IMPACT OF INCREASED OIL PRICES ON EASTERN EUROPE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP08S01350R000601910003-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: December 27, 2016
• Document Release Date: March 29, 2012
• Sequence Number: 3
• Publication Date: May 1, 1974
• Content Type: REPORT

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sewet
Intelligence Report
Impact of Increased Oil Prices on Eastern Europe
Secret-
ER IR 74-10
May 1974
Copy N2 190
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Secret
Impact of Increased Oil Prices on Eastern Europe
KEY JUDGMENTS
Increased oil prices should not hurt Eastern Europe
seriously through 1975. The outlook for 1976-80, how-
ever, is much gloomier.
Soviet oil deliveries are expected to level
off after the 1971-75 trade agreement
expires; prices paid for Soviet oil probably
will then be raised in line with world prices.
? If prices stabilize at roughly US $10 a
barrel for crude, the East Europeans in
1980 would have to pay $5.9 billion more
for net oil imports-$3.9 billion to the
USSR and $1.9 billion to the West.
? The projected 1980 oil bill would add
about 20% to projected imports from the
USSR and 10% to hard currency imports.
? Bulgaria will be by far the hardest hit,
followed by Czechoslovakia, East Ger-
many, and Hungary; Poland still relies
heavily on coal and Romania is a net oil
exporter.
To pay for Soviet oil, Eastern Europe will have to
boost greatly its exports of consumer goods and machin-
ery and must pour more investment into the Soviet
resource base. Moscow probably will have to offer new
credits or deferred payments for oil in return for East
European investment.
To pay for Western oil, Eastern Europe will need
more barter agreements with the Middle East or long-term
credits like those the oil-producing countries are likely to
provide to the LDCs.
Even with Soviet and Western assistance, most East
European countries will not be able to avoid strains on
their balances of payments and on their domestic econ-
omies in 1976-80.
Note: Comments and queries regarding this report are welcomed. They may be directed to
Economic Research,
25X1
25X1
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1. The Middle East war, the oil embargo, and
higher world market prices produced a hectic winter in
Eastern Europe.1 Beginning in November 1973, gas and
fuel oil rationing, Sunday driving bans, lowered speed
limits, and higher gasoline prices appeared. The oil crunch
also sent the East Europeans scurrying for oil supplies,
some of it commanding exorbitant prices of $16 or more a
barrel. Moreover, after 8 years of listless negotiations,
Hungary, Czechoslovakia, and Yugoslavia suddenly agreed
in February to build the Pan Adria Pipeline to bring in
Middle East oil. And the East European planners went to
work trying to find ways of coping with the high prices
expected for both Soviet and Western oil in 1976-80.
2. All of the East European countries except
Romania have depended on the USSR for most of their oil
needs. In 1973, Moscow supplied more than nine-tenths of
the crude oil required in Czechoslovakia and Poland,
about three-fourths in Bulgaria and East Germany, and
three-fifths in Hungary. In addition, Bulgaria and East
Germany obtain some of their supplies from the Middle
East on Soviet account. Romania, which relies on its own
resources and some imports of Middle East crude, is a net
exporter of petroleum.
3. The USSR began encouraging the East Euro-
peans to convert to oil and develop their petroleum
refinery and petrochemical industries in the early 1960s.
This process was spurred by the completion in 1963 of the
first Friendship Pipeline, which feeds refineries in all of
the countries except Romania and Bulgaria. The avail-
ability of Soviet oil has pushed East European oil
consumption from 9% of all energy sources in 1960 to an
average of 17% in 1970. Moreover, the oil-dependent
industries-chemicals, transportion, and oil refining it-
self-have become a key factor in overall economic growth
in Eastern Europe.
4. The conversion to oil has gone farthest in
Bulgaria and Hungary (see Table 1). Poland, with large
1. Bulgaria, Czechoslovakia, East Germany, Hungary, Poland,
and Romania.
Oil as a Percent
of Total Energy
Consumption
Imported Oil as a
Percent of Total
Oil Consumption
Imported Oil as
a Percent of Total
Energy Consumption
Total
9
17
69
12
Bulgaria
16
46
96
44
Czechoslovakia
7
17
98
17
East Germany
5
14
99
14
Hungary
16
29
68
19
Poland
5
10
95
9
Romania
29
23
Nega-
Nega-
tivel
Civet
deposits of high-quality coal, relies relatively little on oil;
the share is somewhat larger in Czechoslovakia and East
Germany, which also are heavy users of coal. In Romania,
Eastern Europe's only major crude oil producer, the share
of petroleum has declined with the rapid exploitation of
natural gas resources.
5. East European imports of Soviet crude oil
increased from 6 million metric tons2 in 1960 to about 50
million tons in 1973. Shipments under the current trade
agreements (1971-75) have been on schedule and seem
assured through the period at fixed prices of roughly
$2.50 a barrel. Deliveries in 1975 should reach 59 million
tons, which-allowing for some conservation efforts-
would fall 17 million tons below East European import
requirements (see Table 2).
6. Moscow so far has remained silent regarding
shipments beyond 1975. Given its own production
problems and rising consumption requirements, not much
more than 65 million tons of Soviet crude would be
available for Eastern Europe in 1980-50 million tons
short of estimated import requirements of 115 million
tons. Soviet output of crude oil fell below plan in 1972-73,
and drilling difficulties encountered in old oilfields and in
Western Siberia are driving up costs. Soviet exports of
refined products probably will not rise much; in fact the
growth of East European refining capacity is expected to
dampen demand for Soviet products.
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Table 2
Eastern Europe's Imports of Crude Oill
Preliminary
Projected
Projected
1960
1965
1970
1971
1972
1973
1975
1980
Eastern Europe
6.5
18.9
39.4
45.7
54.6
61.9
76.5
115.0
USSR
6.2
18.4
34.4
38.6
44.4
N.A.
59.0
65.0
West
0.2
0.6
5.0
7.2
10.2
N.A.
17.5
50.0
Bulgaria2
Negl.
2.2
5.7
7.5
8.3
9.7
13.0
20.0
USSR
""
2.2
4.8
5.8
6.4
N.A.
10.0
11.0
West
""
0.1
0.9
1.8
1.9
N.A.
3.0
9.0
Czechoslovakia
2.3
6.1
9.8
11.5
12.6
14.3
17.0
25.0
USSR
2.3
6.0
9.4
10.7
11.9
N.A.
15.5
17.0
West
....
0.1
0.4
0.8
0.7
N.A.
1.5
8.0
East Germany2
1.9
5.1
10.3
10.9
14.9
16.3
18.0
25.0
USSR
1.8
4.9
9.2
9.8
11.2
13.0
15.0
16.0
West
0.1
0.2
1.1
1.2
3.7
3.3
3.0
9.0
Hungary
1.5
2.3
4.3
4.9
6.1
6.6
9.0
14.0
USSR
1.4
2.1
4.0
4.4
5.2
5.4
6.5
8.0
West
0.1
0.2
0.3
0.5
0.9
1.2
2.5
6.0
Poland
0.7
3.2
7.0
7.9
9.7
11.2
13.5
21.0
USSR
0.7
3.2
7.0
7.9
9.7
10.9
12.0
13.0
West
....
....
....
....
0.3
1.5
8.0
Romania
....
....
2.3
2.9
3.0
3.8
6.0
10.0
USSR
....
....
....
West
....
....
2.3
2.9
1. Because of rounding, components may not add to the totals shown.
2. Part of Bulgarian and East German crude oil is shipped from the West on Soviet account.
7. In any case, the USSR probably will raise the
price on its deliveries to Eastern Europe after 1975. CEMA
countries usually readjust their foreign trade prices at the
beginning of each five-year period. Most East Europeans
expect a large hike in oil prices when the current long-term
agreements expire. An article in a Polish journal in January
1974, for example, concluded that long-run oil prices in
trade among the Socialist countries cannot differ greatly
from prices on the world market. Also, Hungary's
National Bank President Andor Laszlo in a January press
conference left only a small ray of hope when he said
intra-CEMA trade will follow such world price trends as
are judged to be permanent."
8. The prices the Soviets are now charging the
Yugoslavs suggest what is in store for the CEMA countries.
A Yugoslav correspondent in Moscow complained in
February that, "At the beginning of last year a ton of oil
cost about $20 [$2.70 a barrel] now it costs about $71
[$10 a barrel] at the most favorable world prices, but
Soviet producers are asking even more."
9. Assuming that world market prices settle out
at $10 a barrel for crude and that the USSR charges the
East Europeans this price, the bill for Soviet crude would
come to $4.7 billion in 1980 (see the map). Adding net
imports of $0.5 billion worth of refined oil products (at an
assumed price of $20 a barrel) brings the total oil bill to
$5.2 billion. This is $3.9 billion more than the cost would
have been if early 1973 prices had prevailed (see Table 3)
and represents about one-fifth of projected total imports
from the USSR in 1980.
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EASTERN EUROPE
The Crude Oil Bill in 1975 and 1980
) $1.3 Billion $3.6 Billion
4$10 per barrel) ($10 per barr
Increase for Crude Oil
Increase in Net Cost
of Products
Total
Total
2,140 to 3,560
240 to 365
2,380 to 3,925
Bulgaria
360 to 600
130 to 200
490 to 800
Czechoslovakia
560 to 930
30 to 45
590 to 975
East Germany
525 to 880
....
525 to 880
Hungary
265 to 440
20 to 35
285 to 475
Poland
430 to 710
80 to 120
510 to 830
Romania
....
20 to -35
-20 to -35
1. Thew estimates are based on the assumption that the price of crude oil will be $7 to $10 a barrel
and of petroleum products $15 to $20 a barrel. The base price used to calculate the increased bill is
that obtaining in 1972-about $2.50 for crude oil and $5 for products.
10. The share of the West in East European
imports of crude oil has risen from only 13% in 1970 to
about 20% in 1973. Most of the Western crude is either
bought, refined, and resold to the West by Romania or
sent to Bulgaria and East Germany on Soviet account. By
1975 the East Europeans will be buying nearly one-fourth
of their imported crude from the West; by 1980 the share
could exceed two-fifths.
1975
3nw;.
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$11 Billion $4.7 Billion
($2.50 per ($10 per
`----r` barrel), -
11. Eastern Europe also has been importing
petroleum products from the West-mostly from Western
Europe. All of the countries except Bulgaria, however, are
net exporters of oil products to the West. In 1972, net
exports of petroleum products-mainly from Romania-
were about 3.5 million tons. Both imports and exports of
refined products should level off in the remainder of this
decade.
12. The bill for Western oil will not present much
of a problem until after 1975. At $10 a barrel, Eastern
Europe will pay $1.3 billion for Western crude oil in 1975.
Expected net exports of products (at$20a barrel) should
bring the total oil bill down to $0.8 billion. At the higher
prices, the East Europeans would be paying some $200
million more than at early 1973 prices-only 2% of
projected East European hard currency imports in 1975.3
13. The outlook for 1980 is another story. At
$10 a barrel, East European expenditures for Western
crude would come to $3.6 billion. After deducting East
European exports of oil products, the bill would be $2.5
billion, or $1.9 billion more than the cost of imports from
3. Hard currency imports are primarily those from the industrial
West. It is assumed that the OPEC countries will demand hard
currency in payment for much of the oil they ship to Eastern
Europe.
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the West at early 1973 prices (see Table 4). The higher
costs of Soviet and Western oil may force the East
Europeans to pay an additional $5.9 billion for net oil
imports in 1980. Even if prices fall well below current
quotations-say to $7 a barrel for crude and $15 a barrel
for products-the increased import bill would still total
$3.5 billion.
14. Bulgaria will be the hardest hit. The net
increase in its bill for Western oil could add 50% to hard
currency imports by 1975 and more than 100% by 1980
(see Table 5). Furthermore, increased Soviet oil prices
would boost total imports from the USSR in 1980 by
one-fifth.
15. For Czechoslovakia, East Germany, and Hun-
gary the increased bill in 1980 could add as much as
one-fourth to imports from the USSR and raise hard
currency imports by one-sixth. Polish imports of oil would
add one-fifth to imports from the Soviets but only 5% to
hard currency imports. Romania would be in the best
position; its imports of Western crude will continue to be
offset by earnings from exports of oil products.
some concessions and credits. The USSR, in fact, could
defer payment for oil until after 1980 in return for the
large East European exports of machinery and labor
already slated for investment in Soviet raw materials
projects. After 1980, when Soviet repayments in products
begin, Eastern Europe would have to increase investment
or exports to keep trade in balance. Indeed, part of the
condition for deferring payments might be that Eastern
Europe use the breathing spell to beef up industries of
interest to the USSR. Without some concessions, the East
Europeans would find it nearly impossible to import what
they need from both the USSR and the West in the next
few years.
19. Eastern Europe almost certainly will not be
able to increase hard currency exports sufficiently to
cover the higher costs of oil imported from the West. Some
of the best hard currency earners-such as processed foods
and low-sulphur Polish coal-may have to be diverted
partly to the Soviet market. Furthermore, the fairly strong
demand for East European semi-finished manufactures in
the industrial West may drop off because of the West's
own difficulties in paying for oil.
16. To meet the increased bill for Soviet oil after
1975, the East Europeans will have to boost their exports
to the USSR substantially and get started on longer term
investment in Soviet energy development. Moscow un-
doubtedly will want more manufactured consumer goods,
certain raw materials, and perhaps machinery that it now
receives from Eastern Europe. The Poles reportedly have
been asked for more coal, part of which might be sold in
the West for hard currency to be credited to the Soviet
account. In addition, the USSR may demand some
products that the East Europeans are selling successfully
in the West, such as processed foods.
17. The USSR also is eager to obtain more East
European investment in its resource base, especially in
fuels. So far, final agreements have not been signed for
East European investment in Soviet oil development, and
because of the long time needed for exploration and
development of new fields, such investment is unlikely to
pay off until after 1980.
18. In view of the potential strain on Eastern
Europe, Moscow probably will find it necessary to grant
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20. To ease the import burden, Eastern Europe is
trying to conclude barter and cooperation arrangements
for Western oil. Several deals have already been signed.
Poland, Hungary, Bulgaria, and Czechoslovakia recently
signed agreements to deliver equipment, complete plants,
and technical services to Libya in exchange for crude.
Poland is to obtain increasing amounts of Libyan oil
through 1980 in exchange for cargo and tanker ships and
designs, technical assistance, and equipment for petro-
leum, power, transportation, and other projects. Libya
also agreed in February to supply Romania with 12
million tons of crude through 1977 in return for assistance
in building a refinery and aid to Libyan agriculture and
housing. In November, Poland agreed to supply refineries
in exchange for Iraqi oil. In 1971, Romania granted Iraq a
credit for petroleum development to be repaid in Iraqi oil,
and under a 1969 agreement the Czechs will receive Iraqi
crude oil to repay a $27 million loan used in building a
refinery at Basrah.
21. Other arrangements call for Romania and
Poland to cooperate with several Latin American coun-
tries in the exploration and development of oil resources.
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Eastern Europe's Increased Bill for Western Oill
Increase in Net
Earnings from Sales
of Products
Total
575 to 955
1,655 to 2,750
525 to 790
540 to 815
50 to 165
1,115 to 1,935
Bulgaria
100 to 165
300 to 495
....
....
100 to 165
300 to 495
Czechoslovakia
50 to 80
265 to 440
35 to 55
35 to 55
15 to 25
230 to 385
East Germany
100 to 165
300 to 495
75 to 1 1 0
75 to 1 10
25 to 55
225 to 385
Hungary
80 to 135
195 to 330
35 to 55
35 to 55
45 to 80
160 to 275
Poland
50 to 80
265 to 440
15 to 20
30 to 45
35 to 60
235 to 395
Romania
195 to 330
330 to 550
365 to 550
365 to 550
-170 to -220
-35 to 0
1. These estimates are based on the assumption that the price of crude oil will be $7 to $10 a barrel and of petroleum products $15
to $20 a barrel. The base price used to calculate the increased bill is that obtaining in early 1973-about $2.50 for crude oil and $5
for products. The values of net earnings on oil products may be overstated because in 1972 the average price of oil products imported
by Eastern Europe from the West was about twice the average price of products exported.
Eastern Europe's Increased Bill for Net Imports of Petroleum
and Petroleum Products as a Percent of Total Projected Imports)
As a Percent
of Imports
from the USSR
As a Percent
of Hard Currency
Imports
Total
12 to 19
Negl. to 2
6 to 10
Bulgaria
12 to 20
29 to 48
65 to 107
Czechoslovakia
13 to 22
1 to 2
9 to 15
East Germany
14 to 24
1 to 3
7 to 12
Hungary
9 to 15
5 to 8
10 to 16
Poland
12 to 20
1
3 to 5
Romania
-2 to -3
-8 to -11
-1 to 0
1. Projections of imports do not take into account probable price increases for other products.
Projections were based on trends in the early 1970s and on the assumption that some of the East
European countries will cut back the growth of imports from both the USSR and the West.
2. Prices for Soviet oil are assumed as fixed through 1975.
the ownership shares of the oil producers beginning to pass
50%, their oil is now easily marketable and at high prices.
22. Eastern Europe also would welcome new
medium-term and long-term credits from the West to help
pay for oil. Such credits probably would take the form of
Eurodollar loans by Western banks. For some countries
such as Bulgaria-with a 40% ratio of debt service to
exports-sizable new credits might put too much of a
burden on the balance of payments. Bulgaria, and perhaps
other East European countries, may be able to qualify for
credits from the Social Development Fund recently set up
by the OPEC to help developing countries. These credits
are to run 25 to 30yearswith an interest rate of about 2%.
OPEC representatives indicated that the fund might
initially amount to $150 million.
The Poles also are considering joining with Occidental
Petroleum in exploring for oil in the Baltic, in Ecuador,
and in the North Sea off the Norwegian coast. Even
though the outlook for barter arrangements looks fairly
bright, the oil-producing countries are unlikely to agree to
as many deals as they would have before the recent
Arab-Israeli war. A major incentive for bilateral deals was
the limited market for government-owned oil. But with
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23. In the absence of enough barter or credit
deals, the East Europeans-especially Bulgaria, Czechoslo-
vakia, East Germany, and Hungary- will have to cut back
on plans for imports from the West. They are unlikely to
sacrifice growth rates by reducing needed imports of raw
materials or semi-manufactures. Instead, imports of manu-
factured consumer goods and perhaps some types of
capital equipmentwill be the first to go.
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24. For Eastern Europe the Middle East crisis
produced immediate restrictions on gasoline and fuel oil
consumption. In November 1973, Bulgaria and Romania
imposed general gas rationing, and in December, Poland
introduced rationing on gasoline used in vehicles of
government officials and of collectives and cooperatives.
Several of the countries placed a ban on Sunday driving,
lowered speed limits, and ordered a reduction in the
consumption of heating oil. In January 1974, Poland
increased prices of gasoline at the pump an average 75%
and boosted prices of fuel to enterprises. I n March,
Bucharest exchanged its rationing program for higher
gasoline prices. Czechoslovakia announced an 80% in-
crease in gasoline prices in April but partially offset the
rise by a drop in the road use tax.
25. The oil situation-and the uncertainty of
prices-also has put a heavy burden on planners trying to
get a head start on the 1976-80 plan. The next six years
should see strong inflationary pressures, slower economic
growth, some restructuring of output and consumption,
and some pause in plans for increasing consumer welfare,
possibly including a slowdown in the auto boom.
26. The oil import bill certainly will fan inflation-
ary pressures in Eastern Europe. As in Czechoslovakia,
Poland, and Romania, some of the higher fuel costs will be
passed on to the consumer. But a large share of increased
prices will be covered by subsidies, putting a substantial
strain on state budgets. The Hungarians, for example,
claim that if all of the oil prices of the past six months had
been passed on to the consumer, the consumer price index
would have jumped 5%. And Poland plans to subsidize
80%-90% of increased fuel prices to industry, hoping that
the remainder can be met by fuel savings and not by
another rise in prices.
27. Planners also may have to resign themselves
to a slower rate of economic growth during 1976-80. The
hardest hit by higher costs or any cutback in fuel supplies
would be chemicals, metallurgy, agriculture, and food
processing. These also are the industries relying most on
imported Western equipment, which too may be trimmed.
The Hungarians, for example, already are expecting
output of the Budapest Chemical Works to be 25% below
plan this year because of the high cost of Western
chemicals for insecticides. But all industries-and agri-
culture which depends heavily on petroleum products-
would be affected by high costs or shortages of fuel for
transportation.
28. Furthermore, Moscow's desire for more con-
sumer durables could cause the structure of investment
and output to swing in the next few years toward older
consumer industries such as food processing, textiles,
leather, wood, and paper. Romania-even though the least
affected by the oil situation-is hinting at both a slow-
down in production and a shift in favor of consumer goods
in the next plan period.
29. The East Europeans are also considering
changes in the structure of energy consumption. The
Hungarians hope to economize in the use of fuel oil and
plan to use domestic coal as much as possible to feed
powerplants. Poland is looking for assistance from West
Germany and the United States in setting up pilot plants
for the conversion of coal into liquid fuels. But any such
scheme will probably not yield results until after 1980.
Even the Romanians are concerned; by 1980 about
one-half of their imports of crude oil will be needed for
domestic consumption instead of being processed for
export. The Romanian State Council issued an elaborate
decree in November 1973 which called for the conserva-
tion of oil products and conversion to other sources of
energy. Industrial use of fuel oil in Eastern Europe-
especially in the electric power, metallurgical, and build-
ing materials sectors-could be reduced without great
difficulty or loss of efficiency by converting to coal.
30. East European planners undoubtedly are
now juggling alternative sets of prices, imports, and output
for the 1976-80 period, waiting for talks to begin on the
new five-year trade agreements with the USSR. But
Moscow too has some tough questions to answer in
forming its policy toward Eastern Europe in the next plan
period. If the USSR is to meet the needs of its own
industries and consumers, it cannot appreciably increase
oil deliveries to Eastern Europe. Certainly, Moscow would
be reluctant to divert exports slated for Western hard
currency markets. They probably also would not agree to
shave the world market price of oil substantially. And yet,
as a Soviet economist stated recently, the USSR must
continue to take care of other CEMA countries and to
supply oil to small countries such as Yugoslavia and
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Finland, as well as hold on to established markets in
Western Europe.
31. The Soviet dilemma probably will be resolved
in favor of concessions to Eastern Europe, especially to
Bulgaria. On the one hand, Moscow cannot afford to drive
the East Europeans closer to the West by exacting all of
the economic leverage at its command. On the other hand,
concessions on oil in return for closer East European ties
to the USSR clearly would promote Soviet policy toward
CEMA integration.
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