Rarely, 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 implications.

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 overwhelming 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, production, and most important, in the potential to provide significant 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 countries. They have coördinated their efforts through the Organization of Petroleum Exporting Countries (OPEC) which was established in 1960. Since 1970, producing governments have imposed in rapid succession changes in previous agreements that had been negotiated and renegotiated with their concession-holding companies, predominantly affiliates of the Anglo-American 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 unilaterally 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 royalties from about 90 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 between the producing countries and the oil companies, the governments earn additional income from the sale of their newly acquired oil. Its amount, of course, depends on the percent of government ownership and the price they charge for their oil. Agreements had been concluded, as recently as late 1972, under which producing countries acquired a 25 percent participation in the 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 60 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 1, 1974. On such a basis, the government income from the total oil-producing operations in key countries would average about $9.25 per barrel.1

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 $60 billion in 1974. The oil revenues of all OPEC countries are increasing from $15 billion in 1972 to nearly $100 billion in 1974. Allowing for all their own foreign exchange requirements, OPEC producing countries will still have available surplus revenues on the order of $60 billion this year alone. And there remains a clear and present danger that under conditions as they exist now, the supply of oil from individual 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 his radical shift in the balance of power is perhaps the most dangerous aspect of the current situation. Whatever the merits of their case (of which more later), the world faces frightening repercussions 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 consideration by the societies that have to deal with this new exercise of oil and financial power, be they recipients or dependents, producers or consumers.

The security of international oil supply operations is further affected by regional conflicts in the producing areas of the Middle East-in particular the still unresolved issues posed by the Israeli-Arab confrontation. There are other potentially dangerous and divisive possibilities, as reflected in Iran's policy of establishing 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 Kurdish 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 economic 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 is deeply involved in Middle East affairs and with the strategic 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 confrontation 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 coöperation?

II

The first key fact that must now be recognized is that the position of the international oil companies has changed completely over the past few years. Up to about 1969 the major concession-holding companies still could determine levels of production, investments, exports and prices. Moreover, they still possessed substantial 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 directives issued by the oil-producing countries. Nothing perhaps reflects the present state of affairs more dramatically than the fact that American- and Dutch-owned oil companies had no choice last fall but to become the instruments for carrying out the embargo 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 producing 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 available are subject to unilateral cancellation at any moment, as were all preceding arrangements.

At the same time that they have been deprived of effective control 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 abdicated 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 another similar crisis.

If the role of the major international oil companies in established 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 directly 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 production and development of oil, gas, coal, shale, tar sands, and atomic resources in areas politically secure, the international oil companies are bound to play a major-if not the major-role in expanding dependable additional sources of energy supplies. Even though their foreign crude oil resource base is subject to progressive 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-importing 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 contingent 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 companies function, as in the past, effectively to preclude direct dealings between importing and producing countries relating to oil supplies, prices, etc., which may easily lead to political confrontations. To the extent that the companies maintain their operations 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 preferences 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-country governments in oil industry operations than heretofore. One major objective will be greater "transparency" in oil company 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 continuing role to play. Producing countries will become increasingly involved downstream, as direct crude sellers and through investment. Consuming countries will become increasingly involved upstream, through various exploration and crude arrangements. Within this emerging fragmentation of world oil trade, the integrated facilities of the companies could provide an important, 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 comprehensive 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.

III

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 practically 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 experience 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 rewards 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 $100 billion in 1974, compared with some $20 billion in 1972. For developing countries alone, it will jump from $5 billion in 1973 to $15 billion in 1974-and the $10-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 requirements of some $60 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 various 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 countries 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 production, 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. Kuwait, Libya, Abu Dhabi, Ecuador, and Venezuela have already announced restrictions in their production. Iran has threatened 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 countries 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 contraction 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-payments deficits, and with a terrible economic and political problem of inflation, to which oil prices have made a substantial contribution. But the oil balance-of-payments burden is just starting and the transfer of funds to oil-producing countries just beginning. 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.

IV

As a first step, the insecurity of oil supply and the financial problems that have arisen clearly call for a wide-ranging coordinated program among all importing countries. This was the main reason why the American government called for a conference of the major oil-importing countries in February of this year. This coöperative effort falls into two basic parts: first, what must be done internally by the importing countries; and second, what a coördinated policy should be vis-à-vis producing countries. With the oil-producing countries already coöperating closely through OPEC, coöperation among the oil-importing countries is a simple necessity; properly understood and handled, it can be the only way to achieve constructive overall adjustments.

Among themselves, the importing countries must first establish and coördinate their research and development programs with regard to existing and new energy resources. Unnecessary and time-consuming duplication must be avoided, and research and development efforts should be concentrated on those resources where optimum results can be expected. The skills available for research and the engineering resources that would have to be employed, if not pooled, should at least be utilized in accordance with a program for maximum overall efficiency.

The oil-importing countries must also establish a concurrent and consistent program of energy conservation which would provide for far greater efficiency in the use of energy resources. Here too the research effort and the measures to be taken should be coördinated 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 coördination.

Thirdly, the major importing countries must be able to agree on a problem that has so far eluded their efforts-that of adequate stockpiling and burden-sharing. On stockpiling, no importing 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 political or economic reasons. Remaining oil imports must be parceled out according to some formula based not on the previous percentage of imports from the sources cut off, but on the basis largely of need-so that those fortunate enough to possess substantial 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 restricting 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 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 dangerous repercussions as severe deflation and unemployment. To deal with the situation will require an unprecedented degree of self-restraint, prudent economic management and political sophistication and wisdom. Past experience suggests extreme skepticism 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 advantages-by making arrangements for oil imports that would tend to preëmpt 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 coöperation among the major oil-importing countries. A measure of common appreciation does now exist for most of these "headings of cooperation" 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 behavior.

The hardest questions remain. Even if coöperation is achieved in all these respects, can it serve to do more than shorten the period of extreme vulnerability and cushion the impact of continued one-sided decisions by the OPEC countries? Is consumer coöperation 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 producing 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-importing and oil-producing countries.

Already, however, the limits of the individual approach are obvious. Even for the most aggressive of the oil-importing nations, 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 promise 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 politicians 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 problem 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 inconsistent 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 coöperation among the producing countries has brought about the present situation, so a similar coöperation among the importing countries is now an essential prerequisite to a balanced solution. Only if the major importing nations act to coördinate their policy can they expect to be able to present the supply and financial problems 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 adjustment 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.

V

If coöperation among oil-importing countries is essential to the development of constructive coöperation 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.

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 potential oil supplies, oil reserves may well be exhausted in perhaps 20 to 30 years. But in a free 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 conservation 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 maintain, 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, unduly enriched the developed countries at their expense. (Whatever 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 contribution 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, could improve their economic position substantially if they 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 development 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 development of its manifold uses. The major oil-importing nations, in particular, must give heed to the legitimate grievances and aspirations of the oil producers.

On the other hand, the producing countries cannot continue to take the position that the economic situation of the major importing 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 countries. For if this happens, the viability of the producing countries 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 responsible 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 producing 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 countries, 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-à-vis the producing nations. Whatever the concern of producing 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 importing countries will continue to acquiesce and remain passive, even if the world's economic and political stability is at stake. This cannot be a safe basis upon which the producing countries could proceed. If the worst is to be avoided, the producing countries must be made to recognize the danger of pursuing 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 adventurism 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 to the various dynasties and national governments. Most of them must have inevitably reached the conclusion that their hold on power, which is sometimes tenuous, depends in the final analysis on a satisfactory relationship 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 independence could not safely be assured if the United States and its allies were to be fatally weakened vis-à-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 consequences of such policies.

VI

So far I have been making the case for unprecedented coöperation among the oil-importing nations, and for much greater understanding by both producing and importing countries of each other's needs and of the common interests that affect both groups. If reason alone controlled human affairs, one might conclude that a satisfactory solution was possible from greater understanding alone.

Unfortunately, that is not the case. One must in the end come back to the harsh economics of the energy situation worldwide, and of the rapidly rising trends in oil consumption that have lain at the root of the present crisis. For it is these trends essentially-far outstripping the growth of indigenous energy sources-that have made the oil of the OPEC countries, especially in the Middle East, so vital to practically every nation of the world, and have thus given the OPEC countries the bargaining leverage to establish the present unilaterally controlled price and supply situation. With all the understanding and sympathy in the world, the producing countries cannot be expected not to use a bargaining 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 and 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 production 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 production within the major oil-consuming countries. Yet it remains as clear as it was a year ago that no drastic technological breakthrough 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:

1972 1975 1980 1972-1980

(Millions of Barrels (Average Annual

Daily Oil Equivalent) 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

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 sustained 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 pressure 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-à-vis the producers.

To get these essential results I believe we shall have to go considerably further. Again for illustrative purposes, let us see what the situation would be if the oil-importing countries could manage 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 production, a revised table would look like this:

1972 1975 1980 1972-1980

(Millions of Barrels (Average Annual

Daily Oil Equivalent) Percentage Growth)

Primary Energy Demand 80 87 104 3.3

Oil Consumption 45 49 56 2.7

Oil Imports 27 30 29 0.8

Needed from the Middle East 18 19 18 0.1

This level of austerity would, I believe, be just adequate to permit the major industrialized nations to maintain viable economic 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 countries. 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 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 countries which are net consumers of oil. Thus, it would remain essential to have financial mechanisms and arrangements that would cushion this differential 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 countries 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 assumes 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 nations need their oil revenues for immediate development purposes. 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 supplying more than 60 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 designed 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 substantially from present totals of roughly eight million barrels a day to 12-13 million barrels per day. If these trends were to continue, and if the need for Middle East oil were to level off at 18 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 reduction in their levels of production, or alternatively to seek to increase 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 reductions. 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 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 cohesiveness of private cartels in similar circumstances. At most, the economic facts of supply and demand frame the problem; it will still be decided by national governments 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 argument 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 depression, or of political stability when the will and ability of strategically powerful nations to support them had been eroded.

VII

To sum up, four elements are essential to move to a reasonable adjustment: far-reaching coöperation among the oil-importing nations, an understanding by the importing nations of the interests and aspirations of the producing countries, a clear-cut (and painful) program of energy austerity by the oil-importing countries, 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 coöperation can it be expected that the producing countries will come to this necessary conclusion; at the same time coöperation 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 financial burdens on all oil-importing countries tolerable and to bridge the gap until the day, not too far distant, when the producing 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 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 combination with national domestic agricultural policies-have damaged the interests of the needy developing countries in particular. 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 countries 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 impact 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 wasteful 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 once readily available supplies of oil begin to stagnate or decline.

Accordingly, the price of oil moving in world trade is bound to be a kind of administered price, not necessarily negotiated directly between producing and importing countries but 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 countries 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.

In sum, I believe that the world situation would now call for solemn undertakings that would assure the essential oil requirements 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.

Footnote

1 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 support 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 producing governments have said the companies are entitled to earn. Such a price would be some $3.00 per barrel less than 93 percent of posted prices.

You are reading a free article.

Subscribe to Foreign Affairs to get unlimited access.

  • Paywall-free reading of new articles and a century of archives
  • Unlock access to iOS/Android apps to save editions for offline reading
  • Six issues a year in print, online, and audio editions
Subscribe Now