In the City
Oil and the dollar
Nicholas Davenport
The City should be looking beyond this transitory affair next Tuesday, because more important things lie ahead in this very sick world. In view of the deepening world recession the Chancellor can do little more than help restore our morale and make us feel that if we work we will get a little more out of it than he does. He will, of course, tell us to 'buy British' if we have more to spend, for, as the Bank of England says, the disturbing feature of the behaviour of imports in 1977 was the rise of nearly 13 per cent in the volume of imports of finished manufactures. The imports of motor cars rose by about 26 per cent. But don't go on about the bloody-mindedness of motor car workers. They are helping to beat the world recession in trade by boosting the exports of other countries — incidentally, weakening sterling and more competition.
The world recession in trade is becoming more serious than that of the 'thirties because it is much more difficult to cure. In the 'thirties you could just pump money into the economy by government deficit spending — a la Keynes — because there was no inflation. Now that there is universal inflation it can't be done without making infla
tion worse. America has tried it — her• budget deficit has run into some $45 billion — but her monetary authorities now say that
enough is enough; they have begun tO put up interest rates to counteract their inflation. President Carter had actually proposed a package of tax cuts worth $24i billion but as a large part of the tax cuts go to offset higher social security contributions and fiscal drag, the cuts cannot be called very stimulating. However the US are to be thanked for achieving a higher growth rate than the rest of the world which has led tri a stupendous deficit on their balance of payments. It helps us all.
The dollar crisis has been another difficulty in the way of curing or abating the world trade recession. The dollar has been caught up with the energy crisis. Oil imports are costing America over $40 billion a year and while Congress delays the passing of the energy Bill the dollar will remain weak. This, of course, is of great concern to the Arab oil producers who, since the quad rupling of the price of their oil, have amassed over $150 billion in overseas assets denominated mainly in dollars. The Saudi Arabians have already written to President Carter saying that they will not be able to resist much longer the Arab calls for an increase in the price of oil to offset the lower value of their dollar takings. Unfortunately these oil receipts are not evenly spread among the Arab states. Saudi Arabia, Kuwait and the United Arab Emirates
account for over 90 per cent of them. The rest of the producers are pressing hard for another rise in oil prices which, of course, would greatly add to the price inflation in the western capitalist countries struggling to get out of their recession. God help us all! The whole inflationary hold-up — the 'stagflation' — in the West can be traced back to the OPEC quadrupling of the price of oil in 1973.
What makes this question of an oil price rise pressing is that while Saudi Arabia has the largest oil reserves, and runs a budget surplus even though produciion has been cut down to match the fall in world demand, most of the other Arab producers have not got such large reserves, are short of revenue for their various state purposes, and know that by the late 'eighties world energY demand will exceed supply and oil prices may be rocketing. So they would be foolish to allow the depletion of their limited reserves to continue at such a low price — in real terms — for their crude oil.
While the Saudi Arabians have no wish to rock the boat of the western capitalist world they will find it very difficult to resist the price demands of their partners at the next
CiPEC meeting (now postponed for a Month). Can President Carter get his energy Bill through Congress in a month? It Proposes drastic measures — taxes on new large cars, tax rebates on small ones, a stand-by tax on petrol if consumption exceeds a specified ceiling, a crude oil equil!sation tax making consumers pay approxiinately world oil prices for their oil, incentives for energy-saving measures, taxes that could force utilities and industrial users to switch to coal etc. It is a huge mouthful of 11,11Pleasant stuff for Congress to swallow. let the President has warned them of the ultimate disaster if the industrialised west begins to run short of oil energy in the next t,en years. Economic growth would stop; the Juin!) in energy costs would set off another sPiral of price inflation; industry would be tchrown into disarray; social unrest would ;Ilow. Our enemies are waiting and longing for this to happen. Yet it need not hapPen if Congress were to co-operate more with its highly-intelligent (if weak) President.
There is some hope, as I write, of an easing of the dollar crisis. The highly resPected Arthur Burns, the retiring head of the Federal Reserve, suddenly came to tile rescue last week with a plan to save the d,?llar, if his successor agrees with his ideas. rre has warned the government that a further significant slide in the dollar could h„ave 'serious implications for the whole of 'Ile western world.' He proposes a massive intervention in the exchange markets by inobilising America's $70 billion of usable Pld and currency resources. He suggests an 11131.1inediate sale of the gold reserves of $50 and the issue by the Treasury of $10 cidlion of foreign currency bonds. Further 12e would tap the IMF immediately for $2 of SDRs and $7 billion of credits. intervention on this scale in the market would certainly put the bears to flight and give the dollar the capability of holding its °twit. As 1 have said, the recent little help drciiri the Germans was derisory but a "„Ynamic. intervention on Dr Burns's scale would turn the exchange markets round. It W,Lcitild certainly keep the dollar Stable until 'Lie vital energy Bill is passed by Congress. f The energy crisis which threatens the ture of the west can be avoided if the ustrial powers got together and coorui 'nate their conservation (and antiuration) plans. Other sources of energy will certainly be developed and the one thilich I believe will be found economic is the rapping of the heat below the surface of L'e earth. A far-seeing friend has also ei'inted out to me that an energy crisis could verrainly be avoided if the Arabs with their west investment funds co-operate with the st in developing a new auto engine which s'yti°111d drive a car at half the usual concteMPtion of petrol. Such an engine has been vised and is being tested. But again time IA,
r •
luring short. It looks as if the industrial to'°ruld leaders are finding it as difficult to get lt,,e,ther as President Sadat and Prime
• '‘inister Begin.
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