Business

Compared with the horrors yet to be unleashed, today’s oil crisis will seem like a skirmish

Peter Brimelow January 24 1977
Business

Compared with the horrors yet to be unleashed, today’s oil crisis will seem like a skirmish

Peter Brimelow January 24 1977

Compared with the horrors yet to be unleashed, today’s oil crisis will seem like a skirmish

Business

Peter Brimelow

“What effect is OPEC having on the Third World countries?” echoes the oil analyst, with the impatience that only New Yorkers can show when asked to consider something other than their own navels (or, in this case, the U.S. economy). “They’ll starve, of course. Bangladesh is the wave of the future. Those people will have to eat each other. And I don’t think the Arabs give a good goddamn.”

Although Saudi Arabian oil minister Sheikh Ahmad Zaki Yamani is apparently successfully holding the latest price increase to 5%, half what other OPEC members wanted, we’ll be hearing more, not less, about OPEC in 1977. The problems the oil cartel has already created are going to get worse, not just for the Third World but for everyone—including, ultimately, its own members. Like wolves creeping in around a camp fire, these problems leer at us from every angle:

International finance. The panic that spread through international banking circles after the 1973 Middle East war and the subsequent oil price rises diminished once it became clear that the short-term difficulties of recycling Arab money could be handled—that, in fact, the Arabs were either spending or lending their additional revenues in the industrialized world. But this has brought new spectres: the fear that the Third World will be unable to pay off its debts, because of its oil bills, which could threaten major North American banks; danger that in shunting their reserves around the Arabs might inadvertently flatten some innocent by-standing currency, which is one explanation of sterling’s recent collapse.

International economics. Countries such as Canada face OPEC price increases stretching into the indefinite future. There seems to be no hope that the cartel will collapse, as would normally happen in a competitive market. The industrial economies have proved too addicted to oil to cut down their consumption quickly and pressure individual OPEC members. The members themselves, being governments rather than profit-grubbing corporations, are primarily concerned with noble, or at any rate abstract, ideals rather than sordid commercial questions.

At first, oil price increases seem inflationary, since the price of everything related to oil jumps. But the overall effect is deflation, dislocation and depression, as oil-based industries become uneconomic and other activities are sacrificed to pay the higher oil bills. A major hunk of purchasing power has been transferred to OPEC. It

can’t be replaced by government deficit spending, since Western policy-makers are still shaking from their last brush with hyperinflation in 1974. In theory, the industrialized economies will eventually adjust to their new task of providing the Arabs with fighter planes they can’t fly and whiskey they’re not supposed to drink. When, and how well, remains open to debate. But the longer-term problem remains unresolved. The mini-states of the Persian Gulf, for example, are engaged in a ludicrous competition to build dockyards, steel mills and cement factories sufficient for a cast of teeming millions instead of the handful of illiterate nomads who actually live there. Most of these projects will never work, and if they do they will have no market. It’s a misallocation of international resources on a scale unparal-

leled in history, with the possible exception of the pyramids The entire world will pay for this, by forgoing the growth that would have followed these resources’ productive application. The negative effects will be felt for decades.

Domestic psiisy. Canada initially attempted to cushion the OPEC price rises by freezing domestic levels and subsidizing imports. This was politically useful in eastern Canada, but it has simply delayed the adjustment of consumption that must eventually be made, as well as removing incentives to look for oil in Canada. Ottawa is now trying to narrow' the gap and there will be at least two price increases this year. But OPEC is still busily widening it. Higher prices will hurt. Some industries, such as petrochemicals, and areas like Quebec will suffer, particularly since our major trading partner, the United States, is even more reluctant to leave its own wonderland of frozen oil prices. But Ottawa can’t afford the import subsidy much longer. This bullet must be bitten soon, by allowing prices to rise.

War. This time last year, Saudi officials literally cowered in their overdecorated offices at the mention of Iran, their northern neighbor, fellow-oPEC member and hereditary enemy, w7hich has enough oil money to arm its people to the teeth but not to feed them. The Saudis know they cannot defend their oil reserves, about 27% of the non-Communist world’s, with their miniscule four million population, and they are intensely suspicious of the Shah’s ambitions. Yet now, suddenly, they have defied him over the most recent price rise, with the result that currently Iran’s production is down by 30% to 50%. Iran cannot afford this. As if this weren’t enough to spark the conflict that experts on the area have been long predicting, wait for the uproar when the Saudis present the bill for their restraint within OPEC to the United States, and demand even further concessions from Israel.

The problem of war may seem remote. North Americans, reflecting their own historical experience, tend to believe that lines drawn on maps are somehow immutable. OPEC leaders are more conscious of the barbarism that actually underlies relations between states. But, of course, without this naïveté, the West, which developed OPEC’S oil, forms its only possible market and alone makes the weapons and other artifacts the oil nations so ardently desire, could never have acquiesced so supinely in its own dispossession in the first place.