, reward private speculators in
the metal—they nave managed to do
quite nicely on their own. It would award
the official hoarders—that is, precisely
those rich countries which were most
bloody-minded
about
international
co-operation in the days of dollar glut—
while doing nothing to help the poorer
countries. Where gains did match oil
deficits, that happy outturn would be
pure accident. I f the object of the
exercise is to increase world liquidity,
there arc better ways of gong about i t




SURVEY

INTERNATIONAL BANKING

The abolitionists propose a backdoor route to a market-related price
for official stocks. Its advantage over
the front-door approach is that it ducks
the problem of coming up with one
definitive price formula. Each central
bank would be left free to strike whatever deal it could with whatever partner
it liked—the Arabs, presumably, standing
to get prime terms. The solution would
amount to formally treating central
bank gold holdings as second-line
reserves, rather like Britain's old dollar
portfolio. That might be more realistic.
It would still require international agreement and still ran foul of the equity
argument.
Then there are the awkward implications for the future of SDRs. That a
higher official price would make a nonsense of the current debate about defining
SDRs in terms of a basket of currencies
(or in terms of currencies in general)
would not be too serious if an official
gold price remained: the simple solution
then would be to leave the valuation
provision of SDRs alone. As matters
are now the unit is effectively defined
in terms of gold. Coping with an abolition of the official gold price would be
much stickier.
But the more serious objection is the
likelihood that a rehabilitation of national
gold reserves would unleash Gresham's
law. Though they may differ in their
recipes for mixing exchange rate
flexibility and stability, virtually all
finance ministers now pay lip service to
the idea that any permanent system of
world money should be based on SDRs
and must not risk a return to a sloppy
compromise between a gold and a dollar
standard. Whether these sentiments
would be translated into practice once
official gold stocks were revalued, however, is another matter altogether.
T H * official hoarders

Funding in the I M F
For all these reasons, The Economist
would favour funding national stocks
into the I M F . In exchange for their
gold, central banks could be offered
special profit-linked SDRs; if the I M F
subsequently sold gold at a higher price
than it had paid to buy it in, some part
of the profit, say half, would be distributed proportionately among the original
owners, the balance to be applied to
beefing up the IMF's resources for
concessionary lending to less-develcoed
countries (a link in another guise) or,
during an interim period, to Mr Witteveen's proposed oil-financing scheme.
Actual sales, if any, would be left to the
discretion of the I M F . Normally they
would be made through the free markets
—and all central banks would be free to
buy (and seD) gold on those markets after
the initial funding of their existing holdings. Alternatively, for an interim period,
the I M F could be authorised to sell gold
directly to die central banks of oilproducing countries.
Even this scheme would not be wholly
"fair". Today's official gold hoarders
would still get something of a windfall,
both because the initial conversion
price of gold would have to be pitched
higher than the present official gold price
ami because they would share in the
profits of any subsequent I M F sales.
But it would be fairer than the other
alternatives. Moreover, while giving a
needed initial boost to the resources
both of the I M F and of individual
countries, it would not prejudice the
long-term position of the SDR but,
rather, directly or indirecdy, enhance it.
Agreement would not be easy—and our
sketchy outline is full of technical gaps.
But such an approach should at least
be discussed before the issue is prejudged by the actions of one small club.

(at $ 4 2 . 2 2 an oz)
Official
gold
<$ billion)
Industrial countries:
United States
Germany
France
Switzerland
Italy
Holland
Belgium
Canada
Japan
Britain
Austria
Other developed countries:
Portugal
S. Africa
Spain
Less developed (excl.
oil producecs)
IMF

total
reserves

11.7
5.0
4.3
3.5
3.5
2.3
1.8
0.9
0.9
0.9
0.9

81
15
50
43}
54
35
35}
16
7
14
30}

16
9
11}
29
12
9
8
4
2
2
11*

128}
86}
85
426
84}
139
108
112
10
21}
267

1.2
0.8
0.6

4U
65$
9

34
13}
6

n/a
n,'a
61

2.6
6.5

9
—

3
—

>973 (rg. baton tha first nsn in t»i pneast Additional o» Mis an i

As a % of:
normal
imports

additional
oil bills

2}

279

DECEMBER

27,

1973

Hobart Rowen

The Impact of Arab Oil Demands
,

The Western W6rld, which should
have known better, can now see that
, appeasement of • the Arab nations
didn't pay: Europe and Japan, which
had gracelessly bowed to Arab blackmail, are confronted with a new doubling of tile price of crude oil, which is
likely to plunge them into an economic
tailspin.
•
»
International oil experts calculate
'that the world's imported oil bill has
suddenly jumped about $40 billion, on
top of a $17 billion increase created by
higher prices announced October 16.
Oil price inflation of this magnitude
—which'bears no real relation to costs
a - can have a disastrous effect on the
less developed nations, and poses extraordinary problems — possibly unmanageable — Iter tome of the indtutrial countries.
The "Christmas present" of reduced
cutbacks means very little when the
more important factor of prices is considered* This sober thought is begining to be reflected in reaction from,
consuming countries all over the worid.
Japanese authorities, for example,
estimate that if oil imports are maintained at this year** volume, their entire currency reserves of $13 billion
will be wiped out by the higher costs.
And the ball game isn^ over yet: the
new prices, according to the Kuwaiti
oil minister, cover just the first quarter, of 1674. Another boost i^i in the off-

greed should convince sriy fair-piinded
person that the oil weapon is being
wielded primarily, to enhance the
wealth and the economic leverage of
the m a l l group oi nations clustered
around the Persian G u l l

pects that once the Arab-Israeli dispute is settled, the Persian Gulf nations will lower the price of oil in
grateful acknowledgement that their
political goals have been metT.

Their embargo 'against a handful of
nations, and the onagain, off-again series of production cutbacks are merely
devices by a well-run cartel to maxim
ize already swollen profits.

If the price of oil ever moves down,
it will be becsyae_the Arab Oil weapon.—the boycott combined with the unbelievable price jumps—propels others
into a crash program to develop alternate sources of energy.

What will be the Western response
if the Arab nations, inundated by
paper money, take it into their heads

Western response if the

The new market priee few Persian
Gulf oil is about $8.80 a barrel, which
works out to a delivwvd price here of
about $10a barrel, aibiir-itold increase
in * year. But accondlng to energy czar
WilUam E. Simon, the United State*
could boost domestic prodmtfiop
4 blUiori to 0 tthumhamw «t ' t t ' E
barret
v

Arab nations demand
payment for their
oil in gold?9'

Nonetheless Slkofc mates clear that
the administration, i f "toot actually as
sured of an -end to the.-Arab embargo,T
is indeed quite hopeful that its
mends, the Saudis; Kill soon turn toe
spigot on.

" What will be the

to demand partial or total payment
for their oil in gold?
So far, the1 Western World, the
United States included, has betrayed a
shameful impotence in the face, of the
Arabs' economic aggression,, 1 '
Prof. Rfchird Gaxdnpr of Columbia
v h a s pointed out—violates existing to-

There may be some naive observers
left who still believe that the Arab oil
weapon is merely a diplomatic tool
yielded to force Israel back to her old
borders.
-

The world has been willing to delude itself into thinking that if the Inraett "liability" Couldbe brushed aside,
all would be well.

,But t h r ' latest examples of Arab

But is there anyone around who ex-




non's, decision against coupon rntig d gaaollhe at thte tiaie is &
compound not otriy of a fear the bureauoatte mfess Involved but an total
tion thititfeally wont be necessary.
Wfcat is needed at this point, ill
ti«Jt te a long-run prpgntmlor n f r

trials, along the lines of prppoealsjar ~ d y initiated by Sen.
Me**
dale(MBnn.) ,

The Arab nylons, as Gardner mA^
should he p u t S n not** t h a t t b e y « § k

taUSe"'e0(>l,0lniC * * * * * * *

280
THE MONEY MANAGER

Gnomes' of Moscow Recycling
Oil Money to West
By ROGER LOVE
A portion at least Of Arab oil revenues are.being recycled through the.
Eurodollar market to frantic oilhungry borrowexa-rbut perhaps not
in th» way that Western monetary
draftsmen had intended.
Demand for money is certainly
there; first quarter medium-term.
Eurodollar l o a n s by international
banks are estimated to have reached
a record $10.5 bttlkm, nearly four
tittles the $2.9 bUHon total of the
1973 first quarter and more than
doubl* the $4*9 billion of the 1973
fourth quarter.
The iat*et berretwing? -compare
with the previous quarterly record' of$728 billion in the 1978 third quarter.
France, Italy and the United Kingdom drew an estimated $8.2 billion
in official borrowings from the Euromarket in the first quarter, and may
be seeking more than$«-billion additional in the ncirt few months.
Sources say that a portion of the
money borrowed did originate with
oil-producing countries, but some of
it 'bypassed th# traditional financial
pipelines through Zurich, London or
Frankfurt, and came instead through
Moscow.
The recycling: .mechanjenr of the
Moscow "gnomes" worfcd.afe foHo^s: •
hard currencies from Western and
other consumers to oil producers to
pay for oil; hard currencies from oil
producers to Bgypt and Syria for.
Mideast war and re-armament ex- '
penses; hard currencies from Egypt
and Syria to the Soviet Union for
military hardware; and hard currencies from the Soviet Union to Euromarkets for foreign borrowers.
The amounts v involved are difficult
to determine, but some sources indicate that activity of Soviet banks as
Eurocurrency offerers, mainly dollars,
increased substantially in the first
quarter this year, to the extent of
several billion dollars.




Besides the oil-currency-arms circuit to Moscow, the Soviet Union has
also been profiting on foreign sales
of raw material^ at high world prices,
including the prices paid for Soviet
oil deliveries to .many European countries—at Middle-East prices. Soaring
prices for gold, in Western markets,
in small part reflecting Arab demand
for the metal rather than currencies,
has attracted some Soviet bullion
sales, helping to feed the Moscow^
dollar pool and expand Soviet Euro-*
dollar lending, sources say.
Some of this Moscow money, at
interest rates of 100 or better, has
been going to beth oil-strapped industrial countries and chronieally-cash-,
short developing countries through
the Eurodollar market, with hardnosed Soviet bankers* apparently no
readier than-anybody else—including
the oil producer*—to make cash available to the poorest countries at anything less than the highest going,
rate.
The demand for medium-term
Euromoney to meet oil and other payments deficits, appears insatiable.
France raised $?.3 billion in this area
in the first quarter this year', contrasted with no borrowing last year,
and may be seeking a further $8 billion in the ne*t few months. Italy
raised $2.2 billi+n in the first quarter
alone, against about $4.4 billion
through all of last year, and some

281
"projections are that it may seek a
further $2.5 billion in the near future.
British Eurodollar borrowing totaled
$3.7 billion in the first quarter,
against $2.3 billion in all of last year,
and London may seek another $1 billion. Some Euromarket sources see
a further $20 billion in demand for
Ipurocredit in the coming period:
France, $3 billion; Britain, $1 billion;
Italy, $2.5 billion; Japan, $2 billion.;
Brazil, $2. billion; Spain, $1 billion,
and the rest split among other countries.
A t the same time, demand and inflationary
pressures have caused a
sharp shift f r o m the long end of the
Euromarket' iftto the medium-term
area, at seven-ta-ten years maturity.
This - largely. neftecis; accelerating inflation in all industrial countries,
which is making investors increasingly, reluctant to put money into
long-term securities.
I n fact, the total of long-term Euro
issues in the first quarter was down
over 40$ from the final quarter of
1973, with continuing inflation making
it unlikely that the trend will be reversed.
The secondary1 Eurobond
market has also been adversely affected, by a general malaise, sharp
price declines and reports that major
Swiss investment funds were unloading large portions of the Eurobond
portfolios and shying away from new
issues in the face of demands from
fund holders for repayment.
The unprecedented demand for
Euromoney from industrial countries
> has of course boosted interest rates

Activity of Soviet banks as
Eurocurrency offerers, mainly
dollars* Jntreased substantially
in the first quarter this
year, to the extent of several
billion dollars.
and caused governments to- resort to
considerable "arm twisting" pressures on underwriting and issuing
syndicates over terms of their issues
and in some cases the reluctance of
syndicates to proceed with planned
offerings. Some observers say that
the British Government was lucky to
get the terms it did for its recent $2.5
billion ten-year borrowing, even with

3 7 - 2 1 1 O - 74 - 19




Into Proposes A New 'World Bank'
U N I T E D NATIONS—-Iran has pledged $1 billion for a series of wideranging measures to increase world money flows and provide development
funds for the less advanced countries, Iranian Finance Minister Jamshid
Amouzeghar told the three-week special General Assembly session on
economic problems.
" A t the core of these proposed measures is the establishment of a new
special development fund with an initial.capital of $2 billion to $3 billion,
to be financed jointly

by the oil-exporting as well as

industrialized

countries," he said.
Iran will open its plan to any oil-ex-porting and industrialized countries
willing to put up capital, M r . AmMuegit&r said.

v

\

His country wants to establish a special development fund, he said,
because "10 industrial countries have 51% of the vote in. the World Bank
and, as a result; vexy imps>riantprojects h»ve been pr«p«sed by developing
countries and been rejected on political grounds."
His government wants a "one man, one vote" board of governors for
the new institution, representing developing, oil-exporting and developed
countries equally, he added.

.

major
British
commercial
banks
handling the issue.
The spread London obtained over
thxee, s i * or twelve month Eurodeposit rates (at the borrower's
option) is staggered from a respectable 0.375# for the first two years of
the issue to 0.75$ for the final three
years, the latter a rate generally imposed on lesser-quality borrowers.
The "base" Eurodollar deposit rates
have recently been running at a
shade above or below 10 though in
recent weeks they shot to 10% % and
higher.
There is little indication of any
decline in these rates, given both the
enormous projected demand and the
iack of evidence of any intergovernmental consensus on staggering borrowing to avoid driving interest rates
through the roof..
Japan was switched from a lender
to a borrower of Eurodollars under
the lash of the oil crisis. Optimists
hope that Arab oil revenues will more
than make up the gap of supply and
the increased demand. But Arab oil
producers have thus far shown re-:
luctance to lend money at even market rates to international institutions,
which are "politically safe" and which

would also safeguard against currency depreciations and devaluations.
The Arabs appear to wish to keep
veto power over the end-use of their
funds, even in development and balance of payments aid to the poorest
countries, which generally supported
the Arab cause in the Mideast war.
Borrowers from the industrial world,

There is little indication of
any decline in Eurodollar
rates, given both the enormous
projected demand and the
lack of staggering
of borrowings.
who were generally lukewarm if not
opposed to the Arab cause, may well
find similar policies affecting their
attempts to tap Arab cash, via the
Eurodollar market. Denmark, for instance, is a traditionally heavy Eurodollar borrower and is also in Arab
badbooks for its alleged pro-Israel
attitude.
•

282
WORLD FINANCIAL

MARKETS
m a j o r p o r t i o n of O P E C i n v e s t m e n t s .

Morgan Guaranty T r u s t
C o m p a n y of N e w Y o r k

Energy
self-sufficiency*
percentage derived from
domestic sources, in 1971

W h i l e t h e r e is a n e l e m e n t of t r u t h
in all t h e s e

J a n u a r y 1974

oil

prices

on

0
6
1
5
2
7
7
98
74

11
15
18
22
53
51
64
110
89

should

the

U.S.

for

payments
Japan
Italy
Belgium
France
United Kingdom
Germany
Netherlands
Canada
United States

presumptions,

the

ad-

v e r s e i m p a c t of t h e c u r r e n t l e v e l of

the

next

not

be

balance
few

of

years

underestimated.

As

s h o w n in T a b l e 2, n e t i m p o r t s of oil
and gas a m o u n t e d to 1 0 %
U.S.

imports

1973.

This

in

of t o t a l

January-October

ratio

is

considerably

h i g h e r o n l y in J a p a n , b u t it is l o w e r
i n all E u r o p e a n c o u n t r i e s . S i n c e

it

requires s o m e time to d e v e l o p sub"Source: OECD, Economic Outlook

stitutes

for

oil,

these

ratios

give

s o m e i n d i c a t i o n of t h e r e l a t i v e

ad-

v e r s e i m p a c t of h i g h e r oil p r i c e s o n
various countries' imports.

Further-

more, as the table shows, the share
of oil a n d g a s in t o t a l U . S .

The impact of oil

rose sharply

imports

in r e c e n t y e a r s .

This

reflects the fact that i n c r e a s e d

on the dollar

do-

mestic d e m a n d for s o m e y e a r s now
has had to be c o v e r e d entirely

In r e c e n t m o n t h s t h e e x c h a n g e m a r k e t s ' a s s e s s m e n t of t h e d o l l a r

and

other currencies has b e e n influenced
h e a v i l y by t h e d e v e l o p m e n t s in t h e
s u p p l y a n d p r i c e of oil. S o o n

after

t h e c h a n g e s b e g a n t o o c c u r in O c tober,
the

market

view

that

participants
the

adopted

United

States'

by

i m p o r t s . Irv f a c t , b e f o r e O c t o b e r , i.e.
before the
creases

embargo

were

and

price

announced,

lowing

for

the

Alaska

pipeline,

that the volume

it w a s

in-

and

al-

of

the

completion

anticipated

a n d v a l u e of

U.S.

oil i m p o r t s w o u l d i n c r e a s e a t a v e r a g e a n n u a l r a t e s of a b o u t 1 3 %

payments

20%,

would

adversely

a n d 1 9 8 0 a n d t h a t t h e s h a r e of o i l

than

be

affected

those

of

less

Japan

and

Europe.

T h i s v i e w is b a s e d o n s e v e r a l

pre-

respectively,

between

and

e c o n o m y a n d b a l a n c e of

1973

in t o t a l U . S . i m p o r t s w o u l d c o n t i n u e
to mount. This underscores the be-

Table 2

s u p p o s i t i o n s . First, t h e U n i t e d S t a t e s

lief t h a t it w i l l r e q u i r e a m a j o r e f f o r t

Net oil and gas
imports
as percentage ot total imports

is less d e p e n d e n t o n f o r e i g n e n e r g y

o n t h e p a r t of t h e U n i t e d S t a t e s t o

sources than

reverse the trend toward

1970

1972

1973'

6.3
15.1
8.5
7.1
8.6
8.2
4.8
4.0
1.2
(2.5)

7.6
19.6
8.6
7.8
9.9
9.6
5.2
5.6
3.4
(3.2)

10.0
17.3
8.5
8.5
7.7
7.6
6.0
3.5
2.2
(4.4)

most other

industrial

c o u n t r i e s ( s e e T a b l e 1). S e c o n d , its
industrial activity w o u l d b e

United States
Japan
United Kingdom
Germany
France
Italy
Switzerland
Belgium
Netherlands
Canada"

"based on data for i mports prior to the effects of
oil price increases in October
"net exports

World Financial Markets / January




f o r e i g n oil

directly

increasing

imports.

Estimates

of

increased

net

a f f e c t e d r e l a t i v e l y little a s t h e U n i t e d

current-account b a l a n c e s for

oil

a n d g a s i m p o r t s , a n d of t r a d e

States has a large capacity to save
oil a n d e n e r g y in g e n e r a l ,

particu-

larly in t h e h o u s e h o l d s e c t o r . T h i r d ,
this country has a very g r e a t p o t e n tial f o r i n c r e a s i n g its d o m e s t i c

en-

e r g y supplies

be-

come

and

could

self-sufficient

again

in e n e r g y

m a t t e r of y e a r s . F o u r t h , t h e
States'
nancial

1974

large

and

markets

in

United

sophisticated
would

a

attract

fia

industrial
Table

3.

countries
U.S.

are

oil a n d

given

gas

billion on the a s s u m p t i o n

will

not

of imports

exceed

that

of

t h a t t h e r e will b e s o m e
of

oil

prices.

This

will

in

imports

a r e p r o j e c t e d t o rise b y a b o u t

p h y s i c a l volume

and

major

that
in
1973

$11
the
1974
and

weakening
push

the

t r a d e a n d c u r r e n t a c c o u n t s into d e f i -

283
cit a g a i n in 1 9 7 4 a f t e r 1 9 7 3 ' s

brief

earnings

respite. T h e trade b a l a n c e could be

well

in

growth

deficit

by

following

an

$3

billion

$1 b i l l i o n

(customs

this

estimated

year,

surplus

basis)

in

of

1973.

of

U.S.

decline

in

and

response

companies

line

with

profitability

to e a s e d

rect-investment

may

reduced

abroad,

U.S.

in

foreign-di-

controls,

and

due

In v i e w of t h e c o n t i n u e d h i g h g r a i n

to t h e a p p r e c i a t i o n of t h e d o l l a r in

prices, agricultural exports will again

recent months.

do

well,

and

may

even

exceed

In

contrast,

net tourist

expendi-

the already high $181/2-billion

level

tures as well as direct military

of

non-

penditures

last y e a r . T h e

balance on

a g r i c u l t u r a l t r a d e ( e x c l u d i n g oil a n d
gas)

should

favorable,
current
is

be considerably
at

assuming

level

of

maintained,

approximate

dollar

and

more

least

the

devaluation

may

balance

rise

in

from

1973

it s e e m s

moderately,
sales
the

flect

rather

closely

expected

t o a d e f i c i t of p e r h a p s $2 b i l l i o n or

shift a d v e r s e l y

c l u d i n g oil, will b e o f f s e t s i g n i f i c a n t -

trade

and

of

the

that

unlikely

improvement

to

Thus,

w e a k e n i n g of t h e t r a d e b a l a n c e , a n d

t h e a d v e r s e s w i n g in t o t a l t r a d e , in-

an

military
partly

countries.

t h e o v e r a l l c u r r e n t a c c o u n t m a y re-

in

by

increase,

ex-

decline

overseas

well

oil-producing

more

ly

and

may

could

to

a b o u t $6 b i l l i o n this y e a r .
However,

abroad

net

in-

1974.

by a b o u t $4

Beyond

current

deteriorate

accounts

further

on

the

could
of
of

the

the m a j o r items, U.S. interest

t h e d o l l a r o v e r t h e p a s t six m o n t h s

pay-

very

much

different.

be

Outstanding

and

average
low

are

those

could

be

of

likely
last

event

that

agricultural

Along

with

the

United

States,

countries on

n e a r l y all o t h e r i n d u s t r i a l

be

will e x p e r i e n c e c o n s i d e r a b l e

to

year,

an offsetting

interest-bearing
producing

in t h e

e x p o r t s s h o u l d fall.

U . S . l i a b i l i t i e s t o f o r e i g n o f f i c i a l ins t i t u t i o n s of industrial

effective

account

appreciation

v i s i b l e t r a n s a c t i o n s in 1 9 7 4 . A m o n g

m e n t s to nonresidents m a y not

10%

billion

1974,

but

bethere

increase

liabilities

countries.

well

to

Since

in
oil-

it

is

countries
deter-

i o r a t i o n in t h e i r t r a d e a n d

current-

account

will

balances.

There

be

w i d e v a r i a t i o n in t h e e x t e n t of t h i s
weakening,

however.

Germany

still

s o m e w h a t doubtful that U.S. interest

is likely to h a v e a s i z a b l e t r a d e sur-

r a t e s in 1 9 7 4 o n t h e a v e r a g e will b e

plus. T h e c u r r e n t p a y m e n t s b a l a n c e s

below those
ments

on

in 1 9 7 3 , i n t e r e s t

these

foreign

m a y not c h a n g e m u c h .

pay-

liabilities

Repatriated

of

Britain

will

and

Italy,

already

bad,

worsen

probably

further.

Can-

a d a and Holland are hardly affected
a t all by t h e oil d e v e l o p m e n t s , o n a

Table 3

net

Trade
and current-account
in billions of dollars
change in net
oil/gas balance
in 1974

guesstimates

payments

-11
+ 1/2
-11
-4
-6
-6
-51/2
-21/2
- 1/2
-11/2




because

of
gas

resources.
The
trade balance
1973
1974

current account
1973
1974

+1
+ 11/2
+3%
-51/2
+ 12
+ 1V2
-5
+ 1/2
+ 1/2
-21/4

-3
+1%
-31/2
-81/2
+ 51/2
-31/2
-8
-2
0
-3

+2
-1/2
0
-31/2
+31/2
+ 1/2
-3
+3/4
+11/2
+1/4

-2
-1/2
-7
-6
-31/2
-41/2
-51/2
-2
+ 1/2
0

guesstimates

presented

in

T a b l e 3 imply that the m a j o r industrial c o u n t r i e s
stantial

United States
Canada
Japan
United Kingdom
Germany
France
Italy
Belgium-Lux.
Netherlands
Switzerland

basis,

t h e i r o w n c o n s i d e r a b l e oil a n d

will

collective

achieve

a

sub-

improvement

in

their non-oil and gas trade performa n c e . M o s t of this g a i n c a n b e a n t i c i p a t e d to a r i s e t h r o u g h i n c r e a s e d
OPEC-country

spending

on

trial

products,

together

with

net

improvement

developing

indus-

vis-d-vis

countries

—

some

non-oil,
perhaps

t h r o u g h s o m e d e c l i n e in c o m m o d i t y

Morgan Guaranty Trust Company

j

284
p r i c e s — or t h r o u g h e n l a r g e m e n t of
the

Socialist

countries'

net

deficit

S o m e of t h e c o n j e c t u r e t h a t
been

as to t h e

circulating

has

amount

of O P E C i n v e s t m e n t s l i k e l y t o f l o w
t o t h e U n i t e d S t a t e s in 1 9 7 4 is a l most

certainly

account

balance.

Indeed,

progress

is b e i n g m a d e o n f a c i l i t a t i n g c a p i t a l
o u t f l o w s . A t t h e t u r n of t h e y e a r ,

position with the West.

exaggerated.

Deci-

s i o n s c o n c e r n i n g t h e i n v e s t m e n t of

a

s i g n i f i c a n t r e l a x a t i o n of U . S . c a p i t a l
controls w a s announced: the
est

equalization

tax

was

inter-

reduced;

the regulations covering U.S. direct
investment

abroad

were

eased

to

the extent that they no longer c o m -

based

p e l t h e f i n a n c i n g a b r o a d of n e w in-

factors,

including

v e s t m e n t , a n d in f a c t p e r m i t n e t r e -

r a t e s of r e t u r n , s a f e t y of

principal,

s u r p l u s oil r e v e n u e s w i l l b e
on

a

variety

of

p a y m e n t s of p a r t of U . S . c o m p a n i e s '

a n d l i q u i d i t y . F r o m t h e v i e w p o i n t of

outstanding foreign debts; and

such criteria, U.S. financial

ceilings covering foreign claims

markets

offer s o m e attractive investment o p -

banks and

portunities. H o w e v e r , as will be dis-

tutions

c u s s e d in a s u b s e q u e n t s e c t i o n , in-

the
of

amount.

vestment
just

in

one

the

of

a

United

number

States

of

c h a n n e l s for c a p i t a l f l o w s f r o m
oil-exporting

to

the

the

oil-importing

countries. O P E C

c o u n t r i e s will

doubtedly

to

want

investments

in

is

possible

of

were

raised

regards

by

capital

a

insti-

modest

inflows,

the

c o n t i n u e d a p p l i c a t i o n of F e d e r a l R e serve Regulation M — w h i c h imposes
reserve

requirements

on

banks'

un-

Euro-dollar repatriation to the U n i t e d

their

diversify

terms

As

nonbank financial

S t a t e s — a p p e a r s to i n d i c a t e t h a t t h e

currency

Federal

Reserve

is

interested

in

a n d p o l i t i c a l risks. E v e n a s r e g a r d s

moderating

dollar-denominated investments, the

f l o w s . It a l s o s h o u l d b e

recognized

Euro-dollar and Euro-bond

that

large-scale

m a y offer relatively m o r e
r a t e s of r e t u r n t h a n a r e

markets
attractive

obtainable

in t h e U . S . d o m e s t i c m a r k e t .
invested
course,

in

the

do

not

Euro

Funds

markets,

result

in

of

capital

the

equity

short-term

possibility

capital

of

investments

in U . S .

in-

compa-

n i e s a n d in U . S . r e a l e s t a t e by f o r eign parties already has stirred concerns
the

in

some

quarters,

including

Congress.

flows to the United S t a t e s unless the
funds are
If t h e

relent to U.S.

United

very

the

to

ob-

dollar

strong.

The use of

re-

c a p i t a l inflows,

c e i v e l a r g e net
viously

residents.

States w e r e

Too

would
strong

OPEC revenues

become
a

dollar

The

oil r e v e n u e s of t h e O P E C

na-

would adversely affect our trade and

t i o n s c a n b e p r o j e c t e d t o rise f r o m

c u r r e n t - a c c o u n t b a l a n c e s . In e f f e c t ,

about

a l a r g e s h a r e of t h e c o m b i n e d

p r o x i m a t e l y $ 1 0 5 b i l l i o n in 1 9 7 4 . T h i s

cur-

$22

r e n t - a c c o u n t d e f i c i t of i n d u s t r i a l n a tions with the O P E C countries would

crude

be

billion

projection
oil

in

1973

assumes

to

that

production

ap-

OPEC

averages

ap-

United

States —

p r o x i m a t e l y 3 4 m i l l i o n b p d in

probably an unacceptable

develop-

c o m p a r e d with nearly 3 0 million bpd

shifted

to

the

in 1 9 7 3 — p o s s i b l e o n l y if t h e

ment.

1974

Arab

T h u s , if t h e U n i t e d S t a t e s r e c e i v e s

producers end their cutbacks — and

a d i s p r o p o r t i o n a t e s h a r e of t h e oil-

t h a t oil p r i c e s r e m a i n a t r o u g h l y t o -

exporters'

day's

investible

funds,

these

levels.

This

projection

also

large inflows will n e e d to be offset

m a k e s a l l o w a n c e for t h e i m p a c t o n

by U . S . c a p i t a l o u t f l o w s to a v o i d t o o

average

strong

a g r e e m e n t s n o w in e f f e c t in a n u m -

a dollar

and

excessive

de-

t e r i o r a t i o n of t h e c o u n t r y ' s c u r r e n t -

World Financial Markets / January




1974

oil

prices

b e r of o i l - p r o d u c i n g

of

participation

countries.

285
T h e p o s s i b i l i t y of s u c h a n i n c r e a s e

w o r l d ' s l a r g e s t oil e x p o r t e r , h a s p u b -

in oil r e v e n u e s h a s r a i s e d q u e s t i o n s

licly

concerning

expressed

reservations

about

and

t h e m a g n i t u d e of t h e m o s t r e c e n t oil

p a r t i c u l a r l y w h e t h e r it is f e a s i b l e for

price increases, and has suggested

the world's financial m a r k e t s to ab-

that s o m e price reduction should be

their

disposition,

s o r b s u c h l a r g e s u m s not o n l y this

considered. A relatively small reduc-

y e a r but in t h e y e a r s a h e a d . S e v e r a l

tion,

e.g.,

about

10%

would

still

observations concerning the magni-

l e a v e c r u d e oil p r i c e s h i g h

tude

to t h e p r i c e s of m a n u f a c t u r e d g o o d s

of

these

revenues

and

their

a n d to t h e m e d i u m - t e r m e q u i l i b r i u m

absorption can be made.
It is q u e s t i o n a b l e w h e t h e r t h e oil
r e v e n u e s of t h e O P E C

relative

nations

ac-

p r i c e level f o r oil, b u t it w o u l d b e a
s t e p in t h e d i r e c t i o n of m a k i n g p a y -

tually will r e a c h $ 1 0 5 billion. C u r r e n t

ment

p r i c e s f o r oil a r e o n t h e h i g h s i d e .

oil i m p o r t bills, a n d t h e e m p l o y m e n t

In

of

the

past,

OPEC

countries

ex-

pressed concern because the price

more

of t h e i r m a j o r e x p o r t h a d n o t r i s e n
in t a n d e m

w i t h t h e p r i c e s of

their

of

the

consuming

producing

countries'

countries'

revenues,

manageable.

It s e e m s , f u r t h e r m o r e , not u n l i k e ly

that

the

combination

of

higher

i m p o r t s . A s s h o w n in T a b l e 4, h o w -

oil p r i c e s , n e w c o n s e r v a t i o n

meas-

ever, the most recent

ures, and slower e c o n o m i c

growth

r o u n d of oil

price increases has much more than

in t h e i n d u s t r i a l c o u n t r i e s m a y c u r b

r e d r e s s e d t h e p a s t i m b a l a n c e in rel-

s o m e w h a t t h e d e m a n d for oil. It is

ative price m o v e m e n t s . T o be sure,

p o s s i b l e t h a t t h e v o l u m e of oil c o n -

the many years during which crude

s u m e d in t h e i m p o r t i n g c o u n t r i e s a s

oil p r i c e s l a g g e d w e l l b e h i n d t h e in-

a g r o u p in 1 9 7 4 m a y b e little c h a n g e d

c r e a s e s in p r i c e s of

from the 1973

goods

represent

manufactured

substantial

country income foregone.

OPEC

Nonethe-

level.

If oil p r i c e s w e r e to b e
say,

by

10%

from

reduced,

today's

levels,

less, t h e oil p r i c e a d j u s t m e n t s m a d e

a n d if O P E C oil p r o d u c t i o n w e r e to

last O c t o b e r w e r e m o r e t h a n suffi-

remain

cient

1 9 7 4 oil r e v e n u e s of t h e O P E C c o u n -

to

restore

the

purchasing

p o w e r of t h e o i l - e x p o r t i n g c o u n t r i e s .

at

its

tries w o u l d

1973

level,

then

be a b o u t $85

the

billion —

T h e f u r t h e r d o u b l i n g of oil p r i c e s at

perhaps a m o r e realistic expectation

t h e t u r n of t h e y e a r h a s put t h e p r i c e

than the previously mentioned $105

of c r u d e oil s u b s t a n t i a l l y o u t of line

billion.

relative

to t h e

prices

of

manufac-

t u r e d g o o d s , a s w e l l a s of a g r i c u l tural

commodities

and

non-ferrous

metals.
export
terms

It

prices

new

oil

prices

represent

in t h e ability of t h e O P E C c o u n t r i e s
to p u r c h a s e g o o d s a n d s e r v i c e s in

Table 4
Comparative
in U.S. dollar

The

a b o v e all a v e r y s i g n i f i c a n t i n c r e a s e

appears

also

that

prices may be above

crude

oil

medium-term

the world

market. The

capacity

of

the oil-exporting countries to m a k e

e q u i l i b r i u m l e v e l s . W i t h t h e m o s t rec e n t r o u n d of p r i c e i n c r e a s e s , t h e r e

index numbers, base 1950 = 100
1970

latest >

1960
150
209
Manufactured
111
203
goods
126
Food
94
215
269
Non-ferrous
base metals
124
105
681
Saudi Arabian
light crude
108
"Third quarter 1973 for manufactured goods,
food, and non-ferrous base metals; January 1,
1974 for Saudi Arabian light crude




productive

u s e of s u c h g o o d s

and

s e r v i c e s t e n d s to b e u n d e r e s t i m a t e d ,

w a s a d r a m a t i c c h a n g e in t h e e c o -

h o w e v e r . T o b e s u r e , s e v e r a l of t h e

n o m i c s of t h e e n e r g y i n d u s t r y . T h e

OPEC

countries,

will

future be

able

n e w oil a n d g a s r e s o u r c e s , a s w e l l

to

as m a j o r e f f o r t s to d e v e l o p a l t e r n a -

their

tive e n e r g y s o u r c e s — w h i c h in t h e

e v e r , will b e a b l e t o s p e n d

l o n g run c o u l d t u r n o u t t o b e c h e a p e r

tively m o s t or all of t h e i r oil

t h a n oil at t o d a y ' s p r i c e s . I n d e e d , a

ings.

spokesman

for

Saudi

Arabia,

in-

the

make

the

Saudi

producer,

for the f o r e s e e a b l e

p r e s e n t oil p r i c e level will s p u r

Arabia,

including

largest

t e n s i v e d e v e l o p m e n t of e x i s t i n g a n d

u s e of o n l y a f r a c t i o n

revenues.

Many

others,

of

how-

producearn-

T h e major oil-exporting countries'

Morgan Guaranty Trust Company /

286
g o o d s i m p o r t s f r o m t h e r e s t of t h e
world

totaled

about

$17

billion

1 9 7 2 . In 1 9 7 3 , t h a t f i g u r e m a y

likely t o r e m a i n v e r y l a r g e .
M o r e o v e r , t h e p r i c e s of t h e g o o d s

in

well

h a v a b e e n close to $25 billion.

As

p u r c h a s e d by the p r o d u c i n g

coun-

tries will increase c o n s i d e r a b l y as a

t o t a l O P E C oil r e v e n u e s w e r e a b o u t

result of t h e i n f l a t i o n a r y f o r c e s

$ 1 5 b i l l i o n a n d $ 2 2 b i l l i o n in

in

and

1973

respectively,

it

1972

is

clear

motion

by

increases.

recent

This would

bring

about

exporting countries spent more

on

r e c e n t s w i n g in t h e t e r m s of

imports

oil

between the oil-producing and con-

received

in

suming

revenues.
In f a c t , six of t h e O P E C c o u n t r i e s
— Algeria, Iran, Iraq, Indonesia,

Ni-

partial

set

price

at

they

a

oil

t h a t in b o t h y e a r s s o m e of t h e o i l -

than

least

the

countries.

reversal

Since

of

the
trade

exchange

r a t e s c a n p l a y o n l y a m i n o r r o l e in
the adjustment process b e t w e e n the

g e r i a , a n d V e n e z u e l a — h a v e in t h e

oil-producing and consuming

past

im-

t r i e s , t h e a d j u s t m e n t is l i k e l y t o o c -

de-

cur

been

porters,

substantial

both

velopment
rowers

of

recipients

assistance,

in t h e

markets.
debt

as

capital
of

and as

international

bor-

directly

through

coun-

relative

price

changes.

capital

In s u m ,

The

combined

external

combined

these

countries

probably

it s e e m s

likely that

expenditures

on

the

imports

of g o o d s b y t h e o i l - e x p o r t i n g

coun-

e x c e e d e d $ 1 7 b i l l i o n a t t h e e n d of

tries could easily r e a c h $35

billion

1 9 7 3 , i n c l u d i n g m o r e t h a n $5 b i l l i o n

or m o r e

b o r r o w e d in t h e E u r o - c u r r e n c y m a r -

oil

ket since 1970.

billion.

Furthermore,

per capita

incomes

in 1 9 7 4 , i m p l y i n g

revenues

on

Since

the

many

unspent

order
of

of

$50

oil

the

ex-

porters will b e a b l e to s p e n d

most,

in t h e six O P E C c o u n t r i e s j u s t m e n -

if not all, of t h e i r r e v e n u e s , t h e b u l k

t i o n e d r e m a i n v e r y l o w by t h e s t a n d -

of t h i s $ 5 0 b i l l i o n will a c c r u e t o

ards

of

the

developed

countries,

also

represents

the

i n c r e a s e s . In t h e a t t e m p t to i m p r o v e

current-account

importing countries with the

economies,

nations, w h i c h o n e w a y or

m o s t of t h e

oil-exportare

in t h e p r o c e s s of m a p p i n g o u t , v e r y

deficit

approximate

living s t a n d a r d s a n d t r a n s f o r m t h e i r

ing c o u n t r i e s a l r e a d y have, or

a

h a n d f u l of c o u n t r i e s . T h i s $ 5 0 b i l l i o n

e v e n c o n s i d e r i n g t h e r e c e n t oil p r i c e

of

the

oil-

OPEC
another

h a s t o b e f i n a n c e d in 1 9 7 4 .
There

are

a number

of

possible

a m b i t i o u s d e v e l o p m e n t p r o g r a m s in-

approaches

v o l v i n g s i g n i f i c a n t e x p a n s i o n of t h e i r

from the oil-exporting to the oil-im-

e c o n o m i c and social infrastructures,

porting countries.

and

transfer

major

industrialization

pro-

grams. T h e y also are b e c o m i n g
rectly
the

involved

in m a n y

petroleum

sectors

of

the

primary

former.

channeling

The

reserve

Some

funds

latter

could

assets

observers

to

have

suggested, for e x a m p l e , that oil-im-

ranging

p o r t i n g c o u n t r i e s c o u l d sell g o l d t o

from the exploration for and devel-

the producers at market prices. Non-

opment

O P E C countries have gold

of

production

industry,

di-

to

crude
and

supplies,

to

the

distribution

of

end

amounting

to

reserves

approximately

one

p r o d u c t s . M a n y of t h e p r o j e c t s a n d

billion o u n c e s .

p r o g r a m s e n v i s a g e d by t h e p r o d u c -

tries also could transfer S D R s ,

ing c o u n t r i e s a r e h i g h l y c a p i t a l

s u p p l y of w h i c h c o u l d b e i n c r e a s e d

tensive,
tures

and

and

dollars.

will

require

imports

In a d d i t i o n ,

of

in-

expendi-

billions

military

Oil-importing

counthe

by n e w a l l o c a t i o n s .

of

S o m e of t h e e x c e s s O P E C

reve-

equip-

n u e s c o u l d b e p l a c e d in t h e

EuroEuro

m e n t p u r c h a s e s by s o m e O P E C n a -




b a n k s to c h a n n e l the funds to

the Soviet bloc, have been and are

World Financial Markets / January

c u r r e n c y m a r k e t , l e a v i n g it t o

tions, f r o m both the W e s t and from

oil-consuming nations, partly to help

1974

the

287
finance

current-account

defi-

cits. W i t h t h e n e t s i z e of t h e

their

oil-exporting

Euro-

countries.

A n o t h e r a p p r o a c h to r e c y c l i n g t h e

currency market having a p p r o a c h e d

surplus

a n e s t i m a t e d $ 1 5 0 b i l l i o n at t h e e n d

channel them through a multilateral

of 1 9 7 3 , up f r o m a p p o x i m a t e l y

organization, such as the IMF.

$105

oil

revenues

would

be

to

One

b i l l i o n a t t h e e n d of 1 9 7 2 , this m a r -

proposal being given

k e t h a s d e m o n s t r a t e d t h e a b i l i t y to

w o u l d involve a n e n l a r g e m e n t of t h e

a b s o r b a l a r g e influx of n e w f u n d s .
T h i s is not to s a y t h a t t h e r e
no l i m i t a t i o n s o n t h e

Euro-currency

m a r k e t ' s c a p a c i t y to a b s o r b

funds.

l i m i t s to t h e a m o u n t

There

are

credit

risk t h a t

Euro

b e w i l l i n g to t a k e
f u n d s to

are

banks

of

would

in r e l e n d i n g
with w e a k

countries

the
cur-

General

consideration

Arrangements

whereby

the

to

Borrow,

would

Fund

borrow

from the oil-exporting countries, and
relend

to

tries.

the

The

oil-importing

value

of

the

coun-

exporting

countries' claims on the I M F
be

guaranteed

in

terms

could

of

SDRs.

T h e t e r m s of t h e o i l - e x p o r t e r s ' l o a n s ,

r e n t - a c c o u n t b a l a n c e s of p a y m e n t s ,

including the value guarantee, would

and

h a v e to b e s u f f i c i e n t l y a t t r a c t i v e to

mounting

ness. T h e r e

external

indebted-

is, in s h o r t , no

assur-

induce

them

to

participate.

More-

a n c e t h a t t h e d i r e c t i o n of s u c h l o a n s

o v e r , I M F c r e d i t s w o u l d h a v e to b e

— which

for m u c h l o n g e r t e r m s t h a n c u r r e n t

would

be

determined

l a r g e p a r t by f a c t o r s s u c h a s
t i v e i n t e r e s t rates, c r e d i t

in

rela-

demands,

short-term
such

a

facilities.

scheme

by

out

to

the

creditor

flow

it c o u l d p e r m i t a n o r d e r l y

as d e t e r m i n e d

policies — would

be

the

in t e r m s of i n t e r n a t i o n a l

best

payments

of

oil

mutual

be

the Euro banks, and national capital

creditworthiness

the

However,

could

and

revenues

satisfaction

debtor

to

if

worked
of

countries,

the

recycling

consuming

c o u n t r i e s , a n d m a k e it p o s s i b l e for

equilibrium.
S o m e of t h e s u r p l u s oil r e v e n u e s

t h e latter to a v o i d a b r e a k d o w n into

m a y b e i n v e s t e d d i r e c t l y in t h e n a -

c o m p e t i t i v e t r a d e a n d p a y m e n t s bi-

tional money and bond markets

of

lateralism.

the

or

developed

without

countries,

special

with

bilateral

arrange-

ments involving e x c h a n g e - r a t e guarantees,

or

special

security

issues.

Still a n o t h e r p o s s i b i l i t y c o u l d
volve

long-term

capital

flows

countries.

In

this

The oil-producing countries already

fall d e v e l o p m e n t

h o l d p a r t of t h e i r r e s e r v e a s s e t s , for

less-developed

e x a m p l e , in s t e r l i n g a n d d o l l a r

category
assistance

countries

Part

of this a s s i s t a n c e

a n c e s ( b a n k d e p o s i t s , T r e a s u r y bills,

the

form

a n d g o v e r n m e n t b o n d s ) in t h e U n i t e d

credits. T h e oil-exporting

bal-

in-

from

t h e o i l - e x p o r t i n g to t h e o i l - i m p o r t i n g

bilateral

could

take

grants

and

countries

have

in t h e p e r s p e c t i v e of t h e

of e s t a b l i s h i n g v a r i o u s d e v e l o p m e n t

size

of

the

major

money

tries'

and

whether
value

industrial
bond

measured

coun-

markets —

in t e r m s of

of o u t s t a n d i n g

the

securities,

or

indicated

the

(LDCs).

Kingdom and the United States. But
combined

also

of

would
to

their

intention

institutions through w h i c h assistance
would be c h a n n e l e d . M o r e o v e r ,
isting

development

finance

izations, including the World

t h e v o l u m e of a n n u a l n e w i s s u e s —

the

African Development Bank, and the

of

oil

revenues

that

c o u l d b e a b s o r b e d by t h e s e m a r k e t s
is s u b s t a n t i a l .
ments
more

might
than

In f a c t , s u c h
initially

a shift

invest-

involve

in a s s e t

little

owner-

s h i p f r o m t h e c e n t r a l b a n k s of oili m p o r t i n g c o u n t r i e s to t h o s e of t h e




Development

Bank,

the

amount

Asian

ex-

organ-

Inter-American

Bank,

Development

the

Bank

c o u l d s e e k f u n d i n g for a p o r t i o n of
t h e i r l e n d i n g p r o g r a m s f r o m t h e oilexporting countries.
S o m e of t h e s u r p l u s oil r e v e n u e s
also

probably

will

Morgan Guaranty Trust

be

utilized

Company

for

288
various

long-term

investments,

in

e q u i t i e s , in r e a l e s t a t e , a n d e v e n in
direct

investments.

However,

in

approximately
1973

$27

billion

represented

at

about 4

end-

months'

cover, based on the import outlook

1 9 7 4 it is likely t h a t t h e b u l k of t h e

for t h e c o m i n g y e a r . A d r o p b a c k to

revenues

3 months' cover would allow a

ways
in

will

be

described

the

employed
earlier:

Euro-currency

in

deposited

market;

v e s t e d in n a t i o n a l m o n e y a n d
markets;

channeled

the

inbond

through

the

I M F ; a n d d i s b u r s e d a s a i d to d e v e l oping

countries.

modest

Only

a

s e r v e r u n d o w n of $3 b i l l i o n ,
would cover 1 3 %
current-account
2Va

into

stock markets and other equity

in-

v e s t m e n t s in t h e n e a r f u t u r e .

The

estimated

deficit.

A

drop

to

would

cover

billion, or 3 1 %

relatively

p o r t i o n is l i k e l y to g o

months'

of t h e

re-

which

yield

$7

of t h e d e f i c i t .

remainder

of

the

increased

c u r r e n t - a c c o u n t deficit will have to
be

met

Many

through

capital

uncertainties

inflows.

obviously

exist

in t h i s a r e a . In t h e p a s t , n e a r l y t w o t h i r d s (or a b o u t $11 b i l l i o n in 1 9 7 2 )

Impact of the oil

of t h e t o t a l n e t c a p i t a l f l o w f r o m t h e
O E C D countries (about $18 billion)

situation on the LDCs
F o r t h e l a r g e g r o u p of t h e

to t h e L D C s h a s b e e n f r o m

less-de-

private

s o u r c e s . In s o m e L D C s , t h e a d v e r s e

veloped countries (LDCs) which are

impact

of

not m a j o r p e t r o l e u m producers, the

current

account

c o s t of p e t r o l e u m

payments may m a k e private lenders

imports will

rise

f r o m a n e s t i m a t e d $5 b i l l i o n in 1 9 7 3

the

oil

situation

of t h e

on

the

balance

of

and investors more cautious.

to a r a n g e of $ 1 3 - $ 1 5 b i l l i o n in 1 9 7 4 ,

As regards official capital

flows,

assuming currently prevailing prices

it is w o r t h n o t i n g t h a t o f f i c i a l d e v e l -

a n d 1 9 7 3 v o l u m e s . T h e 1 9 7 3 oil i m -

opment

port

a

c o u n t r i e s in 1 9 7 2 a m o u n t e d to a b o u t

1972

$ 7 b i l l i o n . T h i s a i d e f f o r t b y t h e in-

level

represented

substantial

increase

already

over the

assistance from the

OECD

l e v e l of $ 3 . 7 billion. A l s o , s o m e s l o w -

dustrialized nations would be

ing

t h a n o f f s e t by t h e e s t i m a t e d

in

L.DC

export

growth

is

ex-

more
$9-bil-

p e c t e d . A s a result, a t r a d e

deficit

lion i n c r e a s e in L D C p e t r o l e u m

of

basis)

p o r t c o s t s . M o r e o v e r , in v i e w of t h e

about

for

all

$22

billion

(c.i.f.

non-oil-exporting

LDCs

for

industrialized nations' o w n projected

1 9 7 4 s e e m s likely, v e r s u s a b o u t $11

current-account

b i l l i o n last y e a r a n d $9.5 b i l l i o n

t e n a n c e of t h e a i d f l o w a t

1972. Their

net deficit on

in

services

deficits, the

l e v e l s m a y n o w b e in q u e s t i o n . P r e vious

The

f l o w s a t s o m e t h i n g c l o s e to

non-oil-exporting
facing

a

LDCs

are

current-account

mainpresent

w o u l d a d d p e r h a p s a billion dollars.

therefore

im-

commitments

may

hold

the

recent

l e v e l s in t h e n e a r t e r m , b u t c e r t a i n l y

d e f i c i t of a b o u t $ 2 3 b i l l i o n t h i s y e a r ,

no i n c r e a s e a p p e a r s f e a s i b l e . T h u s ,

which

a s e a r c h f o r w a y s to s h i f t m o r e

compares

with

an

annual

a v e r a g e of $ 1 0 billion in t h e

1970-

73 period.

is

P a r t of t h i s d e t e r i o r a t i o n n o d o u b t
will

be

these

the aid effort to the O P E C

covered
countries'

by

drawdowns

international

serves. Indeed, recent record

of
re-

rates

likely.

This

d i r e c t i o n of f l o w s w i t h i n e x i s t i n g a i d
programs;

and

the O P E C

oil-exporting

non-oil-exporting

L D C s a c u s h i o n to a b s o r b a portion
of

the

increment

t e r m s of

World Financial Markets / January




1974

in

oil

import cover,

(b)

mechanisms

to

directly increase the aid flows from

have

the

essentially

b r e a k s d o w n into t w o p a r t s : ( a ) r e -

of e x p o r t g r o w t h a n d c a p i t a l i n f l o w s
given

search

of

nations

nations toward the

non-

LDCs.

As regards the former, the poten-

costs.

In

tial

reserves

of

1973 figures on d e v e l o p m e n t credits

seems

limited.

Based

on

mid-

289
from the World Bank,
Inter-American

IDA and

Development

the

Bank,

these possibilities b e c o m e s an
portant

question.

In t h e s h o r t

imrun,

12 major oil-exporting countries ac-

the

c o u n t e d for a b o u t 1 2 % , or m o r e t h a n

short-term

$ 3 billion, of t o t a l o u t s t a n d i n g l o a n s

p u r c h a s e of oil, w h i c h c o u l d later

a p p r o a c h i n g $ 2 7 billion. A c t u a l
f l o w s of

aid funds from

sources

to

amounted

these

to $ 7 7 0

all

12

net

OECD

countries

credits

could

to

finance

r o l l e d o v e r or r e - f i n a n c e d
er-term

debt.

grant
the

intojofig-

Another

possibility

w o u l d be the creation o f a new I M F

1972,

l o n g - t e r m f a c i l i t y s i m i l a r to t h a t n o w
a v a i l a b l e to L D C s for c o m p e n s a t i n g
d r a w i n g s d u e to e x p o r t s h o r t f a l l s .

all

LDCs.

accomplished

Some

by

partial

current

redirection
in t h e

prepayment

disbursed

loans

and

flows

could

short
of

run

already

relending

of

by oil

exporters

to t h e s o u r c e . T h e

back

aid

in

countries

or 9 . 8 % of t h e t o t a l of s u c h f l o w s to

be

million

OPEC

short-run

p o t e n t i a l f o r r e d i r e c t i o n of this sort,

However,
no d o u b t

other

take

regional

organizations

m a k e project

making

funds

di-

program

before
OPEC

r e c t e d t o w a r d t h e L D C s — is c l e a r l y
m u c h greater. T h e various possibili-

LDCs.

—

rechanneling

through

the

IMF, development assistance directly f r o m O P E C to t h e L D C s ,

greater

f u n d i n g of e x i s t i n g i n t e r n a t i o n a l d e velopment
OPEC

organizations

nations — have already

mentioned
However,

in t h e p r e v i o u s
the

n e e d s of s o m e
ciently

from

urgent

near-term

that

the

been

financial

L D C s will b e

an

suffi-

timing

of

(or

greater

on

general

sup-

funding
would

new

Further,

time

from

the

have

funds

much
to

organization

the

available

of

OPEC-financed

development

b a n k , a l r e a d y m e n t i o n e d by t h e S e c r e t a r y - G e n e r a l of O P E C , will r e q u i r e
considerable

the

section.

unless

it m i g h t b e s o m e

countries

impact

ties

ex-

similar

essentially

loans, so t h a t

port) loans,

OPEC

will

For

t h e W o r l d B a n k w e r e w i l l i n g to start

h o w e v e r , p r o b a b l y d o e s not e x c e e d

gory — increasing

time.

ample, the World Bank and

$2 b i l l i o n to $3 billion.
T h e p o t e n t i a l in t h e s e c o n d c a t e -

possibilities

more

Among
LDCs,

the

impacts

time.

the

petroleum

non-oil

primary

of

the

exporting

and

new

situation

secondary

international

will

of

course

v a r y w i d e l y , d u e to t h e s k e w e d distribution

of

gold

and

foreign-ex-

c h a n g e r e s e r v e s , d i f f e r e n c e s in relative d e p e n d e n c e

Table 5
Selected

less-developed

on imported

t r o l e u m a n d l e v e l s of

countries

A l t h o u g h v e r y a p p r o x i m a t e in

millions of dollars, c.i.f.

1974 total
$

295
800
600
1,200
820
225
2,200
450
110
225

increment vs
increment
% of
1974 over 1973 gross reserves
$

175
500
350
550
500
145
1,300
200
75
145

(a) Based on U.N. data (or 1971, except for Brazil and Chile.
(b) Excludes Panama.




some

c a s e s , t h e d a t a in T a b l e 5 a t t e m p t

estimated 1974 oil imports

Chile
Korea
Philippines
India
Taiwan
Central America (t>)
Brazil
Mexico
Peru
Argentina

pe-

development.

59%
48
41
40
33
31
20
17
13
12

% of energy
consumption not
covered by
domestic
production (a)
60%
54
97
17
52
93
45
9
39
10

some evaluation

of t h e primary

ef-

f e c t s in a s e l e c t i o n of c o u n t r i e s for
w h i c h dar-i

a r e r e a d i l y a v a i l a b l e . Of

this g r o u p , C h i l e a p p e a r s to b e t h e
most

vulnerable

due

to

relatively

h i g h d e p e n d e n c e o n oil a n d low international

reserves,

although

the

oil c r i s i s c o m e s at a t i m e w h e n t h e
international

financial

community

has b e c o m e m o r e disposed

toward

Chilean credits. Brazil, w h i c h heads
the

bottom

half

of t h e

ranking,

a n i n t e r e s t i n g c a s e of h i g h
dependence

on

petroleum

is

overall
imports

but s u f f i c i e n t f i n a n c i a l r e s o u r c e s to

Morgan Guaranty Trust

Company

290
g e t t h r o u g h t h e s h o r t run.
Secondary

impacts

of

the

c r i s i s w i l l a f f e c t all L D C s
degree

regardless

of

in

oil

some

relative

de-

p e n d e n c e o n oil i m p o r t s . F o r e x a m ple,

the

slowdown

in

economic

g r o w t h in t h e U n i t e d S t a t e s , J a p a n ,
a n d W e s t e r n E u r o p e , b r o u g h t o n in
p a r t b y t h e w o r l d w i d e oil s h o r t a g e ,
will

reduce

d e m a n d for m a n y

exports — probably

LDC

affecting

com-

modity prices as well as the growth
of m a n u f a c t u r e d e x p o r t s . A l s o , s h a r p
p r i c e i n c r e a s e s for i n d u s t r i a l g o o d s
i m p o r t e d by m a n y L D C s for u s e in
manufacturing — as
increases
to

in

fuel

inflationary

well

pressures.

petrochemical

scarcities

versely

both

affect

as

direct

costs — w i l l

add

Finally,
will

ad-

industry

and

agriculture, t h e latter d u e to fertilizer
shortages. Thus, the secondary
p a c t of t h e oil s i t u a t i o n , w h i l e
quantifiable
mainly

to

at

present,

aggravate

balance-of-payments
cussed

World Financial Markets / January




1974

above.

the

will

imnot
tend

primary

effects

dis-

291
T H E WASHINGTON POST

A p r i l 20,

1974

Big Powers to Tap
Euro-dollar Mart1
For Arab Oil Debt
From News Dispatcher

TOKYO—A meeting of
some of the world's major
industrial countries on the
oil problem ended yesterday
with forecasts they would
have to pay billions of dollars to Arab and other petroleum producers and then
borrow much of the money
back.
The conclusion emerged
from a two-day meeting of a
working party from the Organization for Economic Cooperation and Development,
a club of 24 of the world's
advanced countries. Eleven
countries were represented




at the meeting, the United
States by outgoing Treasury
Under Secretary Paul A.
Volcker.
The group's spokesman, .
Dr. Otmar Emminger, vice
president of West Germany's.
Central Bank, p r e d i c t e d ; ,
the huge sums of dollars be- ing accumulated by oil pro>.
ducing countries, would b«r;
partly channeled back to '
western nations and Japan,,
through the European cur- '
rency market.
Although Emminger re- ^
fused to discuss figure*, conference sources said OECD ;
countries would suffer bal- '«
ance of payments deficits of'
|25 to $40 billion this year ;
trying to pay for oil.
They forecast also that '
Middle East countries and ;
other producers would eon- *
trol a hoard of $200 to $250 ;
billion in "oil dollars" by *
1980,
"In any case the figure* :
are enormously large," Emminger told a news conference. "The problems they :
raise for the advanced countries and international fi- *
nancial markets are great."
The West German official
said that as oil countries ac- ;
cumulate dollars the problem of investing them is .
bound to arise.
, ;
"TO begin with, a rela- «
tively large part will be in- *
vested in liquid form in in- ;
ternational money markets,"
Emminger said.
"Up to now international ^
money markets, particularly the European dollar market,
have performed reasonably :
well as a medium between
oil producing countries and
medium term borrowers."
Emminger said medium
term loans totaling around
$12 billion have been channeled through the European
currency market so far this
year.

He added that "under the
present circumstances" the
, Eurodollar mechanism appeared able to handle the
task.
But the Dow Jones Now
Service reported from London that there has been concern expressed in the Eurobond market over the drop
m the dollar exchange rate,
notably against the German
mark.
The service observed that
Emminger, at the Tokyd
meeting hinted that the
mark could appreciate further. Emminger said that
West Germany is willing to
assume some deterioration
in its balance of payments
to make it possible for deficit countries to improve
their payments positions.
He went on to say that exchange rates must play
some role even if they
couldn't be used exclusively
to even out surpluses and
deficits.
With both the interest
rate and currency outlook
unfavorable to the Eurodollar bond market, underwriters have been looking for
special situations that will
appeal to investors.

292
_

_

_

MARCH 4, 1974

IMF Survey




Shah Offers

Proposal

Fund Advances Work on New Oil Facility
As Iran Pledges to Lend Its Financial Aid
Intensive international efforts are c o n t i n u i n g in the search for solutions to the
balance

of

petroleum

payments

problems

arising

from

the

recent

sharp

increases

in

prices.

I n W a s h i n g t o n , t h e F u n d ' s E x e c u t i v e B o a r d is c u r r e n t l y d i s c u s s i n g a n

outline

p r e p a r e d b y t h e staff f o r t h e e s t a b l i s h m e n t o f a n e w f a c i l i t y , o f t e n r e f e r r e d
as t h e o i l f a c i l i t y , t o assist c o u n t r i e s i n f i n a n c i n g c u r r e n t a c c o u n t d e f i c i t s

to

from

h i g h e r oil bills. S u c h a facility w a s p r o p o s e d b y M a n a g i n g D i r e c t o r H . J o h a n n e s
W i t t e v e e n to the C o m m i t t e e of 20 ( C o m m i t t e e o n R e f o r m of the
Monetary

System

and

Related

Issues)

at

its

Rome

International

meeting

(IMF

Survey,

January 2 1 , 1 9 7 4 , page 17), a n d the C o m m i t t e e of 20 asked the Executive

Board

to explore the idea urgently.
In T e h e r a n , m e a n w h i l e , the c o n c e p t that the n e w oil facility w o u l d

receive

s u p p l e m e n t a r y financing f r o m t h e h i g h e r earnings of t h e oil p r o d u c i n g
tries w a s a d v a n c e d

as t h e

Iranian

authorities

$1 b i l l i o n this year, t h e b u l k o f w h i c h

pledged

to

is t o b e d i r e c t e d

set a s i d e

to the

new

coun-

at

least

facility.

T h e b a l a n c e is t o b e u s e d t o p u r c h a s e W o r l d B a n k b o n d s , a n d t o p r o v i d e
of the financing of a n e w institution

proposed

by the Shah of

Iran to

part
make

loans o n concessionary terms to d e v e l o p i n g countries that d o not p r o d u c e
a n d are thus especially hard hit by h i g h e r oil

Iran's p l e d g e of $1 billion for t h e t h r e e purposes f o l l o w e d
Teheran a m o n g Iranian authorities, M r . W i t t e v e e n , and
President

of

the

World

Hoveida, announced
was

attended

by

Bank

Group.

Iran's

Prime

Amuzegar,

Mr. M c N a m a r a and Mr. Witteveen.

the

discussions

R o b e r t S.
Minister,

t h e d e c i s i o n at a press c o n f e r e n c e

jahangir

oil,

prices.

Minister

on
of

in

McNamara,
Amir

Abbas

February 21
Finance,

that

and

by

Staff m e m b e r s o f b o t h t h e B a n k a n d

the

Fund have b e e n h o l d i n g discussions w i t h authorities of oil p r o d u c i n g c o u n t r i e s
on

the

problems

stemming

from

higher

prices,

M r . W i t t e v e e n p l a n s t o visit o t h e r o i l p r o d u c i n g

and

in

the

months

ahead,

nations.

Role of Oil Facility
F o l l o w i n g t h e d e c i s i o n o f t h e C o m m i t t e e o f 2 0 in f a v o r o f u r g e n t

exploration

o f t h e n e w oil facility, the 13 industrial c o u n t r i e s r e p r e s e n t e d at t h e W a s h i n g t o n
Energy C o n f e r e n c e a g r e e d o n February 13 to lend

i m p e t u s to this a n d

other

efforts to deal w i t h oil-related b a l a n c e of p a y m e n t s disequilibria u n d e r w a y
the Fund, the W o r l d Bank, a n d t h e O r g a n i z a t i o n for E c o n o m i c C o o p e r a t i o n
Development

( I M F Survey,

T h e o i l f a c i l i t y w o u l d assist F u n d m e m b e r

countries

in m e e t i n g t h e

i m p a c t o f t h e i n c r e a s e i n o i l i m p o r t costs b y p e r m i t t i n g d r a w i n g s i n

Access to the n e w facility w o u l d

their

b e s u b j e c t t o a n assess-

m e n t o f m e m b e r s ' b a l a n c e o f p a y m e n t s p o s i t i o n , a n d it w o u l d b e
tary t o t h e i r o t h e r access t o F u n d

initial

amounts

related to their o i l - i n d u c e d deficits, to t h e size of their reserves, a n d to
q u o t a s in t h e F u n d .

in
and

February 18, 1974, page 49).

supplemen-

resources.

F r o m t h e o u t s e t it has b e e n e n v i s i o n e d t h a t t h e F u n d w o u l d u s e its e x i s t i n g
resources but might n e e d to s u p p l e m e n t t h e m by b o r r o w i n g m a i n l y f r o m
exporting countries.

T h e Fund's recent discussions w i t h

these countries

b e e n to s o u n d o u t the possibilities for such financing, a n d Iran's p r o p o s a l
l o a n s t o t h e F u n d f o r t h e o i l f a c i l i t y is a t m a r k e t - r e l a t e d
T h e existing resources of the

Fund

consist of

for

rates.

holdings

a n d currencies w h i c h can be s u p p l e m e n t e d by additional

oil

have

of

gold

and

SDRs

(Please turn to next page)

293
borrowing under Article VII, Section 2, of
the Articles of Agreement to

replenish

Currencies of oil exporting countries

and changes in other prices create very

held by the Fund were equivalent to SDR

large surpluses among a number of oil

the Fund's holdings of any member's cur-

1.17 billion, including Venezuelan

producing countries and a number of very

boli-

large deficits among both developing and

rency. The financing of a new oil facility

vares equivalent to SDR 218.5

in part by borrowing w o u l d be an in-

Trinidad and Tobago dollars to SDR 63

industrial countries.

stance of the Fund's obtaining additional

million, Iranian rials to SDR 144 million,

stances, he said, it is important that gov-

resources f rom its member countries.

Iraqi dinars to SDR 81.5 million, Kuwaiti

ernments react in an appropriate way, for

At the end of January, the Fund's holdings of

currencies

were

equivalent

to

million,

Under such circum-

dinars to SDR 45.3 million, Saudi Arabian

if they were to. react in the wrong way,

riyals to SDR 100.5 million, Algerian dinars

applying more or less mechanically old

to SDR 97.5

to SDR 5.370 billion, and its SDR hold-

SDR 18 million, Nigerian naira to SDR 102

payments

ings were SDR 508 million.

million, and Indonesian rupiahs to SDR

world might face very serious problems.

Am&tig the

currencies were holdings of U.S. dollars
equivalent to SDR 6.129 billion, deutsche
marks to SDR 481.2 million, and Canadian
dollars to SDR 819.6 million.




million,

Libyan dinars

to

classical doctrines of restoring balance of

SDR 23.889 billion, its holdings of gold

279.2 million.

overcome

v

equilibrium

immediately,

the

The proposed oil facility, he said, would

Proposal of the Shah

In Teheran, Mr.

immediate difficulties in an ap-

propriate way, with the Fund helping to

McNamara and

Mr.

finance the deficits, and for this purpose

Witteveen promised urgent and sympa-

he said it would be desirable if some of

thetic consideration by the World Bank

the surplus countries would give their

and the Fund of the Shah's proposal for a

Regarding

the

developing

countries

new lending institution to provide conces-

which do not produce oil, Mr. Witteveen

sionary loans to developing countries that

recognized

do not produce oil.

Under the Iranian

especially acute, and not merely one of

proposal, the institution would have total

financing the deficit, but also a problem

capital in the first year of from $2 billion

of the debt burden which has to be met.

to $3 billion, contributed in about equal
parts by the oil exporting countries and
by industrial nations.

Iran will

present

the proposal to the Organization of Petroleum Exporting Countries.
The proposal calls for the institution to
have

a

board

of

governors

providing

about equal representation for oil exporting, industrial, and developing countries.
This board would supervise and direct
policy, and would appoint a board of
directors, selected on the basis of their
economic and financial competence, to
conduct normal operations. Technical and
administrative work would be done by
the management and staffs of the World
Bank and the Fund.

For the future, it is

envisioned that the new institution's lending would be primarily long term in character, and for development projects; but
at the outset, it would make shorter-term
loans for balance of payments support.

Press Conference Comments
As explained in the Teheran press conference by Mr. Amuzegar, the Iranian suggestion is for the 12 member countries of
the Organization of Petroleum Exporting
Countries and 12 industrial countries each
to contribute some $140 million to $150
million to the institution to provide its
capitalization of $2 billion to $3 billion.
Mr.

Witteveen

welcomed

the Shah's

proposal as constructive not only under
present conditions, but for the future as
well. He noted that the higher cost of oil

that their

problem will

be

294
THE ANNUAL REPORT
OF THE
COUNCIL ON INTERNATIONAL ECONOMIC POLICY
February 7, 1974

The Rise of Oil Prices: Implications for the
World Economy
Export prices have now been divorced from factors such as costs and return to capital and are
largely determined by the producer governments.
Beginning in February 1971 with the Tehran Pact,
effective control over oil prices has rested increasingly with producer countries working through the
Organization of Petroleum Exporting Countries
(OPEC). Posted prices rose approximately 70%
between October 1970 and October 1973. In October 1973, the Persian Gulf producers announced
unilaterally that posted prices would rise another
70% immediately. Libya joined them in announcing larger price increases. Nigeria, Venezuela, and
Canada—the three largest suppliers to the United
States—also declared substantial increases in their
export prices—in some cases beyond those imposed
for oil from the Persian Gulf. Then in December,
the Shah of Iran announced on behalf of the Persian




Gulf members of OPEC that the posted prices announced in October would be doubled beginning
1 January 1974. Current oil prices are shown in
the table on the following page.
Price and Balance of Payments Impacts
The drastic increases in oil prices w i l l have a
significant short-term impact on both the domestic
economies of all nations and on international economic relationships. However, because a pricc
change of this magnitude for a basic industrial
product has no modern precedent, the extent of the
impact is uncertain.
Impact on Domestic Economies
Even before the recent price hikes, many of the
world's economies were already decelerating. It
was expected that growth would slow from its
recent exceptionally high pace to a more sustainable one, where product shortages and inflationary
pressures would ease. The higher oil prices will

295
PRICE STRUCTURE FOR SELECTED CRUDE OILS, 1 JANUARY 1974
(See also oil price tables in Appendix B)
US $ per Barrel
(34° Crude)
(Saudi Arabian)
Persian Gulf
11.65
0.10
7.01

(34° Crude)
Nigerian

(40° Crude)
Libyan

(26° Crude)
Venezuelan

14.69
0.35
8.73

15.77
0.30
9.49

13.67
0.51
8.59

1.46
5.55
0.50
7.61

1.84
6.88
0.50
9.58

1.97
7.42
0.50
10.29

2.28
6.31
0.50
9.60

Posted price1
Production cost
Government revenue
Of which:
Royalty
Profit tax
Estimated oil company profits ..
Estimated safes price (f.o.b.) ..
Estimated transport cost*
(to US Gulf Coast)
Estimated sales price (c.i.f.)
(to US Gulf Coast)

1.48

0.67

0.65

0.46

9.09

10.25

10.94

10.06

'Differences in posted prices reflect differences in oil quality and transport costs.
'Transport costs are assumed to be about the same as the average for 1973 (i.e.. Worldscale 100).
accentuate this slowdown by reducing consumer
purchasing power, slowing demand for petroleumbased products, and causing deferral of some business investment as w e l l as consumer purchases.
The result w i l l be a reduction i n economic growth,
somewhat higher unemployment than expected and,
of course, a continuing h i g h rate of inflation w i t h
increased oil costs adding to other price pressures.
The reduction of growth, however, should be
only temporary. T h e duration of the expected slowdown w i l l depend largely on the ability of each
economy to adjust to the new price structure. Production patterns i n the world's industrial countries
are n o w beginning to shift to meet demand for
products w h i c h contain or use less petroleum. The
prime example i n the US is of course the shift tow a r d smaller automobiles. The investments needed
to make this structural shift w i l l help to avoid an
economic d o w n t u r n , and even to increase g r o w t h
in the near future. For these reasons, and because
of the general soundness of the w o r l d economy,
many observers believe that the economies of most
nations w i l l begin to accelerate again d u r i n g the
latter half of 1974.
This sequence w i l l not come automatically. Governments w i l l have to carefully adjust their monetary and fiscal policies so that they can help to
accelerate the structural shifts w i t h o u t adding further inflationary pressures. Further, all nations must
cooperate to avoid a competitive trade war, w h i c h
could lead to a serious recession: some nations
might be tempted to t r y to stimulate employment
during this d i f f i c u l t period by providing export
incentives or imposing import barriers, and such
"exporting of unemployment" could provoke retaliation by other countries.




Impact

on the World

Economy

T h e price increases w i l l also affect balance-ofpayments accounts and international financial markets. T h e consuming countries' oil import b i l l w i l l
increase dramatically this year if current crude oil
prices are maintained. A t present consumption
levels, w o r l d o i l imports w o u l d j u m p f r o m $45 b i l lion i n 1973 to about $115 b i l l i o n i n 1974 or about
a $70 b i l l i o n increase. E x p o r t i n g countries' revenues
w i l l increase i n 1974 to nearly $100 b i l l i o n or
three-and-a-half times the 1973 level. As shown
below, the Arab states w i l l receive about half of
the total revenue increase, w i t h Saudi Arabia showing the largest gain.
REVENUES FROM OIL EXPORTS
(Billion US$)

Total
Arab
Saudi Arabia
Kuwait
Libya
Algeria
Iraq
Other
N on-Arab
Iran
Indonesia
Nigeria
Venezuela
Other

1973
Estimated
27
15
5
2
2
1
2
3
12
4
1
3
3
1

1974
Estimated
95
51
20
8
7
3
6
7
44
18
4
8
11
3

Most producers w i l l be able to spend only a
small part of their increased revenues on foreign
goods and services. Even before the recent price
increases, the earnings of Saudi Arabia, Kuwait,
and the other small Persian Gulf states exceeded
their absorptive ability. Their imports and aid dis-

296
bursements w i l l probably grow substantially in
1974, but by nowhere near the amount of the increase in earnings. Other Arab producers have a
greater current need for oil earnings to finance
their economic development and military programs,
but even in these countries the magnitude of the
revenue increase and the normal delays in planning
make it virtually impossible to spend all revenue
this year.
The major non-Arab oil exporters—Iran, Indonesia, Nigeria, and Venezuela—will find it somewhat easier to expand imports immediately. For
the most part, these countries have larger populations and greater opportunity for economic diversification than do most Arab producers. Nevertheless,
the revenue increases are bound in the short run
to outstrip the ability of even these countries to
absorb foreign goods and services. I n all, oil-producing countries w i l l probably have extremely large
surpluses to invest or deposit abroad.
These available investment funds w i l l flow mainly
to oil-consuming countries. Some w i l l be invested
in long-term assets such as real estate and securities. But because these types of investment decisions take time, most of the funds w i l l probably go
into short maturity assets—such as Eurodollars—
and dollar deposit accounts. While the international
financial markets w i l l be able to absorb these investment funds, their magnitude w i l l probably depress interest rates. Lower interest rates should,
in turn, stimulate new investments in productive
facilities.




The reflow of most oil exporting revenues back to
the oil consuming countries w i l l mean that, as a group
their overall payments position w i l l be balanced. Individual nations, however, may experience problems, since there is no necessary relationship between
a country's higher oil import bill and the reflow
of funds from the producing countries. The US w i l l
be in a fortunate position because it possesses substantial quantities of domestic oil and alternative
energy sources. The sharp strengthening of the
dollar in exchange markets in January 1974 reflects
in part the expectation that the US balance of
payments w i l l be less severely affected than those
of other industrial nations. The dollar's renewed
strength, however, is a mixed blessing: continued
appreciation of the dollar may reduce the competitiveness of US goods in world markets.
Developing countries face especially serious problems as a result of the price increases. The non-oilproducing L D C s face an increase in their collective
oil import bill of near $10 billion this year, an
amount roughly equivalent to the total development assistance being disbursed by developed countires. An undetermined but substantial figure must
be added for the impact Of the increased prices
for imports which grow out of the increase in
energy costs. It may be that some of these countries
could borrow to meet increased costs, but, to the
extent they do so, their ability to borrow for other
purposes is reduced. The alternatives are to reduce
their standard of living, receive more foreign aid,
or see energy prices reduced.




•

HO 9560 Gen.

TMt m e t

74-33 5

OT THE RISE IN THE PRICE

OF CRUtt OIL ON THE WOftLO SCONOMY:
Prognosis t n d P o l i c y

Options

298
THE IMPACT OF THE
RISE IN THE PRICE OF CRUDE OIL
ON THE WORLD ECONOMY
--Prognosis and Policy Options-Table of Contents
I.

Impact on Prices

1

II.

Impact on Demand and Output

3

III.

The Balance of Payments

5

IV.

Policy Options for the United States
and the Other Industrial Countries

7

A. Reduce price of crude oil

8

B.

Policies to offset economic recession

9

C.

Balance-of-payments policies
--Financing

9
9

--Adjustme nt
D.
V.

10

Less Developed Countries

13

Another Look at the Numbers

List of Tables
Table 1 - - Impact of October and December 1973
Increase in Price of Imported Oil.
Table 2 - - Increase in Oil Revenues of OPEC
Countries, 1974 over 1973

Table 3 - - Balances of Payments on Current
Account
Table 4 - - The Increase in Oil Exports of OPEC
Countries, 1974

Appendix
Petroleum Exporting Countries: Oil
Exports and Revenues




1

299
T H E I M P A C T OF T H E
RISE I N T H E P R I C E OF CRUDE O I L
ON T H E W O R L D E C O N O M Y
- - P r o g n o s i s and P o l i c y Options - -

In October and D e c e m b e r 1973, the O P E C c o u n t r i e s r a i s e d e f f e c t i v e
o i l p r i c e s f r o m $3. 45 a b a r r e l landed in N o r t h A m e r i c a and W e s t e r n
E u r o p e to roughly $9 a b a r r e l . E v e n i f the A r a b o i l e m b a r g o and c u t - b a c k of
production w e r e ended s h o r t l y , the p r i c e i n c r e a s e alone w i l l r a i s e m a s s i v e
economic p r o b l e m s f o r the w o r l d :
- - I n f l a t i o n , a l r e a d y a s e r i o u s p r o b l e m , w i l l be given a s h a r p
s t i m u l u s : s o m e 3 p e r c e n t a g e points w i l l be added to
to the r a t e of p r i c e i n c r e a s e in 1974.
- - D o m e s t i c d e m a n d , and hence output, e m p l o y m e n t , and r e a l
i n c o m e , m i g h t be r e d u c e d s i g n i f i c a n t l y i n 1 9 7 4 - - b y s o m e 2
p e r c e n t a g e points m o r e than would o t h e r w i s e have been the case.
- - A c u t e b a l a n c e - o f - p a y m e n t s p r o b l e m s w i l l face m o s t
c o u n t r i e s - - n o t a b l y n o n - o i l p r o d u c i n g less developed
c o u n t r i e s , but a l s o Japan, the United K i n g d o m , and
I t a l y i n 1974.

W h e t h e r these p r o b l e m s m a t e r i a l i z e in a s u b s t a n t i a l way w i l l depend
in p a r t on the p o l i c i e s adopted by the i n d u s t r i a l countries and the d e g r e e
of cooperation a m o n g t h e m . M o r e o v e r , the p r o b l e m s a r e so m a s s i v e , and
the r i s e i n the p r i c e of o i l so g r e a t , that it s e e m s u n l i k e l y that c u r r e n t
o i l p r i c e s can be long m a i n t a i n e d .
T h i s m e m o r a n d u m discusses the above e s t i m a t e s and t h e i r i m p l i c a t i o n s
f o r p o l i c y . The e s t i m a t e s a r e n e c e s s a r i l y rough. T h e i r only p u r p o s e i s to
p r o v i d e a r e a s o n a b l e f r a m e w o r k f o r the development of e c o n o m i c p o l i c y .
I.

I m p a c t on P r i c e s

The i n c r e a s e in the p r i c e of i m p o r t e d o i l w i l l have a m a j o r i m p a c t
on w o r l d p r i c e s . A s can be seen in table 1, f o r the O E C D c o u n t r i e s as
a whole the i n c r e a s e d cost of i m p o r t e d o i l should r a i s e d o m e s t i c p r i c e s
( m o r e t e c h n i c a l l y , the G N P d e f l a t o r ) by m o r e than one p e r c e n t a g e point.




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TABLE 1
I m p a c t of October and D e c e m b e r 1973
I n c r e a s e i n P r i c e of I m p o r t e d QlT

E f f e c t s on I m p o r t s
$ billions
a/

A s % of T o t a l
E x p e n d i t u r e s (1973)

Selected Countries
U.S.

9. 5

0. 7

Japan

8.3

1. 5

France

4. 5

1. 2

Germany

5. 3

1.2

Italy

5.0

1. 8

U.

5. 0

1.8

K.

BLEU

1. 5

1. 8

Netherlands

1. 5

1.5

O E C D total

46.6
7.5

1. 2

Non-OECD

Grand Total

54. 0

a / The e s t i m a t e s show the e f f e c t of the change i n o i l p r i c e s on the 1973
v o l u m e of o i l i m p o r t s .
S o u r c e : O E C D , E c o n o m i c Outlook, P a r i s , D e c e m b e r 1973 and F e d e r a l R e s e r v e
e s t i m a t e s J a n u a r y , 1974 ( M e m o r a n d u m of H e l e n J u n z ) .




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M o r e o v e r , since the increases w i l l be passed along m o r e in percentage
r a t h e r than absolute t e r m s (in o r d e r to m a i n t a i n m a r k - u p m a r g i n s constant
as a percent of costs), and since wage-push inflation is also l i k e l y to develop,
the p r i c e increase for the O E C D countries could w e l l be higher than that
i m p l i e d i n table 1. Indeed, it might amount to 3 percentage points or
m o r e . (The impact on the United States would be w e l l below a v e r a g e since
domestic energy supplies a r e l a r g e . )

II.

I m p a c t on Demand and Output

The p r i c e i n c r e a s e for i m p o r t e d o i l i s i d e n t i c a l in its economic
i m p a c t to a tax on o i l consumption. The net economic i m p a c t depends
on the public's r e a c t i o n to the "tax" and the use to which the "tax c o l l e c t o r ' puts the r e v e n u e .
Helen Junz of the F e d e r a l R e s e r v e e s t i m a t e s that the d i r e c t
impact of the i n c r e a s e in the p r i c e for i m p o r t e d o i l would be to reduce
G N P by 1. 5 to 2. 2 percentage points below what i t otherwise would have
been, a /
This seems reasonable since, as can be seen in table 1, the
i n c r e a s e in the p r i c e of i m p o r t e d o i l - - t h e additional "tax" imposed by the
o i l - e x p o r t e r s - - a m o u n t s to some 1 . 2 percent of 1973 G N P .
As can be seen in the appendix, the " t a x " , or increase in o i l earnings by
the o i l - e x p o r t i n g countries, is expected to amount to some $60 b i l l i o n i n
1974 as earnings of O P E C countries, which w e r e $25 billion in 1973, soar to
$84 b i l l i o n i n 1974. b /
P a r t of this w i l l be offset by i n c r e a s e d purchases
of goods and service's by the o i l - e x p o r t e r s .
In 1973, these countries bought some $20 b i l l i o n w o r t h of goods and
s e r v i c e s f r o m the r e s t of the w o r l d . A 50 percent i n c r e a s e - - a n i n c r e a s e
in purchases of $10 b i l l i o n - - c o u l d be r e a d i l y financed but would be d i f f i c u l t
to accomplish in one y e a r . Y e t , even if such an i n c r e a s e took place, it
would leave the r e s t of the w o r l d with a deflationary i m p a c t of roughly
$50 b i l l i o n .
A g r e a t e r i n c r e a s e in expenditures by the o i l - e x p o r t i n g countries is
not l i k e l y . As can be seen in table 2, a substantial p a r t of tne i n c r e a s e in
revenue w i l l accrue to A r a b countries with l i m i t e d absorptive c a p a c i t y - s m a l l populations and unambitious p r o g r a m s for economic development.
Even the other oil countries w i l l experience a lag before they can t u r n
their increased f i n a n c i a l r e s o u r c e s into effective purchasing p r o g r a m s .

a / M r s . Junz uses i n d i r e c t tax e l a s t i c i t i e s d e r i v e d f r o m Bent Hansen
( F i s c a l Policy in Seven Countries, 1 9 5 5 - 6 5 , O E C D , P a r i s , M a r c h
1969) or f r o m n a t i o n a l m o d e l s .
b/ The data in the tables a r e roughly consistent. Such inconsistencies as
exist do not a l t e r the a n a l y t i c a l or policy conclusions.




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Table 2:

I n c r e a s e in O i l Revenues of O P E C C o u n t r i e s ,

A r a b Countries with
limited absorptive
capacity

$26. 0 b i l l i o n

Saudi A r a b i a
Kuwait
Abu Dhabi
O t h e r P e r s . Gulf
Libya

Other A r a b C o u n t r i e s

6. 6

Iraq
Algeria
Other

Other C o u n t r i e s

30. 6

Iran
Nigeria
Other W. A f r i c a
Venezuela
Other L a t i n A m e r i c a
Indonesia
Other F a r E a s t
USSR & E . E u r o p e

OPEC

59. 3

World Total

62. 8

Source:

Appendix.




1974 o v e r 1973

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CRS-10

U n t i l that happens, the impact of the i n c r e a s e in the p r i c e of o i l
is c e r t a i n to depress demand and income i n the o i l - i m p o r t i n g countries.
The fact that the i n c r e a s e in f i n a n c i a l assets of the o i l - e x p o r t i n g countries
w i l l be invested in the o i l - i m p o r t i n g countries does not offset this conclusion.

III.

The Balance of Payments

The i n c r e a s e in the p r i c e of o i l w i l l have a staggering i m p a c t of the
balances of payments of a l l countries. The m o s t r e c e n t e s t i m a t e s , shown
i n table 3, a r e exceedingly rough but they suggest the following g e n e r a l
conclusions:
- - T h e o i l exporting countries m a y e a r n some $55 b i l l i o n net
i n 1974, compared to $6 b i l l i o n in 1973.
- - T h e United States, which r a n an e s t i m a t e d surplus on c u r r e n t
account (trade, s e r v i c e s and p r i v a t e t r a n s f e r s ) of $4. 5
b i l l i o n i n 1973 now is p r o j e c t e d to run a deficit of $1 to 2
b i l l i o n (instead of an e a r l i e r forecasted surplus of $9 b i l l i o n ) .
- - T h e United Kingdom and Japan e s p e c i a l l y , but I t a l y , F r a n c e and
G e r m a n y as w e l l , face l a r g e c u r r e n t account deficits in 1974.
- - F i n a l l y , the n o n - o i l producing less developed countries,
which r a n a deficit of $9 b i l l i o n in 1973, a r e expected to
show a deficit of $23 b i l l i o n in 1974 if i t can be financed.
W i t h foreign aid running at $8 b i l l i o n , financing such a
deficit w i l l be quite d i f f i c u l t .
These e s t i m a t e s , which, to r e p e a t , a r e subject to wide m a r g i n s f o r e r r o r and
a r e not f o r e c a s t s , give a reasonable idea of the o r d e r s of magnitude involved
in the change in the p r i c e of oil. The swings envisaged a r e enormous.
T h e r e would be no b a l a n c e - o f - p a y m e n t s p r o b l e m i f the o i l exporting
countries spent t h e i r i n c r e a s e d earnings for goods and s e r v i c e s , though there
would be a m a j o r t r a n s f e r of r e a l r e s o u r c e s f r o m o i l i m p o r t i n g to exporting
countries. (Indeed, u n t i l the l a t t e r increase t h e i r purchases in other
countries, no r e a l burden is placed on the o i l i m p o r t e r s . )
N o r would t h e r e be a b a l a n c e - o f - p a y m e n t s p r o b l e m if the i n c r e a s e d
earnings of the o i l e x p o r t e r s came back to the i m p o r t e r s as e i t h e r s h o r t t e r m or l o n g - t e r m investments. This is almost c e r t a i n to happen at least
for the next y e a r and m o r e . But these loans and investments would have to
equal, country by country, the i n c r e a s e in net i m p o r t s f r o m the o i l countries.
This is a most unlikely constellation. Thus, 1974 seems c e r t a i n to p r e s e n t
the developed countries and the rton-oil producing less developed countries
with m a j o r policy p r o b l e m s .




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CRS-6

T a b l e 3:

B a l a n c e s of P a y m e n t s on C u r r e n t A c c o u n t a /
($ b i l l i o n )

1972

Oil exporting countries
U n i t e d States
A l l other countries

1973

Projection:
Before Dec.
Oil Price
Rise

1974
After
Dec. Oil
P r i c e Rise b/

1.6

6. 1

12. 5

55.0

-6.2

4.5

9.0

-1.5

8. 1

-1.1

-21.5

-53.5

Japan

7.0

1.5

-0.9

-6.0

France

1.0

0.6

-0.2

-3.7

Germany

2. 2

5.5

3.6

-2.5

Italy

2. 4

-1.4

-2.0

-3.5

U. K .

0.7

-2.4

-3.5

-7.5

-7. 5

-9.0

N o n - o i l producing
p r i m a r y producers

-17.7

- 2 3 . 0 c/

a / Goods, s e r v i c e s and p r i v a t e t r a n s f e r s .
b / The e s t i m a t e s a l s o a l l o w f o r a s o m e w h a t l o w e r v o l u m e of o i l i m p o r t s and
a d d i t i o n a l e x p o r t s to the o i l p r o d u c i n g c o u n t r i e s .
c j L a r g e l y n o n - o i l L D C s , but a l s o includes S i n o - S o v i e t c o u n t r i e s and e r r o r s
and o m m i s s i o n s .
S o u r c e : F i r s t two c o l u m n s : I M F , O E C D " W o r l d E c o n o m i c O u t l o o k " D e c e m b e r 26,
1973. T h i r d : c o l u m n H e l e n Junz of F e d e r a l R e s e r v e . L a s t column: O E C D , s o u r c e ,
J a n u a r y 12, 1974.




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IV.

P o l i c y Options for the United States and the Other I n d u s t r i a l Countries

The policy options open to the i n d u s t r i a l countries s e e m c l e a r . M o s t
i m p o r t a n t , m o r e than any t i m e since the G r e a t D e p r e s s i o n of the 1930's,
economic cooperation among the i n d u s t r i a l powers is essential. T h i s point
seems obvious, but r e c e n t developments suggest that the cooperation
may be no m o r e forthcoming now that i t was a l m o s t half a century ago.
The g e n e r a l lines of policy a r e not in dispute as broad p r i n c i p l e s .
communique of January 18, 1974 of the I n t e r n a t i o n a l M o n e t a r y Fund's
C o m m i t t e e of Twenty m e e t i n g in R o m e , spelled t h e m out as follows:

The

. . . i n managing t h e i r i n t e r n a t i o n a l payments countries must
not adopt policies which would m e r e l y aggravate the p r o b l e m s
of other countries. A c c o r d i n g l y , they s t r e s s e d the i m p o r t a n c e
of avoiding competitive depreciation and the escalation of r e strictions on t r a d e and payments. They f u r t h e r r e s o l v e d to
pursue policies that would sustain a p p r o p r i a t e levels of economic
activity and e m p l o y m e n t , while m i n i m i z i n g inflation. They
recognized that serious difficulties would be created for many
developing countries and that t h e i r needs for f i n a n c i a l r e s o u r c e s
w i l l be g r e a t l y i n c r e a s e d and they urged a l l countries with
available r e s o u r c e s to make e v e r y e f f o r t to supply these
needs on a p p r o p r i a t e t e r m s . The C o m m i t t e e agreed that
t h e r e should be the closest i n t e r n a t i o n a l cooperation and
consultation i n pursuit of these objectives.
The only question is whether actions w i l l conform to these p r i n c i p l e s .
These p r i n c i p l e s , with one m a j o r addition, and t h e i r r a t i o n a l e a r e
spelled out below:
A.

Reduce p r i c e of crude o i l

Though not agreed by the C o m m i t t e e of Twenty, the most obvious
and most effective policy would be to induce the O P E C countries to l o w e r the
p r i c e of crude oil. To do this, the r e s t of the w o r l d would have to show that
such action is in the s e l f - i n t e r e s t of the O P E C countries. Such an approach
might be f a c i l i t a t e d i f it took place in an atmosphere which does not condone
the O P E C action on p r i c e .
A r a b spokesmen, c e r t a i n l y , but even a number of i m p a r t i a l
o b s e r v e r s in the A m e r i c a n press and e l s e w h e r e suggest that the O P E C
action is a n o r m a l and l e g i t i m a t e use of economic p o w e r , analogous to
the p r i c i n g policies of A m e r i c a n corporations. I t is also argued that the
action is m o r a l as w e l l since income is t r a n s f e r r e d f r o m the r i c h to the
poor. Both propositions a r e questionable.




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CRS-10

If the oil countries were companies operating within the
United States, they would be in violation of anti-trust laws and subject
to civilian and criminal penalties.
Moreover, there is generally a close relationship between
the cost of production of a product--the intellectual and physical
effort involved--and its price. But Middle East oil costs an estimated 13 cents a b a r r e l to produce a/ and the price to the oil companies is now about $7 a b a r r e l , for a mark-up of some 4, 000 p e r cent. Nor are the price increases accomplishing a more equitable division
of world income by taxing the rich to help the poor. As shown e a r l i e r ,
the non-oil less developed countries, which have incomes of some $300
per person, w i l l be hit hardest. And the o i l - r i c h countries of the
Persian Gulf w i l l have per capita incomes amounting to some thousands of
dollars per person.
The OPEC countries might be persuaded to lower their price
for a number of more compelling reasons:
1.

They must realize that the large and precipitous rise in
the price of oil is creating major economic problems
for both the developed and less developed countries. As
noted e a r l i e r , the increased price is a major stimulus to
inflation and economic recession. With such conditions,
all would lose. Sheikh Yamani, Minister of Petroleum of
Saudi Arabia recognized this in a statement in Tokyo on
January 27th.

2.

Balance-of-payments problems and an economic recession
would result in trade restrictions and reduced demand for
all imports, so that attempts of the OPEC countries to
diversify their economic base and to export oil would be
inhibited.

3.

The OPEC countries must recognize that the increased
price of oil is encouraging the development of alternative
sources of energy. The result could be lower prices for
oil in the future so that oil-in-the-ground would be less
valuable than oil sold today.

4.

Finally, the OPEC countries must recognize that if
business and governments make major investments to
develop alternative sources of energy, they will protect
these investments through import restrictions if
necessary. This implies future economic problems
for oil exporters.

a/ This is the cost for Persian Gulf oil; other costs are higher: 38 cents
in Nigeria, 40 cents in Venezuela, 45 cents in Libya, 75 cents in Algeria,
and $1. 08 in the United States and Canada.




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CRS-10
B,

P o l i c i e s to offset economic r e c e s s i o n

The developed countries must take positive m e a s u r e s to avoid
letting the deflationary i m p a c t of the i n c r e a s e in the p r i c e of o i l r u n its course.
And, countries must not let f e a r of b a l a n c e - o f - p a y m e n t s deficits inhibit
expansionary economic m e a s u r e s .
I f a l l the developed countries move to expand t h e i r domestic
economies together, the a d v e r s e b a l a n c e - o f - p a y m e n t s i m p a c t w i l l be m i n i m i z e d .
And, as the l a r g e s t single economic unit, the United States has a s p e c i a l
responsibility not to let i t s e l f and the w o r l d continue its slide into an
economic r e c e s s i o n .
C.

B a l a n c e - o f - p a y m e n t s policies

T h e r e a r e two basic ways countries can m e e t a b a l a n c e - o f - p a y m e n t s
deficit. They can finance i t . They can adjust to i t - - e n c o u r a g i n g economic
changes which w i l l wipe out the d e f i c i t .
T h e r e a r e good reasons why financing the deficit is the p r e f e r r e d
route for most countries in 1974.
- - F i r s t , the adjustment r e q u i r e d is e n o r m o u s - - o f the o r d e r
of $55 b i l l i o n , as can be seen in table 3.
--Second, it is c l e a r that a l l countries w i l l be unable to a d j u s t - that the n o n - o i l i m p o r t e r s , as a group, w i l l n e c e s s a r i l y r u n a
trade and b a l a n c e - o f - p a y m e n t s d e f i c i t . Thus, the attempt of one
c o u n t r y - - F r a n c e , f o r e x a m p l e - - t o get a balance can succeed only
at the expense of another c o u n t r y - - t h e United States or G e r m a n y ,
perhaps.
- - T h i r d , c u r r e n c y devaluations or depreciations can only
contribute to f u r t h e r inflation and serious s o c i a l p r o b l e m s
in the devaluing country.
The i n c r e a s e in o i l p r i c e s w i l l throw e v e r y m a j o r country's balance of
payments into d e f i c i t . To avoid this having an unhappy psychological effect
on policy, o i l i m p o r t s - - o r at least the i n c r e a s e in the value of o i l i m p o r t s - could be excluded f r o m the n o r m a l t r a d e account. This segregation of data
would be only cosmetic, but it could c l a r i f y thinking about a p p r o p r i a t e policy.
Financing: The o i l producers w i l l have to lend o r invest most of t h e i r
sharply i n c r e a s e d earnings to the r e s t of the w o r l d . T h e r e is no a l t e r n a t i v e .
Indeed, much of the i n c r e a s e d earnings m a y w e l l a c c r u e to the United States
with the m o s t developed and sophisticated capital m a r k e t .
The O E C D countries can " r e c y c l e " , or r e l e n d , the loans and investments
of the oil countries to those in need of such finance. T h e r e is ample precedent
for this.
Much of this " r e c y c l i n g " w i l l be done by m a r k e t f o r c e s . H o w e v e r , i f
they prove inadequate, governments, the I M F and national c e n t r a l banks can
complete the task.




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If the oil producers buy gold or SDRs f r o m central banks and
reduce the amount of monetary reserves thereby, the international community
can replace these assets by another issue of SDRs.
Adjustment: There w i l l be a temptation for countries to t r y to
adjust their balances of payments rather than borrow to finance their
1974 deficits. Some countries may try to hold or attract reserves in a
variety of undesirable ways--by raising interest rates above what would
be required for domestic economic reasons, or by enduring deflation and
unemployment. If they do, unemployment w i l l be intensified and passed on
to other countries.
There w i l l be a temptation for countries to let their currencies
f l o a t - - o r s i n k - - o r to r e s t r i c t imports in order to restore their trade
surpluses and slow their losses of financial reserves.
But countries must recognize that such actions w i l l not draw funds
from the oil producers, but w i l l merely shift reserves f r o m one industrial
country to another. The result w i l l be unhappy in both economic and
political terms as unemployment is exported to other countries.
Real cooperation among the industrial powers is needed.
countries w i l l have to work out common policies on:

The

--interest rates specifically and overall economic policies
more generally;
--exchange rates—the free market or floating solution could be
disasterous in 1974 however useful it was in 1973 and
might again become in the future.
The argument for coordinating the monetary and fiscal policies of the major
countries is clear and not controversial. This is not true of the proposition
on exchange rates.
The argument against letting the market decide on the appropriate
exchange rate during this period of great strain on every nation's balance
of payments is twofold. F i r s t , the market generally exaggerates the i n fluence of new factors. Second, as a result, major and partly unnecessary
economic adjustments are forced on countries. These can be quite costly
in terms of unemployment and inflation.
Recent events may provide an example. Since the beginning of the
oil crisis the effective devaluation of the dollar has been cut in half.
This reflects the assessment of the market that the United States w i l l be
relatively much less damaged by the rise in oil prices than the other major
nations. The result w i l l be to stimulate U.S. imports and to inhibit U.S.
exports. Unless countervailing action is taken, this could result in increased unemployment in the United States.
In addition, the depreciation
of the European currencies and the Japanese yen w i l l contribute to inflation
in both areas with resultant social turmoil, and without affording any clear
r e l i e f to their balances of payments.




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D.

Less Developed Countries

I t is c l e a r that the n o n - o i l producing L D C s face especially
difficult t i m e s . In o r d e r to m a i n t a i n t h e i r recent r a t e of economic growth
they w i l l need at l e a s t a doubling of economic aid to finance the b a l a n c e of-payments deficit due solely to the i n c r e a s e d p r i c e of o i l .
T h e r e a r e only three ways out of the i m p a s s e :
- - F i r s t , the L D C s w i l l have to r e s t r i c t i m p o r t s or reduce
domestic demand, i f they cannot finance the i n c r e a s e d
d e f i c i t . This means m o r e unemployment, a l o w e r r a t e
of economic growth, if any, at home, and i n c r e a s e d
deflationary p r e s s u r e on the developed countries.
--Second, the usual aid donors could double or t r i p l e
t h e i r aid d i r e c t l y or provide a s p e c i a l c r e d i t f a c i l i t y
in the I M F or W o r l d Bank for loans to the L D C s . The
o i l producers could provide the financing and would ask
for guarantees on their investments plus a reasonable
r a t e of r e t u r n .
This approach has serious drawbacks. The L D C s a l r e a d y have
too heavy a burden of indebtedness. T h e i r a b i l i t y to r e p a y new
loans is seriously in doubt. And, such loans would not finance
capital i m p r o v e m e n t s which would r e s u l t in future i n c r e a s e s in
output, but would m e r e l y finance c u r r e n t consumption.
Thus,
the liklihood is that there would be defaults on the new loans
leaving the I M F or W o r l d Bank and, consequently, the m a j o r
developed countries wi