INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000100070003-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 27
• Document Creation Date: December 22, 2016
• Document Release Date: January 25, 2011
• Sequence Number: 3
• Publication Date: February 18, 1983
• Content Type: REPORT

Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
?wt 4'-.'. ^nreruora Iv nI I,cc r
International
Economic & Energy
Weekly
DI IEEW 83-007
18 February 1983
Copy 0853
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
1 Perspective-Economic Recovery and World Trade
iii Synopsis
3 Briefs Energy
International Trade, Technology, and Finance
National Developments
directed to F
]Directorate of Intelligence,
Comments and queries regarding this publication are welcome. They may be
_____
Secret
18 February 1983
International
Economic & Energy
Weekly
18 February 1983
15 International Finance: The IMF Quota Issue
19 Coal Synfuels: Diminished Expectations
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
25X1
25X1
25X1
25X1
25X1
25X1
9 X1
25X1
^
25X1
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
International
Economic & Energy
Weekly
Synopsis
Perspective-Economic Recovery and World Trade
World trade has stagnated for a second consecutive year, and prospects for a
strong upturn appear bleak. If, as we except, recovery in the industrial West is
weak, calls for more protectionism probably will increase
Ottawa is responding to heavy pressure to protect domestic industry by
imposing a broad variety of nontarriff barriers. Declining domestic demand,
coupled with rising import penetration in the automobile, textile, and footwear
industries, have caused major cutbacks in Canadian production and have led to
restraints on imports of these goods. Canada's protectionist policies are
unlikely to change greatly with either of the two major parties in office.
International Finance: The IMF Quota Issue) 25X1
Pressures to borrow from the IMF are now more severe because of the
wrenching structural adjustments to global recession that nearly every country
is experiencing. Under the eighth quota review, the IMF last week agreed to
boost members' subscriptions from about $65 billion to approximately $100
billion on the assumption that increased resources will be necessary to meet
members' needs for balance-of-payments assistance through most of the 1980s.
Coal Synfuels: Diminished Expectations 25X1
Declining oil prices, escalating capital costs, and reduced government funding
have combined to cause massive cancellations and delays in coal-synfuel
projects around the world. As a result, coal synfuels are unlikely to make much
of a contribution towards reducing the Free World's dependence on Middle
East oil or Western Europe's and Japan's rising reliance on imported natural
gas over the next two decades.
iii Secret
DI IEEW 83-007
18 February 1983
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
JV%;I Vt
International
Economic & Energy
Weekly (U)
18 February 1983
Perspective Economic Recovery and World Trade
World trade has stagnated for a second consecutive year, and prospects for a
strong upturn appear bleak. The prolonged economic recession in the West has
been the driving factor but other trade contracting forces have been set in
motion. Protectionist pressures are mounting worldwide, financially strapped
LDCs are cutting back imports, and the oil producers are constraining the
growth of their economies as their current account surpluses disappear.
Although we do not foresee a collapse of trade similar to that of the early
1930s, we believe that a return to the heady days of the 1950s to mid-1970s is
unlikely in the next few years.
Throughout the postwar period growth and trade were interlinked-continued
economic growth stimulated a further expansion in trade, which contributed to
more rapid economic growth. In 1948-73 world production rose at an annual
rate of 5 percent while trade grew at a 7-percent rate. Under the auspices of
the GATT, trade barriers-especially tariffs, the most obvious form of
protectionism-were lowered and made less discriminatory.
However, both economic growth and world trade faltered in the mid-1970s and
have slowed drastically since 1980. During 1980-82, OECD real output has
risen only 2 percent; LDC real output has increased at a 1-percent annual rate
compared with a 5-percent pace in the last half of the 1970s. Reflecting the
slowdown in growth, world exports, as reported by the OECD, declined slightly
in 1981 and fell by an estimated 3 percent last year.
The near-term outlook for growth and trade is not promising. Most observers
believe OECD growth will average just over 2 percent through midyear 1984
with accompanying increases in unemployment and mounting protectionist
pressures. Governments increasingly view imports as a threat to domestic jobs
and are resorting to quotas, voluntary restraint agreements, and local content
rules to stem the flow of foreign goods. The failure of last fall's GATT
Ministerial to make a strong commitment to stop the slide into protectionism is
symptomatic of the changed circumstances.
1 Secret
DI IEEW 83-007
18 February 1983
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
Secret
18 February 1983
Slow OECD growth will also translate into little or no increase in LDC export
earnings, forcing further slashes in LDC imports. The slump in export sales
could precipitate moves on the part of the developing world to try to conserve
badly needed foreign exchange reserves: In addition, LDCs may increasingly
seek barter trade arrangements and focus on expanding intraregional trade. A
substantial increase in bilateralism and regionalism could seriously threaten
multisided free trade.
In our judgment, the key to a pickup in world trade is a strong economic recov-
ery in the industrial West. Protectionist pressures would ease and intra-OECD
trade would expand. At the same time, the OECD recovery would boost LDC
export earnings and would signal to the banking community that LDCs are
better positioned to handle their debt. Once activity picks up and non-OECD
countries have reduced their external deficits to sustainable levels, OECD
export opportunities would expand and further stimulate growth in world
trade.
If, as we expect, recovery in the industrial West is weak, calls for more
protectionism probably will increase. The structural changes in the industrial
countries, particularly the decline in heavy industry, will foment protectionist
sentiment which, in turn, could further impede the recovery of world trade. At
the same time, the financial problems facing the LDCs probably will persist,
prompting LDC governments to continue restraining the inflow of foreign-
made goods.
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
Energy
Demands for An announcement by the British National Oil Company that it will propose a
Oil Price Cut crude oil pricing arrangement on Friday could lead to a price cut that would
touch off a reduction worldwide. Libya is already calling for a special OPEC
meeting to consider an oil price reduction as buyers demand an adjustment. 25X1
Shell Oil Company has stopped buying at official prices, and a number of
Japanese companies have refused shipments from the Persian Gulf. Libyan
and Nigerian exports are reported down about 500,000 barrels a day in recent
expect BNOC to announce a $2 to $3 per barrel 2525X1
reduction in official North Sea prices. Indications of a cut by the British along
with recent threats by Saudi Arabia and its Arab neighbors to lower prices
have encouraged buyer resistance, increasing willingness in OPEC to accept a
price reduction on Saudi terms. Arab producers in the Persian Gulf are
seeking a new pricing formula based on a benchmark price of about $30 per
barrel, $4 below the current price. Libya's willingness to adjust prices is a
major breakthrough. Mexico wants to delay its decision until after other
producers make the first cut, but it would be quick to follow to protect its share
of the market.
Venezuelan Oil Recently announced spending cuts in the petroleum sector will have little
Spending Trimmed immediate impact on the country's oil industry but could affect plans to raise
crude oil productive capacity to 2.6 million b/d by mid-decade. The US
Embassy reports that investment by the national oil company, PDVSA, is
forecast to be about $3.4 billion this year-a cut of about $1.3 billion-and
spending over the next five years is projected at $21 billion, a 40-percent drop
from earlier plans.
Development in the Orinoco heavy oil region will continue, however, and
should provide enough new production in coming years to offset declines in
many of Venezuela's older oilfields. Expansion of total productive capacity by
200,000 b/d in mid-decade, as planned by Caracas, however, is now unlikely.
The spending cuts will more immediately affect US firms, which provide
Venezuela with about 60 to 75 percent its oil sector's annual imports. A
contract held by Lummas engineering, an American firm, for.the $4 billion
Cerro Negro heavy oil project has effectively been canceled. Foreign purchases
of drilling pipe this year are reported to have been cut in half and the contracts
that have been awarded have gone to Japanese suppliers submitting exception-
ally low bids
Secret
DI IEEW 83-007
18 February 1983
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Canadian Nuclear A recent Canadian Government study indicates that direct government
Power and Electricity intervention may be necessary to assure the viability of the Canadian nuclear
Exports industry. To avoid direct government subsidies, the Canadians are planning to
push for increased electricity exports from nuclear power plants to the United
States. Early this month, the Point Lepreau Nuclear Power Plant-the first
plant with a portion of capacity specifically designated for export-began
exporting electricity to the United States. A second nuclear plant-wholly
committed to electricity exports-has been proposed for Point Lepreau, and
additional proposals for nuclear power plants devoted to the export of
electricity are expected. In 1981 Canada exported nearly 34 billion kwh of
electricity to the United States-representing the energy equivalent of 170,000
b/d of oil. Nearly 90 percent of this electricity went to the industrial
Northeast and the far West, two areas of the United States where numerous
nuclear power plant construction projects have been canceled.
Weak Response to India's latest offer of petroleum exploration and production sharing rights has
Indian Oil Exploration apparently generated almost no interest from foreign companies, partly
Offer because of the world oil glut. While foreign suppliers are offering drilling rigs
and platforms at cheaper prices and more favorable credit terms than in the
past, Indian petroleum companies cannot afford to expand their own efforts to
investigate the less promising areas that were offered to foreign companies.
New Delhi will benefit from the slight reduction in development costs, but
long-term hopes of reducing a crippling oil import bill by increasing domestic
supplies have been dimmed.
International Trade, Technology, and Finance
Chinese-Canadian According to the US Embassy in Beijing, Chinese and Canadian trade officials
Textile Talks earlier this month failed to agree on a new level for Chinese textile exports to
Canada. Canada is threatening to abrogate its textile agreement with China
and impose unilateral controls if lower import levels cannot be negotiated.
Beijing threatened to reduce purchases of Canadian grain if Ottawa took
unilateral measures. The Chinese made similar threats last month against US
grain firms because of US textile quotas.
The threats to boycott US and Canadian grain appear to be negotiating
tactics. Although the Chinese are increasing purchases of Argentine and
French grain, the United States and Canada normally supply nearly 80
percent of China's imported grain, and China is unlikely to drastically cut
purchases from both sources.
Secret 4
18 February 1983
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
NTT Support for Nippon Telegraph and Telephone Corporation (NTT) plans to invest over $1
Japanese Computer billion for computer development during the 1980s, according to press reports.
Firms Fujitsu, NEC, and Hitachi reportedly have been selected to develop the
computers. NTT's planned investment apparently will exceed direct MITI aid
to the Japanese computer industry and may allow the firms to shield
development of key technologies from competitors such as IBM Japan that are
seeking to become involved in MITI programs.
Ostensibly, NTT plans to develop two major series of mainframe general
purpose computers to be introduced in 1987 and 1990 for use by NTT.
According to press reports, the later series will incorporate revolutionary
changes in computer technology using ultra-high-speed components and a
radically new and powerful design. We believe the NTT program will have sig-
nificant commercial implications for Japan's computer industry. We expect
Fujitsu, NEC, and Hitachi to develop and produce their own commercial
versions of NTT's planned new computer systems, although NTT will bear
most of the development costs.
other important trading partners
Increased LDC Libya's General National Maritime Company reportedly has agreed to a joint
Protectionism in service with three British shipping lines. A centralized booking agency
Shipping Trades controlled by the Libyan company will allocate cargo among the lines,
reserving 50 percent for Libyan ships and eliminating opportunities for ships of
third nations. Libya apparently intends to extend this program to its trade with
The Libyan action follows similar moves by Brazil and Argentina, which first
concluded protectionist liner agreements several years ago. Venezuela, the
Philippines, and other LDCs are preparing protectionist measures of their own.
Most LDCs are seeking to legitimize bilateral cargo sharing in the liner trades,
drastically reduce or eliminate the use of flags of convenience, and impose
mandatory cargo sharing for bulk cargoes from developing countries.
The Libyan-British arrangement and similar moves by other countries almo25X1
certainly will result in higher freight rates for shippers and seriously reduce
cargoes for third nation ships. Western shipowners' acceptance of such terms,
moreover, will make it more difficult for their governments to argue against
National Developments
Developed Countries
Tokyo Proposes MITI is seeking to broaden a law, due to expire in June, that authorizes the
New Depressed formation of cartels to ensure orderly reductions of capacity in industries faced
Industries Law with long-term declines in demand. The new legislation would also provide
financial and tax incentives to help restore international competitiveness. If the
5 Secret
18 February 1983
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Cabinet and the Diet agree, firms in the seven designated industries-electric
furnace steel, aluminum refining, chemical fibers, petrochemicals, chemical
fertilizers, cardboard, and ferroalloys-would be eligible for:
? Subsidies to fund research and development.
? Special first-year depreciation allowances on new capital investments.
? A 10-year, rather than the current five-year, carryover of capital losses
incurred in the disposal of excess production capacity.
? Japan Development Bank loans to finance capital investments involving new
technology and to pay retirement bonuses to employees who retire early as
part of a capacity reduction plan.
In an attempt to obtain Japan Fair Trade Commission (JFTC) approval of the
draft legislation, MITI has dropped several controversial provisions that had
also raised concern in Washington. The new law would be valid for five rather
than the 10 years originally proposed. In addition, mergers, sharing.of
production facilities, and joint sales networks would remain subject to JFTC
review, and MITI would have to consult with the JFTC on the antitrust
implications of "structural improvement plans" before approving them. De-
spite these concessions, the Japanese press reports there are still differences
between MITI and the JFTC on the law. The JFTC is said to oppose a
provision that it make public its criteria for approving or rejecting mergers.
JFTC officials believe they would then have difficulty rejecting any merger, no
matter how anticompetitive, so long as it did not violate the letter of the JFTC
criteria.
Less Developed Countries
North Yemeni Request North Yemen's President Salih last week urged Saudi King Fahd to provide
for Assistance help for the country's faltering economy. Sanaa's foreign exchange holdings
have dronned from $1.6 billion in March 1980 to less than $600 million,
reportedly held back funding for various government departments, but the
military and the security services were not included.
The Saudis, because of reduced oil revenues probably will not give North
Yemen much additional aid and may even try to wring political concessions
from Sanaa for maintaining official aid at the level of about $300 million it
has averaged in recent years. Riyadh has repeatedly urged Salih to cut back
Soviet military aid programs for North Yemen. If increased Saudi aid is not
forthcoming, Salih will have to institute new austerity measures that could
provoke unrest.
Secret
18 February 1983
25X1
25X1
2
5X1
1
25X1
25X1
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
Economic Cabinet President Pinochet's cabinet shuffle this week has raised doubts about the
Changes in Chile government's ability to revive the economy and to resume external debt
payments. According to the US Embassy, the new financial team of Finance
Minister Caceress and Economy Minister Martin lacks the stature to resolve
Chile's financial problems. In announcing the shakeup, Pinochet attacked
domestic critics'and said there would be no major changes in economic
The changes will do little to restore confidence, and 'foreign bankers probably
will be more cautious in supporting Santiago's requests to restore credits and
renegotiate maturing debt. Caceress and Martin will have to resolve the issue
of government guarantees for private-sector foreign borrowings to get the
:1
25X1
policies.
Thai Petrochemical
Project
additional gasfields by 1987 to supply the complex.
Bangkok is moving ahead with an ambitious $870 million petrochemicals
complex scheduled for completion by 1990. The project is a key element in
Thailand's proposed Eastern Seaboard Development Plan, which is designed to
turn a segment of the coast along the Gulf of Thailand into an industrial
alternative to overbuilt Bangkok. Despite the present depressed world petro-
chemicals market, Thai officials argue that the complex is feasible because it
will use relatively inexpensive domestic natural gas and because it will sell its
output domestically. Bangkok has promised investors protection against
competing imports if world prices fall. The supply of natural gas to the project
may be a problem, however. Production from Erawan, Thailand's only
operating field, is running at about half the projected 7 million cubic meters
per day, and Bangkok is counting on the trouble-free development of
7 Secret
18 February 1983
25X1
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Soviet Retail Price The US Embassy in Moscow confirms retail prices of a variety of consumer
Increases goods and services have been raised substantially. Although the range and
extent of the price increases are not yet known, prices of basic food products
reportedly were not changed. The price increases will pass on to the consumer
some of the higher costs resulting from 1982 wholesale price increases as well
as absorb some of the excess purchasing power of consumers. General
Secretary Andropov in late January strongly hinted price hikes were imminent
when he told factory workers in Moscow that "incongruities" in certain
existing prices must be eliminated. Unlike the past, there has been no public
announcement of these price hikes.
Recommendations to raise consumer prices were being publicly voiced even
before Brezhnev's death. In fact, recently released Soviet statistics for 1982
imply an inflation rate last year in the USSR of about 3 percent in retail trade.
Although Western measures of Soviet price changes have always indicated a
moderate rate of inflation in the USSR, official Soviet statistics have
consistently recorded almost no inflation.
Secret 8
18 February 1983
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
Canada:
Protectionist Trends '
Ottawa is responding to heavy pressure to protect
domestic industry by imposing a broad variety of
nontariff barriers. Declining domestic demand,
coupled with rising import penetration in the auto-
mobile, textile, and footwear industries, have
caused major cutbacks in Canadian production and
have led to restraints on imports of these goods.
Canada's protectionist policies are unlikely to de-
crease no matter which of the two major parties is
Government Attitude Toward Protectionism
Canadian business and government leaders have
long recognized the need for exports because the
domestic market of 24 million people is too small to
support large-scale production in many industries.
At the same time, successive Canadian govern-
ments-while paying lipservice to an open interna-
tional trading system-have maintained high im-
port tariff walls. In response, foreign-largely
US-firms moved inside the walls by investing in
Canadian corporations or establishing subsidiaries.
Now, foreign firms (74 percent of them US) control
46 percent of Canada's manufacturing sector. The
highest degree of foreign ownership is in the electri-
cal products, transportation, and chemical indus-
tries, more than three-fourths of which are foreign
To bolster Canadian-owned business, Ottawa has
developed a range of instruments to protect Cana-
dian firms. The most extreme example, the Nation-
al Energy Program, is explicitly aimed at boosting
Canadian ownership in the petroleum sector to at
least 50 percent. Introduced in 1980 the NEP
replaced depletion allowances for oil and gas com-
panies with discriminatory exploration grants.
Grant levels are determined by the degree of
domestic ownership and control of the exploring
company or consortium. Moreover, petroleum com-
panies involved in large energy projects are strongly
encouraged to use Canadian sources of supplies and
Over the years nontariff barriers have played an 25X1
increasingly important role in Canadian protection-
ism. In line with MTN agreements, Ottawa has cut
tariffs significantly and further cuts will continue
until 1987. 25X1
Canadian agriculture has been a major beneficiary
of nontariff protection. Imports of several agricul-
tural commodities, such as fruits and sugar, are
subject to quotas. In addition, Canadian farmers
benefit from healthy subsidies which boost produc-
tion and thus discourage imports. Artificially low
grain shipping charges have held down the cost of
western grain shipped to the eastern provinces. This
effectively insulates the market from foreign com-
petition and improves export competitiveness
Nontariff barriers also play a key role in the
manufacturing industry. Traditional measures such
as quotas and subsidies are used mainly to protect
declining labor intensive industries from low-cost
Third World competition. Less visible devices, such
as taxes and crown corporations, typically give
growth industries-particularly those employing
high technology-an advantage in the domstic
2 Crown corporations are federally or provincially owned corpora-
tions. They often invest in growth industries to ensure Canadian
participation. For example, the Canadian Development Corporation
Secret
DI IEEW 83-007
18 February 1983
25X1
1
25X1
25X1
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Tariffs. Traditionally high; designed to protect
small domestic manufacturers from foreign compe-
tition. Tariff protection remains significant for the
textile, clothing, footwear, shipbuilding, and rail-
car industries.
Quotas. A 1971 law allows Ottawa to impose
mandatory restrictions on imports of any manufac-
tures that cause or threaten to cause serious injury
to Canadian producers. Canadian quotas are
largely directed toward textile and footwear prod-
ucts supplied by Third World manufacturers=
Taxes. A 1975 law terminated the tax deductions
for expenditures by Canadians on advertising in
Canada through the US media. The tax system
also encourages Canadians to keep their savings in
Canada.
Government Procurement. Ottawa and all the prov-
inces have guidelines on government and crown
corporation procurement. A price preference of 10
to 15 percent if often granted the domestic producer.
Tenders often are not made public and only compa-
nies on government lists are allowed to bid. When
enough Canadian companies are listed, foreign firms
may be barred from bidding.
Subsidies. Both the Ministry of Industry, Trade,
and Commerce and the Department of Regional
Economic Expansion offer subsidies to private
corporations to encourage domestic production.
Common methods employed are loan guarantees
and grants. Ottawa has financed a five-year $200
million aid program to restructure the textile'and
clothing industries.
Crown Corporations. Petro-Canada, the Canada De-
velopment Corporation, Air Canada, and Canadian
Rail have invested in key industries thereby increas-
ing Canadian ownership. These corporations often are
used to promote development of high-growth indus-
tries, for example, petroleum, medical supplies, elec-
tric products, and chemicals.
Canadian providers of services also benefit from
several protectionist measures. The tax system pe-
nalizes firms that patronize publications and broad-
casters deemed to have insufficient Canadian own-
ership. For example, the cost of advertising in
newspapers and magazines that have less than 75
percent Canadian ownership cannot be deducted
from taxable income. In addition, Ottawa limits
foreign participation in the banking industry to 8
percent of the domestic market and mandates that
data processing by banks be performed within the
country.
Ottawa also has several programs to promote ex-
ports-on which nearly one-fourth of the jobs in
Canada depends. The Trudeau government has
been particularly concerned with stimulating ex-
ports of manufactured goods to move away from
Secret
18 February 1983
Canada's traditional reliance on sales of natural
resources. The Export Development Corporation
(EDC), established in 1968, provides export financ-
ing to foreign buyers of Canadian capital goods,
equipment and services. In 1981, the EDC provided
$1.4 billion in export financing and an additional
$2.2 billion in insurance and related guarantees.
Last summer, legislation was proposed in Parlia-
ment that would double the EDC's authorized $810
million capital to boost its lending power.
In the agricultural area the Canadian Wheat Board
guarantees export credits at or below commercial
rates to purchasers of Canadian grain. Subsidized
credit sales by the CWB to the USSR, Poland, and
East Germany boosted Canadian grain exports in
25X1
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
1981 and 1982. A bill to set up a government
marketing corporation, Canagrex, to promote ex-
ports of nongrain agricultural products is now
before Parliament.
Recent economic problems have encouraged the
rise of import protection and export promotion
policies. Since mid-1981 the Canadian economy
has contracted more sharply than in any other
postwar period; real GNP plunged 5 percent last
year. Since June 1981 the unemployment rate has
risen from 7.4 percent to 12.8 percent. Despite a
record trade surplus in 1982, the sharp rise in
unemployment and severe import penetration in
key industries have intensified calls for protection.
Ottawa has taken direct action to curb imports in
the automotive, textile and footwear areas. Despite
a Voluntary Export Restraint (VER) agreement
limiting Japanese sales of automobiles, Japan's
share of Canada's automobile market rose from 15
percent in 1980 to 23 percent in 1981, prompting
Ottawa to request negotiations for a second VER in
1982. When Tokyo balked at Ottawa's proposal to
limit shipments to 146,000 vehicles, Canadian cus-
toms authorities began to examine individually all
Japanese vehicles entering Vancouver, significantly
slowing imports. Japan then agreed to further
restraints. Nevertheless, because of slumping Ca-
nadian auto production, Japan's share of the auto-
mobile market increased even further in 1982. This
has pressured Ottawa to tighten restraints; negotia-
tions on a third VER are in progress.
In August 1982, Ottawa reinstated a global quota
on leather footwear similar to an existing quota on
canvas footwear. In 1978-81 the original quota had
contributed to cutting the import share of the
leather footwear market from 64 to 52 percent.
When the restrictions were suspended in late 1981,
leather footwear imports surged 19 percent over the
next nine months, dropping domestic production by
and have initiated requests for compensation.
15 percent and causing layoffs in many Canadian
shoe factories. Although the quota is aimed at low-
cost Third World imports, both the United States
and the European Community have been affected
exports.
The situation in the textile industry is similar to
that in footwear. Last July, the Canadian textile
and apparel industries made a joint submission to
Ottawa asking for rollbacks to 1980 levels in textile
imports from Hong Kong, South Korea, Taiwan,
and China. The request stemmed from the loss of
over 27,000 jobs-15 percent of the industries'
combined labor force-since May 1981. Negotia-
tions have been inconclusive, and imports of cloth-
ing continue to increase. Ottawa is now considering
unilateral action to limit textile imports, despite
Chinese threats of retaliation against Canadian
The economic outlook remains bleak with only a
weak recovery expected over the next two years.
Unemployment will remain over 12 percent in 1983
and improve little in 1984. Canadian resource-
based exports should pick up as the United States
emerges from the recession, but the manufacturing
industries-especially machinery, electrical prod-
ucts, and fabricated metals-will be slow to recov-
Strong and militant labor unions in the automotive
and steel industries will continue to press for
additional protection. Canadian-US automotive
trade presently enjoys duty-free status under the
1965 Auto Pact, but Ottawa is concerned by its
growing deficit with the United States in automo-
tive parts trade and has put out feelers on renegoti-
ating the pact. A government-industry study on the
status of the Canadian automotive industry will be
issued later this year and is likely to suggest that
some new protectionist measures are necessary,
particularly against Japan.
Secret
18 February 1983
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
Current US-Canadian Trade Disputes
Canada's Foreign Investment Review Act (FIRA).
Enacted in 1974, FIRA has required some companies
investing in Canada to increase their exports from
Canada or to favor Canadian suppliers. The United
States is challenging FIRA under the GATT, claim-
ing a violation of international agreements on nation-
al treatment. The case will establish a precedent in
the treatment of national investment policies. F_
non primary goods in Article 9 of the GATT. In
addition, the 9.8 percent interest rate was below the
OECD consensus rate (11.25 percent at the time) and
the repayment period exceeded the maximum OECD
terms of 8.5 years. Though the Department of Com-
merce found in favor of the US complaint, the
company has withdrawn its petition and the case has
been dropped.
Bombardier Export Credits. In July 1982 the EDC
offered $560 million in financing to the Manhattan
Transit Authority for the purchase of subway cars
from Bombardier Inc. of Canada. The financing
would cover 85 percent of the contract price, repay-
able in 10.5 years at an effective interest rate of 9.8
percent. A US competitor complained that the offer
violated the prohibition on export subsidies on
Regional disparities, aggravated by the current
downturn, play a key role in fomenting Canadian
protectionism. Although the west's petroleum-
based economy has slowed, the traditional manu-
facturing sector in Quebec and the fishing and
lumber industries of the Atlantic provinces have
been battered. Spokesmen for Quebec-a strong-
hold of Trudeau's Liberal Party-have a large
impact on his decisions and are pressing for policies
to boost economic growth in the east. The push for
regional balance will continue as recovery develops
faster in the more resource-oriented industries of
Softwood Lumber. The International Trade Commis-
sion has issued a preliminary finding that Canadian
subsidies to its timber industry are hurting American
lumber producers. US producers have argued that the
low fees charged to private Canadian companies to
cut timber on public lands constitute a subsidy on the
nearly $2 billion in lumber exports to the United
States.
two years. The Liberals are unlikely to alter their
protectionist policies even if Trudeau retires.
Protectionism could get a boost, however, if a
minority Liberal government takes office, depen-
dent on support from the New Democrats. The
New Democrats are highly nationalistic and pro-
tectionist, particularly toward unionized heavy in-
dustries. Their influence would, at the least, make a
minority Liberal government even more sensitive to
the fortunes of such industries as automobiles and
steel.
western Canada.
Party Attitudes. Canada's protectionist policies are
unlikely to change greatly after the election to be
held by early 1985, although differences do exist
between the parties. The Progressive Conservatives
under Joe Clark or a new leader are not politically
dependent on Quebec but probably cannot afford to
ignore further protection of declining, labor-inten-
sive industries. They have supported the Trudeau's
government's moves to limit imports over the past
Implications for the United States
Canadian protectionism has its heaviest impact on
the United States because it is Canada's largest
trading partner by far. Many of Canada's protec-
tionist measures affect US goods even when they
are aimed primarily at low-cost Third World im-
ports. Of particularly serious consequence to the
United States are nontariff barriers applied to high
technology goods and other manufactures. Nation-
alist investment policies, tax incentives, and subsi-
Secret
18 February 1983
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
To the United States (billion US $)
38.0
41.2
46.2
As a percent of total exports
68
63
66
As a percent of total US imports
18
17
18
From the United States (billion US $)
38.8
41.5
45.3
As a percent of total imports
72
71
69
As a percent of total US exports
21
19
18
dies to manufacturing industries make US goods
less competitive in the Canadian market. Canadian
electrical products and machinery, for example, are
heavily subsidized. Moreover, the items most often
benefiting from export promotion-capital goods
and wheat-compete directly with US products.
ment.
Government procurement policies are becoming a
more prevalent protectionist tool. Many of the
goods purchased by Ottawa, the provincial govern-
ments, and the crown corporations come from the
United States. An early 1982 report estimated that
government procurement agencies would spend
over $1.5 billion on imports in 1982. All of these
entities have now implemented "buy Canadian"
policies that could significantly reduce US sales.
Regulations mandating increased use of locally
provided materials in large public and private
energy projects, for example, will have a substan-
tial impact on US suppliers of oil and gas equip-
Secret
18 February 1983
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
International Finance:
The IMF Quota Issue
If, as now envisaged, demands on IMF resources
from troubled borrowers continue to mount, the
IMF could run out of funds this year. As of
yearend 1982, the Fund had some $30 billion for
new lending, but it has committed or is about to
commit almost $25 billion through programs with
Mexico, Brazil, Argentina, and other countries,
leaving a scant $5 billion to handle new requests.
The IMF may choose not to maintain such ambi-
tious programs by borrowing new funds. In any
event it would quickly run into statutory limits on
its own borrowing, which cannot exceed 60 percent
of the level of quotas.
Quotas, or members' subscriptions, account for
about two-thirds of the IMF's resources; the re-
mainder is borrowed. Quotas, which also represent
the members' voting strength in the organization,
are reviewed at least once every five years and
revised if necessary. Under the eighth quota review,
the IMF last week agreed to boost members'
subscriptions from about $65 billion to approxi-
mately $100 billion on the assumption that in-
creased resources will be necessary to meet mem-
bers' needs for balance-of-payments assistance
through most of the 1980s. If approved by member
governments, these additional resources probably
would become available to the IMF beginning in
late 1983 or in 1984. The US quota is about 20
percent of the total.
The IMF plays a vital role in assisting countries
suffering from temporary balance-of-payments
problems. After the first oil shock, it was able to
meet the needs of as many as 60 countries because
the average needs of each country were relatively
small, as drawings over $1 billion were made only
by Italy in 1974 and 1975 and by the United
Kingdom in 1976 and 1977. In addition, special
facilities financed outside the quota system met a
large share of the borrowing needs.
Pressures to borrow from the IMF are now more
severe because of the wrenching structural adjust-
ments to global recession that nearly every country
is experiencing. In 1982, 64 countries drew a record
$9.7 billion from the Fund, with the pace of
borrowing accelerating sharply in the fourth quar-
ter. Drawings in 1983 will be even greater as the
Fund makes disbursements to borrowers-notably
Brazil, Mexico, and Argentina, who were negotiat-
ing IMF programs at yearend.
Moreover, we do not expect demands on the IMF
to abate for several years. Widely publicized,
multi-billion dollar emergency credits for such
countries as Mexico, Brazil, and Argentina are only
short-term measures to meet immediate cash crises
and prevent default. It is the accompanying pro-
grams of financial conservatism that address the
underlying problems. However, it will take perhaps
three to four years of sustained effort for major
borrowers to restore their creditworthiness, regain
normal access to financial markets, and resume
robust economic growth.
The Impact of Global Recession
The persistent and worsening financial situation of
the LDCs is closely tied to the global recession that
is now well into its third year. In particular, LDC
exporters have been hit by a collapse of commodity
prices without any rise in industrial country de-
mand. Eight of the 12 Third World countries with
Secret
DI IEEW 83-007
18 February 1983
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Year Number of Total Average
Countries
1970
1,510
37
1977
36
4,010
111
1971
1,900
56
1978
33
4,680
142
1972
1,760
65
1979
42
2,380
57
1973
870
35
1980
49
4,880
100
1974
4,860
97
1981
59
8,270
140
1975
5,640
104
1982
64
9,660
151
1976
8,060
134
the most serious debt problems suffered major
declines in export earnings last year, while the
others experienced sharp drops in the growth of
export earnings. In addition, the rise in interest
rates that took place over 1980 and 1981 added
some $10 billion in debt service costs to LDCs
during that period. The burden of interest pay-
ments rose to over one-fourth of the total foreign
earnings for such countries as Mexico, Brazil,
Chile, and Argentina.
Any acceleration in the OECD's economic recovery
would provide the LDCs with needed breathing
room, in part because it would signal the banking
community that LDC export prospects will im-
prove, putting the LDCs in a better position to
handle their debts. However, the direct gains from
a more rapid OECD expansion will not be felt
immediately and will not be evenly distributed
among the troubled debtors. In our judgment, most
of the initial pickup in economic activity will be
concentrated in the consumer sector. Increased
demand for LDC raw materials will take considera-
bly longer to materialize in part because of the
large inventory overhang for many raw materials.
Secret
18 February 1983
Further Shocks Likely
While this OECD-growth-led recovery is taking
place, the IMF may have to handle additional
shocks brought on by the adjustment process itself.
An unprecedented number of countries with com-
plex international linkages will all be attempting to
reform their economies over the same period. Tak-
en individually, the prospects that each country
could smoothly adjust under the aegis of the IMF
are good; together, adjustment raises new prob-
lems. In 1981, for example, Brazil and Argentina
each sold about 20 percent of their exports to other
South American countries and purchased about.15
percent of their imports from them. Bolivia, Para-
guay, and Uruguay probably will find it increasing-
ly difficult to meet debt payments and import bills
because of their heavy dependence on sales to
troubled neighbors.
Moreover, IMF help might be needed to handle
any shocks that may arise from an uncertain oil
market over the next several years. Mexico, for
example, could lose over $5 billion in foreign
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
earnings if oil prices fall to $20 per barrel. Without
compensating financing, Mexico would have to cut
imports by that amount on top of the 40-percent
reduction, to $15 billion, that occurred last year.
Nigeria, Venezuela, and Indonesia will be running
into increasingly serious financial constraints this
year even if oil prices remain steady. If prices
decline to $20 per barrel, these countries would
have a combined drop in earnings of $17 billion.
We do not believe that foreign bankers would be
willing to increase exposure in these countries
much, if at all. None of these countries has much
maneuvering room; all have been drawing down
their reserves substantially in recent months to pay
for needed imports and debt servicing.
The adjustments demanded by the IMF and pri-
vate creditors have high political and economic
costs, which are in part held in check by the
assurance of continued IMF support if needed and
by the opportunity for national governments to
share the onus of adjustment with a faceless but
respected partner. In the absence of such discipline,
we believe that political pressure could force gov-
ernments to abandon adjustment programs, there-
by sacrificing the longer term development of their
countries. The prospects for this are probably high-
est in such countries as Argentina and Mexico with
highly nationalist governments.
The Demonstration Effect of IMF Participation
Even though a quota increase would probably not
show up on the IMF's books until late 1983 or in
1984, its approval would boost the sagging confi-
dence of commercial lenders that the Fund will
continue to back adjustment programs that will
help debtors to meet their obligations. For the next
few months, major US and other industrial country
banks may again be called on to provide a quick
infusion of cash to these borrowers to avert a crisis.
Emergency loans by large banks, however, will only
provide a temporary solution to South American
debt problems. If the smaller institutions continue
to reduce their lending, debt service could become
unmanageable without full IMF participation.
New Lending Associated with Billion US $
IMF Programs
Country
Estimated
Debt
Yearend
IMF Package
New Lending
Associated With
IMF Package
1982
Brazil
87
5.5
4.4
Mexico
83
3.9
5.0
Yugoslavia
19
0.5 a
1.0
Beyond this, IMF programs-which include plans
for restructuring financially troubled economies
and monitoring their progress-are the key to
convincing foreign private banks to share the cost
of the economic adjustments the LDCs must make.
The IMF programs recently under negotiation are
associated with a substantial amount of new bank
lending. The Fund's involvement and leverage over
debtor countries have been crucial to getting com-
mercial banks to continue to provide credit when it
is needed most to ease the adjustment process.
A growing number of other Latin American coun-
tries are increasingly vulnerable to a credit contrac-
tion that could be precipitated by a lack of confi-
dence that the IMF will continue to lead in solving
debtors' cash problems:
? Chile's financial position, already weakened by a
decline in exports, capital flight, and a slowdown
in new lending, turned critical after bankers
stopped credit operations in a recent financial
dispute with the government.
? Venezuela is increasingly vulnerable to a loss of
banker confidence because of its poor economic
and financial management, high short-term debt,
dwindling reserves, and uncertain oil export pros-
pects. International lenders are shying away from
new loans, undermining the government's plans
to refinance short-term public debt. Failure to
refinance these could lead to debt rescheduling.
Secret
18 February 1983
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
? Argentina is vulnerable to another credit contrac-
tion because of its need to arrange new financing
to roll over maturing debt. Smaller US banks
may be especially unwilling to renew lending
necessary to finance exports and purchase needed
imported industrial supplies.
? Peru is also encountering difficulty in obtaining
longer term credits, despite its willingness to pay
higher rates.
The European View
West European leaders were generally in favor of
greater increases in the IMF's lending capability
than the United States. Initially some major Euro-
pean countries were sympathetic to increases of
about 65 percent. The European negotiating posi-
tion last week was for a 50-percent increase, or 10
percentage points higher than the United States'
initial position. West Europeans subscribe to the
idea that IMF resources must be augmented to
improve the debt service capability of troubled
borrowers in the absence so far of a strong econom-
ic recovery in the West. They further believe that
the IMF is the key organization to convince debtors
to make necessary financial adjustments, and that
the IMF is in a strong position to persuade private
banks to maintain their exposure.
The West European governments probably believe
that the 47.5-percent quota increase that emerged
was the best possible under current economic con-
ditions and the political mood in the United States.
West Europeans believe the quota increase will be
adequate for only about three years and that the
five-year review process will need to be replaced by
another three-year review. The West Europeans
view the immediate need for liquidity as great, and
they fear that the end-of-year deadline for imple-
menting the quota increase is not soon enough;
nonetheless, they strongly oppose IMF borrowing
in the private markets to fill the gap.
Secret
18 February 1983
The European reaction to a failure on the part of
the US Congress to ratify the US share of the
quota increase probably would be dramatic. Any
backing away by the United States to support the
quota increase would be viewed by West European
governments as a reversal of the present policy of
working together for a coordinated response to
international financial problems. West European
bankers probably would echo this criticism and
tighten credit across the board in self defense.
We have not seen any evidence so far that Europe-
an capitals consider the increase in the US quota in
doubt. They probably foresee a contentious Con-
gress but calculate that the Congress will eventual-
ly view approval in the United States' best interest.
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
Coal Synfuels:
Diminished Expectations
Declining oil prices, escalating capital costs, and
reduced government funding have caused massive
cancellations and delays in coal-synfuel projects
around the world. These cutbacks and a recent
study by the Institute of Gas Technology suggest to
us that Free World production of synthetic fuels
from coal will increase by less than 1 million
barrels per day oil equivalent (b/doe) by the year
2000-approximately one-third the growth forecast
by the International Energy Agency (IEA) in 1981.
As a result, coal synfuels are unlikely to contribute
much toward reducing the Free World's depend-
ence on Middle East oil or Western Europe's and
Japan's rising reliance on imported natural gas over
the next two decades.
Changing Outlook
Following the 1973 oil crisis, many observers be-
lieved production of synthetic fuels from coal would
grow rapidly. Coal-synfuels technology had a long
history of development, and world coal reserves
were twice those of oil and natural gas; nearly 50
percent of proved recoverable reserves are in.the
United States, Australia, and Canada. With oil
prices expected to continue rising, most analysts
believed coal synfuels would be cost competitive by
the mid-1980s. According to 1976 industry assess-
ments, synthetic natural gas from coal was expect-
ed to cost about $19 per boe and coal-based
syncrude about $25 per boe
The 1979 oil crisis gave added impetus to coal
synfuels. Spurred by the cutoff of Iranian oil, the
South African Government initiated a crash pro-
gram to expand its synfuels industry through con-
struction of a third, large-scale coal conversion
plant (SASOL III). In other countries, research and
development on coal-synfuels technology surged;
IEA member government expenditures on coal
synfuels R&D and demonstration plants jumped
from about $400 million in 1978 to over $700
million by 1981
During the last two years, numerous coal-based
synfuel projects have been delayed or abandoned.
Coal liquefaction efforts have been especially hard
hit. Plans for the construction of the first commer-
cial-scale direct liquefaction facility (SRC-II)-a
joint venture between the United States, West
Germany, and Japan-were canceled in mid-1981.
In Australia-once the center for technology devel-
opment-liquefaction projects have been almost
completely cut back, according to industry officials.
As for coal gasification, although some small,
commercial-scale projects are proceeding, plans for
large-scale plants have, for the most part, been
scrapped. Three projects in the United States, for
example, with a combined output of over 150,000
b/doe have been canceled over the past 18 months.
In Western Europe, Shell has backed out of two
projects-the largest with an output of 40,000
b/doe-and Gasunie, the Dutch gas monopoly, has
shelved plans for a 20,000 b/doe plant.
Cutbacks stem largely from:
? Weak oil prices; most industry forecasts now
assume flat or declining real oil prices to 1985,
with prices rising by only 2 to 3 percent per year
thereafter.
? Sharply rising capital requirements; the estimat-
ed cost of the Dutch gasification plant, for exam-
ple, more than tripled in just three years.
? Reduced government funding because of bur-
geoning budget deficits and lower than expected
growth in energy demand.
Secret
DI IEEW 83-007
18 February 1983
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Types of Coal Synfuels
From Gasification
? Low-BTU gas (about 5,300-8,800 BTUper cubic
meter), used for combined cycle power systems.
? Medium-BTU gas (about 12,400 BTUper cubic
meter), which can be transported short distances
and used as a chemical feedstock, fuel gas,
reducing gas for metallurgical purposes, and as
an input to liquid hydrocarbon production.
? High-BTU gas (about 35,300 BTUper cubic
meter, the. same as natural gas) for use as
pipeline-quality fuel.
From Liquefaction
? Synthesis gas, methanol, and synthetic petro-
leum liquids, such as fuel oil, gasoline, diesel
fuel, and kerosene.
not progress beyond the demonstration phase be-
cause of technical, economic, or marketing prob-
lems. All gasification and liquefaction processes,
moreover, must undergo substantial development
before large-scale plants can be built. According to
the IGT study:
? Improved coal gasification techniques will not be
ready for large-scale implementation until the
late 1980s.
? Direct liquefaction processes will not be ready for
commercial use until the early 1990s.
Coal Gasification. Low- and medium-BTU gas has
been produced from coal for more than 100 years,
and many plants are currently in operation. First-
generation technology to produce high-BTU gas is
proven and commercially available but is relatively
expensive and inefficient. A commercial-scale plant
(20,000 b/doe and up) based on more efficient
second-generation processes and able to use a wider
variety of coals has not yet been attempted.
? Availability of cheaper alternatives to coal syn-
fuels such as Soviet natural gas.
Technology
Present synfuels production is based on coal conver-
sion processes developed in the 1920s and 1930s.
The processes are largely inefficient; from 40 to 60
percent of coal's energy content is lost, with the
higher losses applying to the production of premi-
um fuels. Consequently, much of the benefit in low-
cost coal is lost in processing.
Coal Liquefaction. Technology for liquefaction has
not progressed as far as that for gasification and
appears even less economically attractive. The only
commercially available process-used in South Af-
rica's SASOL plants-produces medium-BTU gas
from coal and then chemically combines the gas to
form liquid products such as heating oil and gaso-
line. This two-stage process, however, is extremely
inefficient, using up more than half of the coal's
energy content in the conversion process. Most
analysts contend that the process is used in South
Africa only because of large coal reserves, low
mining costs, and Pretoria's willingness to subsidize
the process to lessen South Africa's vulnerability to
Gasification and liquefaction processes under de-
velopment represent an extension of existing tech-
nology in a quest for greater efficiency, adaptabil-
ity to a broader range of coal types and production
of higher value products. According to a recent
assessment of coal conversion technologies by the
Institute of Gas Technology (IGT), however, most
of the approximately 40 coal conversion processes
under development outside the United States will
Secret
18 February 1983
an oil embargo.
Second-generation liquefaction processes avoid the
gasification step and liquefy the coal directly.
Although several pilot plants have been construct-
ed, none of the individual processes has been proven
in sustained, large-scale operation, and numerous
25X1
25X1
25X1
25X1
25X1
25X11
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
South Africa's SASOL II-the world's largest coal conversion
plant-completed at a cost of nearly $3 billion.
years, according to press reports.
.uncertainties remain. All of the processes, for
example,'must preheat a slurry of pulverized coal
and oil before the liquefaction process takes place,
a step that remains difficult at sustained high
operating rates with varying types of coal. More-
over, with the cancellation of the SRC-II project in
1981, large liquefaction plants will now have to be
scaled up from around 500 b/d rather than from
the proposed 15,000 b/d capacity of the SRC-II
plant. Cancellation of this project could set back
commercialization of liquefaction technology by 10
Synfuel Economics
Production costs for coal synfuels-both gas and
liquid-have risen sharply since 1973, outpacing oil
and gas price increases. Escalating capital costs
have been the key factor. Synfuels processes are
highly capital intensive, and capital charges ac-
count for about two-thirds of the product price of
synthetic liquids.
limited engineering and technical information.
Since then costs have been further boosted by
inflation, record-high interest rates, and environ-
mental regulations.
Based on current technology and recent detailed
capital cost assessments by industry and govern-
ment sources, the future cost of coal synfuels from
full-size plants probably will range between $60
and $100 per boe for liquids and between $35 and
$65 per boe for synthetic natural gas. Because of
the extensive work on coal synfuels, we believe it is
unlikely that there will be major breakthroughs
that will significantly reduce present cost assess-
ments or render current technology obsolete.
Because of higher estimated production costs for
liquid synfuels, price competitiveness with oil has
been postponed by 15 years or more. With current
oil prices of $34 per barrel, we believe synthetic
petroleum products from coal probably will not be
economic until around the year 2000, even if real
capital requirements were se-
verely underestimated in the mid-1970s because of
Secret
18 February 1983
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
oil prices increase 3 percent per year. Even then,
capital needs for a commercial-scale liquefaction
plant of $3 billion or more may hinder construction.
Coal gasification is less costly than liquids produc-
tion. Given current natural gas prices of about $27
per boe in Western Europe and $32 per boe in
Japan, industry analysts believe synthetic natural
gas may become cost competitive in the 1990s if
gas prices rise in tandem with oil prices. Once
again, however, huge capital requirements are a
major constraint. Some industry analysts contend,
for example, that it would cost $54 billion to
construct the necessary coal gasification plants to
equal the energy throughput of the Soviet gas
pipeline. In contrast, West European construction
and equipment loans for the pipeline now total
about $8 billion.
Synfuel Backers
South Africa. Determined to lessen its vulnerability
to an oil cutoff, Pretoria is the world's leader in
commercial-scale coal conversion. When the coun-
try's three SASOL plants are operating at capacity
in 1985, they are scheduled to provide about
115,000 b/d of product and supply roughly half of
South Africa's liquid fuel needs. Plans for the
construction of a fourth plant (SASOL IV) are in
the study phase. According to recent State Depart-
ment reporting, South Africa must add a new
synfuels plant the size of SASOL II or III every
four or five years to maintain the percentage of its
energy requirements produced from local sources.
West Germany. Building on established World War
II technology and backed by government funding,
West Germany is the world's leader in coal synfuels
technology. Despite recent project cutbacks, the
government remains committed to developing this
technology, primarily for export. According to
State Department reporting, two gasification pro-
jects and a liquefaction project probably will con-
tinue to receive partial (40-50 percent) government
support. Under the government's proposed budget
Secret
18 February 1983
for energy R&D, coal synfuels have been allocated
$900 million for the period 1982-85.
Japan. Dependent upon imported oil for over 60
percent of its energy requirements, Japan remains
active in developing coal synfuels. Three liquefac-
tion processes now under separate development are
to be combined into one process through the con-
struction of a 750-1,500 b/doe pilot plant. Con-
struction of a 150 b/doe liquefaction pilot plant in
Australia is also proceeding under a Japanese-
Australian joint venture agreement.
Tokyo no longer expects
to meet the goals set in 1979 for its alternative
energy research program. While the program envi-
sioned an annual synfuels output of nearly 600,000
b/doe in 1995, the IGT forecast places production
at only 30,000 b/doe in 1995 and 50,000 b/doe in
2000.
Free World production of coal-based synthetic
fuels is approximately 300,000 b/doe, less than 1
percent of oil output. Based on the IGT assessment,
we estimate production will increase by less than
1 million b/doe by the end of the century-
approximately one-third the growth forecast by the
International Energy Agency in 1981. Because of
huge capital costs, construction of large-scale syn-
fuels plants will be rare. Relatively small facilities,
each producing about 12,000 b/doe or less, will be
used to meet localized supply needs and to prove
selected technologies. South Africa, we believe, will
continue as the major synfuel producer because of a
desire to reduce dependence on imported oil.
Because of the cancellation of many commercial-
scale and demonstration plants, coal synfuels will
provide little cushion in the event of an oil supply
disruption. Facilities require up to six years for
construction, and we believe the industry will lose
critical technical and engineering skills as projects
are canceled or postponed indefinitely.
25X1
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Iq
Next 1 Page(s) In Document Denied
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
 Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6
Secret
Sanitized Copy Approved for Release 2011/01/25: CIA-RDP84-00898R000100070003-6