'WORLD OIL COOPERATION OR INTERNATIONAL CHAOS,' BY WALTER J. LEVY, FOREIGN AFFAIRS, JULY 1974

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-01194A000100570001-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 31
• Document Creation Date: November 11, 2016
• Document Release Date: August 6, 1998
• Sequence Number: 1
• Publication Date: July 29, 1974
• Content Type: REPORT

Approved For Release 1999/09/02 : CIA-
"WORLD OIL COOPERATION OR INTERNATIONAL CHAOS," by Walter J. Levy, Forei.
Affairs, July 1974.
"NATION'S CHIEF ENVIRONMENTAL ADVISER OFFERS A LONG-RANGE PLAN FOR ENERGY,"
by Russell W. Peterson, Smithsonian, July 1974.
"OIL, TRADE AND THE DOLLAR," by Lawrence A. Mayer, Fortune, June 1974.
The three attached articles offer insights into the energy crisis and
important aspects of it relating to the U.S. The Levy piece appeals for
worldwide cooperation among oil producers and consumers, a theme we push
vigorously. We recommend locally appropriate dissemination of the theme
including replay of article.
The Peterson article by the chairman of the President's Council. on
Environmental Quality describes the optimistic Half and Half Plan developed
by the CEQ which assumes that energy savings in this country of 0.7 % per year
are feasible, and hence calls its projection the Half and Half Plan -- half
conservation and half growth through exploitation of additional sources of
energy.
The Mayer survey of U.S. and other major consuming nations in the first
phase of the oil crisis finds the U.S. relatively better off than most, and
reflects that the strength of the free world economic system has been demon-
strated by its ability to withstand what Levy calls the "supply shock' of
the October 1973 embargo and the overall cutback in Arab oil production."
The Peterson and Mayer articles are intended for background use.
This issuance contains articles from domestic and foreign
publications selected for field operational use. Recipients are
cautioned that most of this material is copyrighted. For repub-
lication in areas where copyright irifringernent may cause prob-
lems payment of copyright fees not to exceed $50.00 is authorized
per previous instructions. The attachment is unclassified when
detached.
E-2APPfQVed JToj'a Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
WORLD OIL COOPERATION
OR INTERNATIONAL CHAOS
By Walter J. Levy
CPYRGHT
ARELY, if ever, in postwar history has the world been
confronted with problems as serious 'as those caused by
recent changes in the supply and price conditions of the
world oil trade. To put these changes into proper perspective,
they must be evaluated not only in economic and financial terms
but also in the framework of their political and strategic impli-
cations.
I need not dwell here on the overwhelming importance of oil
for the energy requirements of.,every country in the world; nor
do I plan to elaborate on the fact that-except for the United
States, the Soviet Union and a small number of countries that are,
or will become, self-sufficient-most of the nations of the world
will, at least for the foreseeable future, depend almost entirely on
imports from a handful of oil-exporting countries, with an over-
whelming concentration of oil production and reserves in the
Persian Gulf area of the Middle East. Among those countries in
the Gulf, Saudi Arabia is predominant in terms of reserves, pro-
duction, and most important, in the potential to provide signif-
icant expansion of supplies. Inevitably, producing decisions by
Middle East governments, especially Saudi Arabia, will play a
pivotal role in future world oil availability and pricing.
Over the last three years or so, oil-producing countries have in
fact taken over complete control of the oil industry in their coun-
tries. They have coordinated their efforts through the Organiza-
tion of Petroleum Exporting Countries (OPEC) which was es-
tablished in 1960. Since 1970, producing governments have im-
posed in rapid succession changes in previous agreements that
had been negotiated and renegotiated with their concession-
holding companies, predominantly affiliates of the Anglo-Ameri-
can.international oil companies. These changes were arrived at
under the threat that if the oil companies would not acquiesce,-
the producing countries would legislate such changes unilaterally
or expropriate the concessions. In October 1973 the last vestige
of negotiations was abandoned and producing governments uni-
laterally set posted prices on their oil.
In the exercise of this power, Middle East producing countries
have raised their government oil revenues from taxes and royal-
ties from about go cents per barrel in 1970 to about $3.00 per
barrel by October 1973 and then to $7.00 per barrel by January
1974. In addition, as a result of the participation agreements be-
tween the producing countries and the oil companies, the gov-
ernments earn additional income from the sale of their newly
acquired oil. Its amount, of course, depends on the percent of gov-
ernment ownership and the price they charge for their oil. Agree-
ments had been concluded, as recently as late 1972, under which
producing countries acquired a 25 percent participation in the
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
oil-producing operations and were also committed to sell most of
their participation oil to the oil companies at agreed-upon prices;
now producing countries are demanding that these arrangements
be changed in their favor. Only a few arrangements have yet been
concluded, but most of the producing countries will probably
insist on at least the equivalent of 6o percent participation and a
price for the sale of their oil corresponding to about 93 percent
of the posted price-both changes most likely to be imposed with
retroactive effect as of January I, 1974. On such a basis, the gov-
ernment income from the total oil-producing operations in key
countries would average about $9.25 per barrel.'
Meanwhile, the oil income of the Middle East producing
countries has increased from $4 billion in 1970 to $9 billion in
1972, and to a presently estimated $6o billion in 1974. The oil
revenues of all OPEC countries are increasing from $15 billion
in 1972 to nearly $ioo billion in 1974. Allowing for all their own
foreign exchange requirements, OPEC producing countries will
still have available surplus revenues on the order of $6o billion
this year alone. And there remains a clear and present danger
that under conditions as they exist now, the supply of oil from in-
dividual producing countries or a group of them to individual
importing countries or a group of them might-as in October
1973-at a time unknown, again be curtailed or completely cut
off for a variety of economic, political, strategic, or other reasons.
The quick pace at'which the producing countries have effected
this radical shift in the balance of power is perhaps the most dan-
gerous aspect of the current situation. Whatever the merits of
their case (of which more later), the world faces frightening re-
percussions on account of the suddenness with which oil costs of
importing countries and oil revenues of producing countries have
been inflated. There just has been no time for mature consider-
ation by the societies that have to deal with this new exercise of
oil and financial power, be they recipients or dependents, pro-
ducers or consumers.
The security of international oil supply operations is further
affected by regional conflicts in the producing areas of the Mid-
dle East-in particular the still unresolved issues posed by the
Israeli-Arab confrontation. There are other potentially danger-
ous and divisive possibilities, as reflected in Iran's policy of es-
tablishing herself as the major strategic power in the Persian
Gulf and the Indian Ocean. This could, in due course, aggravate
what is already a latent conflict between Iran and some of the
Arab countries-not only Iraq, where the hostilities are acute,
but perhaps even Saudi Arabia. There are also disputes between
Iraq and Kuwait, unresolved boundary issues between Saudi
Arabia and Abu Dhabi, and internal conflicts such as the Kurd-
ish problem in Iraq. Further problems are posed by inherently
unstable governments in many of these areas and by uncertain
and unpredictable rules for the succession to power.
Moreover, within the Persian Gulf area there are varying eco-
nomic and strategic relationships between some of the producing
countries and Western powers on the one hand, and the Soviet
Union and even Communist China-on the other. Moscow
CPYiRGHT
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
 Appr e dir _helease 1999/09/02 : CIA-RDP79-01 194A000100570001-3
is deeply involved-in Middle East affairs and with the stra-
egic and national policies of some countries, particularly Iraq
and Syria. As the producing countries increasingly assert their
oil and money power, they are also likely to become increasingly.
involved as hostage or pawn in any major power struggle.
How can the nations of, the world handle this new situation.?
What is the role of the international oil: companies? Above all,
how can the producing and importing nations avoid a confron-
tation or simply a series of reciprocal actions that must tend more
and more toward economic chaos and grave political danger? Is
there a way to reconcile the various national interests and to
achieve constructive overall cooperation?
The first key fact that must now be recognized is that the posi-
tion of the international' oil companies has changed completely
over the past few years. Up to about j969'the major concession-
holding companies still could determine! levels of production, in-
vestments, exports and prices. Moreover, they still possessed sub-
stantial bargaining leverage'in their negotiations with producing
countries, largely by virtue of the surplus producing capacity that
obtained in the Middle East, and even in the United States into
the latter sixties.
All this has now gone. The producing countries have taken
over from the companies the power to set production levels, to
designate or embargo export destinations, to direct investments
and to set prices. The oil-producing affiliates of the international
oil companies have become completely subservient to the direc-
tives issued by the oil-producing countries. Nothing perhaps re-
flects the present state of affairs more dramatically than the fact
that American- and butch-owned oil companies had no choice
last fall but to become the instruments for carrying out the em-
bargo on oil shipments to their own home countries.
Thus, the companies no longer possess any real leverage. About
the only role. that is, in effect, left to them in established produc-
ing areas is that of a contractor providing technical services,
getting in return some privileged access to oil-at costs and
prices determined by producing governments. The extent of
even this "privilege" and the time over which it will be avail-
able are subject to unilateral cancellation at any. moment, as were
all preceding arrangements.
At the same time that they have been deprived of effective con-
trol over their producing operations, the role of the international
oil companies in consuming countries has come under increasing
fire, fueled also by the recent sudden increase in company profits.
During the emergency, consuming governments largely ab-
dicated any effective role; the companies thus had to make far-
ranging decisions as to allocation of supplies, pricing, treatment
of nonintegrated companies, and many other issues. It was the
companies that kept sufficient supplies moving to all countries;
now, after the event, some of their decisions are being challenged
by consuming governments. It is extremely doubtful whether the
companies still possess the necessary flexibility to cope with an-
other similar crisis.
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
If the role of the major international oil companies in estab-
lished producing areas is diminished, it is nonetheless important
to understand what their remaining position is. The technical
services they can provide are extensive, and vital to continuing
development of the producing countries' resources as well as to
efficient producing operations. Moreover, none of the producing
countries is prepared to handle alone the disposition of the huge
volumes of production they control the ' downstream facilities
of the majors provide assured outlets for the mainstream of their
production, while remaining quantities of crude can be sold di-
rectly or used to support refining and petrochemical production
in their own countries or in joint ventures abroad.
Because of their size, scope, technical competence and financial
strength, coupled with their important positions in the produc-
tion and development of oiY, gas, coal, shale, tar sands, and atomic
resources in areas politically secure, the international oil com-
panies are bound to play a major-if not the major-role in ex-
panding dependable additional sources of energy supplies. Even
though their foreign crude oil resource base is subject to progres-
sive erosion, the major internationals will accordingly continue
to provide for the importing countries over the years ahead the
most flexible sources of energy supply.
However, the international oil companies are no longer able
to assure the continuity or price of regular supplies to oil-import-
ing countries. And while they can hope to maintain continued
preferred access to substantial production in support of their
affiliates' crude requirements, even that is uncertain and con-
tingent on the producing countries' self-interest in extending
such offtake rights. .
Downstream investment in refining, marketing, and transport
thus tends to become extremely risky, because the viability of
such investment is predicated on secure supplies. Meanwhile, as
a logical part of their own development program, -producing
countries are using their control over crude availability to spur
refining and petrochemical investment in their own countries
and to acquire tanker fleets-all of which will in due course add
to consuming countries' foreign exchange import costs and
adversely affect the flexibility and security of their supplies.
In the circumstances, oil-importing countries can no longer
expect the companies to fulfill their earlier most important role,
as an effective intermediary between the interests of producing
and consuming countries. Nor can the international oil com-
panies function, as in the past, effectively to preclude direct deal-
ings between importing and producing countries relating to oil
supplies, prices, etc., which may easily lead to political confron-
tations. To the extent that the companies maintain their opera-
tions in producing countries, they in fact reflect the producing
governments' economic, political, and strategic policies. To be
able to hold on to whatever tenuous residual rights or prefer-
ences the producing countries might still be willing to extend,
the companies will have no choice but to acquiesce in virtually
any kind of conditions imposed or exacted.
All this points to a far greater involvement by consuming-
Appr
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
country governments in oil industry operations than heretofore.
One major objective will be greater "transparency" in oil com-
pany policies. Oil-importing countries cannot be in the dark with
respect to negotiations in producing areas, when the decisions
vitally affect the security and price of their essential oil supplies.
They will want to know more about investment plans and policies
in their own countries. And with transparency will inevitably
come progressively more government interposition throughout
internal oil economies.
But here, too, the international oil companies will have a con-
tinuing role to play. Producing countries will become increas-
ingly involved downstream, as direct crude sellers and through
investment. Consuming countries will become increasingly in-
volved upstream, through various exploration and crude arrange-
ments. Within this emergiifg fragmentation. of world oil trade,
the integrated facilities of the companies could provide an im-
portant, perhaps the major, core of efficient operations.
In sum, whatever arrangements on supply, financing, and
pricing the oil companies may still be able to conclude formally
with producing countries, in practice and underlying reality such
arrangements cannot be ignored by the importing countries but
are bound to be decisively affected by their policies. Moreover,
with the.vital concern the importing countries have not only for
price but for availability of oil, it now appears inevitable that
their governments will also in due course establish a compre-
hensive policy of surveillance and consultation-perhaps even
some measure of control-with regard to oil company operations
encompassing the whole range of oil activities vitally affecting
their countries.
As the problems of oil have become matters that in many key
respects can only be handled directly between governments, so
their gravity has now become all too clear. Faced with the major
"supply shock" of the October 1973 oil embargo and the overall
cutback in Arab oil production, the immediate reaction of prac-
tically every importing country was to engage in a competitive
scramble for oil supplies, coupled with offers to adapt its
Middle East policy to Arab demands, and promises of all kinds
of financial inducements. It was indeed a humiliating experi-
ence for historically independent and proud nations. What
we were witnessing, in fact, was not only the fragmentation of
the operations of the multinational oil companies, but also the
polarization of the oil policies of the importing countries, with
foreign petroleum ministers skillfully influencing individual
importing countries through the device of handing out oil re-
wards and punishments.
Then, late in 1973, the advance in world oil prices dictated by
OPEC countries was of such magnitude that practically every
importing nation was suddenly confronted with major balance-
of-trade problems of immediate and continuing effect. The cost
of foreign oil supplies for all importing countries will exceed
$Too billion in 1974, compared with some $2o billion in 1972.
For developing countries alone, it will jump from $5 billion in
CPYRGHT
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
1973 to $i S billion in 1974-and the $io-billion increase will,
exceed all the foreign aid that these countries received in the
previous year. Meanwhile, as noted, the OPEC producing
countries will accumulate, during 1974 alone, surplus holdings
of foreign exchange not needed for their own import require-
ments of some $6o billion--or nearly two-thirds of the net book
value of total U.S. private foreign investment.
Obviously, this surplus accumulation of funds will somehow
be recycled into the. world's monetary system initially, probably
.mainly into the short-term Eurodollar market. But this process
will not necessarily result in the availability of loans to the vari-
ous importing countries in accordance with their individual
foreign exchange needs. The creditworthiness of the borrower
will decide whether or not Eurodollar loans will be available;
many of the developing countries and some developed countries
will not qualify under this criterion. Foreign grants and soft
loans-some of them probably never to be repaid-will have to
be made available, and the Monetary Fund and the World Bank
are addressing themselves to this problem. I doubt that anything
like adequate amounts can be made available.
But the financial oil drainage is not only a short-term and
passing issue. It will be with us for many, many years-if oil
prices remain at present levels (or rise as is now occasionally
threatened), and if the oil-producing countries. themselves are
not prepared to make favorable loan arrangements to needy
countries in addition to whatever the developed countries are
able and willing to do. To the extent that oil imports are financed
by a continued recycling of surplus oil revenues via investments
or loans on commercial' terms, oil-importing countries will face
pyramiding interest or individual charges on top of mounting
direct oil import costs.
Equally if not more disturbing is the question whether or not
the producing countries owning already large surplus funds will
be willing to continue to maintain or to expand their production
and accumulate financial holdings that might result, in part at
least, in nothing but paper claims that could not be repaid. If the
producing countries make direct foreign investments, the bulk
of such investments will obviously be placed in the advanced
developed countries, where it would appear to be safest and most
profitable. That will leave the less-preferred developed coun-
tries and the developing countries out in the cold. Moreover, the
scope for such investments owned directly by foreign producing
governments is likely to be limited. Accordingly, oil-exporting
countries with surplus revenues might well decide to reduce
production-to conserve their liquid gold in the ground rather
than increase potential paper claims above ground. Oil revenue
surpluses could thus well conduce to oil supply shortage.
There are thus valid reasons to fear that even where present
policies of producing countries provide for expanding oil pro-
duction, circumstances might arise where, in what they consider
to be their own self-interest or even for any political whim, the
governments involved abruptly cut their level of oil exports.
COYRGHT
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
Kuwait, Libya, Abu Dhabi, Ecuador, and Venezuela have al-
ready announced restrictions in their production."Iran has threat-
ened to do so if the importers object to price levels.
The financial dilemma for oil-importing countries is clear. In
order to finance oil import costs, they will have to look to
progressively expanded foreign investment by, or indebtedness
to, producing countries. Without any amelioration in the cartel
prices and payments terms, the alternative for importing coun-
tries would be rather severe reductions in oil imports and oil
consumption. To cut back imports drastically, to levels that could
be financed out of current income, would hardly be a viable
solution. The resulting shortfall in total energy, and the economic
consequences of declines in :production, employment and trade,
would further undercut the oil-importing countries' ability to
finance even sharply reduced levels of oil supplies. The contrac-
tion of energy consumption and economic activity would thus
become a cumulative spiral.
In sum, the short- to medium-term implications of'the present
situation are simply not bearable, either for the oil-importing
countries-especially the nations already needy-or for the world
economy as a whole. In the wake of this topsy-turvy winter,
with the Arab oil embargo against the United States now
lifted, the temptation is momentarily strong to suppose that
the oil crisis has now genuinely eased. The major industrialized
countries of the world once again look forward to economic
growth, though at lower rates, with worldwide balance-of-pay-
ments deficits, and with a terrible economic and political prob-
lem of inflation, to which oil prices have made a substantial con-
tribution. But the oil balance-of-payments burden is just starting
and the transfer of funds to oil-producing countries just begin-
ning. In any case, no significant lasting relief at all is in sight for
the needy oil-importing countries. The fact is that the world
economy-for the sake of everyone-cannot survive in a healthy
or remotely healthy condition if cartel pricing and actual or
threatened supply restraints of oil continue on the trends marked
out by the new situation.
As a first step, the insecurity of oil supply and.the financial
problems that have arisen clearly call for a wide-ranging co-
ordinated program among all importing countries. This was the
main reason why the American government called for a con-
ference of the major oil-importing countries in February of this
year. This cooperative effort falls into two basic parts: first, what
must be done internally by the importing countries; and second,
what a coordinated policy should be vis-a-vis producing coun-
tries. With the oil-producing countries already cooperating
closely through OPEC, cooperation among the oil-importing
countries is a simple necessity; properly understood and handled,
it can be the only way to achieve constructive overall adjust-
ments.
Among themselves, the importing countries must first estab-
lish and coordinate their research and development programs
with regard to existing and new energy resources. Unnecessary
and time-consuming duplication m
CPYRGHT
Approved For Release 1999/09/02 : CIA-RDP79-0 194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
and development efforts should be concentrated on those re-
sources where optimum results can be expected. The skills avail-
able for research and the. engineering resources that would have
to be employed, if not pooled, should at least be utilized in ac-
cordance with a program for maximum overall efficiency.
The oil-importing countries must also establish a concurrent
and consistent program of energy conservation which would pro-
vide for far greater efficiency in the use of energy resources. Here
too the research effort and the measures to be taken should be
coordinated on an international basis.
Whatever the course of foreign oil prices, policies to conserve
consumption and to spur the development of alternative energy
sources will remain relevant for, the future. Moreover, a high
degree of government involvement is essential to the success of
such efforts-including the-'probable necessity of government
guarantees putting a floor under the selling price of alternative
energy sources. For if-as we shall see later-there is a chance
that foreign oil prices will fall, then private interests working
on projects for tar sands, shale, gasification of coal and`the like,
will not be willing or able to continue their efforts. If a major
effort to develop alternative energy resources is to be sustained,
particularly in North America, the criterion cannot be orthodox
economic soundness weighing the price of alternative energy
against the actual (or predicted) price of foreign oil. Rather,
the decisive criterion must be the price to which foreign oil
could and would rise if the alternative energy supplies were not
forthcoming. The public interest in avoiding dependence on
foreign oil dictates public support and a substantial measure of
price guarantees by individual countries, notably the United
States but perhaps others as- well, again acting in coordination.
Thirdly, the major importing countries must be able to agree
on a problem that has so far eluded their efforts-that of ade-
quate stockpiling and burden-sharing. On stockpiling, no im-
porting nation should now have on hand perhaps less than a
supply equal to six months of its imports. And there must be clear
contingency plans for restrained consumption and for sharing,
if oil supplies are again cut off or curtailed-whether for politi-
cal or economic reasons. Remaining oil imports must be parceled
out according to some formula based not on the previous per-
centage of imports from the sources cut off, but on the basis
largely of need-so that those fortunate enough to possess sub-
stantial national energy resources would have the smallest, if
any, claim on the oil still flowing. Beyond that, I do not believe
it would be politically feasible to establish rules that would
require countries able domestically just to cover their minimum
requirements to export some of their domestic energy supplies to
a less fortunate country.
Moreover, oil-importing countries must abstain from trying
to resolve their balance-of-trade problems by unduly pushing
their general exports to other oil-importing countries or by re-
stricting their imports from them. Such policies would only
aggravate the problems of these other countries. Competitive
devaluation of currencies or inflation of export prices would be
CPYRGHT '
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
self-defeating, since the oil-producing countries clearly intend
to adjust the level of oil prices in accordance with an index of
currency values as well as the cost of manufactured goods and
other commodities in world trade. The oil-importing countries
may have to act in many other ways in order to avoid such dan-
gerous repercussions as severe deflation and unemployment. To
deal with the situation will require an unprecedented degree of
self-restraint, prudent economic management and political so-
phistication and wisdom. Past experience suggests extreme skep-
ticism that the countries will in fact consistently follow such
policies. But if they do not, the consequences for all of them
could become very serious indeed.
Bilateral transactions between oil-importing and producing
countries or their respective companies will inevitably be of
growing importance. But in concluding such deals the importing
countries must abstain from trying to obtain unilateral advan-
tages-by making arrangements for oil imports that would tend
to preempt sources of supply through discriminatory. practices,
or by transactions designed to tie up for themselves an excessive
part of the import capacity of the oil-producing country. They
must also resist the temptation to offset their oil deficits by the
competitive rearming of the various Middle East countries, a
practice bound in the end to produce a military disaster for all.
So much for the minimum initial requirements for cooperation
among the major oil-importing countries. A measure of common
appreciation does now exist for most of these "headings of co-
operation" by at least a large majority of the relevant importing
countries, although they have yet to be fleshed out by practical
working arrangements'.or adequate guidelines for national be-
havior.
The hardest questions remain. Even if cooperation is achieved
in all these respects, can it serve to do more than shorten the
period of extreme vulnerability and cushion the impact of con-
tinued one-sided decisions by the OPEC countries? Is consumer
cooperation truly adequate if it does not address itself to the key
questions of price and supply?
I believe the answer to both questions is in the negative. When
the brewing crisis came to a head last fall, the initial reaction of
many importing countries was to try unilaterally to take care of
themselves for both economic and strategic reasons-through
barter arrangements, major investment offers to various produc-
ing countries, even in some cases extravagant arms supply deals.
This tendency was an understandable reaction in the first phase
of the new crisis, and indeed a continuing degree of individual
national initiatives is not only inevitable, but can be healthy in
some respects, in providing an infusion of economic and political
alternatives into the changing relationships between oil-import-
ing and oil-producing countries.
Already, however, the limits of the individual approach are
obvious. Even for the most aggressive of the oil-importing na-
tions, it has not worked effectively; they find themselves with very
large obligations in return for very small increments of favorable
treatment, or for nothing more concrete than a generalized rom-
CPYRGHT
Approved or Release 1-3
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
ise for the future. Moreover, where there have been specific.
.deals, these are as much subject to abrogation or revision as the
basic arrangements themselves. "What have. you done for me
lately?" is not a question confined to the dialogue between pol-,
iticians and voters.
Moreover, precipitate attempts by individual countries to go
it alone can only obscure the nature of the problem, which is
basically a common one that engages not only the interests of all
the importing countries but the interests of the producers in a
viable world economy and in their own regional and national
political stability. The producers are bound not to see the prob-
lem in this light if one importing country after another posits
this arrangement or that as its own selfish modus vivendi. And
to defer attempts at resolution of the common payments problem
while individual initiatives are being exhausted is bound to make
eventual general agreement more difficult, because so many in-
consistent cards will have been played.
Thus, it is my conviction that a constructive accommodation
between the interests of producers and importers, enabling the
latter to pay for and finance adequate oil imports, is possible only
if the importing countries share a common appreciation of the
need for a price adjustment as well as for the establishment of
financial mechanisms to this end. Just as far-reaching coopera-
tion among the producing countries has brought about the present
situation, so a similar cooperation among the importing coun-
tries is now an essential prerequisite to a balanced solution. Only
if the major importing nations act to coordinate their policy can
they expect to be able to present the supply and financial prob-
lems they are facing in.an effective manner-and to make clear
the implications of these problems for the producers themselves.
Moreover, only then could they impress upon at least the relevant
producing countries what I believe are the two central elements
in a satisfactory long-term arrangement-some downward ad-
justment in the level of foreign crude oil prices to all consumers,
and specific relief, including long-term deferment of payments,
for the neediest of the oil-importing countries.
If cooperation among oil-importing countries is essential to
the development of constructive cooperation with producing
countries, so too is a full and fair understanding by the importers
of the case of the producing countries. Many of its key points
were presented vividly in last July's issue of Foreign Affairs by
Jahangir Amuzegar of Iran; these points and others have since
been developed in a series of public statements by various leaders
of producing countries. Nonetheless it helps to go over the main
elements that enter into the attitudes of the producers, and to
explore the validity of their arguments, seeking to arrive at a
clear picture of what their long-term interests are.
PYRGHT
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
A major goal of producing countries is rapid and consistent
progress in their economic development so that they can become
economically viable and secure by the time their oil reserves
peter out. In the meantime, the pace of their industrial progress
depends largely on the size of their oil revenues, and the level
of oil prices is of decisive importance for their present and future
prosperity.
The producing countries also cite additional reasons to justify
the huge price increases that they imposed in the course of 1973,
The large increase in oil prices, they say, is warranted by the
alternative cost that would have to be incurred if oil had to be
replaced by other energy sources such as shale oil, oil from tar
sands, etc. Even though there is currently still a surplus of poten-
tial oil supplies, oil reserves may well be exhausted in-perhaps 20
to 30 years. But in a fr'e competitive market, prices would not,
at this time, reflect future shortages of supply and would thus
provide no encouragement for the development of substitutes.
Accordingly, the oil-producing countries say that high oil prices
are now necessary so that research and development programs
for new energy sources will be promptly initiated. Otherwise,
with the long lead time required, energy would be in short supply
when world oil production begins to decline.
Also, so they argue, high oil prices now will result in oil con-
servation and encourage the use of oil for the most essential and
valuable purposes where it cannot be so easily replaced, such as
for petrochemical production. The highest-value use, they main-
tain, should in practice be the basis for oil pricing. -
The producing countries also assert that the high current oil
prices redress the injustice of too low a level of prices in the past,
when oil prices had fallen behind those of manufactured goods
and food which the oil-producing countries had to import.
Relatively low oil prices in the past have, they maintain, un-
duly enriched the developed countries at their expense. (What-
ever the degree of validity of this argument for past periods, it
should be noted that the increase in oil prices between 1970 and
January 1974. has, according to a United Nations analysis,
amounted to 480 percent and was extraordinarily larger than
that of practically any other commodity. The share of petroleum
in world imports of about $316 billion during 1970-the last
year for which detailed statistics are available-amounted to
about 7.7 percent; at January 1974 commodity prices, the value
of 1970 imports would have increased to $618 billion, of which
petroleum would have accounted for as much as 23 percent.)
Oil-producing countries are aware that high oil prices may
harm the progress of other developing countries. But primary
responsibility for economic assistance, so they postulate, rests
on the rich developed countries. And even though oil-producing
countries maintain that in development terms they are still poor,
they have stated that they, too, will make a substantial contribu-
tion to support developing countries, and a number of them have
indeed done so. In addition, they will endeavor to convince other
raw-material-producing developing countries that they. too,
routd improve eir economic position substantially if they
CPYRGHT
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
would only follow the OPEC example.
The producing countries also complain that in the past they
have been deprived of economic development based on their oil
resources, such as refineries, petrochemical plants, tankers, and
energy-intensive industries. Instead, enormous quantities of gas
have been flared. Accordingly, it is a basic part of their develop-
ment policy that investment in local petroleum-processing plants
should be undertaken on a large scale within the oil-producing
countries, and that they should participate far more in the whole
operation of the transportation and exporting of oil.
Obviously, there is substantial merit in many of the points now
so forcefully advanced by the oil-producing countries-and it is
no effective answer to point out that Western initiative was
largely responsible both for- the discovery of oil and for the de-
velopment of its manifold uses. The major oil-importing nations,
in particular, must give heed to the legitimate grievances and
aspirations of the oil producers. I
On the other hand, the producing countries cannot continue
to take the position that the economic situation of the major im-
porting countries is no concern of theirs. It is one thing to adjust
oil prices to the real or imagined wrongs of the past, another to
carry that adjustment to the point of jeopardizing the future
economic, political, and strategic viability of importing coun-
tries. For if this happens, the viability of the producing coun-
tries themselves must surely be affected over the years to come.
There is thus no alternative for the importing countries but to
try to convince the producing countries that there must be respon-
sible accommodation between the interests of importing and
producing countries: In order to carry conviction, it is essential
that there be basic unity among importing countries about the
underlying assessments and their policy goals. In the light of the
extremely sensitive relationship between consuming and produc-
ing countries, a contrary position of one or two major importing
countries would tend to destroy the effectiveness of this approach.
It would also further strengthen the producing countries in the
sense-of power that they believe they hold over importing coup-
tries, and would encourage them to conclude that they could
effectively maintain their internal as well as external security in
the face of evolving world chaos.
In actual fact, however, many producing countries, in spite of
the extraordinary concentration of oil and money resources in
their hands, are as yet quite fragile entities, without substantial
strategic and military strength in world affairs. They have been
able to assert themselves because of the disunity among, and
unwillingness of, importing countries to take any firm position
vis-a-vis the producing nations. Whatever the concern of pro-
ducing countries and companies in the pivotal transition from
surplus producing capacity to tightness of world oil supplies, the
oil-importing countries were largely complaisant about the
course of events. Now, unrestrained exercise of their oil and
money power by producing countries presupposes that the im-
porting countries will continue to acquiesce and remain pas-
sive, even if the world's economic and political stability is at
CP
RGHT '
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-31
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
take. This cannot be a safe basis upon which the producing CPYRGHT
ountries could proceed. If the worst is to be avoided, the pro-
ucing countries must be made to recognize the danger of pur-
uing such a course.
There is also the danger that this concentration of oil and
money resources would tempt the Soviet Union to make use of
fundamentally weak and socially unstable ;producing countries-
by proxy, so to speak-in order to undermine the economic and
political stability of the non-Communist world. Soviet adven-
turism cannot be ignored, especially the application of Soviet
power through controls over certain governments such as those
of Iraq or Syria, as well as by internal threats through Soviet
support of subversive opposition to governments. There exists, in
practically every one of these countries, the potential for sudden
revolutions by extreme elements.
All of these factors are clearly known Xo the various dynasties
and national governments. Most of them must have inevitably
reached the conclusion that their hold on power, which is some-
times tenuous, depends in the final analysis on a satisfactory re-
lationship with the non-Communist world. We are all interested
in the maintenance of a peaceful cohesion among Middle East
countries. But they must recognize that if this cohesion is mainly
used to enable them to enforce their will on the rest of the world
through the use of oil and money power, they would not only
undermine the position and strength of the importing countries
but would also expose their governments and nations to extreme
risks.
The oil-exporting countries must be aware that their own inde-
pendence could not safely be assured if the United States and its
allies were to be fatally weakened vis-a-vis the Soviet Union. It
would not be in their self-interest to refuse to supply the. vital
oil needs of the world or to insist on an unmanageable level of
prices, and risk the economic, political, and strategic conse-
quences of such policies.
So far I have been making the case for unprecedented coop-
eration among the oil-importing nations, and for much greater
understanding by both producing and importing countries o
each other's needs and of the common interests that affect both
groups. If reason alone controlled human affairs, one might con-
clude that a satisfactory solution was possible from greater un-
derstanding alone.
Unfortunately, that is not the case. One must in the end corn
back to the harsh economics of the energy situation worldwide
and of the rapidly rising trends in oil consumption that hay
lain at the root of the present crisis. For it is these trends essen
tially-far outstripping the growth of indigenous energy source
-that have made the oil of the OPEC countries, especially i
the Middle East, so vital to practically every nation of the work
and have thus given the OPEC countries the bargaining leverage
to establish the present unilaterally controlled price and supply
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
situation. With all the understanding and sympathy in the world,
the producing countries cannot be expected not to use a bargain-
ing position as strong as the present one of OPEC and its Middle
East members. In last July's Foreign Affairs, Carroll Wilson
argued that the United States would be placed in an intolerable
state of dependence on Middle East oil if it did not develop other
sources of energy to the maximum and at the same time curtail
the rate of growth of its energy consumption from 4.5 percent to
a suggested three percent. Essentially the same analysis must now
be applied to the oil-importing nations as a whole, not for the sake
of eliminating a critical degree of dependence on the Middle
East-for that is simply not in the cards at least for the rest of this
decade-but for the sake of.containing thereafter the problems
of oil supply and finance a;id of establishing now an acceptable
degree of balance in the bargaining positions of producers and
consumers of oil.
The starting point should be the period from 1968 through
1972, when energy consumption in the non-Communist world
as a whole increased at 5.6 percent per year, and oil consumption
by 7.5 percent per year. The result was that Middle East oil pro-
duction went up by an average of 12.5 percent per year.
Now the prospect for the period from now until 1980 is for a
substantial expansion in non-oil energy sources and in oil produc-
tion within the major oil-consuming countries. Yet it remains
as clear as it was a. year ago that no drastic technological break-
through is in sight at least in this time frame. We are still talking
about natural gas, coal, hydroelectric power and nuclear fission
as the primary alternatives to oil-and one need hardly add that
even substantial increases in some of these are still fraught with
difficulty.
In response to the new situation, it is already reasonable to
postulate some conservation at the margin in response to higher
energy costs. Given the dynamic energy needs of Japan, the
developing countries, and to a lesser extent Western Europe,
however, it is difficult to see that "conservation at the margin"
will in itself produce a dramatic drop in the growth of energy
needs. Supposing, for example, energy consumption grew at
only 4.6 percent per year instead of the 5.6 percent of the 1968-
72 period, the picture might look something like-this:
7972 1975 1980
1972-1980
(Millions of Barrels
Daily Oil Equivalent)
(Average Annual
Percentage Growth)
Primary Energy Demand
80
91
115
4.6
From Non-Oil Sources
.35
38
48
4.0
Oil Consumption
45
53
67
5.1
Indigenous Oil Production
18
19
27
5.2
Oil Imports
27
34
40
5.0
Needed from the Middle East
18
23
29
6.3 .
(IPYRGHT
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
Obviously, this is a broad-brush projection. But it is enough,
I believe, to demonstrate two fundamental conclusions: (1) that
even at current prices this rate of oil imports could not be sus-
tained by the oil-importing countries on a current payments
basis; (2) that with production increases fairly well spread
among the producing countries, none would be under any pres-
sure to lower prices or to increase production further. (This is a
modest conclusion; actually the pressure would be greater for
production cutbacks than for increases. The oil simply might
not be forthcoming.) In short, mere "conservation at the margin"
-itself more than many governments are now asking of their
people-will neither avoid economic calamity nor provide a
balanced situation vis-a-vis the, producers.
To get these essential results I believe 'we shall have to go con-
siderably further. Again fdr illustrative purposes, let us see what
the situation would be if the oil-importing countries could man-
age genuine austerity in their use of energy, cutting their growth
rate to, say, 3.3 percent. (The reduced U.S. growth rate would
have to be less than this; with all U.S. energy waste, it would
still involve a major change in habits and ways. For Japan and
the developing countries, the impact on production growth
would be far more severe. In short, this kind of reduced rate of
increase does deserve to be called austerity.) In such a case, using
the same assumptions for non-oil sources and indigenous oil pro-
duction, a revised table would look like this:
1972 1975 1980
1972-1980
(Millions of Barrels
Daily Oil Equivalent)
(Average Annual
Percentage Growth)
Primary Energy Demand'
8o
87
104
3.3
Oil Consumption
45.
49
56
2.7
Oil Imports
27
30
29
o.8
Needed from the Middle East
18
19
18
al
This level of austerity would, I believe, be just adequate to
permit the major industrialized nations to maintain viable eco-
nomic and industrial` operations, including continued growth but
at a lower rate than might have been projected on the basis of
previous oil prices and supply availability. Even then, most of
the oil-importing countries would, at least. until the latter part
of this decade, be exposed to a very substantial and-in the case
of some countries-nearly unmanageable financial burden. In
short, while the deliberate initiation of such austerity would
require an act of political will far exceeding what is actually
happening in most importing countries, the choice will in the
end be compelled by financial pressures. The longer it is put off
the worse it will get.
Once undertaken, this austerity policy could in time achieve
some trade balance between the producing and consuming coun-
tries. In particular, the huge annual accumulation of surplus
funds by Middle East producing countries would start to decline
about 1978 and would reach manageable proportions shortly
thereafter. Put differently, the importing countries would in
CPYRGHT
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3 li
aggregate terms be able to pay for their oil by a steadily increased
flow of goods and services to the producers. At the same time,
however, since the ability of the importing countries to supply
goods and services is concentrated in only a handful of them, the
financial burden of oil imports would vary greatly, remaining
very substantial for the less-industrialized developed countries
and especially for the developing countriesI which are net con-
sumers of oil. Thus, it would remain essential to have financial
mechanisms and arrangements that would cushion this differ-
ential impact and make it bearable.
Turn now to the situation of the oil exporters. The second table
suggests that their total exports would level off and then start to
decline slightly by the end of the decade, as the importing coun-
tries managed to increase their non-oil sources of energy and as
indigenous oil sources were tapped more fully (principally the
North Sea and the North Slope in Alaska). The table also as-
sumes that oil producers outside the Middle East will increase
their total capacity somewhat, and will be motivated to produce
at maximum attainable levels-since practically all of these na-
tions need their oil revenues for immediate development pur-
poses. Thus, the total demand on the Middle East-would tend to
decline by the end of the decade.
This is not to suggest for a moment that the Middle East oil
producers'would'then be in difficulty. They would still be sup-
plying more than 6o percent of the oil moving in world trade,
and Middle East oil would remain vital to Japan, Western
Europe, and the developing nations-in an austerity situation,
any further cuts would reach the bone more rapidly than in the
present somewhat "soft"- situation. In short, the Middle East
producing countries as a group would remain in a strong position.
At the same time, the production levels of individual countries
in the Middle East would be placed seriously in question. Kuwait
(like Libya in North Africa) is already pursuing policies de-
signed to conserve its oil reserves and thus to stabilize output
below previously attained levels of production. On the other
hand, Iran and Iraq look to increase their production very sub-
stantially from present totals of roughly eight million barrels a
day to 12-13 million barrels per day. If these trends were to con-
tinue, and if the need for Middle East oil were to level off at i8
million or so barrels per day, it is evident that the remaining
suppliers-especially Saudi Arabia and Abu Dhabi which had
previously benefited from oil revenues far in excess of their
development needs-would then have to accept a drastic reduc-
tion in their levels of production, or alternatively to seek to in-
crease their output by reducing their prices (and thus giving
consumers an incentive to ease up on their austerity).
It is an open question, which of course cannot be analytically
resolved, whether in the light of these circumstances the various
Middle East producing countries would decide to "fight it out"
among themselves by competing for exports through price reduc-
tions. They might seek to go in the opposite direction, to enter
into a production and export control agreement under which
they would rearrange their respective production and export
CPYR6HT
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
levels. At the same time, they might try to increase their prices
and tax takes so as to provide for the needs of those Middle East
countries that would have to reduce some of their previously
anticipated production. On a rational basis, the latter course
might be chosen, since any price and tax reductions would tend
to force others downward as well, so that the Middle East as a
whole would obtain lower revenues for the same or a higher level
of production than before the initial price and tax reductions.
In trying to assess what under such conditions the producing
countries might actually decide to do, we must think not only. or
even mainly in economic terms, nor draw only on past experience
with regard to the cbhesiveness,of private cartels in similar cir-
cumstances. At most, the economic facts of supply and demand
frame the problem; it will still be decided by national govern-
ments in the producing countries, and their policies are likely
to be governed by an extraordinary combination of political and
strategic as well as economic factors.
On the basis of such a broad assessment, the short-term argu-
ment for controlling production and maintaining or further
raising prices and tax takes must encounter a growing awareness
of wider relevant considerations. For such a course-in effect
responding to consumer austerity by higher producer prices-
would surely leave the importing countries with even worse
financial problems than are now in prospect. Even more heavily
than now, the burden of paying for restrained but more expensive
oil imports would fall upon lagging economies suffering from
extremely serious financial problems. Even more than now, the
producing countries would have to ask themselves whether they
could expect to remain islands of prosperity in a worldwide de-
pression, or of political stability when the will and ability of
strategically powerful nations to support them had been eroded.
To sum up, four elements are essential to move to a reasonable
adjustment: far-reaching cooperation among the oil-importing
nations, an understanding by the importing nations of the inter-
ests and aspirations of the producing countries, a clear-cut (and
painful) program of energy austerity by the oil-importing coun-
tries, and a recognition by the producing countries that even in
an austerity situation any attempt to hold prices high must result
in worldwide dangers to which they could not be immune. Only
with far-reaching consumer cooperation can it be expected that
the producing countries will come to this necessary conclusion;
at the same time cooperation without austerity will not do the
job. Both are needed, and a large new dose of political will, not
yet in sight, will be required to achieve them.
The key to a reasonable solution ' is time: to make the finan-
cial burdens on all oil-importing countries tolerable and to
bridge the gap until the day, not too far distant, when the pro-
ducing countries, at least in the aggregate, will have reached the
point where they can be paid in goods and services-and where
they will have joined, for practical purposes, the ranks of the
developed nations.
And the basis for such an adjustment, in turn, is the acceptance
CPYRGHT
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
 Appr
of a principle that, while the sovereignty and control of nations
over their natural resources remains unquestioned, such control
cannot and must not lead to the unrestrained exercise of power,
but must be based on a mutual accommodation of interests or, as
the United Nations Declaration on the Establishment of a New
International Economic Order puts it, on an appreciation of
"the reality of interdependence of all the members of the world
community." Otherwise it will be destructive to all.
Such a principle is not, of course, confined to the case of oil.
The April meeting of the United Nations General Assembly,
and the United Nations reports prepared for it, have underlined
the degree to which the rise in food and- fertilizer prices over the
past two years-created in these -cases by market forces in com-
bination with national domestic agricultural policies-have
damaged the interests of then needy developing countries 'in par-
ticular. The United States especially has it in its power to adopt
measures that would ease the actual cost of food supplies to this
group of countries; one suggestion would be that the United
States provide grain and other crucial food to needy-countries
on concessionary terms or through the application of PL 480
funds. A similar move might be undertaken by the major coun-
tries that export fertilizer. Now, as preparations are underway
for a World Food Conference in the fall, such moves would be
even more in order, based on the continued operation of market
forces for most consumers but with measures to cushion the im-
pact on needy countries.
Oil remains the biggest and most difficult case. Since 1970 the
price and availability of oil moving in world trade have been
determined progressively by the OPEC countries unilaterally,
to the point where the present situation effectively is. one of
price imposed by a cartel. Completely free market prices for
traded oil are not a practical alternative; in' a free market the
existence of large reserves and the very low cost of developing
and producing such oil would mean a market price that would
be very low indeed. Such a price would not be acceptable to
producing countries-since it would not provide them with the
budgetary and foreign exchange revenue badly needed for their
economic development. Nor would it in fact serve the interests
of importing countries as a whole-since it would lead to waste-
ful consumption of oil on the one hand, and on the other would
provide no inducement to the major countries to push forward
in good time with research and development on new and more
costly energy resources which will be needed even more one
readily available supplies of oil begin to stagnate or decline.
Accordingly, the price of oil moving in world trade is boun
to be a kind of administered price, not necessarily negotiate
001- PYRGHT
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
directly between producing an importing countries u at least
established in a way that would attempt to accommodate and
reconcile the economic and financial interests of both groups.
In addition, the specific plight of the needy oil-importing coun-
tries should be provided for, if not through a two-tier pricing
system, then at least by long-term deferral of payments and easy
credit terms for loans. 1f
In sum, I believe that the world situation would now call for
solemn undertakings that would assure the essential oil require-
ments of all the importing countries on terms and conditions that
are economically and financially sustainable. This should be
accompanied by measures to deal along the lines proposed with
the cognate cases of food and fertilizer. At the same time, it is
imperative that all the necessary provisions be made to safeguard
the essential economic interests of the producing countries into a
future when their position will inevitably become less strong
than it is at present. Such a combination of actions would be an
act of statesmanship in which the oil-producing countries and the
oil-importing countries could and should join not only for the
common good, but perhaps even more so in their most cogent
self-interest.
Today, governments are watching an erosion of the world's
oil supply and financial systems, comparable in its potential for
economic and political disaster to the Great Depression of the
1930s, as if they were hypnotized into inaction. The time is late,
the need for action overwhelming.
CPYRGHT
Approved For Release 1999/09/02 : CIA-RDP79-01 194A000100570001-3
 CPYRGH1
Secretary of the Smithsonian
Fort Release 1999/09/02 :
Editor Edward K. Thompson
Board of Editors Ralph Backlund, Grayce
Northcross, James K. Page jr., Edwards Park
Associate Editors David Bourdon, Marlane
Liddell, Louise Smith, John P Wiley jr.
Picture Associate Caroline Despard
Assistant Editors Dee McRae, Donna
Reifsnider, Meredith Riegle
Art Direction John Beveridge
Advertising Director Thomas H. Black
General Manager Joseph J. Bonsignore
Production Nannie Clay Shanahan
Business Carey 0. Randall
Circulation-Promotion Director Anne Keating
Board of Regents
Smithsonian Institution
Ex +o ficio
Chief Justice of the United States
Warren E. Burger, Chancellor
Vice President of the United States
Gerald R. Ford
Appointed by the President of the Senate
Honorable"J. William Fulbright
Honorable Henry M. Jackson
Honorable Hugh Scott
Appointed by the Speaker of the House
Honorable George H. Mahon
Honorable William E. Minshall
Honorable John J. Rooney
Appointed by a Joint Resolution of Congress
Mr. John Paul Austin
Dr. John Nicholas Brown
Dr. William A. M. Burden
Dr. Robert F. Goheen
Dr. Crawford H. Greenewalt
Dr. Caryl P. Haskins
Honorable A. Leon Higginbotham jr.
Mr. Thomas J. Watson jr.
Mr. James E. Webb
National Board of the Smithsonian Associates
Mr. Lewis A. Lapham, Chairman, 6
Mr. Harry Hood Bassett. Mr. John W. Brooks,
Mr. Richard P. Cooley. Mr. Joseph F. Cullman 3rd'.
Mr. Harry B. Cunningham, Mr. Paul L. Davies,
Mr. Leonard K. Firestone, Mr. Charles T. Fisher III,
Mr. G. Keith Funston, Mr. Alfred C. Glassell jr.,
Mrs. David L. Guyer, Mr. Ben W. Heineman,
Mr. Henry J. Heinz II, Mr. William A. Hewitt,
Mr. Frank Y. Larkin, Hon. George C. McGhee,
Mrs. Robert S. McNamara, Dr. Ruben F Mettler,
Mr. Charles M Pigott, Mrs. Malcolm Price,
?Mr. Francis C. Rooney jr., Mr. Merritt K. Ruddock.
Mr. Thomas J. Watson jr., Mr. James 0. Wright
Smithsonian is published monthly by the Smithsonian Associates,
900 Jefferson Drive, Washington, D.C. 20560. ? Smithsonian
Institution 1974. All rights reserved. Reproduction in whole or in
part without permission is prohibited. Subscription price $10 a year
in U.S. and possessions, $11.50 elsewhere. Single copy price 81.00.
Second class postage paid at Washington, D.C. Editorial offices,
900Jefferson Drive, Washington, D.C. 20560. Advertising and
circulation offices at 420 Lexington Ave., New York, New York 10017.
Please address all subscription correspondence and change of
address information to P.O. Box 2606, Greenwich, Conn. 06830
Jut 1.914
CIA-RI 9-0.11 4A00010Q570001-3 dPYRGHT
-mlt sonlan
Table of Contents
The view from the castle: Secretary Ripley tails
successful reintroduction of barn owls to th Castle
Phenomena, comment and notes: Tales of s arks
and rabbits; some innovative remedies for
the control of crime, population and beach erosion
14 Letters to the Editor
20 A Bicentennial reminder of 200 years ago:
Colonies choose delegates for a congress
22 Visitors learn in the Portland zoo-but not more
than monkeys, camels, ostriches and giraffe
By Daniel Jack Chasan, photographs by Ralph Morse
30 The 19th-century restorer Viollet-le-Duc Salvaged
(ruined, some say) France's medieval monuments
By Bern Keating, color photographs by D itri Kessel
40 Yankee Jonathan, an American sharpie,
left an indelible mark on Uncle Sam
By Richard Wolkomir, drawings by Arnold Roth
48 In Carrying the Fire, the command module pilot describ
the long, long ordeal of preparation for the moon
By Michael Collins
56 Eighteenth-century bathing machines brought elegance
to skinny dipping-for kings and commoners alike
By Peggy Heinrich and Ray J. Worssam
62 Replica of Drake's famous Golden Hinde, 4ovingly
built with ancient tools, prepares to brave .he Atlantic
Text and photographs by Terence Spencer
70 Huge Arecibo radio telescope is being resh
ped
to give scientists a more sensitive ear on the! universe
72 The hunger for coal brings boom times to depressed
area-energy-rich Sweetwater County in Wyoming
By David Snell, photographs by Yale Joel
80 The chairman of the Council on Environ ental Quality
offers a detailed, long-range plan for U.S. e ergy
By Russell W. Peterson
83 Smithsonian tours
86 Book reviews
90 July events at the Smithsonian
92 The early bird only catches the wrong trail-
By Patrick Ryan
Approved For Release 1999/09/02
 CPYRGHT
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
By Russell W. Peterson
CPYRGHT
Nation's chief environmental adviser
offers a long-range plan for energy
How much energy will the United States really
need in the year 2000? How can we produce
it with minimal damage to the environment?
Some people still think the shortage of energy last win-
ter wags a fluke, but in truth it was the public's first
exposure to a problem which will dominate our na-
tional life until the end-of the century and beyond.
Major choices must be made about our energy future,
and each of us-as voters, consumers, employees, home
owners-has a stake in and some influence over future
energy policy.
The most important aspect of that policy is the
goals we decide to work toward. At the Council on
Environmental Quality (CEQ) we have developed a
set of goals which we call the Half and Half Plan-a
specific and manageable program of energy conserva-
tion and production, geared to energy needs and en-
vironmental needs. Like all plans, it involves numbers,
graphs and projections. But implicit in the numbers
and curves-at the heart of the plan-are the really im-
portant things: human needs, individual life-styles
and basic values.
To begin with, there is the question of whether our
nation should seek to become self-sufficient in energy-
dependent largely upon our own resources. Some be-
lieve such independence is neither desirable nor prac-
tical. I believe it is both.
The United States, with six percent of the world's
population, consumes about a third of the world's
energy. In the rest of the world, hundreds of millions
of people are living on less than $100 a year. Many na-
tions are trapped by an explosion in their population
which nullifies efforts to improve their level of eco-
nomic well-being. Historically, population growth has
lackened as per capita income has increased. But to
accomplish economic growth requires raising the use
of energy. For this reason, if for-no others, the United
States has an obligation to plan its energy future so
that energy supplies outside the United States can be
evoted to improving the quality of, life elsewhere
round the globe.
To rely primarily on our energy resources, however,
does not mean that the economy must squeal-to a pain-
ul halt or that our comfort and convenience must de-
rease. Energy use will continue to grow. But the
question is: How much? What will our society's energy
demands be in the year 2000?
Traditionally, future energy demands have been cal-
culated by projecting current growth rates in con-
sumption. From 1965 to 1970, energy use per capita
grew at a rate of more than three percent a year. In
1972, the Department of Interior began with that and
projected a total of 192 quadrillion BTUs (British
Thermal Units) of energy in the year 2000, more than
two-and-one-half times present consumption. (A quad-
rillion is a million billion; in the jargon, it is often
shortened to "quad.") This projection was an excel-
lent technical effort, and was representative of a num-
ber of "high-range" forecasts of that period. But the
oil embargo changed our perspective. That amount
of energy production is simply out of the question
without unacceptable dependence on foreign sources
or unacceptable damage to our environment.
What must be understood is that the advertisements
which read "A nation which runs on oil cannot afford
to run short" should have read "A nation which runs
on oil is certain to run short." Seventy-five percent of
the U.S. energy today comes from petroleum and nat-
ural gas. But 1970 was the peak year for domestic
petroleum production; oil from Alaska and the outer
continental shelf will merely slow the decline in what
is available to us. And natural gas supplies are ex-
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001- R
pected to reach their peak shortly. From here on out,
domestic oil and gas production will be declining at
the same time that our energy needs will be increasing.
Hence, to more than double energy consumption
while using only our domestic resources would require
us to quadruple or quintuple present coal production
in the United States, and to increase nuclear power
fromless than one quad today to as much as 60 to 80
quads by the year 2000.
Even if we could, we do not want to do that. The
production and use of energy is the single most im-
portant cause of environmental degradation-all the
way from the devastation of lands by surface mining
and the hazards of deep mining to oil spills, sulfur
emissions and other pollution of air and water. To
consume 192 quads in the year 2000 would put terriIle
strains on the environment
So for many reasons we need a lower goal for total
energy consumed. The H2.lf and Half Plan represents
that-a target of 121 quadrillion BTUs instead of 192
(see graphs pp. 82, 83). We at CEQ believe this is a
more desirable goal for the United States.
Half growth,, half conservation
The Half and Half Plan grew out of analyses of-the
growth in per capita energy consumption since 1947,
not just during the last few years. Over the longer pe-
riod the rate of growth in energy consumption per
capita averaged 1.4 percent. That is lower than the
recent three percent rate, but it supported, -over the
period, a great growth in national affluence.
Furthermore, the Half and Half Plan assumes that
one-half of this growth in energy consumption per
capita can be achieved through energy conservation-
through reallocation from wasteful uses to ones which
meet important human needs. To paraphrase Benja-
..:min Franklin, a BTU saved is a BTU earned. Each
`BTU saved for one purpose means one more that can
be put to wise use somewhere else. In a nation that has
been profligate in using energy, there is plenty of room
for relatively painless conservation.
I believe the United States should make it a major
national objective to make energy savings of 0.7 per-
cent each year. By the year 2000, conserving at that
rate will reduce gross energy inputs by 27 quadrillion
BTUs, more than one-third of our present energy con-
sumption. By making such savings, only 0.7 percent of
the overall growth rate of 1.4 percent must be pro-
vided through additional production of energy. Half
conservation and half growth-hence, the Half and
Half Plan.
The energy savings can be achieved by means with
which readers Of SMITHSONIAN are familiar: better
insulation and more energy-conscious architectural
design in residential and commercial
buildings; personal efforts to reduce
household energy use; more efficient ap-
pliances; more recycling of materials;
better land use; more energy-conscious
design of industrial processes; and, most
important of all, a more efficient trang-
portation system.
At CEQ we have looked particularly
closely at the transpoitation sector and
think it would be possible to provide all
needed transportation services in the
year 2000 with 21.6 quads, a small in-
crease above the 17.0 quads we use today.
Some may- feel this is heretical (the De-
partment of the Interior, for example,
projected 42.7 quads, nearly twice as
much), but we think it could be done.
NET ENERGY CONSUMPTION PER CAPITA
(In Miiltonaof BTUs) ,
1970 re9 '!o
Interior Department projection showed
per capita energy use would rise by 2.5
percent; CEQ calls for only 0.7 percent.
Improved mass transit would be an im
portant factor, but the major change
would come through smaller, more effi
cient cars (see p. 85). It is obvious that
car that gets twice as many miles per gal
Ion uses half as much gas. (It also cuts aii
pollution.) If, over the next decade, w
adopt a new ethic about what constitute
a desirable automobile, we can provide
for universal auto ownership in the yea
2000 and still consume little more gaso.
line than we do now.
Of course, many Americans have deep
seated feelings about cars; many still lieve a big car is an important sign o
success. A few months ago I went to
meeting at the State Department. Al
sorts of dignitaries pulled up in front o
YRGHT
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
 CPYRGHT
1 Approved Forn Relea esJAR /Q~9~,Q 4alAeF?,D~7a9-01194AOOOtQ0-SV0W43able
i
n
the building
arrived in CEQ's Pinto, we were waved vanced nuclear technology. Both sources
away by the doorman. Clearly a member also have severe environmental problems
of the establishment would not be found associated with them, as SMITHSONIAN
in such a car! I had to park a few blocks readers are well aware. Yet environmen-
away and walk to the meeting. The point talists must realize that when they oppose
is that we are going to have to change a particular solution to a basic social
our attitudes about some things.- But need, they must have an alternative. At
we've done it before. People were de- present, these are the only alternatives in
lighted with the' black Model T before sight, so it behooves us to establish and
color, fins, accessories and yearly model enforce the proper environmental regula-
tions for both of these sources.
!, ith coal, how to mine
~. Hope from new technology
Even if such conservation is achieved,
even if half of our 1.4 percent growth rate
is accomplished by energy saving, a great
deal of energy will still need to be pro-
duced. The question is: How can it be
done in the face of dwindling supplies of
oil and natural gas?
Many people have high hopes for new
technologies such as solar energy, geo-
thermal energy and nuclear fusion. I sup-
port an aggressive pursuit of these tech-
nologies, but it takes wishful thinking to
expect that more-than three percent of
our total energy will come from such
sources by the year 2000.
Nuclear fusion as a source of energy
still,.faces many unknowns. Even with
major breakthroughs in fusion research
(and these are by no means certain to
occur), we cannot expect any significant
production from commercial fusion pow-
er plants by the year 2000.
Solar energy is now quite properly be-
ing pushed very hard. Its main applica-
tion will be to heat and cool buildings.
But solar energy will be used almost ex-
clusively on new buildings-few old ones
will be retrofitted-and it will be of lim-
ited use- in the high-density urban dwell-
ings -which constitute a steadily larger
i ,percentage of new home construction.
Once you do the arithmetic, you have to
conclude-hat solar energy appears un-
likely to contribute more than one per-
cent of our energy in the year 2000.
The story is similar for geothermal en-
ergy, for it can supply no more than two
percent of our electricity needs by the
turn of the century.
Therefore, even if energy from the
Earth's heat, the sun's radiation and the
fusion reaction are pushed along as fast
and as far as possible (as they should be),
they simply cannot solve our basic prob-
lem in the next 25 years, and we are left,
inescapably, with the alternatives of coal
and nuclear fission.
The United States has the world's larg-
GROSS ENERGY CONSUMPTION
(In OuadrfNion of BTU.)
Estimate by Interior called for a total
of 192 quadrillion BTUs in the year 2000.
Half and Half plan requires but 121.
problem. Everyone has seen pictures of
the ravages of strip mining, but not every-
one knows that strip-mined lands-with
the exception of relatively arid lands-
1950 '00 70 X80 s0 Loco
Greater use of coal and nuclear fission
means far more energy consumed in form
of electricity, entailing large losses in
cost. A
study CEQ did a year ago showed that
full restoration for Appalachian strip
mines was achievable for about three to
nine percent of the value of the extracted
coal. As the value of coal rises, that per-
centage becomes even smaller. We must
insist on full restoration.
Deep mining is environmentally less
damaging but is extremely hazardous to
the miners. Many coal companies have a
horrible record in protecting the health
and safety of the men underground, but
others have good records. We need to de-
velop new mining technologies and insist
on the best safety practices.
However it is mined, we must burn
coal in a way that minimizes the threat to
our health from emissions of sulfur
oxides. Fortunately, about half of our
coal has low- sulfur content; this should
be allocated to densely populated areas.
Furthermore, we must refine technologies
for removing sulfur from coal. In Japan,
stack gas scrubbers have worked success-
fully. And by the mid-1980s we clan be
converting coal to gas, extracting the sul-
fur in the conversion process and then
piping the gas to individual homes for
heating and cooling.
i ne nevelopment of nuclear energy
poses a different type of environmental
risk, centering on the safety of nuclear
reactors and the safe custody of nuclear
ELECTRICITY ENERGY SOURCES
(In OuedriIIionao1 BTUs)
PETROLEUM
COAL
on
10 mucmm
conversion process (left). At the right
are electric sources. As petroleum
tails off, fission becomes main factor.
materials throughout the fuel cycle. Many
persons, including myself, are therefore
concerned about the projected growth of
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
 CPY'RGHT
Ar%r%rnvmr4 Gnr Dmlmncm l QQQ/AQ/A7 ? t^IA_Df1D7Q_Al l QA AAAAl AAr,7AAAl _2
nuclear energy during the remainder of
the century. My own feeling is that we
need to redouble our efforts to build a
greater safety factor into the design and
operation of our nuclear plants and to in-
sure greater protection from sabotage and
from theft of material suitable for fabri-
cation of nuclear weapons.
It is hoped that breakthroughs in solar
energy by the 21st century may preclude
the need for more fission reactions. In the
meantime, we must not set a course which
will require the construction of too many
new reactors too quickly. The Half and
Half Plan, for that reason, projects a total
of 35 quadrillion BTUs of nuclear energy
in 2000 as compared to 49.2 under the
1972 Department of Interior projection.
We must also focus more attention on
the safeguarding and ultimate disposal
of radioactive wastes (see SMITHSONIAN,
April 1974). Currently, the mass of waste
is still small, but even under the Half
and Half Plan we will have hundreds of
nuclear plants and therefore a great deal
more waste products to deal with. We
must therefore accelerate our efforts to
develop mare acceptable methods of han-
dling this material.
A greater reliance on coal and nuclear
energy means that we will be moving
more and more to electricity in the resi-
dential and industrial sector. Oil supplies
will have to be reserved to meet trans-
portation needs and for petrochemical
feedstocks. The use of greater amounts of
electricity in turn means greater losses of
TRANSPORTATION SECTOR
(M Ousdrflllons of tITU$
Half and Half Plan calls for limited
energy growth in transportation sector,
energy in the process of converting fuel
to power (see graphs opposite). In other
words, we will have to burn more and
more fuel to produce the energy that we
can actually use. It will also require more
transmission lines extending across our
countryside.
As a result of the shock of the Arab
boycott last winter, there is considerable
pressure these days to scuttle environ-
mental -constraints and go full-steam
ahead to produce energy. Much of this
pressure comes from those who fought
the environmental movement in the first
place and now see the present situation
as an opportunity to win the battle they
lost before. The Delaware Coastal Zone
is an example.
When I was governor, Delaware al-
ready had extensive industrial areas and
an existing refinery with room for expan-
sion. We therefore decided that a 115-
mile stretch of unspoiled marshes and
beaches should not be developed for fur-
ther energy facilities but should instead
be preserved for their natural and recrea-
tional value. Now the pressures are build-
ing to reverse that decision. It would be a
major mistake to give in. We need energy,
but we need to protect our land.
It would be a mistake to trade an
energy crisis for a health crisis.
The United States, then, must make a
decision about its energy goals to the end
of the century. We can attempt to con-
tinue the pattern'of energy growth of the
recent past, or we can make a serious com-
achieved primarily through the use of
smaller and more efficient automobiles.
mitment to energy conservation. Int
choosing between these t~o alternatives
we need to reflect upon he impact of
The poor in our society can make good
use of more energy. Meeti tg their needs
is important, and the growth included in
the Half and Half Plan ca permit them
to share more fully in th benefits con- j
(erred by our energy-based economy. But
for most Americans, I fin it difficult to
conceive how a large incr ase in energy
would improve the qualit of life appre-
ciably, even before consi ering the en-
My vision of a future guided by the
going some readjustments, but not fun-
damental ones. We would I ave to recycle
our waste rather than conti ue to exploit
virgin materials (recycling steel and pa-
` per, for example, requires 0 percent less
energy), but this is manife tly desirable.
We would have to become accustomed to
smaller cars, and to walking more and
driving less. We would be lightly cooler
in the winter and slightly warmer in the
summer, and we would to off lights as
throwaway articles. Most important, we
seriously as we now do ab ut money. To
my mind, few of these d anges should
provide any real discomfor
.Furthermore, a Commit ent to energy
conservation may produce some unfore-
7000 195. "1 70
Limited petroleum stocks w~11 have to
be reserved to power these ae tomobiles.
 Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
CPYRGHT
seen benefits. For example, as a continu-
ing energy consciousness influences the
planners and architects and citizens who
create our homes and towns and cities,
we are likely to find ourselves drawn more
closely together. Instead of living in free-
standing houses two miles from the store
and 25 miles from work, we would move
toward an intermixing of the various ele-
ments of our lives. The same will be true
for our neighbors as well.
The end of profligacy in energy con-
sumption may well force us to live with a
greater sense of community-and we may
just find that we like it.
I Incidentally, Saudi Arabia has implied that in its judgment the present high level of
posted prices would have a disruptive effect on the international payments accounts and
should, accordingly, be reduced somewhat. While it might be difficult to obtain the sup-
port of OPEC for a cutback of posted prices, Saudi Arabia could easily achieve a similar
result by reducing the price at which it sells its own oil to a level equal to the tax-paid
cost of the companies' equity crude plus a per-barrel profit comparable to what the pro-
ducing governments have said the companies are entitled to earn. Such a price would be
some $3.0o per barrel less than 93 percent of posted prices.
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
 Approved For Release 1999/09/02 : C,t 79-0 . 0 0 -
CPYRGHT
1L, !NAL),
CPYRGHT
" uv"LL 'a R
C' A
by Lawrence A. Mayer
In an era when Americans have been reeling from one
economic crisis to another, it seems almost Panglossian
to suggest that some large economic problems may ac-
tually be getting solved. The problems in question have to
do with our international economic position, which, only
a couple of years` ago, was a dependable source of bad
news. U.S. goods, it then seemed, were not competitive
in international trade. The dollar was chronically in
.trouble. And the broad scheme of international monetary
arrangements, laboriously fashioned at Bretton Woods
in 1944, seemed to be in need of a systematic overhaul.
.It is at least clear that a lot of the recent news, about
these matters has been good. The U.S. trade balance, $7
billion in the red in 1972, swung back into surplus in mid-
1973. The new international monetary arrangements,
based on floating exchange rates, are working reasonably
well. And the dollar is a more desirable currency.
;:Has the international position of the U.S. undergone a
fundamental change for the better? A flatly affirmative
answer to that question would seem to overstate the case;
in matters pertaining to trade and currency, even ques-
tions that seem'to'be "settled" have a way of popping up
again. For example, after the Arab oil embargo was im-
posed, it was taken for granted that the economies of
Europe and Japan would be set back. It was also widely
assumed that U.S. investment outlets would attract a lot
of the surplus revenues the Arab producers were generat-
ing. For both reasons, the dollar strengthened dramatical-
lyits "trade-weighted" value-i.e., the value in relation
to; the currencies of other major countries, weighted in
proportion to our trade with each of them-rose by 14.7
percent between early July, 1973, and late January, 1974.
;But by this spring the oil pinch in Europe and Japan
suddenly looked less serious, and the U.S. inflation seemed
more serious. Furthermore, the U.S. was not yet receiv-
There's some new muscle in
the U.S. international position,
but it will be sorely tested
while we and the world learn h w
to deal with the high cost of
energy, importance.
THE NEW QUESTIONS
ABOUT THE U.S. ECONOMY VI
ing much of that Arab money. Consequently the dollar
turned down again, losing about two-thirds of the post-
embargo gain by late April.
Obviously, then, there remain some questions about the
strength of the dollar-indeed, of our intern tional posi-
tion generally. And yet, when all the caves have been
entered, it still appears that the most interesting ques-
tions about our position have to do with the possibility
that it is becoming a lot stronger.
Some invisible advantages
Both the fact of our increased strength, and the nagging
presence of those oil-related problems, are evident in the
recent history of the U.S. trade balance. A surplus in
U.S. merchandise trade began to materializ last sum-
mer and for a while seemed to be very strong. But it is
now clear that the future of the trade balance depends
very largely on some "unknowable" matters--on the
amount of oil we must import and on the price we pay for
it. There are some educated guesses to the effect that our
bill for foreign oil this year will be in the $20-billion
range, versus $7.5 billion in 1973. If the increase is really
that sizable, then the substantial merchandise surplus en-
visaged earlier will become a deficit.
But when one takes the so-called "invisib e" interna-
tional transactions into account, the prospect ve U.S. po-
sition looks better. Net income earned on international
investments (the 1973 total: $9.7 billion) is strain bound
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01194A00010057000jFBYRGHT
to outstrip any net deficits incurred by Americans on
tourism, transportation, and military spending. In. con-
sequence, the total current account of the U.S.-the net
on merchandise trade combined with the net on invisibles
-may still be roughly in balance this year.
Given the strong underlying growth in demand for en-,
ergy in the U.S., and the difficulties involved in bringing
new sources on stream, oil imports might continue to in-
crease fairly rapidly for several more years, widening our
deficit on merchandise trade. But there is a chance that
the current account may begin to improve before too many
years if effective economies are made in the use of energy
and world oil prices are lowered. Moreover, export orders
for U.S. durable goods are strong. They have doubled just
in the past two years. One reason is that U.S. goods havq,
become relatively cheaper in foreign markets; as of sev-
eral weeks ago the trade-weighted value of the dollar was
about 19 percent below the level of May, 1970, when the
fixed-exchange-rate system began to break up.
Many of the durable goods on order are long-lead-time
items, which in general have been rising-i.e., they will
be strengthening U.S. export demand for years to come.
Typical of these are engines and turbines, electrical equip-
ment, railway equipment, aircraft and parts, and ships.
Plenty of short-lead-time items are also doing well, of
course, including steel, agricultural machinery, and con-
struction machinery. Exports of food are at record highs
and are likely to remain high unless harvests abroad are
tremendous.
There will be other opportunities for export gains.
Many other nations are hastening to develop their- own
sources of energy, e.g., in the North Sea, and these devel-
opments could open up markets for U.S.-made oil drilling
and production equipment, as well as for valves, com-
pressors, and other pipeline equipment. American indus-
try has a good chance of selling billions of dollars worth
of natural-gas liquefaction plants, tankers to transport
energy in cryogenic form, coal-gasification plants, ma-
:`chinery to manufacture hydrogen or oxygen, equipment
to make fuel from waste products, fuel cells, and nuclear
power equipment.
'.,,Can they afford our goods?
There is one way, however, in which the energy situa-
tion may have an inhibiting effect on U.S. exports. Europe
and Japan still have to get adjusted to paying a lot more
for the oil they import. They took 830 billion worth of
U.S. goods last year-42 percent of all our exports. Now,
with their mounting oil bills, the Europeans and Japanese
will presumably try to hold down on other purchases. In
addition, those of the less developed countries that are not
blessed with their own reservoirs of oil riches will be
'using more foreign exchange to buy oil (as well as food
a,nd fertilizers). In fact, it is hard to see how countries
like India and Bangladesh can fill their most critical im-
port needs without new infusions of foreign .aid.
President Nixon's "Project Independence," the policy
designed to make the U.S. self-sufficient in energy by
1980, may also threaten U.S. exports. Suppose that the
oil prices don't stay at their current high level-that they
are forced down by an avalanche of new supplies. But sup-
pose also that, by the time this happens, the U.S. is com-
mitted to exploit a range of expensive energy sources,
including shale, tar sands, and the less productive oil
fields. In the past, low-cost energy has helped the U.S.
compete in international markets. If we now get stuck
with a lot of high-cost energy, we might dissipate this
advantage and make U.S. exports more difficult to sell.
:: Still, there are more reasons for being hopeful about
our trade prospects than could have been cited a few years
ago. In addition, some businessmen and economists be-
lieve that the environment for trade has been made
healthier by one rather important development : the emer-
gence of the -new international monetary arrangements
based on floating exchange rates.
Saved by the float
Floating rates may foreshadow the solution to a prob-
lem that had affected our international position for years.
The postwar system of fixed exchange rates, whose ori-
gins go back to the Bretton Woods Conference, was in-
creasingly troublesome in the 1960's. For reasons of do-
mestic policy and international prestige, nations were
clinging insistently to their currencies' par values, in the
face of evidence that these were unrealistically high or
low. More and more speculative capital flowed to (or
from) currencies with strengthening (or weakening) bal-
ances of payments, forcing abrupt rate changes-which
were made more painful for having been too long delayed.
The fixed-rate system represented a special problem for
the U.S.; since the value of other currencies was stated in
terms of dollars, it was difficult for this country to change
the dollar's value without disrupting the system. Besides,
we just didn't want to devalue-even when the dollar be-
came steadily more overvalued during the 1960's.
Without floating rates, the world would probably have
gone through several severe currency crises in the past
year or so-notably in the first half of 1973, when the
German mark was soaring and the dollar was weak; and
again when the oil embargo was imposed last fall. During
the embargo, huge flows of capital would have gone out
of some European currencies and the Japanese yen. For-
eign-exchange markets would have had to close and there
would have been something like hysteria in the banking
and business communities before rates were repegged.
But in the event, the float made possible a gradual re-
balancing of exchange rates. It was harder for speculators
to ensure themselves against losses when they attacked
currencies.
It used to be argued that any. floating system would
be bad for international investment and trade. Business-
men would not be able to make deals involving future
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP7 01194A000100500WIC- -IT
T
NE
DOLLAR FOLLOWS TRADE, SOMETIME
1970
1971
1972
1973
'74
S. trade ba ante
'
r?
Daarnein valve
~
.
..
ofthedolar
av why
commitments if they could not count on stable currency
rates. This concern seems to have been misplaced. Busi-
nessmen are still generally able to hedge their bets in the
forward currency markets.
Some critics also argued that a float would inevitably
be "dirty." Central bankers would intervene in the cur-
rency markets, trying to push the value of their own cur-
rencies down or prevent them from rising, in an effort to
make their countries' exports, attractive ; thus the float
-would not really'be free after all, and capital would still
be moving around, fleeing from overvalued to under-
valued currencies. One might suppose that dirty floating
would seem especially attractive today, because so many
countries need to boost their exports, in order to get more
foreign exchange to pay those oil bills.
In fact, dirty floating has not been much of a problem.
The main reason is that, in an era of escalating inflation,
::cheaper currencies look a lot less attractive. More and
more countries have become conscious of the fact that de-
valuation makes imports more expensive and thus works
to, jack. up the inflation still further. In addition, by en-
couraging exports, devaluation reduces the supply of
goods az-ailable to domestic consumers-a process that
also jacks up inflation rates.
,Actually, some nations may try to increase the value of
their currencies so as to make imports cheaper and ex-
ports more;expensive. Countries that are steadily running
large export surpluses are likely to have compelling rea-
,sons for wanting their own currencies moved higher-
:,something:-that leading economic-research institutes in
Kiel and .Essen have recommended for Germany.
Meanwhile, currencies aren't actually floating with
A stronger trade posqion is I
but the relationship etween the two
in recent years has b en more
complicated. The devaluation in
December, 1971, did not at first see
to help our trade bal nce, and so the
dollar kept on driftin lower in early
begin turning into a s rplus-but it
took a while for this f ct lo become
clear, and meanwhile, the dollar
continued to sink. 11 r covered
during the Arab oil embargo last fall
the U.S. less than Europe or Japan.
But then the dollar's value fell
again this year, beta se of our
inflation problems.
The chart covers the period in
which the world was turning to
floating exchange rates. The Canad:,=
dollar began to float i, the spring of
1970, other major cur-encies in Aug--, t.
1971. (The "trade-we hted" dollar
o values were calculate:'
y Morgan
complete freedom. Some of them naturally f 11 into blocs
for example, those in the Western Hemisphere are tied t
the dollar, and seven currencies in Europe are linked i
the so-called "snake." But even apart from these blocs, th
float is not exactly free. In order to prevent excessiv
day-to-day fluctuations, central bankers outinely bu
and sell their currencies in the open market This proces
is generally referred to as "managed floatin
A sense of what's fitting
In principle, managed floating is quite different fro
dirty floating. In practice, there seems to be something o
an overlap. Central bankers do not ordinarily reveal in
formation about their operations until after the fact, no
do they indicate within what ranges they are trying t
maintain the values of their currencies; thus it is gen
erally difficult for an outsider to differentiate betwee
operations that are designed to smooth out fluctuation
and those intended to affect the fundame ital trend o
currency values. It is known, however, that central bank
ers in general have some notions about `appropriate
rates for their own currencies. Consequently, they'r
intervening when free-market processes produce result;
that seem to them to be "inappropriate." T be sure. th
interventions tend to be moderate. They seem to serve a
signals that the central bankers are concerned about th
trend of the market-but they are not serious efforts t
buck the market.
The U.S. appears to be among the countries that ir:er
vene in exchange markets on this basis. However. Fed
eral Reserve Chairman Arthur F. Burns recent . - hi -VU
a bit mysteriously, that the U.S. might go fu ?ther in =rr
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
 0 YR
Approved For Release 1999/09/02 : CIA-RDP79-01194A00010057 001-3GHT
circumstances. He observed, in testimony before Con-
gress, that "no responsible government is prepared to
allow the international value of its currency to be deter-
mined solely by the untrammeled play of market forces."
Burns then 'added a sentence that has since been much
quoted : "We in the United States certainly cannot accept
with equanimity exchange-rate movements that clearly
undervalue the dollar."
There is some disagreement about the meaning of those
wide swings in the. value of the dollar since it started to
float in February,' 1973. Professor Peter B. Kenen of
Princeton believes that the subsequent large decline, the
recovery beginning in late July,- and the recent retreat of
the dollar, are all perfectly normal. "It's not a calamity,"
Kenen insists. "It's the way markets behave. Why should
exchange markets be more stable than those in copper or
cocoa? I am not saying that money is a commodity, but
we have lived so long with narrow movements in exchange
rates that a 20 percent change seems enormous-and it
shouldn't."
On the other hand, Edward M. Bernstein, a veteran of
international currency negotiations who is now a Wash-
ington-based consultant, believes that "we shouldn't want
haphazard swings like those of last year." He believes
the swings can and -yill be moderated.
It is agreed, at least, that some rules need to be estab-
lished for the floating-rate game. Efforts to develop
guidelines for intervention by central banks were going
forward in the International Monetary Fund last month,
and some principles were expected to emerge soon.
Aside from the guidelines, the IMF has for about two
years been developing proposals to replace or reform-the.
collapsed Bretton Woods system. But even without any,
resounding new agreements on this weighty matter, a lot
has been accomplished. A system of sorts is in place,
which means that there is something to elaborate, im-
prove upon, or amend-that there is no need to start
from scratch. In effect, the world is backing into mone-
tar`y reform.
The case for a strong dollar
W .is not entirely clear whether we are also backing
into an era in which the dollar will be strong. The case for
thinking that it will be strong is rather complex and has
to do largely with the chain of events set off by the world
oil `cartel when it began pushing up prices last year.
"The sharp rise in oil prices is equivalent to a tax levied
by the oil countries on their customers. This tax promises,
in the words of Nathaniel Samuels, a partner of Kuhn,
Loeb& Co., "to transfer wealth from one set of' countries
to:;anaother on a scale and at a speed never experienced
before." However, the transfer is not the end of the
matter; ultimately, it seems likely, that wealth will re-
turn to the more industrialized nations, as payment for
their goods or in the form of investments.
If all the money were used to purchase goods, the non-
Communist industrial countries would be transferring at L
immense quantity of resources to the oil producers. Some
thing like 20 to 30 percent of the industrial countries'
exports would go to the oil-producing countries during
the next few years, versus 4 percent in 1972. In fact, th
purchases will surely be much smaller, because the Ara
oil countries in particular-including the one with th
most oil of all, Saudi Arabia-don't have the population
or technology to absorb that many goods.
Within a few years, therefore, the oil countries ma
add something like $135 billion to their financial assets
a sum roughly equal to the official international reserve-,
of the advanced countries early last month. Projection
for ten years ahead run from two to four times that su .
The only financial markets capable of absorbing invest-
ments on any such scale are, of course, in countries wit
well-developed economies. Since these advanced cou -
tries are in general the ones incurring the increased o I
bill, it is clear that, by and large, those "petrodollars '
will be coming home.
Nevertheless, there are many countries in the indu -
trial world that won't be getting nearly enough invest-
ment inflows to offset the higher oil bills. The U.S. h s
a tremendous advantage over Japan and most of Euro
in this respect: we are less dependent on imported o 1
than they are, and we have highly developed capital ma -
kets that seem likely to attract sizable sums from t
oil-producing countries. In the near term, it is true,
lot of this money will be flowing into the chief Europe i
money markets-including the Eurodollar market. Sti ,
there is a prima facie case for expecting the dollar to e
stronger in the long run than the Japanese yen or mo t
European currencies.
A need to spread it around
Indeed, it may become an important responsibility f
commercial and investment bankers in the U.S. and oth r
countries to relend abroad many of the oil-country fun s
they receive. There is a widespread feeling that, in th s
"recycling" effort, the existing private markets must e
supplemented by special arrangements. For exampi ,
former Secretary of the Treasury George P. Shultz h. s
suggested creating a kind of internationally sponsor d
mutual fund to take in Arab money and invest it he e
and abroad. H. Johannes Witteveen, the managing dire
tor of the International Monetary Fund, has been tryi g
to set up a special "oil facility" to recycle some oft e
money flowing to the countries with surpluses. And t e
Shah of Iran has expressed a willingness to lend mon y
at below-market rates to needy countries.
Thus the recycling process is likely to create a lot f
new money flows in the world. In some circumstance;,
the U.S. might actually be competing with Europeans f r
funds. With the ending of controls on lending and inve --
inn abroad, U.S. bankers have a new incentive to rai e
funds. If interest rates on certificates of deposit we e
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3
 Approved For Release 1999/09/02 : CIA-RDP79-01194A0001006t((RWt
competitive with Eurodollar rates, a lot of short-term
money could be attracted from the Eurodollar market-
some of which would then go right back again, as loans.
The end of capital controls also means that our invest-
ment bankers might recapture a lot of financing business
that has recently been done in Eurobonds. That is, U.S,
corporations can once again finance their foreign subsid-
iaries by issuing bonds in the U.S. and sending the pro-
ceeds abroad. Foreigners may also want to float debt
issues here because of the excellent U.S. secondary mar-
kets. Some foreigners are put off by the Securities and
Exchange Commission's registration requirements for
new bonds, which are a lot stiffer than European borrow-
ers are accustomed to. But Europeans can also resort to
private placements, which avoid the SEC disclosure rules.
Though recycling may divert a lot of the petrodollars f
abroad, the U.S. is still expected to end up with more of
the oil producers' investments than anyone else. Some
such expectation, in any case, represents a main hope for
a strong dollar in the years ahead.
They're making us save .
There is one other perspective from which the higher
oil prices might be viewed as good news for the U.S. The
Arab "oil tax" seems to involve a kind of forced saving
for the industrial world, i.e., it is obliged to consume less,
yet at the same time it is expecting to receive vast invest-
ment funds of a kind normally provided out of domestic
savings. As it happens, this forced saving is occurring
at a most opportune time-a period in which many busi-
nessmen and economists have been expressing concern
about a great world capital shortage. Whatever other ef-
fects the higher oil prices have, they are at least creating
tremendous supplies of capital.
On the other hand, the industrial world can take only
so much "good news" of this kind. It is not clear what
would happen if producers of other basic materials emu-
lated the oil producers and formed cartels. Senator
Abraham A. Ribicoff of Connecticut recently conjured
up an image of "an international squeeze play affecting
such materials as chromium, tin, manganese, platinum,
cobalt, nickel, bauxite, and asbestos." C. Fred Bergsten,
an economist at the Brooking Institution, has been raising
similar alarms. The recent demand by Jamaica, that
aluminum producers make far greater tax and royalty
payments on the island's bauxite, has intensified these
concerns.
Conventional wisdom holds that cartels are bound to be
more or less transitory. Even oil, admittedly a special
case in many ways, cannot have its price rigged indefi-
nitely, according to the traditional view: sooner or later,
one or another member of the cartel will start shaving
the price in order to increase the member's own revenues.
Cartels can also be undermined by various consumer stra-
tagems, including, for example, substituting steel for tin
and the development of synthetics (rubber).
uergs en believes that the conven zonal wisdo
no longer applies. He acids, ominously, `,'Examples o
seems light-years away. Shortages of su
placed shortages of demand as the domi
world economics for the first time in almo
and the power position of suppliers and c
thus changed dramatically." It is still unce
Bergsten or the traditionalists are correct
tive views on this matter.
A dilemma with a wallop
ply have re
ant force i
t fifty years
nsumers ha
their respec~
All things considered, the U.S. international positio
has surely been improving. When Preside t Nixon for
mally ended the convertibility of the dolla into gold o
August 15, 1971, and thus finished the hole Bretto
Woods system, no one knew quite what ould happen
There was widespread fear of competitive devaluation
and of a turn to autarchy among nations. F oating was
fearsome step advocated mainly by academics.
The dire forebodings, then, have so far proved to b
misplaced. On the other hand, the new international eco-
nomic environment presents a few proble s that were
not envisaged earlier. One has to do with exchange-rat
policy in an age of inflation.
We now know that lower exchange rates can have ~
terrific inflationary wallop. But higher exchange rates
can wallop an economy too : they reduce exports and,
therefore, foreign-exchange earnings- hich most
h
eir oil bills.
countries desperately need in order to pay t
It is not clear that the present floating 4rrangement~
could endure if many countries, searching for an elu
sive optimal rate, adopted dirty-floating p licies.
There is an especially tricky problem about the appro-
priate exchange rate for the U.S. Suppose that the rat
goes up sharply, reflecting a sizable inflow of Arab in-
vestments. A rising rate would profoundly affect the
structure of American industry, i.e., by shifting the bal-
ance between export- and import-oriented i dustries; but
the new structure might come undone some years later,
when those Arab investments petered out and the ex
change rate went down. Altogether, this would appear t
be a rather painful sequence for a lot of Americans.
But suppose, alternatively, that those Arab invest
ments turn out to be rather meager, and the exchange
rate falls. This too could affect the structure of industry
and, of course, leave us facing heavier doses of inflation
As all these stunning new problems come into focus, i
is increasingly clear that the international economic en
vironment was transformed by the oil-price explosion. I
is noteworthy, and encouraging, that the explosion too
place without tearing apart the world's great web ' o
trade. There have been some displays of rat er aggressiv
self-concern, but, in general, the leaders of he industrial
world have worked together remarkably well. We can only
hope they continue to do so. EN:
Approved For Release 1999/09/02 : CIA-RDP79-01194A000100570001-3