277. Paper Prepared in the Office of Economic Research, Central Intelligence Agency1

ER IB 74–1

INTERNATIONAL ECONOMIC IMPACT OF INCREASED OIL PRICES IN 1974

Summary

Increased prices will mean a $70 billion increase in the Free World oil bill in 1974, if world oil exports approximate the 1973 level, as seems likely. Western Europe will experience about a $33 billion increase; Japan, $11 billion; and the United States, almost $16 billion. If the United States were to cut 1974 consumption by 5% of the 1973 level, the added import bill would be about $12 billion; a 10% cut would limit the increase to about $9 billion. Only a small part of these increases can be offset in the countries’ current accounts by exports to the oil producers, transport receipts, and remittances of oil company profits. US trade competitiveness will tend to improve because the country depends less on imported oil than do Western Europe and Japan, but this advantage may be offset at least partly by the dollar’s appreciation.

Soaring payments for oil threaten a massive loss of purchasing power in the importing countries, equivalent to about 3% of GNP in Western Europe and Japan. Unless expansionary measures are taken, all face severely reduced rates of economic growth—perhaps even declining output—and increased unemployment. The governments will be cautious in inflating demand, however, because of the already high rates of inflation and the uncertain impact of the energy supply constraint on productive capacity.

Any attempts to redress deteriorating trade balances—through import restraints or competitive devaluation—could aggravate international economic tensions. The energy problem has already shifted attention from international trade and monetary negotiations. In any event, major governments will be hesitant to move forward on reform issues until economic prospects become clearer.

The producing countries’ oil revenues will reach about $95 billion in 1974—three and a half times as much as last year. Receipts will rise by about $14 billion for Saudi Arabia; $14 billion for Iran; $8 billion for [Page 790]Venezuela; and about $5 billion each for Kuwait and Libya. The receipts of Saudi Arabia, Kuwait, and the other small Persian Gulf states will far exceed their spending capability.

Discussion

Introduction

1.
This publication is an initial assessment of the possible impact of increased oil prices on the main consuming areas in 1974.2 It also considers some implications of the price hikes for government policies. Discussion is based on the following three assumptions:
  • • The major exporters’ oil prices will remain—on the average—at current levels throughout 1974.
  • • World oil exports in 1974 will approximate the estimated 1973 level of about 32 million barrels per day (b/d), even if the Arabs fail to increase output above the current level.
  • • Oil demand will be essentially unchanged from the 1973 level. Higher prices, conservation efforts, and the general economic slowdown will offset the 5% increase in demand that was expected before the crisis began.
2.
These assumptions lead to only one of several possible scenarios for 1974. The trend in world oil consumption will depend on both the level of Arab oil output and the ability of consumers to reduce oil use without restricting production. If the Arabs move closer to pre-crisis production levels, as we believe they will, oil consumption will be higher than assumed even if prices are maintained or increased. This judgment rests on the belief that the oil importing countries would choose to allow their balance of payments to worsen in order to maintain economic growth and employment.

[Omitted here is the remainder of the paper.]

  1. Source: Central Intelligence Agency, Office of Economic Research, Job 79–T01092A, Box 2. Confidential.
  2. Petroleum production and consumption of the Communist countries are excluded from the analysis, but petroleum trade with the Free World is included. This trade is relatively small. [Footnote in the original.]