VERSAILLES PAPER ON IMPACT OF OIL PRICE DECLINE PREPARED BY COUNCIL OF ECONOMIC ADVISERS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R000600010025-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 3
• Document Creation Date: December 19, 2016
• Document Release Date: December 19, 2006
• Sequence Number: 25
• Publication Date: April 30, 1982
• Content Type: MEMO

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-~oNFIDENT IAL
MEMORANDUM FOR: Executive Secretary
DDI-
30 April 1982
VIA Deputy Director for Intelligenc
FROM
Director, European Analysis
w
SUBJECT Versailles Paper on Impact of Oil Price
Decline Prepared by Council of c
Economic Advisers
1. On 30 April, we provided Robert Murphy at CEA with our
comments on his Versailles paper. We stated that the agency
agreed with the basic conclusions of the paper--that a fall in
oil prices would boost OECD GNP growth and reduce inflation and
current account deficits. The impact of a 10-percent price
decline on growth and inflation mentioned in the CEA paper are
almost identical to results obtained with the use of our LINK
model. However, we estimate that the improvement in OECD current
account balance would be about double the amount cited in the CEA
memo.
2. We indicated our agreement with CEA that among the major
foreign industrial nations, Canada, France, Italy, and Japan
might very well introduce measures to limit the decline in oil
prices. However, we suggested that in the case of Canada, a
reduction in oil prices would not only set back conservation
efforts but also could reduce producer returns enough to
jeopardize Ottawa's goal of energy self-sufficiency.
3. We also stated that our analysis supports the CEA's view
that a decline in OPEC surpluses would not necessarily cause a
reduction of world saving and subsequent rise in interest
rates. In our recent oil price paper we suggested that a fall in
oil prices would reduce budget deficits and, hence, lead to some
easing in interest rates. The fall in interest rates coupled
with the pickup in domestic demand would, in turn, motivate
businessmen to increase their capital outlays. Moreover, the
A
Approved For Release 2006/12/19: CIA-RDP83M00914R000600010025-2
 Approved For Release 2006/12/19: CIA-RDP83M00914R000600010025-2
CONFIDENTIAL
reduction in budgetary and payments deificts would provide
central banks with greater flexibility to ease monetary policies,
a step which would further enhance investment as well as private
consumption.
4. A couple of minor corrections were passed on to CEA.
First, Arab light is now going for $31.50 a barrel rather than
$30 as cited in the CEA paper. Second, we suggested a change in
wording--that the first criticism read "unless taxes on oil
products are "increased" rather than "adopted"--since some
countries already have taxes on oil products.