THE GLOBAL IMPLICATIONS OF A POSSIBLE OIL PRICE DECLINE

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• Document Page Count: 37
• Document Creation Date: December 22, 2016
• Document Release Date: January 11, 2011
• Sequence Number: 2
• Publication Date: December 1, 1982
• Content Type: REPORT

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Directorate of
Intelligence
The Global Implications of a
Possible Oil Price Decline
An Intelligence Assessment
-Secret
--
GI 82-10275
December 1982
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Directorate of Secret
Intelligence
The Global Implications of a
Possible Oil Price Decline
An Intelligence Assessment
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The authors of this paper are Deputy 25X1
Director for Economic-Resource Analysis, Office of
Global Issues, Executive 25X1
Assistant to the Deputy Director for Intelligence.
Comments and queries are welcome and may be
addressed to either 25X1
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Secret
GI 82-10275
December 1982
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Overview
Information available
as of 10 December 1982
was used in this report.
The Global Implications of a
Possible Oil Price Decline
The possibility of a sizable oil price decline is growing. If it occurs,
decisions made during the first year will largely determine its eventual
impact. If oil prices fall in early 1983, for example, the most critical seriod
from a policy standpoint would extend into early-to-mid-1984.
Policy decisions made immediately following a price decline will largely
determine how the global economy is affected. There are substantial
positive aspects that could occur, including:
? Lower inflation.
? Higher economic growth.
? Reduced interest rates.
? Reduced Soviet hard currency export potential.
At the other extreme, lower oil prices could lead to intensified international
financial stress, as well as increased Third World political instability?
which would provide Moscow with opportunities to exploit. Unsettled
conditions in key oil-exporting countries could eventually translate into a
supply disruption of major proportions, threatening an oil price runup well
before the positive impact of the initial price decline worked its way
through the system.
For Western governments there will be a number of policy choices to make:
? They must decide on whether to reinforce downward price pressures.
This could be done by increasing purchases from oil-exporting countries
that decide to reduce oil prices?either by arranging government-to-
government purchases or by expanding purchases for official stockpiles.
? Once prices decline, they must decide whether to adjust macroeconomic
policy:
? Governments could take advantage of the oil-related reduction in
inflation to further accelerate economic growth by adopting more
stimulative policies.
? Alternatively, they could decide to keep the deflation dividend and
forgo some of the policy adjustments that might give added push to
the economic recovery.
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GI 82-10275
December 1982
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If Western governments choose deflation, they risk sending the wrong
signals to the banking community. Indeed, the most immediate concern
brought on by a price decline would be the risk of damage to the
international financial system unless some sort of help were provided to
high-debt countries that are dependent on income from oil, especially
Mexico. Nigeria, Venezuela, Indonesia, and Egypt would also be in
trouble. Among nonoil less developed countries (LDCs), Pakistan could
suffer considerable losses as Persian Gulf oil exporters cut back on aid and
foreign purchases. In all cases the central question would be what kind of
help to provide and under what conditions.
An oil price decline also has important implications for East-West issues.
The Soviet Union stands to lose considerably on the financial front since
more than one-third of Soviet hard currency earnings now come from oil
exports. The Soviets will also earn less from the export of gas because the
price formula is linked to oil. If the price of oil remained low, however, the
financial viability of alternative gas supply projects, such as the Norwegian
option, would suffer serious damage over the longer term. This could lead
Western Europe to greater reliance on Soviet gas supplies than would
otherwise be the case. The risk of Soviet meddling in politically fragile oil-
rich countries might also rise.
This report will describe the pressures that are mounting on oil prices,
explain how an oil price decline, if it occurs, might work its way through
the global economic system in the short run, and highlight the factors that
will influence the magnitude of the impact of a price decline. Because an
oil price decline would have broad impacts that feed back on one another,
this analysis primarily will draw attention to these connections and indicate
what factors will determine how they operate. Because of the complexity of
the issues, the analysis in places will be more impressionistic than precise.
Moreover, inadequate data prevent us from addressing the micro-effects of
an oil price decline. We have not, for example, discussed how the banking
system would be affected by a possible loss of investments in the oil sector;
nor have we assessed the impact on the oil industry itself, including the in-
ternational oil companies. Moreover, we have not addressed how a major
oil price decline would affect the medium and longer run nature of ener
markets and the feedback effects that such changes would clearly have
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Contents
Page
Overview
111
Introduction
1
Oil Market Pressures
1
Producer-Country Pressures
2
Impact on OPEC
2
Revenue Losses
4
Country Adjustment
4
Non-OPEC Oil-Producing LDCs
4
Potential Impact on Nonoil LDCs
4
The OPEC Connection
5
The OECD Connection
9
Industrial-Country Impact and Options
11
Measuring the Impact
11
Policy Alternatives
12
Net Policy Impact
13
The Soviet Connection
14
Some Longer Run Concerns
15
Subverison: The More Likely Threat
15
Other Strategic Concerns
18
Asian Subcontinent
18
Sub-Saharan Africa
19
Southeast Asia
22
Central America and the Caribbean
22
Final Note
22
Appendixes
A. Oil Price Decline: OPEC Country Impacts
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The Global Implications of a
Possible Oil Price Decline
Introduction
During the past year, oil-exporting countries have
been trying to buy time on the expectation that
Western economic recovery would begin by late 1982.
This has not occurred, and consequently oil consump-
tion by non-Communist countries has declined steadi-
ly. Unless a healthy industrial-country expansion be-
gins soon, we believe there is no reason for the decline
to stop. Barring an economic surge in the major
developed countries, the financial and political pres-
sures on individual oil exporters to do something will
intensify. We believe the next six months will be a
critical period because of the nature of the pressures
on them and the direction the oil market seems to be
moving.
A large number of potential price paths could materi-
alize if and when the market breaks. Each of these
different paths would create unique opportunities and
problems. From a strictly financial standpoint some
countries will be winners, some will be losers. Which
country falls into which group will depend not only on
the price path itself but also on the reaction of non-
OPEC governments and the international financial
community. Perhaps the most important factor will be
the policy response of major Western governments. In
any event, we believe that the first year following an
oil-price decline will be the highest risk period. If the
downside risks can be avoided during this period, an
oil price decline could have major positive effects on
the global economy.
Oil Market Pressures
Market pressures for an oil price adjustment have
been building for some time. The key reasons are the
structural adjustment of the world economy to higher
oil prices and the failure of the long-awaited recovery
to materialize in non-Communist-country demand for
oil:
? In OECD (Organization for Economic Cooperation
and Development) countries, the intensity of oil use
per unit of GNP has fallen by 25 percent in the past
decade. This process is continuing.
1
? When the OPEC production-sharing agreement was
pieced together six months ago, it was based on oil
industry projections that fourth-quarter 1982 de-
mand for OPEC oil would reach 22-23 million
barrels per day (b/d). As recently as three months
ago these same analysts were projecting fourth-
quarter demand at 21-22 million b/d.
Based on the most recent industry data available,
however, we estimate that demand in October and
November approximated only 20.5 million b/d?
about 7 percent below the same 1981 period.
Despite a recent increase in OPEC oil production
there is still no end in sight to the decline in consump-
tion. OPEC oil production in November was almost
2 million b/d above levels in August. The increase,
however, reflects no more than the normal seasonal
increase in oil consumption and perhaps an end to the
drawdown of excess commercial inventories. Normal-
ly, companies build inventories during the summer
when consumption is low to meet seasonal increases
during the winter, the
combination of high carrying costs, surplus productive
capacity, and the increased flexibility of the refining
system is causing oil companies to carry lower inven-
tories and shift more of the seasonal pattern of oil
consumption to producers.
Unless some dramatic changes occur we expect little
or no growth in demand for OPEC oil during 1983. If
OECD economic growth approximates 2 percent next
year we would expect demand for OPEC oil to be
about 20-21 million b/d. This is consistent with
almost all oil industry assessments. Because of season-
al variations in demand over the course of a year, the
pricing issue will:be touch and go at least through
next spring. Seasonal factors, for example, could raise
demand for OPEC oil by about 1 million b/d during
the next four months. During the second and third
quarters of 1983, however, demand for OPEC oil
could fall by up to 2 million b/d if oil companies are
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successful in shifting the burden of midyear seasonal
adjustment to oil producers. In our view, the second
quarter of 1983 will be the period when prices will be
most vulnerable, even if internal discipline is main-
tained at the December meeting of OPEC.
Producer-Country Pressures
With financial strains in most oil-exporting countries
mounting there is already extensive pressure to maxi-
mize production without regard for the impact on the
market. The OPEC production-sharing agreement
reached last May was only delicately pieced together
and is now all but dead. Iran, for example, is currently
producing 1.7 million b/d more than the agreement
called for, Libya is producing 1 million b/d above its
allocation, and Venezuela is exceeding its quota by
700,000 b/d. To push their market share, Iran, Libya,
and Nigeria have been shaving prices either directly
or indirectly through such mechanisms as credit
discounts and barter deals. Saudi Arabia has thus far
absorbed most of the production-sharing agreement
overages. As a result Saudi output now approximates
5.6 million b/d.
We doubt that the Saudis will continue to allow their
market share to erode much further.
internal
political conditions and a growing sense that industri-
al-country economic recovery will face additional
delays is leading Yamani to conclude that a sizable
price cut may be needed soon.
We
would not be surprised if this occurred within the next
month or so, although they could choose to wait until
next spring. Earlier this year
the Saudis believed a $6 to $8 price cut was needed to
underpin the market.
If Riyadh moves to cut prices, there is a substantial
chance that the market would slip completely from
Saudi control. Given the financial pressure other oil
exporters face, we believe they would be tempted to at
least match the Saudi price cuts in an attempt to
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maintain their market share. For Nigeria, for exam-
ple, cutting prices $3 per barrel is worthwhile from a
revenue standpoint if sales increase by 140,000 b/d. If
Western governments and international oil companies
respond by shifting purchases to countries that lower
prices, a downward spiral could develop. Moreover,
with oil prices declining, oil firms would almost
certainly move to reduce inventories rapidly, thus
adding fuel to the price ratchet
In this kind of scenario we do not know how far or
how fast oil prices might fall. For the sake of argu-
ment, calculations in this report were made on the
simplified assumptions of an OPEC average-weighted
price drop to $20 or $25 per barrel. Because of the
wide range in actual prices among oil exporters?
reflections of quality and transportation differen-
tials?we calibrated individual country oil prices to
account for this spread. Another simplifying assump-
tion we have made is that oil market shares will
remain constant over the course of the adjustment
period. It should be noted that the current OPEC
average-weighted price is $32.42 per barrel with the
country average ranging from a high of $35.49 for
Algeria, whose exports are heavily weighted by high
quality crude, to a low of $29.58 for Venezuela.
Impact on OPEC
The economic, political, and financial position of most
OPEC countries would be seriously damaged in the
event of a sharp decline in oil prices. Lower oil prices
would raise demand for OPEC oil because of both
reduced conservation and the stimulative effects on
economic growth in oil-importing countries. It would
take at least several years, however, before the posi-
tive effects on demand for oil made up for the price-
related revenue losses. The exact price-demand trade-
off is difficult to gauge because only aggregate data
are generally available. Using past relationships our
calculations indicate that at $25 per barrel demand
for OPEC oil in 1983 would be 1 million b/d higher
than would otherwise be the case; at $20 per barrel
the gain would be 1.5 million b/d. Table 1 summa-
rizes our calculations on demand for OPEC oil and
OPEC oil revenues under alternative price assump-
tions. The calculations assume OECD baseline eco-
nomic growth next year of 2 percent, roughly consist-
ent with recent OECD projections.
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Table 1
Oil Exporting LDCs:
Revenue Impact of Oil Price Cuts, 1983 .
Oil Exports Price per
Production (thousand bid) b Barrel
(thousand (US $1b) b
bid). b
1982 Oil
Revenue
(billion
US $)
1983 Oil Revenue Estimates
$20 per barrel $25 per barrel
2 percent 3 percent 2 percent 3 percent
OECD growth OECD growth OECD growth OECD growth
(billion US $) d (billion US $) d (billion US $)c (billion US $)c
Required 1983 Oil Production
To Maintain 1982 Revenue
$20 per
barrel
(thousand
bid)c
$25 per
barrel
(thousand
bid)c
OPEC
20,134
16,965
32.42
202.3
140.9
146.2
171.7
178.3
30,755
25,294
Q0
Algeria
978
836
35.49
10.9
7.7
8.0
9.4
9.8
1,499x
1,230x
Ecuador
208
118
32.84
1.4
0.4
0.5
0.5
0.6
286x
249x
Gabon
155
143
29.68
1.6
1.2
1.2
1.5
1.5
242x
196x
Indonesia
1,343
844
33.53
10.4
4.4
4.7
5.2
5.6
1,901x
1,631
Iran
2,576
2,076
28.66
21.9
14.4
15.0
17.5
18.2
3,893
3,225
Iraq
810
570
34.83
7.3
4.0
4.2
4.8
5.1
1,172
989
Kuwait
962
798
32.03
9.4
6.5
6.7
7.9
8.2
1,460
1,202
Libya
1,602
1,494
35.25
19.4
15.0
15.5
18.3
18.9
2,524x
2,043
Nigeria
1,381
1,134
34.98
14.6
9.9
10.3
12.0
12.5
2,093
1,728
Qatar
336
324
34.30
4.1
3.3
3.4
4.0
4.1
535
431
Saudi Arabia
6,423
5,790
32.21
68.6
51.3
53.1
62.6
64.9
10,020
8,152
UAE
1,291
1,195
33.87
14.9
11.4
11.8
14.0
14.5
2,027
1,642
Venezuela
2,069
1,634
29.58
17.8
11.4
11.9
13.9
14.5
3,103x
2,576
Other Oil-Exporting
LDCs
Mexico
2,800
1,600
28.50
16.4
11.0
11.0
13.7
13.7
4,067x
3,554
Egypt h
670
390
32.60
4.7
2.8
2.8
3.5
3.5
920x
792x
Angola
135
100
34.00
1.2
1.8
1.8
2.2
2.2
192x
161x
Malaysia
285
240
36.00
3.2
2.2
2.2
2.7
2.7
569x
490x
Brunei
200
150
35.00
1.9
1.3
1.3
1.7
1.7
292x
244x
Oman
330
300
34.00
3.6
2.4
2.4
3.0
3.0
502x
408x
Trinidad and Tobago
200
150
33.00
1.8
0.9
0.9
1.2
1.2
293x
245
a Oil production (including NGLs).
b Second half of 1982 data.
e Second half of 1982 oil revenues at an annual rate.
d Oil revenues generated at an average weighted OPEC oil price of
$20 per barrel given aggregate OPEC production number and
assuming 2 percent and 3 percent 1983 OECD real growth.
e Oil revenues generated at an average weighted OPEC oil price of
$25 per barrel given aggregate OPEC production number and
assuming 2 percent and 3 percent OECD real growth.
f Oil production (including NGLs) required at an average weighted
OPEC price of $20 per barrel and $25 per barrel to equal annualized
oil revenues in column 4. An "x" in column 9 or 10 are those
countries exceeding their maximum sustainable capacity.
Because of rounding, components may not add to total shown.
h These estimates include Egyptian oil that is exported by foreign oil
companies under production-sharing agreements. Egyptian petro-
leum and balance-of-payments data exclude the value of this oil as
well as the capital outflow it represents. Thus, these estimates
significantly exceed oil exports reported in Egyptian data.
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Revenue Losses. OPEC oil revenues would approxi-
mate $210 billion next year if OECD growth averages
2 percent and oil prices remain at current levels. If oil
prices drop to $25 per barrel revenues would decline
by $40 billion to $170 billion; at $20 per barrel the
revenue loss would reach $70 billion. Even these
calculations probably understate the loss since our
methodology incorporates a larger short-run demand
response to oil price reductions than is likely to occur.
A recent Department of Energy study, for example,
indicated that as much as half of US oil savings in the
past few years occurred in nonmanufacturing sectors.
Oil usage in these sectors is less sensitive to the
business cycle and, consequently, is unlikely to re-
spond much to any acceleration in economic growth
caused by lower oil prices.
Table 1 identifies what individual OPEC countries
would earn next year if oil prices decline. If nothing
else changed and if OPEC countries were able to
maintain recent import patterns, their current account
deficit in 1983 with oil at $20 per barrel would
approach $100 billion. This is compared to the $15-20
billion deficit we are projecting for 1982. In most
cases the deficits would be enormous and unsustain-
able. Nigeria and Indonesia, for example, would reach
a deficit of $11 billion and $17 billion; the Saudi
deficit would reach $18 billion. Even if OECD eco-
nomic recovery were to accelerate, deficits would
remain massive well beyond 1983. According to our
calculations, demand for OPEC oil would have to
rebound to near the 30-million-b/d level?a 50-per-
cent increase over current levels?before revenues
return to 1982 magnitudes.
Country Adjustment. We cannot project the adjust-
ment process with any precision. Since their borrow-
ing capability would be reduced, most oil exporters
would face the prospect of very large reductions in
imports. At best we think they might be able to
absorb half the revenue loss through foreign exchange
drawdowns and perhaps some increased borrowing
(table 2). The balance of the adjustment would have to
be through reduced imports. The economic austerity
associated with import cuts of such magnitude would
almost certainly spark some degree of political insta-
bility. Appendix A assesses how individual OPEC
states would be affected by a price decline
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Non-OPEC Oil-Producing LDCs
A sizable number of non-OPEC oil-exporting LDCs
would also experience major revenue losses from an
oil price decline. In terms of size, the largest losers
would be Mexico and Egypt. Without massive and
immediate financial support Mexico would face a
disastrous international financial situation; Egypt
would face serious problems as well. For both coun-
tries we are concerned not only about the internal
economic and political response but also the external
ramifications. Mexico could threaten the stability of
the international financial system, not only because of
the financial loss that banks could incur, but also
because of the impact on bankers' willingness to lend
to other Third World countries. In the case of Egypt
the situation is further complicated because of Cairo's
role in the Middle East peace process.
In addition to this group of established non-OPEC
LDC oil exporters a number of other newly emerging
LDC oil producers would face internal problems
because their leadership has pinned economic develop-
ment expectations on the windfall from increased oil
exports. Among this group of a dozen or so countries,
Cameroon, Ivory Coast, and possibly Sudan would be
most affected since they have the best prospects for
developing a large oil-export sector at current oil
prices.
Potential Impact on Nonoil LDCs
Among the developing countries, the oil-importing
group has the potential for benefiting substantially
from an oil price decline (table 3). They will be
affected in several ways:
? On the positive side, they will gain directly from
lower oil-import costs and indirectly through the
price-induced increase in industrial-country growth.
? On the negative side, their export earnings and
other hard currency they get from OPEC will fall as
the oil exporters introduce belt-tightening measures.
Ona net basis the impact should be beneficial, but
this is not a foregone conclusion. These countries are
now in a precarious economic and financial position
and they will have to get through the first 12 to 18
months of a price decline, a period likely to be marked
by international financial uncertainties brought on by
the price shock.
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Table 2
Oil-Exporting LDCs:
The Price Collapse Scenario
1982 Current Account Balance?
(billion US $)
Projected Change in 1983 Import Volume Associated
With Oil Price Decline a (percent)
$20 per barrel
$25 per barrel
Algeria
?2.9
?6
NEGL
Ecuador
?1.4
?20
?19
Gabon
0.3
?29
NEGL
Indonesia
?7.6
?18
?16
Iran
4.5
?10
?1
Iraq
?20.6
?14
?12
Kuwait
5.0
?16
?8
Libya
?5.6
NEGL
NEGL
Nigeria
?6.5
?14
?7
Qatar
3.0
?32
?11
Saudi Arabia
15.0
?39
?27
UAE
3.7
?39
?26
Venezuela
?2.5
?20
?11
Mexico
?6.0
?18
?9
Egypt
?2.2
?10
?6
Malaysia
?3.7
?46
?21
Oman
0.8
?24
?12
Trinidad andTobago
0.4
?23
?17
a Assuming one-half the revenue loss is absorbed by reserve
drawdown and increased borrowing; the balance from import
reductions.
As it is, nonoil LDCs are in serious economic trouble.
In 1981 nonoil LDCs turned in their worst economic
performance in three decades (figure 1). Aggregate
GDP growth was only 1.6 percent; we expect a weaker
performance this year with growth at about 0.8
percent (table 4). The low growth performance of
recent years has depended heavily on continued rapid
buildup of foreign debt. The aggregate medium- and
long-term debt of non-OPEC LDCs is expected to
reach $425 billion by the end of 1982. This compares
to $262 billion in 1979, before the sharp runup in oil
prices brought on by the Iranian Revolution (table 5).
5
The OPEC Connection. An oil price decline would
reduce oil-import costs for the nonoil LDC group as a
whole. The savings would approximate $16-17 billion
with oil prices at $20 a barrel. Brazil would be the
biggest gainer with oil-import costs declining by about
$4 billion, enough to sharply reduce current account
pressures on Brasilia. Other large gainers would be
India and South Korea?their oil-import costs would
decline sharply. Thailand and the Philippines would
save more than $1 billion each while the oil bills of
Chile, Pakistan, and Morocco would decline by as
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Individual Non-OPEC Oil-Producing LDCs
? Mexico is already in the midst of a financial crisis.
The new government will have a hard time imposing
the austerity needed to bring financial order to the
economy without disrupting the internal political
balance. Recent International Monetary Fund and
World Bank projections indicate that without IMF
support Mexico would be forced to reduce imports
by $5 billion in 1983, in addition to the nearly $10
billion reduction absorbed this year. Even under the
best of circumstances, Mexico would have to forgo
any import growth next year. Imposing an oil price
decline that would cost Mexico approximately $5
billion in foreign exchange would place President de
la Madrid in a desperate position. He would proba-
bly have to weigh the pros and cons of debt
repudiation.
? Egypt has relied heavily on oil export earnings to
finance improvements in living standards and con-
sumer welfare. Oil now accounts for one-fourth of
total foreign exchange earnings. Egyptian direct
revenue losses from a decline in oil prices to $20
could approach $2 billion; indirect losses from
reduced remittances from workers in the Persian
Gulf would also be substantial. An oil price decline,
therefore, would force Cairo to take tough austerity
measures that would endanger the political fabric
in Egypt. As it is, Mubarak and Prime Minister
Afuhi al-Din are extremely wary of undertaking
economic policy reforms that risk upsetting domes-
tic political stability. Cairo probably would attempt
to blunt the impact of reduced earnings by seeking
all US economic aid for balance-of-payments sup-
port.
? Syria, Malaysia, Angola, Brunei, and Oman would
also be sizable losers in a price-decline environ-
ment. Syria would lose as much as $300 million in
revenues, making the Assad government more reli-
ant on its external supporters. Angola might avoid
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major revenue losses if oil-production increases
now planned actually materialize. In the case of
Malaysia, we believe that resulting financial prob-
lems would lead to economic retrenchment as well
as a slowdown in implementing plans for improving
regional defense. As it is, low raw materials prices
have reduced foreign exchange receipts, although
Malaysia is in better financial health than most oil-
exporting LDCs. A recovery in the industrial coun-
tries would, of course, boost Malaysia's traditional
exports.
? We believe that Cameroon stands the best chance of
handling a decline in oil prices, largely because of
the country's strong agricultural sector. Neverthe-
less, a substantial decline in oil prices could create
serious problems for Cameroon's new President,
who is grappling with taking control after the
sudden departure of his predecessor. The govern-
ment is counting on relatively large boosts in oil
income to ensure the completion of its ambitious
development plan. Moreover, officials view oil mon-
ey as crucial to satisfying popular expectations of
improved living standards. According to Embassy
reports, there is already under way a substantial
urban migration that is straining public services
and contributing to inflation and corruption.
? Other LDC oil exporters that would lose include
Peru, Tunisia, and Argentina. The losses for Peru
and Argentina would amount to $270 million and
$25 million. They would also both experience some
loss in exports to OPEC states.
? Sudan. We believe that significantly lower oil
prices, which will reduce Sudan's oil-import bill,
will have a small impact in the near term. Sudan is
not able to service its foreign debts and is experienc-
ing periodic shortages of petroleum products due to
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its lack of foreign exchange. Lower oil-import costs
could be offset, however, by increasing difficulties
in securing economic assistance from Arab Gulf
states and reduced remittances from Sudanese
workers in Persian Gulf countries. Over the longer
term, lower oil prices will reduce the profitability of
developing recent oil discoveries and may lead
Chevron?the major foreign investor?to reconsid-
er its development program. Production is not
slated to begin until 1986 at the earliest.
? Ivory Coast would also be hurt by lost oil revenues.
According to oil company assessments, the Ivory
Coast could export as much as 150,000 bld by
1985, and, at worst, would be self-sufficient in
1983. Some oil industry experts claim that oil
potential is being deliberately downplayed because
President Houphouet-Boigny does not want to en-
courage rising expectations in the face of the eco-
nomic austerity that the Ivory Coast is now under-
going. To the extent that the oil revenues are
reduced, the risk of a military government eventu-
ally replacing the aging President will increase. As
it is, the country's current economic problems and
popular dissatisfaction could pave the way for
outside meddling in the event of a succession crisis.
? Other LDCs with oil-production aspirations include
Guatemala, Ghana, the Philippines and, to a lesser
extent, Zaire, among others. The last two face
serious financial constraints that might be alleviat-
ed by oil. In neither instance, however, do we
believe that oil production/exports would translate
into much domestic economic development because
of a limited resource base and political/bureaucrat-
ic constraints.
7
Figure 1
LDCs: Aggregate Real GDP Growth Rates?
Percent
10
9
7
6
5
4
I I
0
1950 55 60 65
a Weighted by 1981 GNP.
587417 8-82
All LDCs
Non-oil?
I i i exporting
70 75 80 85
much as $400-500 million. In the case of Morocco the
savings would be roughly in line with the amount of
financial aid it receives from Saudi Arabia. We
believe that much of this aid would be at risk.'
Other partial offsets to the lower oil-import cost
would be the loss in remittances from foreign workers
employed in oil-exporting countries, especially in the
Persian Gulf. We estimate that at least $10 billion are
involved with Pakistan, India, Egypt, and Jordan?
the major recipients of such earnings. In East Asia,
the Philippines and South Korea also earn sizable
amounts from this source. Table 6 summarizes the
amount of funds earned from worker remittances by
selected LDCs and the general source of these earn-
ings. According to published statistics, South Korea
also earns about $3 billion annually from construction
contracts with oil countries, mostly in the Gulf. We
believe all of this activity would be sharply curtailed
by a price decline.
' See appendix A.
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Table 3
Financially Troubled Countries:
Foreign Exchange Impact of An Oil Price Decline
Net Oil
Imports,
1981
(thousand b/d)
Net Oil
Import Bill,
1981
(million US $)
Foreign Exchange
Savings Over 1981
Oil Import Bill
(million US $)
Reduction In
Exports to OPEC
(million US $)
Net Foreign
Trade Impact
(million US $)
Current Account
Balance, 1982
(million US $)
at $20/b
at $25/b
at $20/b
at $25/b
at $20/b
at $25/b
Bangladesh
35.6
460
200
135
15
10
185
125
-1,440
Bolivia
0.6
6
0
0
5
5
5
5
-250
Brazil
738.0
9,600
4,210
2,865
300
155
3,910
2,710
-10,600
Chile
56.4
917
515
410
40
20
475
390
-2,600
Argentina
-7.6
-81
-25
-10
60
30
-85
-40
-2,700
Costa Rica
14.3
172
65
40
5
0
60
40
-100
Dominican
Republic
40.8
558
260
185
20
10
240
175
-550
India
415.2
6,295
3,265
2,505
185
95
3,080
2,410
-3,800
Ivory Coast
0.9
45
40
35
20
10
20
25
-2,000
Jamaica
44.1
450
130
50
5
0
125
50
-550
Kenya
46.4
450
110
25
5
5
105
20
-690
Morocco
84.7
1,070
455
300
30
15
425
285
-1,820
Nicaragua
13.0
183
90
65
0
0
90
65
-364
Pakistan
96.4
1,260
555
380
140
75
415
305
-1,424
Panama
28.3
289
80
30
5
0
75
30
-355
Peru
-53.7
-661
-270
-170
20
10
-290
-180
-1,670
Philippines
217.7
2,885
1,300
900
45
30
1,255
870
-3,000
South Korea
535.0
7,280
3,375
2,400
540
285
2,835
2,115
-1,500
Sudan
21.2
380
225
190
35
20
190
170
1,165
Syria
-50.9
-640
-270
-175
30
15
-300
-190
-4,480
Thailand
211.7
2,915
1,370
985
155
80
1,215
905
-2,700
Tunisia
-53.0
-677
-290
-190
30
15
-320
-205
-570
Uruguay
35.0
482
230
165
25
15
205
150
-390
Zaire
-0.8
30
25
20
5
0
20
20
-283
Zambia
14.8
236
130
100
5
0
125
100
-600
Aside from these potential losses, we believe that the
nonoil group would also have to absorb a reduction in
exports to the oil exporters as retrenchment measures
are put in place (table 7). We cannot eyaluate with
much precision how this would be sorted out among
the LDCs. The losses, however, could be sizable.
Using the simplifying assumption that OPEC as a
group reduces imports by about half the revenue loss
they face and that nonoil LDCs share proportionately
in the cutback, nonoil LDCs' exports to the OPEC
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group would decline by $2-3 billion. Taken together-
potential OPEC aid cutbacks, reductions in earnings
from worker remittances, and reductions in exports to
OPEC-we believe that these cutbacks would offset
one-third to one-half of the $16-17 billion saved in oil-
import costs. We do not know how this offset would be
distributed, but the North African, South and South-
east Asian, and West African countries would proba-
bly be most affected.
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Table 4
Non-Oil-Exporting LDCs:
Comparative GDP Growth Performance, 1982
Better than the group average
Benin
Botswana
Burma
Cameroon
Ethiopia
Hong Kong
India
Jordan
Kenya
Lesotho
Mauritania
Mauritius
Niger
Near the group average a
Bahamas
Brazil
Burundi
Central African Republic
Colombia
Congo
Cyprus
Fiji
Guinea
Ivory Coast
Jamaica
Madagascar
Worse than the group average
Angola
Argentina
Bangladesh
Barbados
Bolivia
Chad
Chile
Comoros
Costa Rica
Dominican Republic
El Salvador
Gambia
Ghana
Grenada
Guatemala
Guyana
Pakistan
Senegal
Singapore
South Korea
Sri Lanka
Swaziland
Taiwan
Thailand
Uganda
Yemen Arab Republic
Yemen, People's Democratic
Republic
Zimbabwe
Malawi
Mali
Morocco
Nepal
Papua New Guinea
Paraguay
Rwanda
Suriname
Tanzania
Upper Volta
Zaire
Haiti
Honduras
Lebanon
Liberia
Mozambique
Namibia
Nicaragua
Panama
Philippines
Sierra Leone
Somalia
Sudan
Togo
Uruguay
Zambia
a Countries in this group are expected to come within 1 percentage
point of the group's weighted average GDP growth of 2.4 percent.
The OECD Connection. Nonoil LDCs also would
benefit from the stimulative effects an oil price de-
cline would have on industrial-country economic
growth. Assuming the OPEC current account deficit
9
Table 5
Selected LDCs: Changes in Credit Ratings a
Improving Terms (1982 spread at least 0.1 percentage point less than
1981 spread)
Algeria
Colombia
Indonesia
Peru
Sri Lanka
Stable Terms (1982 spread less than 0.1 percentage point different
from 1981 spread)
Bangladesh Nigera b
Brazil Panama
Chile Philippines
Ecuador South Korea
India Taiwan
Ivory Coast Thailand
Malaysia Trinidad and Tobago
Morocco Venezuela
Stiffening Terms (1982 spread at least 0.1 percentage point greater
than 1981 spread)
Argentina Papua New Guinea
Congo Paraguay
Hong Kong Uruguay
Jamaica Zambia
Mexico
a Changes are determined according to the LDC's weighted-average
spread for 1982 as opposed to 1981. Data as of June 1982.
Subsequently, several of these countries have experienced a substan-
tial decline in their creditworthiness.
b Because of substantial front-end fees.
is allowed to increase to roughly $50 billion, OECD
economic growth would be perhaps 1.5 to 2.0 percent
above what it otherwise would have been. Additional
LDC exports to the OECD under these conditions
would be as much as $10 billion.'
While these indirect effects of an oil price decline will
help the LDCs, the benefits will materialize only with
Our analysis of the impact of a decline in oil prices is based
primarily on econometric simulations using the CIA's linked policy
impact model of the world economy. We believe that this model
provides a rough measure of the orders of magnitude involved and
highlights possible country differences. We recognize that no model
can gauge with precision the actual impacts.
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Selected LDCs: Foreign Exchange Earnings
From Worker Remittances, 1980
Gross Foreign Origin
Remittances
(million US $)
Bangladesh 300 Middle East
Egypt 2,695 Saudi Arabia, Iraq, Libya,
Kuwait, Jordan
India 1,850 UAE, Oman, Kuwait,
Qatar, Saudi Arabia
Jordan 790 Saudi Arabia, Kuwait,
UAE, Libya
Pakistan 2,050 Saudi Arabia, Libya, UAE,
Oman, Qatar
Philippines
South Korea
Sudan
Syria
Thailand
725
540
200
500
230
Middle East
Middle East
Middle East
Middle East
Middle East
a lag. Moreover, the impact will not be evenly distrib-
uted among this developing-country group. One rea-
son for the lag is that it will take time for the positive
effects of lower oil prices to work their way through
the industrial economies, since most of the initial
pick-up in economic activity will be concentrated in
the consumer sector. Moreover, any gain from in-
creased raw materials sales will take time to occur, in
part because of the large inventory surplus for many
LDC raw materials. In the case of copper, for exam-
ple, stocks of non-Communist countries still amount
to 1.5 million tons,
(table 8). This equals 15 to 20 Percent of annual
copper consumption by non-Communist countries
Table 7
Financially Troubled Countries:
Share of OPEC Import Market, 1981
25X1
Milion US $
Percent
Argentina
287
0.18
Bangladesh
72
0.05
Bolivia
31
0.02
Brazil
1,486
0.94
Chile
198
0.13
Costa Rica
15
0.01
Dominican Republic
95
0.06
India
914
0.58
Ivory Coast
114
0.07
Jamaica
13
0.01
Kenya
28
0.02
Morocco
152
0.10
Nicaragua
NEGL
Pakistan
715
0.45
Panama
12
0.01
Peru
101
0.06
Philippines
263
0.17
South Korea
2,678
1.70
Sudan
168
0.11
Syria
146
0.09
Thailand
762
0.48
Tunisia
145
0.09
Uruguay
132
0.08
Zaire
14
0.01
Zambia
15
0.01
We would, therefore, expect a delay of six months to a
year in LDC export responses to stronger OECD
growth. OECD demand for key LDC agricultural
exports such as sugar are not sensitive to the business
cycle in industrial countries, according to studies on
the sugar market. Beyond this, the excess capacity
available for most raw materials sold by LDCs would
further dampen much of a price response. Some
LDCs continued to expand their copper capacity long
Secret
after demand by non-Communist countries began
aeclining. As a result, the capacity of these exporters
is roughly 60 percent greater than current exports,
according to industry data. A similar situation exists
for bauxite and iron ore: As a result of these capacity
surpluses, competition among producers will limit the
speed of any price rises.
This is not to say that the business cycle advantages to
all nonoil LDCs will materialize slowly. If past busi-
ness cycles are a guide, the LDCs providing
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Table 8
Selected Raw Materials: Current Market Status
Thousand metric tons
except where noted
Non-Communist
Countries'
Consumption
Non-Communist
Countries'
Inventories
LDC
Exports
LDC Capacity
Utilization
(percent)
Copper, refined
7,200 .
1,150
1,651 b
70 a
Bauxite
49,927 a
NA
NA
81 b
Alumina
20,950 .
NA
NA
73 a
Tin, refined
161 .
NA
155 b
70b
Iron ore
614,500 c
NA
173,600 c
75 b d
Chromite
6,300 c
NA
NA
75
. Annual rate based on data for the first half of 1982.
b 1981 data.
c 1980 data.
consumer-oriented manufactured goods will quickly
capitalize on Western recovery. South Korea, Hong
Kong, Taiwan, and Singapore?countries in relatively
healthy financial positions?would be the chief bene-
ficiaries. To some extent this pattern of demand for
manufactured goods will also benefit Mexico and
Brazil, so long as they have access to supplier credit.
For the bulk of the nonoil LDCs, however, the first
year after a decline in oil prices could prove to be an
uncertain period. Their borrowing requirements will
remain high and their accumulated debt will continue
to complicate their financial management. They will
continue to need large foreign borrowing, at the same
time financial markets will be trying to cope with the
reverse oil price shock. The banking community is
likely to focus on the risk of a major financial collapse
in Mexico as well as other LDCs at the same time
that they are trying to deal with the financial prob-
lems facing Eastern Europe. This situation will be
further complicated by a rapid asset drawdown by
OPEC states. In considering new loans, bankers will
also have to factor in the relative merits of new credits
to LDCs versus potential loans within their expanding
domestic economies.
11
d Brazil, India, Liberia, and Venezuela accounted for 81 percent of
LDC production in 1980.
c Estimate for 1981.
Industrial-Country Impact and Options
The LDC-OECD connections will be affected not
only by finance and trade but also by the mix of
government policies chosen by industrial countries in
the aftermath of an oil-price decline. For the OECD
an oil price drop would provide substantial leeway for
fiscal and monetary policy adjustment. Domestic eco-
nomic conditions would improve regardless of the
policy direction chosen. Maintenance of current poli-
cies, as well as a decision favoring expansion, would
enhance overall economic trends. Even a decision to
become relatively more restrictive would yield eco-
nomic gains in the eyes of the general public as long
as the offsetting policies did not completely negate the
stimulative effects of the price drop.
25X1
25X1
25X1
Measuring the Impact. As indicated earlier, a drop in
oil prices to $20 per barrel, assuming no offsetting
policy action, would add 2 percentage points to
OECD economic growth in 1983 and further incre-
ments in the following years. The economic impact of
a price drop varies appreciably among individual
countries depending in large part on the relative
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importance of imported oil in overall economic activi-
ty. Nevertheless, almost all of the short-run macro-
economic effects of lower oil prices are positive for the
nonoil-exporting industrial countries: inflation would
be less, unemployment lower, current accounts better,
government budgetary positions improved, and inter-
est rates lower. For oil-exporting OECD countries,
however, the positive impact would be reduced by a
loss of export earnings and reduced oil tax collections.
On the positive side, Japan and Italy would be most
benefited because both countries depend more heavily
on imported fuel than the others. The price reduction
would add an estimated 3.2 percentage points to
Japanese growth and 2.3 percentage points to Italian
growth in 1983. In West Germany and France, the
gain would be about 1.5 percentage points.
Through its impact on real economic growth, the
decline in oil prices would improve the budgetary
positions of some central governments by helping to
reduce their outlays on unemployment insurance and
by increasing public revenues. In the United King-
dom, Norway, and Canada, however, budget positions
would actually worsen; the revenue increase stemming
from higher personal and corporate income tax collec-
tions would be offset by lower royalty payments and
other oil taxes. London estimates that for each $1 per
barrel decline in oil prices, budget revenues fall by
$360 million.
On the inflation front, we estimate that if oil fell to
$20 per barrel the overall OECD inflation rate would
slow by almost 2 percentage points the first year.
Lower oil prices reduce inflation not only directly but
also indirectly by lowering prices of other goods. In
particular, crude oil price movements affect the price
of most other forms of energy. For the Big Seven as a
whole, roughly two-thirds of energy prices move with
the price of foreign oil. Even the price of West
German imports of Soviet gas would be affected by an
OPEC price decline since the contract stipulates that
the selling price will reflect changes in the price of
heating oil in West Germany. Taking these factors
into account, a $1 per barrel reduction in the price of
crude petroleum could lower the OECD's final energy
costs by roughly $21 billion if the price cut is passed
through.
Secret
A drop in the price of oil would have other far-
reaching price effects as well. The price of all prod-
ucts using petroleum or petroleum byproducts as a
feedstock would be lowered, and the prices of most
goods would be affected by a decline in the cost of
fuels used in production and transportation. More-
over, the slowdown in inflation stemming from the oil
price decline should reduce future wage demands and,
hence, the price of goods in general. This would be
particularly true in countries such as Belgium,
France, and Italy where most wage rates are indexed
to inflation.
Although the smaller OECD countries, on balance,
would benefit from the weakening in oil prices, the
Netherlands and Norway would both be hurt. Since
Dutch gas prices are linked to the price of oil, a $4 per
barrel reduction would lower its gas revenues by an
estimated $1 billion; if oil prices were to plummet to
$20 a barrel, the Netherlands would lose $3.5 billion
in revenues. Norway, which is currently producing
almost 600 thousand b/d of oil, would likewise find its
payments position eroded by an oil price reduction;
more than 40 percent of Norway's exports are oil and
gas.
Policy Alternatives. Despite the beneficial economic
effects of declining crude oil prices, a number of
governments might try to prevent oil prices from
falling too sharply because of an overriding desire to
maintain pressure for energy conservation and fuel
substitution. A number of West European countries
can easily counter international oil price trends since
oil prices are administered by the government:
? Rome, for example, has already limited the drop in
the domestic price of oil products; in March the
formula governing oil-product price changes indi-
cated that a price decline was merited but no
adjustment was made. The additional government
revenue accruing from this action has been ear-
marked for Italy's financially troubled electric utili-
ty. We believe Rome thinks it must keep prices high
to maintain momentum for the recently approved
national Energy Program?a 10-year, $80 billion
plan to reduce oil's share in Italy's energy mix to 50
percent by 1990.
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? Paris also has expressed concern that previous gains
in limiting dependence on foreign oil could be
reversed if oil prices dropped precipitously. The
French would probably react to such a situation by
imposing higher taxes on refiners. In adjusting
prices and taxes, however, Paris would have to
assure refiners (whose profit margins have been
compressed in recent years) sufficient profits to
enable them to modernize their capacity to handle
the accelerating shift toward lighter products. The
magnitude of the stimulus Paris will allow will
depend, in part, on the policies adopted by France's
major trading partners.
? In Ottawa, the Trudeau government probably would
try to keep prices from falling too far in order to
protect the domestic oil industry. One goal of
Canada's National Energy Program (NEP) is to
make Canada self-sufficient by the end of the
decade. To encourage exploration and development,
the NEP pegs domestic oil prices to not more than
85 percent of world oil prices. Ottawa is now
considering letting prices rise above world levels
because of the severe impact of the unexpected fall
in world prices. Canada's big energy projects?
development of the Beaufort Sea and East Coast
offshore deposits and expansion of synthetic and
heavy-oil facilities?are not viable at lower oil
prices.
? Facing a large budget deficit and still dependent on
oil for almost 70 percent of its energy needs, Tokyo
probably would increase its petroleum tax to limit
the size of an oil price decline. Recent declines in
the world price for oil have not been felt in Japan
because the depreciation of the yen has more than
offset the fall in dollar prices. Refiners have actually
been pressing the government for price increases. In
the event of a drop in imported oil prices in yen
terms, Tokyo almost certainly would raise taxes on
oil to help maintain its conservation effort and to
reduce the budget deficit that now amounts to about
one-third of central government spending. Also,
additional revenues would go to increased spending
on energy R&D since a portion of the petroleum tax
is earmarked for that purpose.
13
? While a fall in world oil prices would reduce
London's budget revenues and set back British
efforts to maintain oil self-sufficiency, London is
unlikely to artifically hold up prices. London is
presently trying to stimulate oil exploration by
modifying its restrictive tax stance. These moves,
however, would be fruitless if world oil prices
dropped significantly because profits on North Sea
oil would plummet, forcing many companies to
curtail exploration and development expenditures.
London has little choice but to accept the going
world price for oil. As marginal suppliers to the
world market, North Sea producers have little
influence on world prices. Attempts to fully offset
declining oil prices at the retail level are unlikely
because after a number of years of continuous
economic decline we believe such a move is political-
ly untenable.
? Bonn also is not likely to take steps to counteract a
decline in domestic energy prices even though the
decline probably would undermine incentives for
energy saving. An oil tax increase probably is out of
the question because of other controversial tax
increases proposed by the Kohl government. More-
over, the government is satisfied with the progress it
is making in reducing the share of oil in total energy
consumption.
Net Policy Impact. If, on balance, the industrial
countries decide to limit the drop in domestic oil
prices or use the breathing room to reduce budget
deficits and inflation even further, the indirect bene-
fits of an oil price decline to the LDCs would be
reduced. A relatively restrictive fiscal-monetary mix
would also run the risk of being interpreted by the
financial community as a signal to limit lending to the
nonoil LDCs. This would only magnify the problem.
A restrictive policy response coupled with reduced
access to funds would mean that LDC export poten-
tial and repayment capability would be less. This
would encourage bankers to retrench even further.
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Table 9
USSR: Selected Trade in Crude
Petroleum and Petroleum Products
Thousand bid
1980
1981
Gross exports
3,266
3,261
Soft currency countries
2,291
2,341
Communist countries
1,978
2,020
Eastern Europe
1,600
1,620
East Germany
380
380
Czechoslovakia
384
384
Poland
320
320
Bulgaria
300
300
Hungary
186
186
Romania
30
50
Other a
378
400
Non-Communist countries
313
321
Hard currency countries
975
920
OECD countries
942
869
Of which:
France
168
162
Netherlands
145
161
Italy
138
134
West Germany
138
100
Switzerland
53
52
LDCs
33
51
Gross imports
78
98
Hard currency purchases
78
58
Iraq
26
Libya
40
40
Venezuela b
12
10
Other
8
Soft currency purchases from Iran
40
Net exports
3,188
3,163
Hard currency countries
897
862
a Including Yugoslavia, which is not a member of the Warsaw Pact.
b Oil swap for delivery to Cuba.
The Soviet Connection
The impact of lower oil prices will affect the Soviets
as well. For instance, an oil price decline would cause
major hard currency losses since oil exports to the
West approximate 1 million b/d and earn the Soviets
an estimated $13 billion, more than one-third of total
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Figure 2
USSR: Petroleum Exports to Hard
Currency Countries
Billion US $
15
12
9
3
Current dollars
Constant dollars
0
1970
75 80
588044 11-82
hard currency revenues (table 9 and figure 2). If oil
prices declined to $20 per barrel, Moscow would
experience a $6 billion decline in these earnings?an
amount equal to 20 percent of current annual imports
from the West. We do not believe that this loss could
be made up through conservation of oil or by cutbacks
in deliveries to Eastern Europe to free up additional
oil supplies for hard currency sales. The Soviets would
also probably lose at least some arms sales opportuni-
ties in the oil-exporting countries as they cut back
military purchases. We cannot assess the magnitude
of this loss, but the amounts could be sizable. Major
Soviet arms buyers include Libya, Iraq, Iran, and
Syria.
Gas earnings would also decline since gas export
prices in the West European market are closely linked
to oil prices. The losses on this score with oil priced at
$20 per barrel would be in the $1.5-2.0 billion range
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in 1983. Total hard currency losses on energy exports,
therefore, would reach $8 billion. An oil price decline
would affect East-West trade in natural gas. Lower
oil prices, for example, could reduce the amount of
gas purchased from the USSR by making oil more
attractive to West Europeans. On the other hand, the
oil price drop could work to Moscow's advantage in
the future. Specifically, the price drop would all but
eliminate the prospects for developing alternative gas
supply systems to Western Europe by reducing their
earning potentials. This, in turn, would leave the
Soviets in a position to supply as much as 150 billion
cubic meters of gas to Western Europe in the 1990s.
While the Soviets would bear a large direct financial
loss from an oil price decline, they may also be
presented with some new political opportunities. Any
oil-related instability in Third World countries, for
example, could provide Moscow and its surrogates
with opportunities for meddling that might not other-
wise develop. If the repercussions of lower oil prices
are not managed properly and instability in key Third
World countries increases, one advantage Moscow
would have is that Western governments would be
forced to focus their attention on the international
financial scene.
Some Longer Run Concerns
Even if the global economy gets through the first year
of an oil price drop smoothly, there is still a risk that
the entire process could reverse itself if there were a
major disruption in the Middle East oil flow. A key
concern is the relative political, military, and econom-
ic position of Iran. As it is, Saudi Arabia and the
other Arab Gulf states are deeply worried about the
prospect of an Iranian victory over Iraq as well as
about Iranian military intentions. With an oil price
drop the conservative states may not be able to
finance Saddam's war efforts
A military victory over Iraq would reaffirm the faith
of Iranian leaders in the validity of their revolution
and add impetus to their drive for regional hegemony.
The Gulf states know their forces are no match for
Iran's and that their oil facilities are extremely vul-
nerable to Iranian attack (figure 3). Even with
AWACS aircraft, for example, the Saudis could not
counter a surprise Iranian airstrike on Saudi oil
15
installations because time and distances are simply
too short. Iran's operational fighter-bombers?about
100?could strike anywhere in the Gulf in a matter of
minutes from their bases in Bushehr, Bandar Abbas,
and Shiraz. Because of this, the Gulf regimes, which
are currently under internal pressure to put distance
between themselves and the United States, probably 25X1
would reverse themselves and seek a more formal
security relationship with the United States.
Subversion: The More Likely Threat. Even in the
absence of direct military action, Iranian subversion is
likely.
Iran already is
encouraging dissident Gulf Shias (figure 4):
? Bahrain. One of the poorest Gulf states, Bahrain is
the most vulnerable to Iranian-inspired subversion.
The Sunni Khalifa family has traditionally relied on
repression and co-optation of members of the is-
land's leading Sunni and Shia merchant families to
maintain itself in power. In recent years these
methods have become less effective in dealing with
discontent among Bahrain's 140,000 Shias, who
make up 65 percent of the native population but
occupy the bottom rungs of the social and economic
ladder. Shias
increasingly resent the dominance of the largely
Sunni ruling elite.
? Saudi Arabia. Strong resentment over discrimina-
tion and neglect among many young Saudi Shias
makes them susceptible to Iranian propaganda.
Iranian agitation, for example, provoked demonstra-
tions in several Shia townships on Ashura?a Shia
holy day?in November 1979 that left 60 Shias
dead and scores wounded, and again in Qatif oasis a
few months later. At least some young Saudi Shias
subsequently joined the Islamic Front for the Liber-
ation of the Arabian Peninsula, which is based in
Tehran, and 13 Saudis participated in the Bahrain
coup plot. Because the Shia population is heavily
concentrated in the Eastern Province where the
oilfields are and makes up almost a third of
ARAMCO's work force, Shia dissidents pose a
potential threat to the oil facilities. An Iranian
victory over Iraq could stir latent discontent.
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Figure 3
Persian Gulf Oilfields Vulnerable to Iranian Airstrike
-35
-30
-25
410 k 50
TURKEY
Batman
Lake
Van
Tabriz
Urmia
Caspian
Sea
RIA *Tehran
Kermanshah
kladithah
IRAQ
Qom.
.DeVOI
\
Ahvaz:-.,?k
Bilik\Aar-e
Khonvykki\
SA
ARA
UDI
Riyadh*
IA
Oilfield
+ Iranian military airfield
Iranian fighter-bomber
(F-4) range
0 100 200 Kilometers
0 100 200 Miles
0
Kuwait
.
fa0shehr+
go_
? 'Persian
DIdah7n.
SOVIET UNION
I .R A N
?Esfahan
.ghiraz
Bandar-e
'Abbas
Gulf
Macama
AIN
OAT
ohs I ?
?
? A4bullhapi
OMAN
35
30-
25-
Gulf of Oman
,?C4
\ UNITE / Muscat ARO,
V_ .)
? ed
? ?
Administrative
Line
NORTH YEMEN
Boundary representatibn is
not necessarily, authoritative. 5?
0 .0.
? ? ?
? 1:1
OMAN
55
Indian
Ocean
505561 (545664) 12-82
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Figure 4
Shia Muslims in the Western Persian Gulf Region
Lake
Urmia
,) 50
55 60
SOVIET UNION
Caspian
Sea
*Tehran
IRAN
*1.1t1twait
'Shiraz
DO
Manam
-----, ,---,-- -,,
AIN
Administrative
LIng
oha Persian Gulf OMAN
,
25-
TAR i-L/
Abu Dhabi f I Gulf of Oman
\
a 0
'D
? UNITED /
c'' Muscat
\ ARAB (
\ EMIRATES 7
i
30-
INDIGENOUS POPULATION
750,000
500,000
250,000
50,000
Riyadh
.?) Percent Shia
Ash Sharqiyah
(Eastern Province)
NOTE: Figures for Saudi Arabia are
for the Eastern Province only.
O 100 290 Kilometers
O 100 200 Miles
505562 (545664) 12-82
0?5
id bol-
t+ 0 Jj11-1-11
Admintstrative
NORTH YEMEN \Linn
Boundary rep'resentation is
not necessarily authoritative. 5,0
Indian
Ocean
55
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? Qatar. Qatar's 25,000 Shias are strong supporters of
the Iranian revolution and deeply resent the domi-
nance of the Sunni al Thani family, which runs the
tiny shaykhdom like a private estate. A few Qatari
Shias have received terrorist training in Iran, but
there are no known Shia dissident groups in the
shaykhdom.
? UAE. Shias in the United Arab Emirates are too
few to pose a significant threat. The Emirates'
30,000 Shias, concentrated mainly in Dubai and
Sharjah, seem more interested in making money
than in engaging in politics. We know of no orga-
nized Shia dissident groups in the UAE or of any
UAE Shias who have undergone terrorist training in
Iran. Some Shias, however, have provided safehaven
for Shia dissidents from elsewhere in the Gulf and
could provide support for terrorist or other subver-
sive activities.
? Kuwait. The primary risk in Kuwait is the large
number of Palestinians who reside there. In the past
the Kuwaitis have managed essentially to buy off
this group both directly and through aid to frontline
states. While the Kuwaitis should be able to keep
things on an even keel internally, their ability to
supply large-scale aid would erode.
If Saudi Arabia or a number of the smaller Persian
Gulf producers were destabilized, the entire complex-
ion of the Gulf market could change. The loss of even
half of the 11 million b/d that currently pass through
the Strait of Hormuz would quickly drive oil prices
back up.
Other Strategic Concerns
While a drop in oil prices will create economic
opportunities if all goes well, the chance of unfavor-
able shifts in strategic balances cannot be overlooked.
The Persian Gulf is not the only area of concern.
Forces will be set in motion elsewhere. While their
exact impact will depend on how an oil price drop
plays itself out, there are certain political and eco-
nomic shifts that need to be considered even under the
best of circumstances (table 10).
Reference map at end of paper depicts choke points.
Secret
Asian Subcontinent. An oil price drop would have
pronounced implications for the economic and strate-
gic balance on the subcontinent. Pakistan in particu-
lar would risk worsening its economic position because
of its heavy reliance on Saudi aid as well as remit-
tances from Pakistanis working in the Gulf (figure 5).
Remittances from the 1.5 million Pakistani workers in
the Middle East are important to the country's eco-
nomic well-being and domestic political stability. In-
deed, according to Pakistani academic researchers,
approximately 12 percent of all Pakistani households
benefit directly from the employment of a family
member in the Middle East. In addition, 8,000 Paki-
stani military personnel serve in Saudi Arabia in
noncombat, defense-related positions.
According to government reports, monetary remit-
tances have increased from $130 million in FY 1973
to a projected $2.4 billion in FY 1983, which ends
next June.
unreported cash remittances and consumer items
brought in by returning workers boost this figure to
the $3-4 billion range?equal to 85 percent of the
value of exports. In the absence of these remittances,
we believe that Pakistan would have had to sharply
curtail its imports and search for additional external
assistance to meet its foreign exchange needs. As it is,
Pakistan's medium- and long-term debt exceeds
$10 billion.
Foreign exchange losses associated with any Saudi
retrenchment could result in internal pressures on
General Zia to alter policies. From his perspective, the
economic and political balance would be shifted in
favor of India, which would see its oil import bill fall
sharply. Although India would also experience a
reduction in worker remittances from the Gulf and
export reductions, on balance it fares better than
Pakistan. With economic, political, and financial pres-
sures growing Zia may feel compelled to push ahead
on his nuclear program, viewing it as a mechanism to
maintain the regional balance. He may take this
position even if the United States is regarded as a
reliable ally.
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Table 10
Regional Distribution of World Trade, 1980 a
Percent
Imports From Exports To:
United
States
Non-US Central South Middle North Central South
OECD America America East Africa Africa Asia
United States b
0 61 10
8 7 1
2 9
Non-US OECD 13 65
Central America 58 27
8
2 7 2
3 2 NEGL
3
NEGL
6
NEGL
South America
Middle East
North Africa
25
11
41
44
64
55
3
NEGL
NEGL
17
5
1
3
5
1
1
1
NEGL
2
1
NEGL
2
10
Central and South Africa
33
57
NEGL
2
1
NEGL
3
1
Asia
20
44
2
1
6
NEGL
2
21
Excluding trade of Communist countries.
b Because of rounding and the exclusion of certain countries, rows
will not sum to 100.
Zia may also reassess Pakistani policies toward the
Afghan refugee issue. Under the best of circum-
stances we expect that the Afghan refugees will
present a problem of increasing complexity and a
growing threat to Pakistan's internal stability
throughout the 1980s. We believe that the sheer size
of the refugee population?the largest in the world?
will strain the government's ability to accommodate
the refugees, as well as its ability to limit their threat
to political stability. The Census Bureau projects that
the refugee population will reach 2.7 million by 1985
and 3.2 million by 1990, assuming that no additional
refugees will arrive or be repatriated after 1982. If the
flow of Saudi funds were reduced, we would expect
Zia to move to limit the size of the refugee population
and reassess Pakistani policy on Afghanistan.
Sub-Saharan Africa. The West African balance could
be substantially influenced by the aftereffects of an
oil price decline on key players in the area. A major
concern, of course, would be the internal political
stability of Nigeria. Beyond this, however, the area
has been a focal point for the tug-of-war between
Libya and Saudi Arabia. Both the Saudis and
Libyans have been involved in the West African
19
Islamic revival, primarily in support of its fundamen-
talist aspects. The Saudis support Islamic groups that
are politically conservative but fundamentalist in that
they seek strict adherence to Islamic law and custom.
The Libyans, by contrast, fund radical fundamentalist
groups whose political objectives are primarily to
promote regional political destabilization. Thus far,
the Saudis have had the paramount foreign role in the
revival. Saudi influence, however, is extended by
millions of dollars each year in financial support. If
this flow is reduced or eliminated, it would leave
Qadhafi with the upper hand.
If the Libyans have a free hand, it would almost
certainly result in increased political activity by radi-
cal Islamic groups, which could affect not only local
political stability but also US relations with West
Africa. Although a government with Muslim leader-
ship does not necessarily dictate Islamic policies to its
people, those states with predominantly Muslim popu-
lations will find it increasingly difficult to resist
pressures for a greater variety of Islamic projects and
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Figure 5
Pakistan: Emigrant Workers in the Middle East in 1975 and 1980a
(Percent of Total)
Saudi Arabia
U.A.E.
Kuwait
Oman
Libya
Qatar
Bahrain
Iraq
Iran
588058 11-82
Thousand Persons
0 100
1980
1975
200
300
400
500
600 700
_1(11)
1(29)
1(52)
1 (6
J(6)
1
1(14)(5)
1(4)
-1(3)
1
.i(8)(3)
(4f2)
(2)
(0.5)
(0.2)
(1)
a Estimates for 1975 are based largely on official Middle East
government figures. Estimates for 1980 are based on World Bank
funded research conducted in Pakistan and for some countries are
higher than those reported by Middle East governments.
(49)
institutions, such as a national Islamic court?argu-
ment over which almost disrupted Nigeria's transition
to civilian rule in 1979?and state-supported Muslim
'schools. Yielding to such pressures, however, risks
reopening longstanding ethnic and religious jealousies
and provoking political violence.
Although Islamic regimes are not necessarily anti-
Western, we believe the emergence of a strong,
regional fundamentalist Islamic movement?whether
politically conservative or radical?could also have
important implications for relations with the United
States. For example, in Nigeria, where the movement
is strongest, we project that the growing influence of
religiously conservative Islam over the long run is
likely to incline a Muslim-dominated government to
pursue policies that are less friendly to the West. At
the same time, we expect that some of today's militant
Islamic groups will eventually succeed in placing in
positions of political influence members with pro-
nounced anti-Western prejudices. These biases could
Secret
complicate the degree of support Washington receives
from Nigeria and African governments in internation-
al forums and for US initiatives on regional and wider
African issues.
East Africa may also be affected by external feedback
of an oil price decline. If the international transition
to lower prices is handled poorly the costs in this
financially troubled area could be significant. Since
the mid-I970s, East African governments have come
under unprecedented stress over the handling of their
economies. The entire region is in dire need of money,
basic foodstuffs, and producer supplies. This has
caused discontent and unrest that, in turn, has given
the Soviets, Cubans, and Libyans ample opportunity
for meddling at relatively little cost
The most obvious tinderbox is the Horn (figure 6).
The armed insurrection by separatists in Eritrea and
Tigre, the hostilities in the Ogaden, and drought have
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Figure 6
Horn of Africa
Port Sudan
SAUDI ARABIA
Khartoum
SOUTH
YEMEN
SUDAN
Gulf a
Aden
Socotra
1-largeysa
Lake
Rudolf
f
SOMALIA
ZAIRE
Lak
Alber
? ANDA
Lake
Kyoga
Mogadishu
Kampala
Indian Ocean
Lake
Edward
T,
(.(f* N A
'Kigali
a
"1...Lir
BURU Di
Bujumfura
hisimayu
Lake
Tanganyika
anza
TANZANIA
Arusha.i_
Boundary representanon is
not necessarily authoritative.
633221 (544686) 12-82
Mombasa
Dar es Salaam
21
---- Selected Ethiopian
province boundary
O 200 400- Kilometers
0 200 400 Miles
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compounded the chaos that ensued from the sweeping
socialist restructuring of the Ethiopian and Somali
economies during the 1970s. The area south of the
Horn may be even more volatile:
? Kenya, once one of Africa's star economic perform-
ers, has witnessed a steady decline in its economy.
Population growth of 4 percent annually?one of
the world's highest?threatens to overwhelm the
country's fragile rural-urban balance.
? Uganda, devastated by the excesses of the Idi Amin
regime, is recovering but still on tenterhooks as
President Obote fumbles with bringing the internal
security situation under control.
? Tanzania, where disillusionment with President
Nyerere's socialist experiment is rife, is at logger-
heads with the IMF over corrective strategies.
has indicated to Malaysian defense officials that
military spending goals for 1981-85 will not be met.
DIA reported in September that there were indica-
tions that this fiscal year's defense budget might be
reduced as much as 20 percent and that cuts in the
next fiscal year may be even greater. In an environ-
ment of oil price cuts we would expect Malaysia to
implement even steeper defense program reductions.
Over the next few years, the outlook for political
stability and economic recovery throughout East Afri-
ca is grim. The area is important both because of its
proximity to the Red Sea choke point at Bab el
Mandeb?the southern entrance to the Suez Canal?
and its access to the Indian Ocean.
Southeast Asia. Indonesia, Malaysia, and Singapore
are in the early stages of a major defense buildup that
will improve their capability to defend the Straits of
Malacca (figure 7). The buildup?spurred by the
Soviet presence in Vietnam and, for Indonesia and
Malaysia, the perception of a longer term threat by
China?is intended to improve surveillance and de-
fense capabilities over these straits and their eastern
approach, the South China Sea. Total defense spend-
ing this year by the three is budgeted at more than 70
percent above the 1979 level. Current financial prob-
lems, especially in Indonesia, however, could stretch
out implementation of plans for the buildup. If oil
prices decline sharply, we believe Jakarta will look
abroad for additional assistance and concessionary
financing for future military purchases
Malaysia's program would also be at risk. The tight-
ening economic situation has already affected the
Malaysian defense budget. Prime Minister Mahathir
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Central America and the Caribbean. This region is
highly vulnerable to the negative feedback effects of
an oil price shock. Real economic growth in the
Caribbean region fell to 2.5 percent last year, com-
pared to nearly 4 percent in 1977. Central America
did even worse, real growth fell from 6.6 percent to a
negative 1 percent during the same period. The
Caribbean's current account deficit ballooned from
about $200 million in 1977 to an estimated $1.3
billion in 1981 (excluding the French Overseas De-
partments of French Guiana, Guadeloupe, and Marti-
nique), while the deficit of Central America deterio-
rated from $680 million to $2.4 billion. Increased
borrowing to help finance the worsening current
account deficits pushed the regions medium- and
long-term external debt from $8 billion to $15 billion
during the 1977-81 period. In this environment, ac-
cess to bank lending is crucial. If the oil price decline
impairs bank lending to the region, the impact on
their fragile economic and political systems would be
serious. The region also stands to lose access to some
OPEC aid?which totaled $75 million between 1975
and 1980?mostly from Venezuela. Another downside
risk is the loss of potential export markets to Mexico
and Venezuela as they retrench (table 11). They may
also lose sales to Brazil if the financing problem turns
against Brasilia for whatever reason. To the extent
that these countries face new political and economic
stress, the opportunities for Cuban mischief would
increase.
Final Note
This paper has explored the implications of an oil
price decline. We have looked at two price scenarios;
it is conceivable that the price decline, should it occur,
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Figure 7
Sea Routes Through the Malacca and Singapore Straits
,
?
Diego.
Garcia
Strait
Malacca,
-4--- SINaf
Indianpcean
D 'S I A.
- - t
505563 (A01148) 12-82
Boundary representation is
not necessany authoritative.
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Table 11 Percent could go well beyond what we have assumed. The
Importance of Trade With Major steeper the decline the more complex the oil price
Countries of the Region, 1980 shock will be to manage. Beyond this, it should be
noted that a shortfall in the price of oil will greatly
increase uncertainty about the future oil price. In the
Share of Exports To: past several years there has been a consensus in the
market that the real price of oil would vary gradually,
Argentina Brazil Mexico Venezuela perhaps slowly upward, perhaps downward
Central America
Belize 0 0 1.8 0 The uncertainty caused by a downward price shock
Costa Rica 0.2 0.3 0.1 0.2 will create more perceived risk in the market place. It
El Salvador 0 NEGL 0.1 0 will affect exploration and production decisions of oil
Guatemala NEGL 0.1 1.5 0.1 companies and the investment decisions of oil-using
Honduras NEGL 0.1 0.4 0.4 consumers. Many firms and individuals may respond
Nicaragua NEGL 0 NEGL o by deferring major oil-related investments until price
Panama 0.9 NEGL NEGL 1.4 uncertainty reduces. This price uncertainty will also
Caribbean be used as an argument for governments of oil-
Bahamas NEGL 1.3 0.2 0 importing countries to act to stabilize the internal
Barbados 0 NEGL 0 0.2 price of oil.
Dominican Republic 0 0 0 8.7
French Guiana 0 1.2 0 6.0
Grenada 0.5 0 0 0
Guadeloupe 0 0 0 0.1
Guyana 0.4 0.7 1.3 0
Haiti 0 NEGL NEGL 0
Jamaica
NEGL 0 NEGL 1.4
Netherlands Antilles 0.2 1.8 0.3 2.1
Suriname 0
Trinidad and Tobago 0.2
2.7 0 0
0.4 0 0.1
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Appendix A
Oil Price Decline:
OPEC Country Impacts
Nigeria, Indonesia, and Venezuela: Serious Trouble
Nigeria, Indonesia, and Venezuela will be running
into increasingly serious financial constraints next
year even if oil prices hold steady. If they decline,
these countries would have no alternative to extremely
tight economic austerity designed to bring their im-
port bill more in line with their earnings and ability to
pay. We do not believe that the international banking
community would be willing to increase its exposure
in these countries much, if at all; this resistance might
hold even if severe austerity measures were taken
since there would probably be substantial banker
concern about the domestic political consequences of
economic retrenchment. This is particularly so in the
case of Nigeria and, to a lesser extent, Indonesia; how
Venezuela's political system would hold up is not
certain.
Drawing on discussions we have had with bankers and
others familiar with these three countries, we do not
believe that they have much of a financial cushion to
fall back on (table A-1):
? Nigeria is already in serious trouble with creditors;
foreign exchange reserves are low, borrowing capac-
ity limited, and arrearages are growing. According
to Embassy reporting, Lagos has drawn its interna-
tional reserves down to between $1 billion and
$1.5 billion?equal to only a month's imports. The
same reporting indicates that Lagos had amassed
$2 billion in short-term commercial arrearages by
the end of August. These developments have forced
the government into more austerity than it wants;
an oil price decline would put the present govern-
ment's staying power in serious question, in our
view. Oil presently generates over 95 percent of
foreign exchange earnings and 85 percent of total
government revenues.
? Indonesia is financially better off than Nigeria but
Jakarta would have to cut development spending
drastically. The technocrats that influence Indone-
sian economic and financial planning apparently
25
misread the oil market and have consequently
moved slower than they probably should have to
dampen government spending. They did use the visit
in October of World Bank officials to brief Presi-
dent Soeharto on the worsening economic situation.
In these circumstances an adjustment to an oil price
decline would be particularly severe. As it is, we
believe Jakarta is financing the 1982 deficit through
a combination of drawing down reserves and bor-
rowing abroad; indeed, Jakarta has drawn down its
official reserves by more than $3 billion from the
$7.4 billion peak of October 1981. Bank of Indone-
sia Governor Saleh told reporters in early November
that official reserves had fallen to $4.3 billion by the
end of October 1982.
? Venezuela would be unable to pursue its domestic
economic development program and would have to
cut sensitive social programs in the event of a sharp
oil price decline. Caracas might be able to limit
spending cutbacks; at oil prices of $20 per barrel,
however, the options would be limited because its
external creditworthiness has fallen. Venezuela has
already been attempting to restructure half of its
$19 billion public debt to a longer term maturity.
The Falklands conflict and four years of economic
stagnation have made some creditors leery of Vene-
zuela
A price decline in our view could force a
quick debt rescheduling as well as internal political
problems for the government.
Libya, Iran, and Algeria: Some Flexibility
With tighter central government control over their
economic and political system, Libya and Iran proba-
bly have more flexibility in dealing with a sharp oil
price decline than many of the others. Moreover,
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Table A-1
Selected Oil Exporting LDCs:
International Reserve Positions
Billion US $
Official Foreign Assets,
Yearend 1981
Estimated
Imports 1982
Oil Revenue Decline a
US $20/b
US $25/b
Algeria
6
12.0
3.2
1.5
Ecuador
1
2.3
1.0
0.9
Gabon
NEGL
0.9
0.4
0.1
Indonesia
6
19.2
6.0
5.2
Iran
10
10.6
7.5
4.4
Iraq
21
20.7
3.3
2.5
Kuwait
67
8.8
2.9
1.5
Libya
12
15.5
4.4
1.1
Nigeria
4
16.0
4.7
2.6
Qatar
13
1.4
0.8
0.1
Saudi Arabia
144
40.0
17.3
6.0
United Arab Emirates
33
9.2
3.4
0.9
Venezuela
14
13.4
6.3
3.9
Mexico
5.9
15.0
5.4
2.7
Egypt
1.5
9.8
1.8
1.1
Malaysia
3.4
1.1
1.0
0.5
Oman
1.4 -
2.5
1.2
0.6
Trinidad and Tobago
3.3
1.8
0.9
0.6
a Based on real OECD growth of 2 percent in 1983.
because of import reductions already in train, Libya
and Iran would have less need for import cuts than
most other OPEC members:
? Libya would lose about $5 billion from an oil price
decline.
The Qadhafi regime has al-
ready implemented a series of austerity measures to
slow the foreign exchange drain. The retrenchment
may be adding to existing disaffection generated by
unpopular measures enacted last year. In our view,
however, Qadhafi has the wherewithal to keep the
domestic situation in firm control. In any event,
given Qadhafi's ties to Moscow, he will remain in a
position to work with the Soviets if oil-related
opportunities for political gain arise in Africa.
Secret
? Iran is in a better position than most to absorb an oil
price decline; one reason is that import levels remain
quite low because of continued clerical interference
with the management of the economy and because
of the limited development objectives of the Kho-
meini government. We expect Tehran to run a $4.5
billion current account surplus this year; conse-
quently, Iran could probably handle the revenue
losses associated with an oil price decline without
much additional austerity. From a financial stand-
point, Iran remains fairly healthy. By the end of
1982 Iran's liquid foreign exchange reserves should
amount to $6 billion or more.
26
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Iran's foreign
exchange position has improved. The governor of
the Iranian Central Bank recently said that Iranian
foreign exchange reserves were on "a steady trend
upward."
? Algeria has already taken economic austerity meas-
ures to minimize recent cash flow problems and
avoid a sharp deterioration in the current account
this year. Algeria has slowed import growth, dipped
into foreign exchange reserves, and postponed in-
vestment spending. Unless the domestic economy
remains carefully managed, however, Algeria would
run into trouble if oil prices fall. It now has the
largest foreign debt of any Arab country, totaling
$18 billion at the end of 1980, according to the
latest IMF estimates. Even though Algeria sharply
reduced new foreign borrowing in 1980 and 1981,
debt service payments have continued to climb
because of principal payments coming due from
earlier loans and high interest rates. As of October
foreign exchange reserves (excluding gold) declined
to $2.6 billion?approximately three months' worth
of imports.
The Iraqi Case
Iraq is now surviving only on the strength of some $20
billion in aid from other Persian Gulf Arab countries,
primarily Saudi Arabia. Even so, we estimate that
Baghdad has had to draw down official foreign assets
by an estimated $25 billion since the end of 1980;
these reserves currently stand at about $5-6 billion.
To limit the financial drain, Baghdad is now curtail-
ing some of its development program. The problem is
that much of Saddam's popular support has hinged on
his ability to insulate the consumer from the war.
Even if other Gulf Arab countries maintain previous
levels of financial support, Baghdad would have to
reduce imports by about one-fifth in order to limit the
1983 current account deficit to the roughly $20 billion
we are projecting for 1982. We do not believe this
could be accomplished without major domestic politi-
cal ramifications.
Saudi Arabia
Saudi Arabia has a wide range of options, thanks to
its massive foreign asset position. If Riyadh attempted
to maintain current development spending patterns,
27
the current account deficit would swell to about $25 25X1
billion. Financing these, together with other foreign
exchange commitments, including aid to other Arab
and non-Arab countries, would require a $28 billion
asset drawdown. We do not believe the Saudis would
do this.
Development spending is already being curtailed. We
believe that spending cuts would have to be carefully
managed or the government would run the serious risk
of sparking dangerous internal political dissension.
One area we believe the Saudis would cut is the
ARAMCO crude oil development program.
We believe that the additional cuts, if
undertaken, would result in as much as a 1 million
b/d erosion in Saudi oil production capacity over the
next five years. If they cut the program entirely
because of an oil price collapse, the capacity decline
would be greater.
In addition to internal spending reductions we believe
that an oil price decline would lead to substantial
cutbacks in Saudi aid. Riyadh normally spends about
$6 billion annually in bilateral aid, mostly to other
Arab states, including almost $1 billion to Syria, $700
million to Morocco, and $500 million to Jordan. In
addition, Saudi Arabia has provided $9 billion to Iraq
over the past three years (table A-2). Riyadh's interest
in pulling in its aid commitment is suggested by its
recent decision to reduce the size of the $1 billion loan
reportedly committed to Nigeria in exchange for
Lagos's agreement to stay within its oil production
quota set in March.
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Table A-2
Saudia Aitl: Size and Importance of Aid
Million US $
except where noted
Recipient
Current Account
Saudi Aid
Disbursements,
Saudi Aid as a
Percent of Total
Aid Received in 1980
1980
1981
1980
Arab states
Bahrain
128
211
10
24
Egypt
?500
?1,994
350
14
Jordan
?935
1,316
515
20
Lebanon
475
850
60
18
Mauritania
?277
?360
180
62
Morocco
?1,525
?1,942
670
39
North Yemen
?478
?727
290
29
Oman
1,144
1,182
50
16
Sudan
?854
?740
365
32
Syria
?4,519
?4,175
880
19
Tunisia
?285
?489
50
11
Non-Arab Islamic states
Bangladesh
?1,521
?1,397
75
6
Djibouti
13
?4
30
15
Guinea
?74
?105
10
10
Pakistan
?1,010
?882
315
20
Somalia
?74
?50
145
20
Turkey
?3,660
?2,300
210
11
Other states
Liberia
?86
?69
10
9
Sri Lanka
?800
?654
65
14
Zimbabwe
?283
?554
5
1
Special case
Iraq
7,500
?17,800
3,000
42
Other OPEC
Among the other OPEC countries, Kuwait is the
largest and most important. Kuwait has an adequate
financial base to see itself through a substantial
decline in oil prices.
at the end of 1981 the Kuwaitis had $67 billion
in foreign assets that will earn about $7 billion in
interest and dividends in 1982. Imports run about
$9 billion annually. The UAE also is in a position to
absorb price declines. Smaller OPEC countries that
would suffer serious damage include Gabon and
Ecuador.
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Critical Choke Points of the World
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Arctic Ocean
The United States Government has not recognized
the incorporation of Estonia. Latvia. and Lithuania
into the Soviet Union Other boundary representation
IS not nernhsarity eighoutattv
Greenland
(Den.)
Beau fort Sea
Norw y
(wed en
inland
Soviet Union
Canada
Ir
nited
?-jj( gdom
Lu
France
.D R
Romania
Portu
United States
And,
Spain
North
Atlantic
Ocean
strait of Gibraltar
re
Na ?Cypru
Turkey
N Korea
S Korea
Afghanistan
North
J a-p a n Pacific
Algeria
akistan
Ocean
Kiribati
South
Pacific
Ocean
Mexico
Miller Cylindrical Projection
Scale 185,000,000
Guatem la
El Salvado
Ba
Belize Jamaica
dud ran
Nic tagua
Panama
Costa Ric
Panama Canal

ominican
Wes
e BahamasS.
":. ? Antigua and Barbuda
St. Lucia Dominica
st. Vincent end
the Grenadines?ie. . Barbados
Grenada
Trinidad and Tobago
Venezuela
Colombia
Mauritania
Cape,- ?
Verde_ Se
The Gambia
Guinea-Bissa
Guyana
Suriname
French Guiana
(Fr.)
Strait of Hormuz
b.44' a
Banglad Hong
K n
"IC
India
(POtt
Vie na
Guinea in
Sierra Leo
Bab el Mandeb
? corp Nigeria
Coast
Libers
Togo
Sea
P
eaT
e r
Ec
Ethiopia
Somalia
Maldives
(U.K.)
Philippines
rr?
Sri
Lanka
Strait of Malacca
B unei
(
Equatorial
Guinea
Ind ? nesia
' Nauru
? .. . Kiribati ?
Solomon
ewtea"-
;.;,, Islands
t,. . Tuvalu ..
.......
Brazil
S e y belles'
Mozambique
ay
Cl1 le Uru
Argentina
ay
W Falkland Islands
(Islas Malvinas)
(administered by U.K.,
claimed by Argentina)
South
Atlantic
Ocean
Madagascar ,""nt'''',
Indian
Ocean
Australia
South
Africa "-Cw6thr,
aziland
C.A.R. -Central African Republic
F.R.G. -Federal Republic of Germany
G.D.R.-German Democratic Republic ,
U.A.E. -United Arab Emirates
Vanuatir',
? 01
Fijr9.j.
New
Zealand
'):2
Western
Samoa' -
? ?
:!Tonga
croft
January 1982
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