CONTRIBUTION TO CIEP ANNUAL REPORT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R002000020023-9
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 13
• Document Creation Date: December 16, 2016
• Document Release Date: October 5, 2004
• Sequence Number: 23
• Publication Date: December 31, 1974
• Content Type: MF

 (31 December 1974)
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31 December 1974
MEMORANDU24 FOR: Mr. Sidney J. Zabludoff
Council on International
Economic Policy
Old Executive Office Building
SUBJECT Contribution to CIEP Annual Report
1. Attached is the unclassified draft requested
on oil pricing, producer revenues, and consumer oil
import bills for the President's Annual Economic Report.
2. If you have any questions, please call
Distribution: (S-6705)
Orig & 1 - Addressee
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CENTRAL INTELLIGENCE AG'"Af'
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WASHINGTON, D.C. 20505 ' ).`.; ' n
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CONTRIBUTION TO CHAPTER OF CIEP ANNUAL REPORT
ON PROBLEMS RAISED BY INCREASED OIL PRICES
The dramatic increase in oil prices dominated
international economic developments during 1974. The
average cost of a barrel of imported crude oil rose
from about $2.00 in mid-1973 to over $10.00 by the
end of 1974. This increase both added to inflat&.onary
pressures in oil consuming countries and contributed to the
general economic downturn by eroding purchasing power.
EFFECTS IN DEVELOPED COUNTRIES
Duriag the first half of 1974, wholesale prices
in major OECD countries increased at an annual rate of
over 30%. More than half of the increase was attributable
to the direct and indirect effects of higher crude oil
prices. Growing oil bills also accounted for about
half of the nearly 15% rise in consumer prices during
the period. Inflated consumer prices, in turn, led to
increased wage demands. By the second half of 1974,
higher labor costs were becoming an increasingly important
factor sustaining the inflation.
Higher oil costs also depressed economic growth by
shifting about $70 billion in purchasing power from
developed countries to the oil expor--ing countries.
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This drain, analogous to an increase in indirect taxes,
came at a time when most major industrial countries were
dampening demand to combat inflation. Thus, the hoped-
for "soft landing" turned into economic stagnation.
Throughout 1974, most industrialized countries continued
to focus on inflation and did not combat contractionary
tendencies by easing fiscal and monetary policies.
The aggregate trade balance of the developed countries
which constitute the Organization for Economic Cooperation
and Development (OECD) deteriorated from traditional surplus
to a deficit in 1974 of some $30 billion. This represents
a 'net change of $40 billion from 1973. A geographic
breakdown shows that the aggregate OECD deficit was
entirely due to higher oil costs. Although final statistics
are not yet in, it appears that the OECD countries had a
trade surplus with the LDCs of about $20 billion rand a
surplus with Communist nations of around $5 billion in
1974. Their trade deficit with OPEC countries totaled about
$55 billion.
? The plight of some industri .d countries is even more
serious than the $40 billion deterioration in the OECD
deficit indicates because the distribution of the deficit
is extremely skewed. Germany and Japan managed to offset the
affect of the oil price increase on their trade accounts
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through aggressive export promotion. Japan recorded a
small overall trade surplus over the past year while
West Germany, offsetting sagging domestic demand with
rapid export growth, achieved a surplus of nearly $19
billion. If the US, West Germany, and Japan are
excluded, the deficit of remaining OECD members is on
the order of $50 billion.
The United Kingdom, Italy, and smaller developed
countries bore the brunt of the aggregate OECD deficit.
The UK recorded a deficit of over $15 billion last
year, about $8 billion of which was oil. related. Italy, despite
imposition of an import deposit scheme to discourage
imports, finished the year with a trade deficit of about
$9 billion. Nearly $7 billion of Italy's deficit was
due to higher oil prices.
PROBLEMS OF THE LESS DEVELOPED COUNTRIES
Higher oil prices have created trade and payments
problems for non-oil producing, less developed countries
which will become even more serious over time. Throughout
1974, many LDCs were able to finance their higher oil
bills through increased export earnings from primary
commodities and by borrowing extensively in international
markets. Others, however, did not share in. the commodity
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boom and were not able to borrow. Even the richest
non-oil producing LDCs are finding it increasingly
difficult to borrow funds, as their credit lines are
rapidly being depleted.
The economic slump in industrial countries and
the tight food supply situation worldwide are compounding
the problems of the LDCs. Decreased demand for primary
products is already beginning to depress prices and
foreign exchange earnings. Higher food prices are
forcing the LDCs to spend a higher proportion of :ieir
export earnings just.,to feed their populations. These
two factors are making it even more difficult for LDCs
to pay their oil import bills. Without increased
financial assistance, a number of LDCs will be in serious
economic difficulty by the end of this year.
OPEC COUNTRIES' RECEIPTS AND EXPENDITURES IN 1974
Their huge oil earnings have given the oil producing
nations literally more money than they can spend. OPEC's
oil receipts in 1974 total about $94 billion, a more than
threefold increase over 1973. Their spending also increased
drastically. Preliminary trade returns indicate that the
value of OPEC imports increased more than 70% in 1974 to
a total of about $34 billion. This left the OPEC countries
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with an inv(:stable surplus of some $60 billion, the bulk of
which was placed abroad in short-term, bank deposits and
government securities.
OPEC I NVESTt SENT PREFERENCES IMPEDE RECYCLING
One of the immediate problems is the pattern of
oil producer investment, which has made recycling of oil
revenues difficult. The foreign investment patterns of
the oil producers are quite similar. In part, this
reflects shared investment objectives, including:
?Insuring their holdings against political seizure.
?Maintaining -- or increasing -- the real value of
their assets.
*Retaining effective control of their investments.
The similarity is also due to the common environment
for their investment deicison,, including London's predomi-
nance as an international financial center, generally strong
economic and political ties with London and Washington, a
shortage of qualified personnel, and, most important, the
depth of the dollar market.
OPEC investment is concentrated in financial markets
in just a few developed countries. Most holdings --
perhaps 75%-80% of the total -- are dollar denominated.
Eurodollar investments -- dollar assets outside the United
States -- constitute the largest part of the investment
portfolio, while dollar holdings in the United States are
also sizeable and increasing in importance.
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OPEC holdings are largely liquid assets, particularly
bank deposits. While bank deposits generally do not pay
the highest return, they are safe, easily managed, and
can readily be channeled. through intermediaries to provide
the anonymity that makes seizure unlikely.
The oil oroducer preference for short-term deposits
severely lim.4:ts the ability of commercial banks to make
long-term loan commitments. Thus, many developed countries
such as Italy and the United Kindgom are financing trade
deficits, which they can scarcely hope to eliminate soon,
with short-term credit. This mismatch between the supply
and demand for credit is an important aspect of the recycling
problem and raises fears about the stability of the inter-
national financial and monetary systems.
POSSIBLE TRENDS IN OPEC EARNINGS AND INVESTABLE SURPLUS
Unless oil prices fall substantially, the OPEC
countries w.ll continue for some years to earn more than they
can spend. If prices do not increase appreciably, OPEC cU_1 e}_-
ports, will probably rise by about 1.5% in 1975 and level off in
1976 and 1977, when the increase in non-OPEC oil production
will roughly equal the growth of world demand. Under these
assumptions the earnings of oil producers would increase
from $105 billion in 1974 to $112 billion in 1977. Should
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oil producers lower prices by 10% annually beginning-in
mid-1975, their earnings in the final year, after allowing
for a resulting increase in world demand of about 2%,
would be about $91 billion. Conversely, a 10% annual
increase in prices beginning in mid-1975 would increase
OPEC earnings to an estimated $135 billion in 1977,
assuming a 2% drop in demand as a consequence of the
price hike.
The value of OPEC imports will grow rapidly over the
next three years although probably somewhat below the
explosive 75% rate of 1974. Should OPEC imports increase
by 50% this year and 30% and 20% in 1976 and 1977 respectively
aggregate OPEC imports would total nearly $80 billion in 1977.
This projection assumes a declining rate of world inlation
and takes into account the fact that many of the oil
producers with the greatest capacity to increase imports
such as :Cndonesa and Algeria will very quickly utilize the
increased foreign exchange earnings.
Under the constant oil price scenario, OPEC's
investable surplus would decline from $60 billion in
1974 to $33 billion i.--. 1977. Should oil prices ri.se at
a 10% annual rate the investable surplus would stabilize at
about $70 billion over the next three years. A 10% annual
reduction in oil prices would reduce the investable surplus
to $22 b.'.1ion by 1977.
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PROJECTED CONSUMER OIL. BILLS
The aggergate oil bill of consuming countries is
f ~?.f
expected to grow,, about $121 billion in 1974 to $130 billion
in 1977 if present prices are maintained. This figure
includes oil imports from all foreign producers. Assuming
that a 10% change in prices results in a 2% change in
demand, the aggregate consumer bill could reach $154
billion in 1977 in the case of a 10% annual price increase
or fall to $106 billion in the case of a 10% per year
reduction.
(to be followed by Treasury Department section on the
recycling problem)
CIA/OER
31 December 1974 -6-
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TABLE 1
PROJECTED OPEC OIL EARNINGS'
(.L.t QI._ )__
ASSUMING
CONSTANT OIL PRICES
'Il
L3
19 -1
1975
- El
199
.1917
_
0
11
2
112
111
C TOTAL
25,2
105 , 3
11
1.
.
.1-
OPE
11LGER I A
.110
I.a
3, 6
3,6
3,6
ECUADOR
?1
85
15
, l)
l INDONES I A
1,?_
3.5
11,11
11.7
4,7
IRAN
4,5
20.3
21.7
21.7
21,7
IRAQ
1.1 7
5,8
75
6,7
G., -11
KKU',A I T
1.9
8.6
8,2
7,11
7.1.
LIBYA
2.3
6,7
7.9
7,1
7.1
I'll GER3A
2.11
8.7
9.2
9.2
9.2
(ATAR
I !l
1.9
2.0
2.11
2.4
SAUDI ;;i;ABIA
515
29.9 '
32.2
32.9
32.
UNITED ARI;B EMI RATES
1.2
6.6
8.1
8.1
8.1
VENEZUELA
3.0
8.7
CC .7
7..,
7.2
.ASSUMING A 10% ANNUAL INCREASE BEGINNING IN MID-1975
OPEC TOTAL 118.9 126.2 135.2
ASSUMING A 10% ANNUAL REDUCTION BEGINNING IN MID-1975
OPEC TOTAL
109.6 99.2 91.2
1. Actual receipts for oil exports will roughly equal accrued earnin7s
in 1975-77. In 1974, actual receipts were $11 billion less than earn:.:::-:;
because of the average lag of two months in payments by concession.-.J,-..s
producers, which delayed the full impact of the 1 January 1974 price
increase.
CIA/OER 31 DECEMBER 1974
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'1'n 1JI,1; 2
PROXACTED OPEC INVESTABLE SURPLUS 1975-77
ISSUf1ING CQUISTANT OIL Prt1 ,LS
3.975
1.97G
1.977
Expo' CU. Rcccipts
119.9
118.#3
11.8. 9
Oil
114.0
1.12.2
.111.5
Non-Oil
5.9
6. G
7.4
Import Pay inc.,nts
-51.0
-66.3
-79.6
Net Scrvicos
2.0
3.5
Investable Surplus
?67.8
54.5
42.8
ASSUMING J.0
;:NNUT%T, :;EDUCTION
1975
1976
1977
Export Receipts
115.5
105.E
100.5
Oil
?
109.6
99.2
93.1
NUn-0i1
5.9
6.6
7.4
Import Paysaent.s
(f.o.b.)
-51.0
-66.3
-79.6
Net Services
-1.4
9
.7
InyestaLIe Surplus 63.1
40.4
.21.6
ASSUMING to AN,:UZ L INCREr.S1;
Export Rcccipts
oil.
Non-Oil
Import Payn,.onLs (f.o.b.)
No-L S crv i.e ' ;
1975 1976 1977
124;8 132.8** 142.6
118.9 126.2 135.2
5.9 6.6 7.,4
-51.0 -GG. 3 -79.6
3.2 6.7
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C?C1ri C1- 1394
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TABLE 3
PROJECTED OIL IMPORTS
1973-1977
ASSUMING CONSTANT PRICES
19 19Zy. 19 1 1~
TOTAL IMPORT VOLUME
(MILLION B/D) 33.0 31.5 32.0 32.0 31.8
TOTAL VALUE 35.0 120.6 129.9 129.9 128.9
UNITED STATES 6.8 22.4 24,5 24.9 25.3
WESTERN EUROPE 16,6 55.0 57,6 55.4 53.2
JAPAN 5.9' 19,.'. 20,3 21,8 22.6
CANADA 1.1 3.4 4,1 4,1 4,1
COMMUNIST .5 2-,0 2.6 3.0 3.0
OTHER 5.1 18.6 20.8 20.7 20,7
ASSUMING A 10% ANNUAL INCREASE IN OIL PRICES
TOTAL IMPORT VOLUME 31.7 31.4 31.2
TOTAL VALUE 134,4 145.0 154,4
ASSUMING A 10% ANNUAL REDUCTION IN OIL PRICES
TOTAL IMPORT VOLUME 32.3 33,0 33.7
TOTAL VALUE 125.1 115.2 106,6
CIA/OER
31 DECEMBER 1974
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