The Years that the Locust Hath Eaten: Oil Policy and OPEC Development Prospects

For the last five years the world has been trying to cope with a set of problems triggered by the sudden oil price explosion of late 1973: the availability of oil to cover future energy demand, the economic and financial upheaval attending the jump in oil prices, and the utilization of a flood of petrodollars by OPEC countries for their national development and other purposes. These three issues are intimately interrelated and interact on each other; they can thus be properly assessed only in conjunction with each other.

The relationship between oil supply and oil demand has always depended not only on trends in world oil discovery and consumption - including the impact of conservation and the progress made in developing additional energy sources - but on the price and production policies of major oil-producing countries, based in turn on calculations of their political and economic interests. The post-1974 upheaval in the economic and financial structures of the Western industrialized countries, and of the world as a whole, has been kept within controllable limits in part by an economic slowdown and the resourcefulness of Western public and private financial institutions - but certainly also because the principal OPEC countries were not then able or willing to cut production and to press their undoubted bargaining leverage to the utmost. Price advances by OPEC have not kept pace with the overall rate of inflation and the decline of the dollar since the fourfold price increases of 1974, and the real price of oil has dropped substantially. Meanwhile, the great bulk of the new oil money, or petrodollars, flowing to the OPEC countries has been soaked up, often through prodigious spending by these countries in the West. As a result, the shock to the industrialized economies has been cushioned, and the flow of petrodollars directly into the financial system - while itself enormously increased and the source of continuing major problems - has not turned out to be the nightmare many had feared in 1974.