CA PROPAGANDA PERSPECTIVES SPECIAL THE ENERGY CRISIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-01194A000200010001-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 40
• Document Creation Date: November 11, 2016
• Document Release Date: August 5, 1998
• Sequence Number: 1
• Publication Date: June 17, 1974
• Content Type: REPORT

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LIST OF ATTACHMENTS
"The Struggle for the World Product"
Helmut Schmidt, Foreign Affairs, April 1974. . . . . . . . .
"Co-operative Solutions"
The Petroleum Economist, May 1974 . . . . . . . . . . . 13
"Energy R F D"
Craig Powell, Government Executive, May 1974. . . . . . . . . 15
"Oil and the Cash Flow"
C. Fred Bergsten, New York Times, 3 June 1974 . . . . . . . . 18
"Enough Gasoline-What It Will Cost"
U.S. News F World Report, 20 May 1974 . . . . . . . . . . . 19
"The Hard Energy Choices Ahead"
Ralph E. Lapp, Wall Street Journal, 23 April 1974 . . . . . . . 23
"The Oil Cartel and Development Aid"
Hobart Rowen, Washington Post, 23 May 1974 . . . . . . . . . 25
"Review of Current Trends in Business and Finance"
Richard IF. Jannsen, Wall Street Journal, 11 March 1974 . . . . . 26
"Mideast Policy and Oil"
C. L. Sulzberger, New York Times, 20 April 1974. . . . . . . . 27
"Iranian Official, at U.N., Doubts Oil Price Will
Continue Big Rise"
Kathleen Teltsch, New York Times, 23 April 1974. . . . . . . . 27
"No U.S. or World Oil Shortage Seen This Year"
William :D. Smith, New York Times, 13 May 1974 . . . . . . . . 28
"An Optimist on Energy"
Leonard Silk, New York Tunes, 27 February 1974 . . . . . . . . 29
"Selected Current International Economic Issues"
The Annual Report of the Council on International
Economic Policy, February 1974 . . . . . . . . . . . 30
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CPYRGHT
O .E IGN AFFAIRS
F
Vol. 52 APRIL 1974
THE STRUGGLE FOR THE
WORLD PRODUCT
POLITICS BETWEEN POWER AND MORALS
By Helmut Schmidt
No. 3
I\YONE who, in these weeks and months of the "oil crisis,"
is asked to forecast the future development of interna-
tional economic relations and who looks for fixed data
and reliable trends to support his forecast will soon run into seri
ous difficulties. Even after the mid-February Energy Confer-
ence in Washington, the impression, disturbing in many respects,
remains that the world economy has entered a phase of extraor-
dinary instability and that its future course is absolutely uncer-
tain; it may bring stability, but also still greater instability. More
integration, closer cooperation, an improved division of labor
may increase the overall prosperity of nations. But the future
course may just as well be characterized by disintegration, na-
tional isolation and the search for more self-sufficiency, thereby
enhancing the contrasts already existing in the world.
It would be wrong, of course, to believe that the oil price ex-
plosion was the only cause of instability. But the massive increase
in oil prices has clearly revealed the actual fragility of this
elaborate system of economic relations among the nations of the
'.world, from the structure of their balance of payments to their
trade policy. To use energy nomenclature: just as a high-energy
breaks through the electrical shielding which surrounds
;?. atom and penetrates into the nucleus, oil has shaken the very
1ln,iation, of the present world economic system. And just as
n urn?n may induce oscillation and shatter the nucleus, oil
is ...'.[ter the laboriously built structure of the world economy.
l cr~is may touch off a chain reaction of destructive forces,
but--if properly harnessed and controlled-it may just as well
help to improve international cooperation, if all those concerned
join in the efforts to find the common denominator of what is
going on these days between the Libyan desert and the Gulf
of Maracaibo, and if they build a policy of reason on that com-
mon denominator.
At this present stage there can hardly be any doubt that, long
before the explosive_rise in the prices of almost all raw materials,
international economic policy was moving toward a critical
phase. It is no longer possible to ignore the fact that difficulties
Appr vod Wnff Ro aco 4 0001014102 : A RDP79 04 94 A0002 0C
001-3
 Apo
Ap
1-~ e ti , y: t
that this has happened during a period of worldwide new pro-
duction records. Whereas, on the one hand, the world economy
tivas experiencing a fantastic boom, there was, on the other hand,
growing uneasiness about the institutions, particularly the slow-
ness with which they were adapting to changing conditions, to
new tasks and objectives, in order to ensure a greater equality of
starting conditions among nations and to enable an undistorted
exchange of goods and services among them. The crisis toward
which the world economy was moving was not so much one of
production as a crisis of its institutions in structural respects. In
particular, the rules governing the exchange of goods and ser-
vices were questioned on an increasing scale.
The protracted ill-health of the Bretton Woods system was
one of the most significant symptoms of this development. Under
the impact-of the cumulative effects of inflation and speculative
crises, this system finally collapsed and thus ceased to exist as an
integrating factor. Ultimately, the system broke down because it
failed to provide the framework for an orderly exchange of
goods and services. Bretton Woods benefited some countries more
than others-particularly the strong more than the weak-and
above all it burdened the international monetary system with the
payments deficits of the superpower. And thus it is not astonish-
ing that, finally, a system that initially had been so successful
should have produced interventionist policies on an increasing
scale rather than greater economic freedom.
Even with imagination and expertise, it is difficult to establish
a new and bcttcr system. It is difficult to create a supranational
standard of value which is not at the s:imc link a natlmi,il cur-
rency, like the dollar, or a commodity used for speculative pur-
poses, like gold. The "Special Drawing Right," as an artificial
numeraire without a market price, and with official parities only
for transactions between central banks, was to be declared a pri-
mary currency reserve and to be made so strong that it could win
the necessary confidence. There were to be fixed but adjustable
exchange rates. In addition, it was intended to ensure that the
extent and duration of payments imbalances should be appre-
ciably reduced, that the facilities for financing such imbalances
should be limited rather than expanded. All countries were to
be obliged to settle payments balances from their own reserves.
The process of evaluating the pros and cons of the proposed
monetary rules is still under way. What has so far emerged, after
lengthy negotiations in some of the most beautiful cities of the
world-including Nairobi, the modern metropolis in East
Africa, and Rome, the ancient metropolis of Western civiliza-
tion-is at least a basic concept. Luckily, there has--also been
found an interim solution to the important question of the valua-
tion of the Special Drawing Right: the yardstick is to be the
average value of a "basket" of major currencies instead of the
U.S. dollar. On the other hand, however, there has so far been no
decision on the question of how to finance the payments deficits
of the less-developed countries; this question, though at first
glance it appears to be of secondary importance from the point
of view of monetary policy, is actually very important in the
p00YRGHT
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light of recent developments. It is certainly true to claim that,
despite open flanks, the understanding for the common cause has
increased and that therefore the continents have moved closer to-
gether in certain fundamental views. But even if all moral acces-
sories are left aside, nobody-including the author of these lines
-would be able to say just when the new system can be put into
operation. For nobody, in view of the still incalculable effects of
the dynamic changes in the terms of trade, can confidently claim
to be in a position to determine new fixed parities and afterward
defend them against market forces.
There arc more symptoms of this struggle for new and better
rules-e.g., in commercial policy. Last year we witnessed a
peculiar, and largely unnoticed, formalisfic dispute both within
the European Community (EEC) and between the latter and
the United States as to whether and in what form a connection
was to he established betwecn the rc?furrrr of the international
monetary system and the new multilateral trade negotiations
(GATT) in Tokyo. France had initially requested that the new
GATT Round should not begin until fixed parities had been
reintroduced. The other European countries advocated concur-
rent efforts toward further liberalization of trade and monetary
stabilization. The United States, on its part, was ready to support
this formula of concurrent efforts only if it was clearly expressed
that an efficient monetary system also called for a commercial
policy prone to adjustments.
All this looked like a dispute on formal issues only. But, at the
same time, it was the expression of fundamentally different posi-
tions: monetary matters first and trade afterward; or monetary
matters and trade at the same time; or trade promoting monetary
matters-these are concepts which may call for different ap-
proaches on the part of the nations concerned, and possibly the
acceptance of economic disadvantages or sacrifices. Meanwhile,
this dispute has taken on a purely academic character.
The Conference held last September in the Japanese capital
was an example of the above-mentioned concurrency and its
ultimate results are still largely incalculable. The opening decla-
ration of Tokyo is by no means the Magna Carta of an open
world economy based on division of labor, although any reason-
able ;person will accept the objective that the new GATT Round
should promote the further Iibcralization of international trade
in order to raise the standard of living and increase the prosperity
of nations. He will likewise endorse the general claim that exist-
ing customs barriers should be lowered further and other trade
barriers reduced or removed.
But the bureaucratic infighting behind these fine words is still
going on, as is the struggle over the prices of raw materials. The
wrangling is about tariff headings, preferences and counter-
preferences, the, purpose and cxtent of protectionist measures.
Here, too, as in monetary matters, national interests play a prom-
inent role. Not all countries, for instance, are as vitally interested
._in the largest passible degree of freedom for world trade as the
Federal Republic of Germany. Thus, countries which have only
just begun to build up industries at enormous social cost will not
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CPYRGHT
 p I~ae'.9,~~0/cQ2c{,,I[~R71 I4A0~`Q001
Apprc~ t
t)o elf
c mbincs of industrialized countries. On the other hand, even
i highly developed countries there are certain sectors whose
c mpetitiveness is limited; a case in point is the German clothing
i dustry, which is complaining about low-priced shirts being
imported from Formosa and Hong Kong. Such sectors cannot
stand up to international competition and genuine social prob-
1 ms are created in the countries concerned when economic activ-
i is running at a low ebb.
Agriculture will probably continue to be a further reservation
i the system of a free exchange of goods and services. Agricul-
t re is the spoiled child of protectionism, not only because gov-
t nments vie for farmers' votes, but also because-understand-
a ly-every country is anxious to preserve its own minimum
basis for feeding its people. This statement can be proved by
rd-and-fast figures if one looks behind the scenes of European
a well as U.S. agricultural policy. To the outside observer, the
olicy of European integration appears to be a puzzling tug-of-
ar over egg prices or wine quotas. Both in Europe and in the
nited States, the baffled consumer will often have the impres-
s on that relationships between the two are determined exclu-
s vely by soybeans and Arkansas chickens. Those who resent the
conomic power of the United States speak of the American chal-
1 nge, and there may even be such strange excesses as the claim
at the consumption of American chickens results in impotence.
Nor can we be certain that free capital movements are wel-
omed everywhere. Did not American newspapers, for instance,
ublish malicious reports on an allegedly unlimited stream of
;rerman capital into the West? Some people already saw the
lace swarming with Teutonic roughriders lassoing American
attle. And was not the United States somewhat vexed about the
association policy of the EEC, which was even alleged to be striv-
ng for hegemony over the United States? Someone even invented
he malicious quip that the Sixth Fleet in the Mediterranean
would probably soon have to file an application for association.
Meanwhile, however, it will have been realized from New
York to San Francisco how difficult it still is for Europeans to
translate their dream of a political union into reality. It is not
without protracted and painful labors that the Regional Fund is
being created, which so far is the Latest of the instruments of
European unif cation, following the Agricultom l 1= und, the So-
cial Fund and the somewhat ill-fated monetary "snake." And it
is conceivable that Europe's failure to tackle the oil crisis by pur-
suing a common policy will have an impact on the further process
of f unification.
001-3
CPYRGHT
Vat is the reason for this state of affairs? VVhy is it that 30
cars after Bretton Woods the urgently needed reform of the
ntcrnational monetary system makes so little headway? Why is
t that nations find it so hard to soften their protectionist trade
ystems and to give their trade policies a new, open and equal
tructure? Why is it that after almost two decades of effort to-
yard European unification, European political union is still un-
4
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 Approve
finished? What is the reason for these disputes about quotas, cus-
toms tariffs and posted prices? And the oil problem which now
creates new and very strong tensions, is its nature not basically
the same?
David Ricardo would certainly not like this state of the world
economy and its institutions if he saw it. But he might congratu-
late himself on the skepticism and foresight he showed in dis-
cussing the consequences of the free trade thesis of his teacher,
Adam Smith. Admittedly specialization, division of labor and
free trade across national boundaries have increased the wealth
of nations and caused an immense supply of goods in the same
way as the division of labor increased production within a single
nation. But the main problem then is to define the laws which
determine the distribution of this enormous output; it might be
added: which determine the "fair" distribution, the "equitable"
price, the "proper" value.
Even today, these "laws" have not yet been defined. The most
ingenious theories of distribution in most cases explain only parts
of the problem or are infeasible in actual practice. What remains
are resourceful bickerings over the results of the joint efforts, a
game full of ruses and little tricks, with strategies of threats,
attrition and fatigue, of overnight conferences and dissolved
meetings, a game of coalitions and cartels. What we are witness-
ing today in the field of international economic relations-in the
monetary field and now in the field of oil and raw material prices
-is virtually the same as what is going on between trade unions
and employers' associations on the national level. It is a struggle
for the distributions and use of the national product, a struggle
for the world product.
But whereas the struggle for distribution has hitherto been
fought within ilhc framework of monetary and commercial rules,
it has now bccnmcc a struggle over prices as well and has thus
taken on a new and in many respects dangerous dimension.
The struggle over oil prices may he followed tomorrow by a
similar struggle over the prices of other important raw materials.
And since what is at stake is not just pawns on a chessboard, but
the peaceful evolution of the world economy and the prosperity
of the nations of this world, we need a politically sound phi-
losophy if we are to win this dangerous fight.
Approve
It would be a mistake to approach the oil problem with illu-
sions, with a swashbuckling rattle of the sword in the manner of
a ast century's gunboat diplomacy or in an egotistical overbear-
ing manner. This is no way in which to conduct the distribution
combat! Each side, the oil-producing and the oil-consuming
countries, must learn to understand and appreciate the other's
interests, means and possibilities, since there is no other way of
avoiding abortive actions and corresponding reactions. The hec-
tic events of the past nine months appear to indicate that this
point has by no means been fully grasped.
Oil consumers would be well advised to examine th oil pxo-
ducers' motives impartially. It is true that, in the Middle East,
current political issues have a bearii g and that, to this extent, oil
CPYRGHT
 ApprnviPr1 Fnr RPIPacP 1 999/n9M - (IA_RfP79_nh 19annnn900010001-3
s considered a political weapon. But, in essence, the oil price
ssue is not one of a clash over the Suez Canal, the West Bank
r Jerusalem. What the oil producers, and not only the Arab
nes, have in mind is to increase their share in that portion of the
orld product which is created with the aid of oil, the most im-
ortant raw material for years to come. And they are able to do so
o the extent that increased oil prices push up the import figures
f oil-consuming countries at a rate higher than that at which the
atter are able to step up their prices of exports.
The oil consumers would do well to grasp that this is exactly
hat is intended and not to allow certain facts to be repressed
into the subconscious mind, especially the present distribution of
wealth between industrialized countries on the one hand and oil-
producing countries on the other. If, for instance, U.S. per capita
income in 1971, i.e., a year prior to the start of the present price
measures of the OPEC countries, were taken to he loo, the latter
countries' figures for 1971 would be as follows: Kuwait 75, Abu
Dhabi 49, Qatar Libya z8, Venezuela zr, Saudi Arabia 11,
Iran 9, Iraq 7, Nigeria 3, Indonesia z.
And these figures are by no means a true rcflcctiun of tlh,~ actual
level of wealth attained in those countries; the disparity, in real
terms, for the bulk of the population can well be assumed to be
greater than these figures reveal. And it is this gap in incomes or
wealth that alone should be taken to motivate the oil countries'
policies.
Seen from this angle, the Western industrialized countries,
including Japan, being oil consumers, can hardly avoid acknowl-
edging the merits of the oil countries' claim, seeing that cheap
oil was in the past a major factor in the former countries' growth.
They should not blind themselves to the fact that the times of
cheap oil are past and gone. A. posted price of $1.8o per barrel
of Arabian oil from the Persian Gulf, as it prevailed in January
1970, will not recur. It will not do so because oil producers, fol-
lowing ten years of systematic OPEC policies and aided by ao
years of careless energy policies on the part of the consumer coun-
tries, now have the power-in the form of the OPEC cartel-to
achieve by increasing their prices the distribution pattern they
desire. They have the power of those who control resources in
short supply, resources which are of importance, in limitative
respects, to a multitude of production lines in industrialized
countries. There is so far absolutely no substitute for oil and its
derivatives available at short notice; at the most, a sort of fringe
substitution might be possible in alternative fuel power stations.
Certain economics in quantities consumed are, however, possible
at shortnotice and thatalone would involve considerable changes
in consumer habits. In other words: as a short-term proposition,
the elasticity of demand for oil and its derivatives is very slight,
and thus the conditions are right for an independent price policy.
On the other hand, oil producers would do well not to regard
the new independence and power they have in pricing to be a
device which is devoid of all limitations and consequences, espe-
cially in view of the effects this may have on the very existence
of the developing countries. They should proceed with care
CPYRGHT
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-
-
above all not allow this newly grown consciousness to mislead
'them when assessing, the industrialized countries' economic pos-
sibilities. For although there is only a very slight possibility
of substitution for oil at short notice, there is a limit to the
price that can be charged. In the short run there is at least a
point beyond which economic stability would be in jeopardy.
And that point is reached whenever the industrialized countries
are confronted with intolerable adaptation and reorganization
problems incapable of being solved at short notice and arc thus
driven into employment crises or toward an even higher rate of
inflation. In this context, I do not wish even to contemplate a
point-at least theoretically conceivable-beyond which the irra-
tional use of force might ensue.
But if we think in terms of five to ten years, the elasticity of
the demand for-oil will rapidly increase. Oil used for heat-pro-
ducing purposes will become substitutable as soon as the price of
oil equals or exceeds that of alternative sources of energy. How-
ever, scope for substitution is smaller in certain sectors of trans-
portation and of the petrochemical industry. In the long run,
though, oil could be replaced by electricity even in the field of
transportation, for instance if nuclear energy were available to a
greater. extent, and long before that coal will have been assigned
a larger role as a basic material in the chemical industries.
For these reasons, oil-producing countries would not only be
gravely misjudging the power they wield but also be jcopardiz-
ing their own interests if they were to try to attain maximum
absorption on a short-term basis. It would run counter to their
own long-term interests if oil-producing countries were to pursue
a price policy that would drive Western industrialized countries
onto the verge of, or even right into, crises: you do not kill the
goose that lays the golden egg. Extreme, supermonopolistic ab-
sorptions simply are no sensible strategy if the object is to narrow
the income gap between the group of industrialized countries
and the group of oil-producing countries. But the most impor-
tant aspect is that such a policy would force the industrialized
countries to resort to sweeping crash programs designed to
direct their entire resources, their entire sophisticated technology
to the substitution of oil or to the exploitation of unused nil
reserves (sands, shales). Consequently, in the long run the effect
for the OPEC countries might well be reversed. As far as the
interests of the oil-producing countries are concerned, the opti-
mum solution would therefore not lie in a short-term maximum
absorption but rather in an absorption that is achievable and
tolerable on a long-term basis.
With this in mind, a major question mark remains over the
present oil-price policy. Price increases have been so exorbitant
that, as a result of changes in incomes and demand, serious rcpcr-
c:ussions, particularly on employment, cannot he ruled out. lti
W11U11
r11arxrrrg qur rnelrzieia of action. In doing so they should
I CPYRGHT
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 Appr vdegotFi?~1- eaglaplPoIu rRTPIiati?ig ?I PY9ia1s194400020 010(D?Y-I3GHT
ware of the strain which they impose on a fragile monetary
stem through their sudden withdrawal of purchasing power.
Therefore) even if one recognizes-as I do-that producer
ountries have a good case for claiming a greater share, there
ill have to be negotiations on the size and terms, becausea new
quilibrium cannot be the result of monopolistic practices and
cchanisms, but will have to be brought about by balanced
udgment and advance planning. Producer and consumer coun-
ries will have to sit down at the same conference table. In those
alks, the oil-consuming industrialized and developing countries
hould not be forced at short notice to lower their standard of
rosperity at the expense of their social stability. It-should on the
ontrary be in the interest of the oil-producing countries, as well,
o ensure that they can satisfy their requirements by being able
o draw upon industrialized countries' national products that are
n a process of growth and possibly even undergoing structure
changes for the better.
At the same time, the problem of the use of the enormou
monetary purchasing power now accruing to the oil-producin
countries should be discussed, since this will have repercussion
on the employment situation in the industrialized countries an
on the extent of unavoidable structural changes. The search fo
solutions will certainly not be facilitated by the fact that they
is no homogeneity of interests in either group. Some of the oil
producing countries such as Iran and Venezuela will-at leas
on a medium-term basis-be in a position to utilize the accruin
purchasing power for, say, internal investment projects destine
to expand their own production capacity. To this extent they wil
become importers of industrial goods and consequently trigge
off a corresponding demand for export goods in the industria
ized countries. Here lie welcome chances for economic an
technological cooperation aiming at an accelerated industrializa-
tion of the oil-producing countries; this approach will requir
the development of coordinated programs. Other countries such
as the sheikdoms of the Persian Gulf, Saudi Arabia and po -
sibly Libya will-even on a medium-terra basis-not be ab
to absorb the additional purchasing power within their ow
frontiers. They will, in other words, not increase their impor s
and consequently not bring about an increase in demand f r
export goods; they Nvill invest their monetary capital in oth r
countries rather than spend it. This will result at first in t e
accumulation of huge, readily disposable amounts running in bil-
lions, which could well flow back to the industrialized cou I-
tries as capital imports. Such amounts might also be made ava -
ld
de
able to countries of the Third World which in turn cou
them for buying export goods from industrialized countries.
The situation on the part of the oil-consuming countries is
equally differentiated. Some of the industrialized countries a e
more seriously affected than others, the degree varying primari y
according to the extent to which they are dependent upon it
imports and according to the previous position of their curre it
account and their balance of payments in general, and final y,
according to their export, rapacity. Countries with a cure it
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 Approved
ia-f 1 in, (uY'tTYi '- iel~ o6 c`fibr .'T 'd`o ng so h`ey s~fiour~
above all not allow this newly grown consciousness to mislead
them when assessing the industrialized countries' economic pos-
sibilities. For although there is only a very slight possibility
of substitution for oil at short notice, there is a limit to the
price that can be charged. In the short run there is at least a
point beyond which economic stability would be in jeopardy.
And that point is reached whenever the industrialized countries
are confronted with intolerable adaptation and reorganization
problems incapable of being solved at short notice and are thus
driven into employment crises or toward an even higher rate of
inflation. In this context, I do not wish even to contemplate a
;point-at least theoretically conceivable-beyond which the irra-
tional use of force might ensue.
But if we think in terms of five to ten years, the elasticity of
the demand for oil will rapidly increase. Oil used for heat-pro-
ducing purposes will become substitutable as soon as the price of
oil equals or exceeds that of alternative sources of energy. How-
ever, scope for substitution is smaller in certain sectors of trans-
portation and of the petrochemical industry. In the long run,
though, oil could be replaced by electricity even in the field of
transportation, for instance if nuclear energy were available to a
greater extent, and long before that coal will have been assigned
a larger role as a basic material in the chemical industries.
For these reasons, oil-producing countries would not only be
gravely misjudging the power they wield but also be jcopardiz-
ing their own interests if they were to try to attain maximum
absorption on a short-term basis. It would run counter to their
own long-term interests if oil-producing countries were to pursue
a price policy that would drive Western industrialized countries
onto the verge of, or even right into, crises: you do not kill the
goose that lays the golden egg. Extreme, supermonopolistic ab-
sorptions simply are no sensible strategy if the object is to narrow
the income gap between the group of industrialized countries
and the group of oil-producing countries. But the most impor-
tant aspect is that such a policy would force the industrialized
countries to resort to sweeping crash programs designed to
direct their entire resources, their entire sophisticated technology
to the substitution of oil or to the exploitation of unused oil
reserves (sands, shales). Consequently, in the long runt the effect
for the OPEC countries might well be reversed. As far as the
interests of the oil-producing countries are concerned, the opti-
mum solution would therefore not lie in a short-term maximum
absorption but rather in an absorption that is achievable and
tolerable on a long-term basis.
With this in mind, a major question mark remains over the
present oil-price policy. Price increases have been so exorbitant
that) as a result of changes in incomes and demand, serious repcr-
c:ussions, particularly on employment, cannot be ruled out. I.
CPYRGHT
7
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 Appi oXR io ?rt i ~o
aware of the strain which they impose on a fragile monetary
system through their sudden withdrawal of purchasing power.
Therefore, even if one recognizes-as I do-that producer
countries have a good case for claiming a greater share, there
will have to be negotiations on the size and terms, because a new
equilibrium cannot be the result of monopolistic practices and
mechanisms, but will have to be brought about by balanced
judgment and advance planning. Producer and consumer coun-
tries will have to sit down at the same conference table. In those
talks, the oil-consuming industrialized and developing countries
should not be forced at short notice to lower their standard of
prosperity at the expense of their social stability. It-should on the
contrary be in the interest of the oil-producing countries, as well,
to ensure that they can satisfy their requirements by being able
to draw upon industrialized countries' national products that are
in a process of growth and possibly even undergoing structural
changes for the better.
At the same time, the problem of the use of the enormous
monetary purchasing power now accruing to the oil-producing
countries should be discussed, since this will have repercussions
on the employment situation- in the industrialized countries and
on the extent of unavoidable structural changes. The search for
solutions will certainly not be facilitated by the fact that there
is no homogeneity of interests in either group. Some of the oil-
producing countries such as Iran and Venezuela will-at least
on a medium-term basis-be in a position to utilize the accruing
purchasing power for, say, internal investment projects destined
to expand their own production capacity. To this extent they will
become importers of industrial goods and consequently trigger
off a corresponding demand for export goods in the industrial-
ized countries. Here lie welcome chances for economic and
technological cooperation aiming at an accelerated industrializa-
tion of the oil-producing countries; this approach will require
the development of coiirdinatcd programs. Other countries such
as the sheikdoms of the Persian Gulf, Saudi Arabia and pos-
sibly Libya .,,,)1l-even on a medium-term basis-not be able
to absorb the additional purchasing power within their own
frontiers. They will, in other words, not increase their imports
and consequently not bring about an increase in demand for
exhort goods; they will invest their monetary capital in other
countries rather than spend it. This will result at first in the
accumulation of huge, readily disposable amounts running in bil-
lions, which could well flow back to the industrialized coun-
tries as capital imports. Such amounts might also be made avail-
able to countries of the Third World which in turn could use
them for buying export goods from industrialized countries.
The situation on the part of the oil-consuming countries is
equally differentiated. Some of the industrialized countries are
more seriously affected than others, the degree varying primarily
according to the extent to which they are dependent upon oil
imports and according to the previous position of their current
account and their balance of payments in general, and finally,
according to their export rapacity. Countries with a current
App
CPRGHT
X0001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000200010001-3
account surplus, i.e., countries which have so far not used their CPYRGHT
entire national product internally for consumption and invest-
ment, but have made part of it available to other countries,
thereby acquiring monetary claims, are hardly expected to run
into difficulties. This applies, for instance, to the Federal Repub-
lic of Germany, whose current account surplus is quite sub-
stantial. For the Federal Republic, even the increase in oil prices
will presumably not result in a current account deficit. German
export industries enjoy a high reputation in potential purchasing
countries. In addition, the Deutsche Mark is backed by a very
large monetary reserve so that any lean period could easily be
overcome. The effects of the increases in oil prices on income
will of course also be felt by countries with a strong monetary
position.
Other countries whose balance of payments have hitherto been
in equilibrium or have already shown a deficit, particularly a
number of less-developed countries, may well run up such huge
deficits on current account that they might very shortly be facing
enormous financial gaps resulting in an immediate and urgent
necessity either to step up exports or to reduce imports. Such a
situation is extremely dangerous for the future of the whole
world economy. But it would be a great mistake if each individ-
ual country within the group of oil consumers were now selfishly
to try to solve its payments and employment problems by pursu-
ing beggar-my-neighbor policies at the expense of its trading
partners. Any relapse into largely bilateral bartering would be
just as dangerous as any reintroduction of trade restrictions. Nor
should there be any competitive devaluation. After the \Va,h-
ington Conference, we can only hope that, however justified the
concern about specific national problems may be, the common
interest will not be forgotten. Otherwise, an arrival at the point
of no return cannot be ruled out.
The present flexibility of exchange rates may well facilitate
the adjustment process, but it should not be allowed to lead to
excessive downward floating. Any current account deficits that
would remain if a compensatory increase in exports cannot be
achieved at short notice might well be financed from the sur-
pluses of oil-producing countries. The point would be to release
capital flows of more or less the same size as the various current
account deficits of oil-consuming countries. A large-scale con-
centration of investments in a few individual countries would
create well-nigh insurmountable difficulties both for the latter
countries and for those which fail to balance their current ac-
counts for lack of capital imports. Should the earnings of the oil-
producing countries, rather than being invested on a long-term
basis, remain "mobile" as a whole and be capable of being moved
at short notice out of one currency into another and from one
investment outlet to the next, there would furthermore be new
serious risks for the monetary situation.
Of course, a certain portion of the investment-seeking oil funds
mill find-its way to canSumer countries ttton-iaticall in the form
of direct investments, investments in securities, credits and bank
deposits, either direct or via existing or new Euromarkets. Coun-
Appr 01-3
 Approv i?S~Kv~t> a tiik~~i~~0 f na ~l~~[~~1 ~r0a'Iri1 a WO2?1Q:Or10001 3
of these monies might remedy the situation by offering invest-
ment incentives or possibly by issuing foreign currency bonds,
though there should be no free-for-all in the field of foreign
bonds.
If, in the choice of countries in which to invest oil funds, pref-
erence were to be given to those with strong currencies, the Tat-
ters' private sector investment outlets might prove insufficient.
If so, it might be advisable to examine whether public invest-
ment outlets could be expanded. Above all, the countries con-
cerned would have to ask themselves whether they were in a
position to act as "marshalling yards" for international capital
flows. They would have to try to offset inflowing liquidity by
capital exports and this might entail the willingness to accept
financial risks. Two countries that might be capable of under-
taking this very difficult task.could, for instance, be the United
States or even the Federal Republic of Germany. Such a "mar-
shalling yard" could help to direct the capital outflow selectively
into those countries which-as a result of tl-ie oil crisis-are faced
with major balance-of-payments problems. In the first place,
however, this task would be a matter to be tackled by multina-
tional institutions.
No matter what action the industrialized countries may take
to wipe out balance-of-payments current-account deficits, the
fundamental problem as such will remain unsolved. A process
of shifts in patterns of income has been set in motion on a huge
scale. The questions facing the industrialized countries are what
strategy they should reasonably pursue and whether they are
well advised to rely on capital imports in attempting to come to
a long-term solution of their internal employment and financial
problems. During a transitional phase this surely should he pos-
sible and might even be necessary in order to give the indus-
trialized countries concerned time to adapt.
What will probably be unavoidable in the long run is a process
of structural changes which would, among other things, increase
the export capacity of those industrialized countries whose ex-
ports now flow at a low level. This results from the pressure of
the Third World's dire needs. These would increase if the now-
beginning process of transfers of purchasing power were to be
strictly confined to industrialized countries on the one hand and
oil countries on the other, especially if the released investment-
seeking oil billions flow back in the opposite direction. The de-
veloping countries are in danger of being left high and dry.
Their very existence is threatened by increasing oilpricesb---
cause they do not have as high a net product as the indtastrializcd
countries to draw upon. For those who view the prosperity gap
between the rich and the poor of this world with concern, every
effort must be made to see that the oil producers place that por-
tion of their additional purchasing power which they are unable
to absorb at home directly at the disposal of developing coun-
tries to make effective the latter's demand for imports from
industrialized countries. 10
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CPYRGHT
 Approved 01-3
The international organizations, too, will have to join in the CPYRGHT
fforts to channel the investment-seeking funds of oil countries
o where they are needed to lessen the differences between levels
f income. The International Monetary Fund (IMF), the
World Bank, the International Development Agency and the
.egional development banks will in the future have to rely on
hose countries much more than before when seeking to obtain
ending funds, even if-as I hope-the industrialized countries
In not reduce their development assistance below its present
evel.
In the long run, therefore, the oil countries will also be facing
the problem which now is accompanying development assistance
rendered by industrialized countries. Mere financing of credit
to developing countries will not be sufficient in the long run. The
rate at which most countries of the Third World are accumu-
lating capital resources of their own is so low that it is hardly
possible to set in motion an accelerated process of self-develop-
ment merely by offering them assistance in the form of credit,
because most of their gain in productivity is eroded by their
commitments to pay interest on, and repay the principal of, loans.
Thus, in the long run, there will have to be more genuine
transfers of real resources in order to provide the less-developed
nations with a genuine basis for continued self-development and
thus also to decrease social and political tension. The oil-produc-
ing countries are now succcessfully making the most of their
market position for obtaining a larger ,hare, in real terms, in the
world product. This share is considerably larger than all the
development aid being provided by industrialized countries.
Thus, some of the oil producers are automatically beginning to
share in responsibility, a responsibility that they cannot shirk.
Obviously, the developments sparked by the increase in oil
prices can hardly be brought under control unless there is a
change in consciousness of the matter in public opinion. What
is needed is a fundamental change in patterns of behavior both
among individuals and among nations. This also applies to
the question of a less wasteful use of each country's own resources
and its attitude toward economic growth. The richer nations will
have to realize that the product of national labor will not invari-
ably he fully available for domestic distribution. It will not be
easy to make the general public lastingly conscious of this fact.
Developments along these lines have already started in Eu-
rope? Of course, the model of the European Community is not
capable of being applied automatically to other parts of the
world. European integration is an historically necessary process
that must be measured against European criteria. In principle
there is already a substantial levelling out of differences in re-
sources between the countries of Western Europe. The huge gap
between incomes in the industrial centers on the line from Ham-
burg via the Rhine to the -Rhone, including Northern Italy, on
the one hand, and major parts of Southern Italy, Ireland and
gland on the other, will stand. up to a comparison with the
corresponcting gap between certain industrialized countries and
certain developing countries. The United States has a compar-
Appro
01-3
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000200010001-3
able North-South problem. From.thc very outset of the move
toward European unity there was no doubt whatsoever regard-
ing the fact that political integration would have to keep step
with a planned and controlled transfer of funds from the stronger
to the weaker nations. Up to and including 1973, for instance,
the Federal Republic of Germany, the main provider of finance
for the European Community, had paid some DM9.5 billion-
or approximately $3.5 billion at the current :rate of exchange-
net to other nations out of tax revenues. My country, whose finan-
cial capacity should not be overtaxed in the process, looks upon
such payments as the cost of the integration venture.
On a worldwide scale, it will not be possible to reduce the dif-
ferences in the levels of wealth unless the more advanced indus-
trialized nations develop their own resources in close coordina-
tion with one another and with the primary-producing countries.
If they fail to do so, the result might be social storms which could
even seriously jeopardize world peace. If it can be assumed that
most of the developed countries with a high level of prosperity
have a great preference for peace, and that most of the less-de-
veloped countries have a high preference for increased wealth,
there must be a level on which a convergence of preferences
would stabilize the international political situation at a higher
level of prosperity for both the wealthier and currently poorer
countries. It would, therefore, serve the efforts to maintain peace
on a worldwide scale if a comprehensive policy of economic
cooperation were to be pursued rather than a policy of economic
"apartheid."
Seen from this angle, time is short for working out sensible
new rules for monetary affairs and trade. And seen from this
angle, the cost of the peaceful development of the world econ-
omy will now have to be charged and paid.
CPYRGHT
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 19200010001-3CPYRGHT
NO one expected last month's special session of the
United Nations Assembly on raw materials to yield
positive results. But the fact that it was held at all is a
reminder that international trade is indispensable to
world prosperity. Whatever hampers the free exchange
of goods and services, whether economic obstacles
such as tariffs and quantitative restrictions or political
attitudes, tends to depress living standards every-
where. When trading partners are in dispute, co-
operative solutions - the phrase is Dr Henry Kissinger's
- are therefore greatly to be preferred to confronta-
tions. And nowhere is this truer than in regard to oil.
There is some danger that the quest for co-
operative solutions in the field of oil may now lose
some of its urgency because the oil trade looks as
though it is returning to some semblance of nor-
mality. A rapprochement between the USA and the
Arab states has led most of the Arab oil exporting
countries to lift their export bans.- Crude oil pro-
duction in those countries is gradually returning to
the pre-crisis level, and the worldwide scramble for
supplies has thus abated. Posted prices, unchanged
since 1st January, are frozen until the end of June
and the grossly inflated "auction" prices have come
tumbling down. In consuming . countries govern-
ment restrictions on the use of oil are being relaxed.
Nevertheless, there is little justification for com-
placency. Peace has not come to the Middle East.
Oil is now extremely expensive and consumers are
being forced to make drastic economies for lack of
funds. Intractable balance-of-payments problems
loom ahead. Talks about "participation" drag on,
with host governments demanding ever-larger shares
at bargain prices. There is much uncertainty about
the future course of oil supplies and prices.
International companies can be relied upon to
keep the oil flowing, so long as they are allowed to
get on with the job. But they are at present working
under severe handicaps and are very much at the
mercy of host government decisions, in many cases
they do not even know what their current liftings
are going to cost, because "participation" agree-
ments, when finalized, will be backdated. Further-
more, they have no guarantee that agreements
signed today will not be torn up tomorrow. In the
importing countries meanwhile, and especially in
the United States, oil companies are heing made the
scapegoats, not only for OPEC's price-raising exer-
cise, but also for the failure of the local govern-
ment's policies.
It is time for governments of importing countries
.to consider more realistically what contribution they
cam-quake-especially In-.couccrt__with__other govern- terms they are
to-the-stability of the intei7~a~ onafi oikfracle. --Wh r of the futur0
rich beyond their dre.uns. Bt:t
Most of them see the need t?
16 Approved For Release 1999/09/02 : CIA-RDP79-01194A000~2'b0`0r116- 004~~3"""`
Some suggestions are:
(a)
(b)
(c)
(d)
They still need to avoid competitive actin s
that tend to bid up the price of crude Oil.
Fortunately, as the scramble for supplies h s
subsided, the glamour seems to have gone o t
of the bilateral deals that were all the rage
few months ago.
They still need to encourage economy i.
consumption and the development of o I
resources - and other energy resources - ou -
side the OPEC sphere. The latest ideas circula -
ing in the EEC on this subject are reviewed i
a later article.
Governments of the major importing countries
are under obligation to seek co-operati
solutions to the trading problems resu]tin
from the inordinate increase in the price of of .
It is now generally recognized that a competi-
tive struggle for export business, with th
object of eliminating balance-of-payments defi-
cits, could result in a downward spiral
devaluations, depression and unemployment.
The "oil deficit" vis-a-vis the OPEC countrie
must be dealt with co-operatively if this disas
trous outcome is to be avoided.
In the banking sphere, international co-operatio
will be needed to ensure that any shifts in th
financial balances of the oil exporting countrie
from one centre to another do not disrupt th
world's financial mechanism. This and othe
financial aspects of the problem are discusse
in the following article.
Ina porters and Exporters
But it will not be sufficient for western govern
ments merely to reach agreement among themselves:
they need to strive for a modus vivendi with the
Arab governments. A more stable trading relation-
ship between the oil importing and exporting coun-
tries, based on consultation, is indeed in the long-
term interests of both parties, though this does not
necessarily mean that it will be easy to secure.
The main importing countries have been forced in
recent months to seek an insurance against further
interruptions of Arab supplies by expensive pre-
parations for the development of alternative re-
sources. The size of the "premium" they are pre-
pared to pay for this insurance will depend on their
assessment of the risks invoked; and close consulta-
tion with Arab governments might perhaps enable
a more accurate assessment of the risks to be made.
A more stable trading relationship is also very
much in the interests of the exporting countries. o it
is their primary source of income - and in financi;l
 CPYRGHT
invest t~E3br31'4~$~'F~IC'~s`~ 9'1(12'r qPt1hiMdM_16opftg44 000~deriter ests
nq-;nn:~t economies throueh the establishment of countries. ese ave been
new industries. If this objective is to be realized
they must depend heavily on the help of the indus-
trializcd nations, in the shape of training schemes,
industrial know-how and a vast range of sophisti-
cated equipment. They need a stable long-term re-
lationship with American, European and Japanese
firms, just as the latter need a stable supply of oil.
The Russians are not capable of satisfying this need,
and most of the Arab states would not wish to put
themselves in Russian hands.
One particular industry which a number ~of Arab
governments desire to establish is that of oil refin-
ing; and they are making agreements with American,
European and Japanese companies to this end. It is
being suggested therefore that the Persian Gulf will
before long become a large refining centre, supplying
finished products to Europe and Japan. But can
countries which have had their supplies of crude oil
cut for purely political reasons allow themselves to
become dependent upon those selfsame sources for
finished products? If an importing country has
adequate refining capacity it may still hope to cover
its essential needs if some of its crude oil supplies
dry up. But if it is heavily dependent on imports of
products it is much more vulnerable. Before the
Persian Gulf can become a significant source of
,product supplies for Europe and Japan, the Arab
=overnments must do something to rebuild the
confidence they so rudely destroyed six months ago.
Some better understanding between Western and
hardest hit by the five-fold increase in crude oil
prices. The burden thus imposed on their finances is,
indeed, equivalent to the total aid which this group
of countries receives from the industrialized nations.
And the latter group will find the maintenance of
foreign aid more difficult because of the damage done
to their own finances.
OPEC decided in principle last month to establish
a fund from which cheap long-term loans could be
made to developing countries. But ratification by
the individual governments will take some time and,
when this is forthcoming, the detailed arrangements
will have to be worked out. To co-ordinate the
assistance and to ensure that the most effective use is
made of the funds available is a problem that cries
aloud for co-operative solutions.
The need for international co-operation in the
whole field of energy supplies is gradually being re-
cognized. The EEC governments, for instance, are
planning discussions with Arab states, with a view
to holding a Foreign Ministers' conference. Un-
fortunately, the political leadership which is so sorely
needed to deal with these international problems is
not much in evidence in the USA or Europe today.
Governments preoccupied with the problem of their
own survival are not likely to take strong inter-
national initiatives. But we live in one world, and
that world's economic and financial problems can-
not be solved if individual governments are content
to go it alone.
Approved For Release 1999/09/02 : CIA-RDP79-01194A000200010001-3
 CPYRGHT
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GOVERNMENT EXECUTIVE
MAY 1974
... Utopian Talk, but No National Policy
IIIIril 11 By CRAIG POWELL
TO Rep. Mike McCormack (D-Wash.),
Chairman of the House Science and
Astronautics Subcommittee on Energy,
the year 2,000 is the most "realistic"
target date the United States can set for
significantly closing the Nation's "energy
ga" We cannot," McCormack told Govem-
nternt Executive, "hope to see the emer-
gence of inexhaustible environmentally ac-
cepttable sources of energy in this country
until the turn of the Century. Those who
banter around Utopian dates of 1980 to
1985 are merely engaging in political
rhetoric."
He added, "Furthermore, for the Na-
tion~ to meet the year 2,000 goal, there's
a desperate need for a national energy
policy and for one agency within the Ad-
miristration to help develop and to ad-
minister the program, including com-
prehensive research and development."
Most top officials in the energy R & D
arena concur with the Congressman in
principle, if not in degree of bureaucratic
reorganization needed.
While there is general agreement over
the need to pull together a national energy
policy, opinions differ as to the kind of
energy R & D administrative structure re-
quifcd.
Most of the conflicts among powerful
Capitol hill energy policy figures, scicn-
tisuy bureaucrats and interested indus-
trie''s in the past year have swirled around
proposals to create a Department of
Energy and Natural Resources (DF.NR),
which would manage programs now
lodged in the Interior Department and
other agencies, and an independent
Energy Research and Development Ad-
ministration (ERDA), which would have
nuclear research and management capa-
bilities of the Atomic Energy Commis-
sioh and an R & D role in fossil fuel and
other energy source programs.
Atomic Energy Commission Chairman
Dixy Lee Ray, Rep. Chet Holifield (U-
Calif.) and others vigorously opposed sub-
mersion of the AEC and the splitting off
of I its licensing, regulatory, safety and
--- environmental responsibilities to a new
- n c r-eiicrgy cmrtmiss ou. On the other
side of the fence have been Sen. Henry
Jackson (D-Wash.) and others favoring
Apprnv rI Fnr RPIPacP
inclusion of energy :in an administrative
entity handling all natural resource pro-
grams.
Internal Struggles
Adding to difficulties facing the mas-
sive reorganization proposals have been
largely behind-the-scenes struggles among
legislators with strong constituencies in
one or another agency or bureau over
where such entities should be relocated.
'17hese conflicts have been reminiscent of
those preceding creation of the En-.
vironmental Protection Agency.
In the continuing debate over the energy
gap and the research and development ef-
fort needed to guide the Nation out of its
self-made quagmire, it often seems that
"wvirere one stands depends upon where
one sits." Some with specific energy in-
terests exclusively emphasize either near-
term, intermediate-range or long-term
solutions while others advocate conibi-
nations of the three.
AEC Chairman I:ay, whom President
Nixon asked to design a five-year, $10
billion R & D program, has placed main
focus of Government planning activities
on new technologies relating to nuclear
power, coal and oil, shale and considered
the most promising means of moving
toward national self-sufficiency in the
1990S.
Coal gasification,:liquefaction and solid
coal combustion, as well as economical
and environmentally acceptable shalt oil
mining techniques, jf coupled with proper
con;en'ation, could make a big difference.
But even if an expensive, all-out coal
conversion and shale oil technological ct-
fbri could be mounted, the experts believe,
these programs would not really begin
paying off until the 1980-1985 period.
Kicanwhile, several promising conver-
sion processes are being developed. Lurgi
gasifiers, proven successful in Europe, are
unnergoing adaptation to burn U.S. coal.
Experiments are being conducted in a few
American pilot plants in an etl-ori to make
high Btu-rated gas.
The COED (Char-Oil-Energy-Develop-
ment) process for converting solid coal in-
to liquid fuel has been used to power the
destroyer LISS Johnson in tests conducted
by the FMC Corp. for the Federal Office
of Coal Research (OCR). And U.S. Bureau
of Mines researchers are experimenting in
collecting combustion gases from burning
coal seams.
Meanwhile, the OCR, for years a sleepy
Interior Department agency, has been re.
vitalized to help revive the coal indutry,
and next year's OCR budget request is
nearly 10 times the office's 1973 budtrt.
The National Bureau of Standards also
is conducting coal research, along with its
nuclear and other energy R & D work.
Intermediate-to-longer-range solutions
are foreseen in the areas of solar, gcothcr-
mal and nuclear breeeder reactor sources,
but solar and geothermal sources are ex-
pected to be capable of meeting only a
relatively small percentage of the Nation's
total energy needs in the next 15 years.
Breeder Reactors
The nuclear breeder program, which
has been criticized on environmental, tcch-
nical and economic grounds, will use
about 45% of total Federal energy R & D
funds for }'ical 1974.
The ultimate long-range energy source,
of course, is expected to he thermonuclear
fusion. Since fusion v:ould require only
hydrogen from sea water as fuel, it would
be a cheap, clean solution.
Earlier this year, the AEC delayed its
timetable for producing commercial I'tl-
sion power until near the turn of the ('en-
wry because of budget cuts ordered by
the Office of Management and Budget.
McCormack and others are concerned
about the piecemeal manner in which the
Nation has been dealing with the in ny-
sided energy problem.
A nuclear researcher at the Atomic
Energy Commission's Hanford, Wash.,
facility for 20 years and one of only a hand-
ful of scientists elected to Congress, Mc-
Cormack wonders how well the country is
being served when he studies activities and
policies of the myriad of Government of-
fices and agencies that get a slice oi- the
energy R & D pie.
Incredible as it might seem, the number
of Executive Branch Offices and con}:res-
sional committees and subconirnittees in-
volved with energy problems is now ap-
proaching 100.
Asked about this fragmentation of rf-
'I 999/n9/n, .1 IA-Rnp79-nl l gAAnnngnnni nnnl -3
 Approved For Release 1999/09/02 : CIA-RDP79-01194A000200010001CCYRGHT
fort, McCormack said, "There simply is
no single national energy policy. This is an
unfortunate fact of life we have to accept
for now, and work to change.
"There has been an assumed policy in
the past, but it has operated as though
energy sources were inexhaustible, free
and had no impact on the environment."
But he pointed out that establishing
such a policy will be a "fantastically com-
plicated undertaking . , . not so simple as
it might seem at first blush."
He said, "The policy must be based on
the best and most factual information
available. We must do away with fantasies
Anil All Si~m.n (Com erlyd J.
l
B
arre
T,, Milli,-rl
, r,.?~, ~i.Pr, Da, of 1), (kc
Government and industry estimates
set U.S. energy needs by 2000 at the
equivalent of 82.5 million barrels of oil
daily, with domestic production from
all sources 12.5 million equivalent
barrels less. The difference represents
shortages and imports.
such as 'solar energy available soon' and
"'cothermal energy available soon.'
It roust be it policy that will assure
optimum environmental protection. How-
ever, blind emotionalism most not keep
us from achieving the advances and pro-
duction needed."
McCormack added with emphasis,
"Our most urgent need is for a total
systems approach to the problem-today should conduct their own R & D and
and in the future. demonstration efforts. The Federal Gov-
"Without such an approach, catas- ernment would, of course, lend funding
trophe is inevitable." assistance to projects when in the best in-
Ile considers some Administration pol- terests of both parties.
icies and actions in the energy area as "There is much to be gained from such
beneficial and others as misguided. a relaxed cooperative effort. With proper
McCormack believes that reorganiza- financing, this approach could make us
tion of the White House science advisory self-sufficient around the year 2,000."
apparatus last year was a plus. In the McCormack is not hurling brickbats at
shift, the President abolished the Of- current efforts to get R & D programs un-
fice of Science and Technology and his tracked; to the contrary.
Science Advisory Committee and made He is more than pleased that his solar
Dr. H.G. Stever, director of the National energy bill passed the House, 253 to 2. 'Re
Science Foundation, his science advisor. legislation would authorize $50 million
Stever created his own Office of Energy over five years to subsidize development
R & D Policy to support Office of Man- and manufacturing of solar heating and
ageirtent and Budget energy policy deci-, cooling systems for homes, factories and
sionmaking. schools.
The Congressman also credits the Similarly, he is confident of success in
Federal Energy Office staff under 1'i'il- moving an $80 million, six-year geother-
liam Simon, who had to spend most of mal energy authorization bill through
his time putting out day-to-day fuel crisis Congress.
brushfires during the agency's brief the OMB has budgeted
existence, with making a modest start ment and private effort
toward guiding longer-range programs. at between $10 and $11
An energy R & D office headed by Al- next five years.
the joint
in energy i &, D
billion over the
vin Weinberg has been established, and "This amount, I feel, approaches the
Weinberg has set up an interagency com- right magnitude, assuming the even larger
mittee comprised of top R & D experts energy R & D investment expected i-om
froin other Federal agencies. The group the private sector," McCormack said.
has been meeting to review and update the But while he can live with the current
five-year energy R & I) plan and to tailor funding level, McCormack, as a nuclear
it to new demands of the President's scientist, does feel there should be some
"Project Independence" blueprint. reordering of priorities.
Weinberg, a onetime adviser to Chair- "Nuclear energy," he said, "provides
man Ray, previously was known to he at about 4% of the electricity today, and by
odds with Ray staff members over ap- the end of the year, the figure should rise
proaches io developing early recommen- to about 8%. But by the end of the Ccn-
dations for long-range R & 1) strategics. tury, 60% of the electricity should be
McCormack and others have noted that nuclear-produced. Nuclear dwarfs any
realistically, the OMB, not the FEO, plays other potential source."
the major role in shaping energy policy, In his opinion, underfunded programs
and that the OMB more properly should include the high-temperature gas-cooled
he involved in year-by-year fiscal matters, reactor (HTGR) program, the breeder
rather than in long-range R & D planning reactor program, the fusion program from
covering two or three decades. a materials and engineering standpoint,
PMIanagcment of the energy program, in and basic research and development in
McCormack's view, should be done by some other areas.
a cabinet level Drpartmcnt of Science, He also said, "There probably is too lit-
Energy and Technology embracing all tle organization as far as coal R & 1) is
agencies. Its job would be to attack energy concerned. We need more sharply-defined
problems on a broad front by arnassing programs than we have at the moment.
data on all dynamic aspects of file] and We should emphasize these areas more in-
energy sources and technoloti;ies, and con- stead of throwing money at words-
solidating and spurring energy research in biosynthesis; ocean temperature gradients
national laboratories and through grants and the like."
to industry and universities. While the National Science Foundation
---lie feels -strongly that all-institutions -- is primarily concerned with intermediate
nor ofgani7atioriis u ](side of crveinmen>: Tong-range" programs, NSF Director
have financial and moral obligations to Stever fully agrees that energy R & 1)
participate. must be examined and evaluated "trout a
"The relationship between Govern- total systems point of view."
menu, industry, universities and non-profit The NSF position is summed up in the
establishments should he a loose, informal expressed hope that "the process of de-
one," he said, veloping the detailed R & D needs (a
"As we look forward, we should be process including many committees and
working together for the systems ap- individuals) will result in systems type con-
proach. Industry and the universities siderations leading to a more precise
16
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 CPYRGHT
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definition and refinement of R & U goals
than we have been able to arrive at pre-
viously."
,Fhe NSF has undertaken two major
programs: RANN (Research Applied to
National Needs) and ISRU (Intergov-
e?nntental Science and Research Utiliza-
Utilization).
RANN would shorten the lead time bet-
vlween scientific discoveries and their ap-
ilications. ISRU's aim is to provide an cf-
f;e.ctive mechanism for communicating to
II,ZANN the problems of society as pcr-
c'civcd by stale and local government agen-
cies and industry.
Acknowledging that possibly 50% of the
total energy generated, in the U.S. is
N4asted, RANN directs its program toward
points in the system at which major im-
provements are possible by making better
use of resources, introducing new capa-
ljilities and reducing losses.
According to Dr. Alfred J. Eggers Jr.,
NSF's assistant director for Research Ap-
piications, "We are working on solar and
geothermal energy to minimize depend-
r:nce on foreign imports. We support
efforts to make better use of America's
energy resources, especially coal, and to
improve efficiency in the areas of energy
conversion and storage, energy trans-
mission and fuel transportation, and
energy systems."
Donald Beattie, head of NSF's Direc-
torate of Advanced Energy Research and
l'echnology, indicated in an interview that
NSF believes in a single energy man-
agentent agency, but
is not adamant as to
the form it should
take.
"For instance," he
said, "rity directorate
could work very well
under the proposed
ERDA, and I ant sure
there are other agen-
cies that could do so
has well."
He added, "fun-
ding in our principal
areas is increasing
very well. In Fiscal
11974, we had $13
million for solar R &
1) and $4 million for
geothermal, with
!about an additional
$5 million divided be-
tween areas tangent
to the two.
"In Fiscal 1975,
the request has risen
to $50 million for
solar and $22 million
for geothermal work.
The gcotherrnal fun-
ding will probably be
equally split between
the NSF and the
AEC, with NSF ac-
ting as coordinator.
(here also is some
$20 million allocated
to other areas for a total energy R & D
funding request of $94,9(10,000 for
1975. about six times that of
1973.
"We are surprised at the interest in-
dustry has shown in Federal solar pro-
grams. In many areas, the building in-
dusiry would like to use solar heat. While
the (jovernnrerlt should not be funding
any speculative efforts; solar is most im-
portant because it not -only saves fossil
fuels, but also,is most benign in its en-
vironmental impact. So we could spend
more money it: we had it. However, the
added emphasis in 1975, is good balance
between 'crash' and 'orderly' programs."
Beattie said industry does need new
technology more quickly than risk capital
is able to provide it, and that this is an
area into which NSF could put more
money to bring the technology on line.
Almost all of NSF's budget is allocated in
the form of grants or contracts (60% to
universities and non-profit institutions
and 40% to industry).
"Energy," Beattie said, "is the biggest
problem outside of'war. Further, we must
learn to use all energy generated. With
steam plards generating electricity at 40%
of efficiency, we Must improve 'topping'
and 'bonoming' cycles (higher temper-
atures for more heat and use of exhaust
hear).
E=nvironmental and institutional prob-
lcros are more complex than is gener.,l-
ly believed, he noted. Construction of an
energy plant in k'alifornia's Imperial Val-
ley, he pointed out, requires approval at
four different levels of authority.
"What happens," Beattie said, "if one
builder uses solar heat in a shopping cen-
ter only to have another entrepreneur
build a high-rise building nearby that
blocks the sun? The builder of a big
housing development can- go bankrupt
waiting for the :plumbers and electricians
to settle an argument over who installs the
solar system. Wlio owns geothermal heat?
Is it under Federal, state, local or private
ownership? These arc not simple ques-
tions, and they are without precedent."
Total Systems Approach
The requirements necessary to achieve
effective energy research and develop-
ment, then, can be summed up fairly
easily. Fundamentally, there is a need for
a comprehensive national energy policy, as
well as a single management agency to
implement it, using a total systems ap-
proach.
McCormack said, "The United States___
can become independent of imports any
time Americans are willing to cut con-
sumption of oil and other iuels down to
what they already produce.
"But true energy independence means
having enough domestic energy for a
growing industry, a strong defense and
reasonable standard of living."
And Stever, in congressional testimony,
noted, "I think we are in part limited by
ideas and we are in part limited by the
total amount of money.
"Society has got to determine how
serious this balancing problem is going to
become over these years. It is going to he a
matter for Congress and practically every
other unit of our Government, of our
people; every institution of our society will
be involved with this problem."
The debate will produce "solutions"
that will prove to have bugs in them, and
be dropped for newer priority alternatives
after costly, tine-consuming testing and
evaluation efforts.
Obviously, the many conflicting view-
points on the course of energy R & D are
not going to be sorted out and bundled
up into a compact, cohesive national
energy policy package overnight. Mean-
while, the arguments will continue to rage.
Carl future national energy needs be
met by any measures short of a huge Man-
hattan or Apollo-type project? Should
any such project be lodged in an exist-
ing or a new super-agency?
Should natural resources and energy be
lumped together or separated in any
program consolidation? Is the OMB's role
in energy R & U too large? What kind of
Federal guarantees should industry have
against the possibility of going broke if
the bottom drops out of a new energy
technology market sometime in the fu-
ture;? There are many more equally dif-
ficult questions. Pr"J
Approved or Release
 CPYRG.,
p
RPRU
CPYRGHT
46-SGR-,
PYRGHT
02 JD1 79-01
By C. Fred Bergsten b lance of payments of the industrial
orld as a whole.
WASHINGTON-Arab oil earnings To be sure, the flow of money from'
i rise by nabs will not necessarily go to.
mounts will get even bigger in fol- ii divi uzl . industrial countries in-
owing years, the balance-of-payments a ou is that precisely match the de-?
ositions of the consuming countries ine in the trade balance of each,
ill plunge into the abyss, the inter- me industrial countries may wind
ational monetary system will cot- p w th a sizable surplus; others may,
apse, the Arabs will buy up all our ave eficits.
ompanies-so goes the refrain heard Bu this problem is solvable `solely
requently since the dramatic increase ro h action by the industrial coun?
in oil-prices in December. ies hemselves to recycle the money.
w ere it is needed. Much financial.
There are indeed extremely serious cy ing will take place through nor-.
consequences of the oil crisis: al market forces. Some can be,
Inflation has spiraled upward; re- and d by government borrowing in.
cessions are possible if governments he . rivate capital markets.
mistakenly cut back aggregate de- Th Eurocurrency markets - those
mand to cope with shortages of hat end a variety of currencies from
supply; countries producing other raw ur can centers-have grown as rap-
materials have been encouraged to ly several past years as they will
emulate oil exporters; a few of the ave to grow now, ' and the United
poorest countries will suffer serious tats capital market is now fully
deprivations, and political tensions de- vai able with the abolition of con-
riving from the energy problems rols Together, they can handle the
could intensify among countries. ast bulk of the money on their own,
- But the international monetary situ-
ation adds relatively little to the prob-
lem. No industrial country will go
bankrupt. The monetary system will
not collapse. The prophets of financial
doom simplistically compare the in-
crease in each country's oil bill with
its 'existing monetary reserves. They
note that United States' imports will
rise by $15 billion and that its reserves
are $12 billion, and conclude that the
United States cannot pay-even for
one year.
Such observations are absurd. First, -
they ignore that a sizable share of
the increased earnings of the oil-ex-
porting countries will be spent on im-
ports from the industrial world. Some
oil countries will spend virtually all of
'their increased earnings themselves;
all are rapidly revising their develop-
ment strategies and military plans to
do so. Some will lend their money to
others who will quickly spend it.
So, even the trade balances of the
Industrial world will not decline by
more than, say, half of the increase
In its oil bill this year. Those trade
balances will be even better in subse-
quent years, a" any further increases
in oil countries' earnings are more
than offset by their increased imports.
Indeed, the United States appears to
.
have already.reached its-new- plateau
-of-oil impoTtsin-Apri9"'atanrnnual rate
of $27 billion), but there was a surplus
in over-all trade as exports reached an
annual rate of almost $100 billion.
Second, the prophets of doom con-
fuse the balance of trade and the
balance of payments. They ignore the
simple but central fact that the oil
exporters must invest in the_ industrial
world any of their increased earnings
that they do not spend. The Arabs
will not bury the money in the ground.
nd re in fact doing so even as the full
o nt of the higher oil earnings is=
ow being invested.
T e rest of the money can move
hro gh such existing intergovernmeii-.
tal nstitutions as the swap network
am g central banks and the Inter-
national Monetary Fund. Indeed, such
bar stopping will be needed for any
indi idual borrowers whose credit-.
wo hiness comes under doubt in the
private market. But Italy is -the only
sue case to date.
I any event, no special cooperation
wit the oil exporters is needed in
this area. It helps for the International
Mot etary Fund to borrow from them
to elp finance members' deficits, but
the e is no reason to give the oil ex
po ers better terms than other lenders.
oubts are sometimes raised about,
the plausibility of such smooth han-'
dli g of the oil money. First, it is feared
tha the money, like the oil itself, will
be politicized." But it is highly doubt-
ful that the Arabs will try to promote
mo etary instability by shifting their
funs from place 'to place. Once in
ves ed, the very size of the funds
wil make it increasingly difficult for
the Arabs to liquidate quickly with-
out incurring substantial losses. If they
we a to make such shifts, the money
co d readily be recycled through the
sw nework'" eeond, it is argued that some in-'
du trial countries may be unwilling to
ac pt the needed shift in the struc-
ture of their balance-of-payments
s t n,.~ ~I~ ~s e6llh r ajb~O YiA tie gat all of
IJeL ~ _gat
nd 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 imbal-
ances do. And it is certainly sustain-
able for the interim period until en-
-rgy conservation and the develop
ent -of' new sources of oil and
lternative forms of energy are
nought into play to change the energy
ituation to its roots.
Third, some industrial countries
ear that many of their companies will.
a taken over by the oil producers.
They need not. Most of the oil coun-
tries 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 busi-
ness concerns within their boundaries,
hey are quite unlikely to seek ma-
ority control of firms within the
oundaries-and legal jurisdiction-of
thers. Even if they' wanted to,
o not have the manpower to ex3?2tween 5 to 8 per con' yy 3
Ma
d
ende
week
the
;
for
ro- ;
while
uarter
fi
t
h
i
p
.
q
rs
.
v
n t
e
inion
m
3.99
rate
of
at a
cr
diction is crccpirg up A. a'
bar els a day, the highest level'
faster pace then cxp#>cted." icy
far this year.
A spot check of t' :c major" The agency that the
anies indicated that y
om
il
p
c
o
they had similar indications. total was 974,000 barrels a day
The Federal 'r.ncr ,y Admin- above the preceding week and
'
istration's latest forecast had was the largest weekly gain
l demand in the United this year. Most of the increase
t
ua
ac
Stales at 16.1 million barrels a Was caused by a higher level
compared with a demand of imports from Arab countries.
day
,
rate for the period anticipated Shipments from the Arab coun-
before the Arab embargo of tries 651,000 barrels a day in
117.9 million barrels a day, andithe latest week compared with
000 barrels a day in the
of 137
d
l
,
emand
average
an actua
17.2 mitilon barrels a day for preceding week.
1973. Total imports including pe-
Siniilar declines have been trolcum products averaged 6.5
recorded, althou1h based on million barrels a day, the first
time the total has exceeded six
prelin+irnry figures; in most
million harms this year.
countries of INC world
- _ _ -
gnsolinc_hcatin T n the American
Demand for
n -.__
-
.
oil and residual oil. in West Pctrol,.um Institute's ftgur.s for
the weeks
Germanv was oft 6 per cent,
France 11 per cent and Britain showed that for the first time
according to one this year imports of crude oil
12 per cent
,
company's estimates. and products exceeded 1973
an
Consump~ion in Jap, se totals
Production figures tell sever-
pe r cent in the first quarter
of this year, but in recent years al interesting stories.
the increase in consumption In the United States produc-
ee~
LIDYA
....................
APO DHARI
~'" AIGEYiA
1572 Sept. Nov. Aori!
1973 1973 ??74
Sept.
Nov.
A;. i
1972
1973
1973
1974
VENEZUELA
3.2
3.4
3.30
3.1
NIGERIA
1.8
2.1
2.2
2.3
INDONESIA
1.0
1.35
1.39
1.46
ion of crude ail ard condensate
Dialed nine million barrels a
ay in the latest week, com-
ared with 9.37 million barrels
day in the week a year ear-
ier. This represents a cc boni-
ng trend brought on by a de-
fine in productivfty of the na-
ion's major producing wells.
here is some hope that the
igher prices for oil now being
aid in the United States will
esult in a small reversal of this
rend or at least prevent further
msion.
Irar. Pace at Record
overseas, some of the Middle
astern producers, but not all,
ave increased output. The ma-
or factor, Saudi Arabia, with
he world's larpcst oil reserves,
as raised her output to 8.5
million barrels it day from a
mbargo low of 6,5 million and
t-nrc ~ -bargcr September -mte
mt r n arrels~ t?atfng ail which ould n or-I
t i ?
k
t 2.1 mlllon barrels a day, and
bu Dhab is close to 1.5 million
levels before the embargo
against the U.S.
Kuwait and Libya, on the
Cher hand, are producing at
onsiderably less than their
CPYRGHT
.
The New York }+mes/Mat 13,19
pre-cmhargo pace. oth have.
giver conservation a a reason,
but both countries, inch are
sparsely populated, Ave more
'revenues than they new what
to do with at the om2nt.
Iran. a non-Arab ountry in
the middle East, is producing
at a record 6.2 mil on barrel ,
a day, while Nigc , Africa's
leading producer, } as pushed
production to near .3 mullion
barrels a day, also a rccnrd.
Indonesia has raj d produc-
tion to 1.46 millio barrels r.
day, but Venezuel , reduced
production output i April by,
5 per cent to conse a natural]
gas, according to t e Govern
ment.
Nonetheless, on h ante, sup
iply appears in t . slightly
ahead of reduced d nand.
Dues this mean a veering Mfl
record prices for g olive andl
enronme. Hghly
mar
e
unlikely, according most in-
dustry analysts. Th say that
the strength of th Organiza
lion of Petroleum Exporting
Countries would p vent aryl
major price declin in crude
oil, thus putting it oor under
prod ct s.
28
Approved For Release 1999/09/02 : CIA-RDP79-01194AO00200010001-3
 CPYRGHT
NEW YO
27 Fete
J1For Release 1999/09/02 : CIA-RDP79-01194A00020 9YRti
_n Optimist on Energy
Yale, Professor Projects Long-Term
Growth for Economy With New Fuels
To paraphrase the folk sing- "efficient markets" for allocat-
er, "Where has all the gasoline ing energy resources--that is
;gone?" The Shah of Iran says competitive markets with free-
the United States is getting as flowing international trade-
much oil as it did before the econometric the Nardhaus mo-
embargo', but President Nixon del predicts that. the United
and William E. States will continue to rely
Economic Simon, the energy heavily on domestically pro-
administrator, say duced petroleum anatural gas
Analysis they know how for the rest of the nineteen-
much oil we are seventies.
not getting. Public, These domestic sources are'
confusion over the energy
crunch persists despite the
'President's assurance that,
"while Ithe crisis has been
passed, the problem remains."
How long will it last? Until
summer,! as Mr. Nixon suggests?
For a few years, as Mr. Simon
has warned? Of for the next
bentury,, as such pessimistic
scholars1 as Prof. Jay W. For-
rester and Donnella H. Meadows
of M.I.T. believe?
Some', time before the end
of the 1st century, the pessi-
,mists have predicted, this pe-
troleum-based economy will
collapse' unless growth is
stopped and lifestyles drastic-
ally changed.
However, on the basis of a
new econometric study of the
energy problem, Prof. William
D. Nordhaus, an economist at
costs are cheap and transport
costs . are low. But domestic
petroleum resources will be vir-
tuafly exhausted by 1980, ac-
cording to the Nordhaus model.
1.1} the following two decades,
from 1980 to 2000, the United
States is expected to rely al-
most entirely on imported pe-
troleum and imported natural
gas. However, this energy de-
ficit will put a heavy drain
on the United States balance
of payments, amounting to $20-
billion annually.
It will also involve heavy
dependence on foreign coun-
tries that could be politically
unerliable and that could ex-
ploit a monopoly selling posi-
tioh-as the international oil
cartel is currently doing.
After the year 2000, the
Yale University, is much more 1 Nordhaus study finds, the
optimistic about the long-term: American position may im-
outlookfor the supply and de-I' prove sharply. Imported petro-
mand of energy.
Professor Nordhaus, who has
set forth his findings in "The
Allocation of Energy Re-
sources," published in the cur-
rent issue of Brookings Papers
,on Economic Activity, gets the
1United States through at least
the next two centuries without
to coal and shale augmented
by light-water nuclear reactors.
The world energy market,
through the first part of the
21st century, will be in-
creasingly dominated by United
States coal and "e oil re-,
serves.
any significant slowing of thel As the 21st century wears'
long-term growth rate due tol on, the breeder reactor will
a shortage of energy. Beyond; gradually take over-possibly
that, he is counting on breeder
nuclear reactors and other new
energy technologies to carry
the economy into the indefinite
future,
His basic model shows how
society will leapfrog from tech-
nology to technology in the
decades', ahead, as lower-
cost energy sources are ex-
hausted and give way to
;higher-cost sources.
A jump occurs whenever the
cost curve of an old technology
augmented by other new
energy technologies such asi
solar, geothermal, gravitational
or unimaginable.
May Uncertainties
Shale oil and liquefied coal
will still be used for trans-
portation through 2120, but
thereafter all the fossil fuels
will have been exhausted.
The economy will then have
to run on an electric hydrogen
technology or some other exotic
with a resource
olo
ch
t
gy
n
e
"kisses';' the cost curve of 11
new technology. ' base that is virtually infinite-
Based on the assumption of I if high industrial civilizations
are to survive. On this point,
K+
Professor Nordhaus is hopeful,
but he recognizes that his hope
larks a firm scientific founda
tide: I
The Nordhaus hodel cannot
handle many uncertainties such
as the real amount of recover-
able cossil fuel reserves, the
ccist and arrival dates of future
energy technologies, political
mhneuvers or wars, eegree of
reedom or monopoly in the
ornestic and world market and
naiironmental policies.
Yet the econometric model
a? some fascinating stories to
elf, on- the basis of its esti-j
tes tf- predicted prices, pro-
uctian costs and market-deter-
bned royalties, on existing de-
letable resources.
One such story is the delay
f- substantial nuclear genera-
ion of electricity until after
he year 2000. whuge Govern-
ent subsidies are responsible
or the present limited use of
uclear generators.
Even with heavy Federal sub-
idies, nuclear -fuel accounted
or-Il Ss than 1 per cent of total
nited States energy consump-
in 1968.
Rapidly rising prices of nu-
leaithggenerating equipment will
low. the introduction n of nuclear
Fhnology. And serious prob-
ms of nuclear waste disposal
emain to be solved Sf the
witchover to nuclear is to
one as soon as the Nordhaus
ode) projects.
The single most striking re-
It of the Nordhaus analysis
the huge difference between
f
a a_ and "optimal" prices
petroleum. It finds that, even
fore the Arab-Israeli war of
October, 1973, and the subse-
!nt run-up in oil prices, ac-
al petroleum prices in the
United States were far above
rofessor -Nordhaus's estimate o
Iiat long-run competitive sup-
y prices of petroleum would
ve been,.
In 1970, he finds, the price
crude oil in this country
as $3.23'a barrel against his
iculated efficiency price of
:20-a markup of 169 per
nt over cost. Econpmists who
we studied the Nordhaus
to believe that the gap is
e mainly to oil-import quotas
et to prevent foreign price
mpetition) and monopoly
icing as administered by the
xas Railroad Commission and
a small number of interna-
onal oil companies and pro
Bing countries.
Since the October war, the
tlrai price of crude oil has
profits, the present monopoly:(
price in excess of $11 a harreli,
is far too high. He calculates"
that the optional monopol
price for the long run would
have been $4 a barrel in 1970
-a price that would gradually
climb with inflation. (The com-
petitive optimal price would
have been only $1.20 in 1970.)
What policy conclusions ~,
emerge from the Nordhaus
study.
One is that, as long-run
policy, t makes no sense tQ
jack up the prices of ' energy
products for the purpose of
artificaliy preserving energy
resources. At existing yields on
investment, averaging about
10 per cent, it would be wiser
to put cheap sources to work
now and use the real resources
thereby saved to develop syn.
thetic fuels for future use.
Professor Nordhaus's find-
ing that current prices of crude
oil and gasoline are far above
their 104,g-run competitive
supply prices implies that a
Policy aimed at further in
creases n the long-run price
of oil and gasoline would go
i
n the wrong direction.
.Isolation's High Cost
His study appears too contra-
dict the wisdom f na
bona) self-sufficiency in energy
(President Nixon's "Project In-
dependence"). If free trade in
energy s ruled out--.because
of political risks-the alterna-
tive of national self-sufficiency
will be very costly, amounting
to an average of $16-billion a?
year over the next 20 years,
for a staggering total of $3.2
brillion.
It would be a lot cheaper
to engage in international trade
and use a big slice of the
sav-
ings (even as much as half
,of them, or $8-billion a year)
to finance an oil storage pre-
gram to cover, say, four years'
oil imports while holding some
United States oil and gas re-
sources on stand-by reserve,
as recommended by the Shultz
report on oil-import controls
lof 1969 - which the Nixon
Administration rejected.
The main thrust of the Nord-
haus study is that "we should
not be haunted by the specter
of the affluent society grind-
ing to a halt for lack of energy
resources."
In these gloomy days, every
bit of cheer is gratefully re-
ceived--at least until the oppo-
sition knocks it down.
aered much higher above the!
ng-run supply price. To some
onomists this suggests thatic
major break in oil prices lies,!
ead.
Professor Nordhaus figures!!
at the optimal monopoly;'
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The Annual Report
of the
Council on International Economic Policy
February 1974
11. SELECTED CURRENT INTERNATIONAL
ECONOMIC ISSUES
Chapter 1 -SOME IMPLICATIONS OF THE ENERGY CRISIS FOR
THE UNITED STATES AND THE WORLD ECONOMY
Ensuring Adequate Energy Supplies
Until recently, the United States met virtually all
of its energy needs from domestic sources. This self-
sufficiency gradually eroded during the postwar
period as foreign sources offered petroleum at prices
below domestic prices and our domestic energy
production failed to keep pace with our rising
energy consumption. As a result, in 1973 we im-
ported more than 150.0 of our energy requirements.
The Arab oil embargo exploited this vulnerability.
So that the United States does not become depend-
ent upon foreign sources for our crucial energy
needs in the future, the President has declared our
national commitment to achieve the capacity for
self-sufficiency in energy by 1980-"Project Inde-
pendence".
A confluence of events has led to our increasing
reliance on imported petroleum. US demand for
all forms of energy has been accelerating since 1960,
reaching nearly a 5?%'o annual growth rate during
1967-73. At the same time, our domestic produc-
tion of crude oil, gas, and coal has leveled off or
begun to decline. As a consequence, our new energy
needs of recent years have been met through im-
ports-primarily of petroleum. During the 1960s
our oil imports increased only 6% a year, but since
1970 they have risen 18% annually. (See Figure
36.) Our domestic oil production in 1963 covered
most of our consumption, while in 1973 it met only
63% of our needs.
Our growing reliance on imported energy also
extends to natural gas, Domestic gas consumption,
because of its low regulated price, has risen sharply
r 4-,, a~e~ u&i-_satrsfies albQUt-one-thir.
of America's total energy needs. At the same time,
.tile low controlled price reduced incentives for ex-
ploration, with the result that discoveries of new
re~crvvus have not kept pace kith production.
Unlt?? domestic exploration and production can
Figure 36
US Foreign Trade in Petroleum
Million b/d
Exports 0.2
p I I t V I I( i t"f'I f' l l l l i I
1947 50 55 60 65 70 73
est.
once again be increased, the United States may have
to rely upon larger and larger quantities of im-
ported natural gas in liquefied form. In order to
avoid increasing dependence upon imported lique-
fied natural gas, action on the Administration's
proposal to deregulate the price of new natural gas
at the wellhead is vitally important. This measure
will stimulate the needed increase in domestic pro-
duction of natural gas and, over the long run, bring
demand into balance with supply.
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The clnergence of the United States as a major
energy importer comes at a time when other indus-
trialized areas, especially Western Europe and
Japan, are also seeking increasingly large volumes
of imported energy to fuel their own expanding
economics. (See Figures 37 and 38.) With the
advent of the United States as a major competitor
for these resources, demand for the world's known
petroleum reserves has grown substantially, with
brisk competition among the industrialized nations.
In 1973 oil producers took advantage of tight
supply and heavy competition for resources through
two major actions. First, in a move directly related
to the Arab-Israeli war, the Arab oil nations em-
bargoed oil to the United States and the Nether-
lands, and reduced supply to other customers,
highlighting the significance of the Arab countries
in the world supply picture. Second, the Organiza-
tion of Petroleum Exporting Countries (OPEC)
took advantage of their monopoly position and
crude oil prices nearly quadrupled during the past
year.
Unless cooperative actions can be taken to mod-
erate the price increases and to adjust to the dis-
locations caused by them, both oil consumer and
producer nations may find themselves in a worsen-
ing economic position. As a first step in achieving
a cooperative approach internationally, the Presi-
dent has invited a number of major industrialized
nations to a conference in Washington to disc.t:ss
the problen-is of ensuring adequate energy supplies
at reasonable cost.
Short-term Constraints on Expanding
Oil Supply
Thcre is little that major industrial nations can
do immediately to reduce their dependence on
imported oil. In the United States, domestic non-oil.
energy sources such as coal, nuclear power, and
natural gas will in time significantly increase their
current level of production. Alaskan production and
new discoveries in off-shore areas will not increase
domestic crude oil production substantially in the
next year or two, but output is increasing in tradi-
tional production areas, particularly from stripper
wells.
While imports supply about one-third of our oil
needs, Western Europe and Japan rely on imports
for virtually 100% of their supply. (See Figure
39.) Even the North Sea production which will be
coming onstream in the next few years may amount
to no more than 15%-20% of Europe's oil needs by
1980, and Japan has no comparable domestic
sources.
At present, the Middle East has proved oil re-
serves capable of meeting the growing import needs
Energy Sources, 1972
Dcrnest:c
Neg1 _1 Coal
i
--?2%
12%
Negl. Necl.
United Japan European
States Community
11%
10?' 1 Netural Gas
j
Negl.
Crude Oil
4 1,c
Hydro/Nuclear
o
1%
%
d
-
9%
orte
!-
Coal
6`,o
15ro 1L.3%
West France
Germany
t{I
23`k Non-Arab Oil
--' 1%, Other
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Pe+.roleurn Sources
1973 (Jan-Sep)
Domestic
? Production
Arab Imports 9 0
Non-Arab
Impcrts
United Western Japan
States Europe
Million b/d 17.3 15.5 5.4
of the United States, Europe, and Japan. As shown
in Figure 40, they have 62% of the world's proved
supply, as contrasted to less than 117c in the
United States (including Alaska), Western Europe,
and Canada. The Middle Eastern countries, how-
ever, may not expand production sufficiently to
meet the short-run needs of the importing nations.
Kuwait, over a year before the October 1973 Middle
East war, had decided to limit production to 3
million barrels per day. Some Arab states argued
that their oil assets were increasing in value more
rapidly in the ground than they would as currency
in the bank. Another factor which may prevent
Middle East production from increasing to meet
the world's oil needs is the use of oil as a political
tool.
US Steps To Increase and Diversify Domestic
Energy Sources
There is no reason why the United States can-
not become independent in energy. As President
Nixon has declared, the technical and financial
effort required will be comparable to that expended
on the Apollo program which put a man on the
moon. Nevertheless, it is already clear what steps v be necessary.
1. Construction in the next several years of
the lung-delayed Alaska pipeline, which offers
the nic?ans of tapping our large Alaskan reserves
and compensating for production declines.
2. J)ccontrol of prices on new supplies of
natural gas, to encourage the exploration which
by 1950 should result in greatly expanded do-
mestic production.
3. A program to accelerate leasing of lands on
the outer continental shelf for exploration and
development of oil and gas reserves.
'4. A crash program of research and develop-
ment in economical techniques of coal gasifica-
tion and liquefaction, and development of shale
oil designed to make the vast reserves of these
energy resources available as fast as possible.
5. The passage of a national powerplant siting
bill to provide simplified procedures for the
siting and approving of electric energy facilities.
The speeding up of the licensing and construc-
tion of nuclear powerplants in order to reduce
the time required to bring them on-line from
ten to six years.
6. An expedited program of research and de-
velopment to speed the realization of the fai
breeder reactor and other nuclear plans.
7. Stepped-up Federal energy research and
development programs for non-depletable Hower
sources (for the 1990s) such as geothermal, solar,
and fusion.
8. A massive conservation effort designed to re-
duce in the short term unnecessary consumption
of energy for electrical utilities, transportation,
home heating, industrial and commercial usage,
etc.
Expanding and Diversifying Our Foreign
Energy Sources
Although it will remain the goal of the United
States to achieve the capability for national self-
sufficiency in energy by 1980, self-sufficiency does
not mean autarky or isolation. As President Nixon
stated to the Seafarer's International Union on
26 November 1973:
We will continue to use [foreign] energy
sources whenever they are at the right price ...
and that will expand. But we want to be in a
position so that nobody can cut our lifeline.
In other words, in addition to developing domestic
resources, we must diversify our international
sources of energy to the greatest extent possible
so that no one country or likely combination of
countries will be able to influence our policies by
manipulating the supply or price of our energy.
Nor is this the only reason for the United States to
maintain an outward-looking energy posture. US
companies can provide important international serv-
ices in exploration, development, and marketing of
new sources of energy. It is also in our interest to
see new foreign sources of energy developed in
order to have adequate supplies of energy available
for international economic growth.
32
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World Proved Oil Reserves
South America
5.0%
/Mexico 0.6%
The Rise of Oil Prices: Implications for the
World Economy
Export prices have now been divorced from fac-
tors 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 increas-
ii glv with producer countries working through the
Organization of Petroleum Exporting Countries
(OPEC). Posted prices rose approximately 70%
between October 1970 and October 1973. In Oc-
tober 1973, the Persian Gulf producers announced
unilaterally that posted prices would rise another
O;i immediately. Libya joined them in announc-
iit, lar~er price increases. Nigeria, ~'cnczucla, 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,
th'= Sh f-I>?:ri 3 nn~;0ruic~ 011TacIaTf oT Tc Tersian
North America
8.4%
Gulf members of OPEC that the posted prices an-
nounced in October would be doubled beginning
I 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 will have a
significant short-term impact on both the domestic
economies of all nations and on international eco-
nomic relationships. However, because 'a price
change of this magnitude for a basic industrial
product has no modern precedent, the extent of the
impact is uncertain.
Impact on Domestic Economics
Even before the recent price hikes, many of the
world's economies were already decelerating. It
was expected that g ro, th would slow from its
recent exceptionally high pace to a more- su~tain-
ablee one, ,-here product shortages and inflationary
iizsstires tiv_oul L_i~asc. The higher oil prices will
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PRICE STRUCTURE FOR SELECTED CRUDE OILS, I JANUARY 1974
(Sea also oil price tables in Appendix B)
(34? Crude)
(34? Crude)
(400 Crude)
(26? Crude)
(Saudi Arabian)
Nigerian
Libyan
Venezuelan
Persian Gulf
Posted price'
11.65
14.69
15.77
13.67
Production cost ..............
0.10
0.35
0.30
0.51
Government revenue .........
7.01
8.73
9.49
8.59
Of which:
Royalty ................
1.46
1.84
1.97
2.28
Profit tax .. ..... ....
5.55
6.88
7.42
6.31
Estimated oil company profits ..
0.50
0.50
0.50
0.50
Estimated sales price (f.o.b.) ..
7.61
9.58
10.29
9.60
Estimated transport cost'
(to US Gulf Coast) ........
1.48
Estimated sales price (c.i.f.)
(to US Gulf Coast) ........
9.09
'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., world-
scale 100).
accentuate this slowdown by reducing consumer
purchasing power, slowing demand for petroleum-
based products, and causing deferral of some busi-
ness investment as well as consumer purchases.
The result will be a reduction in economic growth,
somewhat higher unemployment than expected and,
of course, a continuing high rate of inflation with
increased oil costs adding to other price pressures.
The reduction of growth, however, should be
only temporary. The duration of the expected slow-
down will depend largely on the ability of each
economy to adjust to the new price structure. Pro-
duction patterns in the. world's industrial countries
are now beginning to shift to meet demand for
products which contain or use less petroleum. The
prime example in the US is of course the shift to-
ward smaller automobiles. The investments needed
to make this structural shift will help to avoid an
economic downturn, and even to increase growth
in the near future. For these reasons, and because
of the general soundness of the world economy,
many observers believe that the economies of most
nations will begin to accelerate again during the
latter half of 1974.
This sequence will not come automatically. Gov-
ernments -,vill have to carefully adjust their mone-
tary and fiscal policies so that they can help to
accelerate the structural shifts without adding fur-
ther inflationary pressures. Further, all nations must
cooper.tt? to avoid a competitive trade war, which
could lead to a serious recession: some nations
might I)e tempted to try to'stimulate employment
during this difficult period by providing export
incentives or imposing import barriers, and such
"exp ,rti:;g of unemployment" could provoke re-
taliad n h-, other countries.
Impact on the World Economy
The price increases will also affect balance-of-
payments accounts and international financial mar-
kets. The consuming countries' oil import bill will
increase dramatically this year if current crude oil
prices are maintained. At present consumption
levels, world oil imports would jump from $45 bil-
lion in 1973 to about $115 billion in 1974 or about
a $70 billion increase, Exporting countries' revenues
will increase in 1974 to nearly
$100
billion or
three-and -n-half times the 1973
level.
As shown
below, the Arab states will receive about half of
the total revenue increase, with Saudi Arabia show-
ing the largest gain.
REVENUES FROM OIL EXPORTS
(Billion US$)
1973
Estimated
1974
Estimated
Total ... .......................
27
95
Arab ...................
15
51
Saudi Arabia ................
5
20
Kuwait .....................
2
8
Libya ......................
2
7
Algeria
1
3
Iraq ........................
2
6
Other ......................
3
7
Non-Arab .....................
12
44
Iran .......................
4
18
Indonesia ...................
1
4
Nigeria .....................
3
8
Venezuela ..................
Other .
3
11
Most producers will 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-
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burscmcnts will probably grow substantially in
1914, but by noti%here near the amount of the in-
cr+.se in earnings. Other Arab producers have a
gr,,:atcr current need for oil earnings to finance
tli .ir econouic development and military programs,
brit even in these countries the magnitude of the
re cnue increase and the normal delays in planning
ni~ake it virtually impossible to spend all revenue
this year.
The major non-Arab oil exporters-Iran, Indo-
rie sia, Nigeria, and Venezuela-will find it some-
what easier to expand imports immediately. For
the most part, these countries have larger popula-
tions and greater opportunity for economic diversi-
fication 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. In all, oil-produc-
ing countries will probably have extremely large
surpluses to invest or deposit abroad.
These available investment funds will flow mainly
to oil-consuming countries. Some will be invested
in long-term assets such as real estate and secu-
rities. But because these types of investment deci-
sions take time, most of the funds will probably go
into short maturity assets-such as Eurodollars-
and dollar deposit accounts. While the international
financial markets will be able to absorb these in-
vestment funds, their magnitude will probably de-
press interest rates. Lower interest rates should,
in turn, stimulate new investments in productive
facilities.
The reflow of most oil exporting revenues back to
this oil consuming countries will mean that, as a group
their overall payments position will be balanced. In-
dividual nations, however, may experience prob-
lems, 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 will
be in a fortunate position because it possesses sub-
stantial 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 will 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 com-
petitiveness of US goods in world markets.
Developing countries face especially serious prob-
lems as a result of the price increases. The non-oil-
producing LDC's face an increase in their collective
oil import bill of near $10 billion this year, an
amount roughly equivalent to the total develop-
ment assistance being disbursed by developed coun-
tires. 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.
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US Export Opportunities in Energy: A Spinoff
Although recent developments in world energy
supply have generated serious international prob-
lems, rising ,vorld consumption of oil and natural
gas has been a major factor in the steady and rapid
growth of US exports of energy-related equipment.
We believe that exports of energy-related manufac-
tures Nvi11 ultimately be a major component of US
sales abroad. As we continue the necessary research
and development and investment to attain self-
sufficicncv in energy by 1950, we shall find our-
selves exporting billions of dollars worth of equip-
ment such as natural gas liquefaction plants, cryo-
genic tankers, deep sea drilling equipment, coal
gasification plants, coal mining equipment, equip-
ment to make fuel from waste products, energy
transmission equipment, fuel cells, hydrogen and
oxygen manufacturing equipment, magnetohydro-
dynamic equipment, nuclear powerplant equipment
for breeder reactors, and eventually fusion reactors.
Petroleum-related Exports
Exports of drilling and other oil-field equipment
reached 5600 million in 1973, more than 40% above
1972. These rapidly growing sales reflect increased
offshore drilling and greater drilling depths onshore.
Both developments contribute to the need for more
painstaking equipment quality control, higher re-
liability and increased sophistication, all areas in
which US suppliers excel. Eventually, a change in
deep-water technology will become necessary. In-
stead of working from surface platforms and drill-
ing ships, contractors will locate parts or all of their
operations on the ocean floor. In deep water, for
work to be performed efficiently, underwater work
chambers must be mated with the wellhead hemi-
sphere for installation, inspection, and maintenance
of flow lines and remote-control equipment. At
present, US firms appear to have a substantial lead
in developing the equipment and techniques for
use in recovering hydrocarbon resources at water
depths up to 1,500 feet.
Arctic engineering is another new area in which
US firms have taken a lead. Intensive work in the
Inc:kenzie Delta in Canada and the Canadian
Arctic l,iands has prepared American firms to
us~dertal;e difficult assignments' in permafrost areas.
While the United States will be exporting pri-
marily drilling and production equipment during
the rest of the decade, pipeline equipment, espe-
cially valves and compressors, will emerge as an
important market contender. As trade develops in
liquefied natural gas, the United States may also
be in a position to sell the cryogenic ships used in
intercontinental LNG transport.
Nuclear-related Exports
Economic planners in most industrialized coun-
tries had already included nuclear energy in their
medium-range and long-range planning to reduce
dependence on oil imports. However, recent devel-
opments in the oil supply and price picture have
accelerated these plans. The French have announced
that they will build no more fossil-fueled powei--
plants after 1977. Japan expects nuclear energy to
supply 25% of its total electricity by 1935, a ten-
fold increase over 1972.
The American lead in nuclear technology and its
application provides opportunities for expandin.
foreign earnings from sales of nuclear equipment,
royalties and licensing fees, engineering and con-
sultant services, and enrichment of uranium for
nuclear plants abroad. Most of the commercial nu-
clear plants now being built abroad are installin,~
American-type light-water reactors. In many cases,
US companies have bid successfully for the basic
contracts to supply reactors, to provide architect-
engineering services, and to supply other equipment
and services. More commonly, foreign affiliates or
licensees of US corporations are in a favored posi-
tion to win the basic contracts, but in any case
there are substantial US earnings where US tech-
nology is being used.
US private sales of nuclear equipment qnd en-
gineering were approximately S700 million in 1973
and are expected to grow to $2 billion to $3 billion
annually by the inicl-1980s. Uranium fuel enrichment
services are also a signif icant part of US nuclear
exports and have high future potential. The revenue
earned from enrichmc-nt services from 1969 through
1973 is about 5300 million. This is expected to in-
crease to $900 million per year by 1955.
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