International trade ; International finance ; Petroleum industry and trade

Hans H. Helbling

English

Research Papers in Economics

/1/N ANY given period, a country’s economic per-
formance in the international arena is determined by
both domestic and foreign forces. In 1974, however,
external forces (the operation of a foreign oil cartel)
exerted an overwhelming influence on virtually all
U.S. international transactions — both imports and
exports.
In addition to the impact of higher oil prices, U.S.
international transactions were affected by the depre-
ciation of the U.S. dollar against most major curren-
cies, high, though differing, rates of inflation here and
abroad, cyclical downturns in many countries, and the
removal of capital controls. Some of these factors are
likely to continue to influence our international eco-
nomic performance in 1975.
At the beginning of 1974, rates of economic growth
in most of the world were declining in response to
both supply constraints and earlier measures which
had been designed to slow the unsustainable eco-
nomic expansion which prevailed in 1972 and early
1973. Not the least of these supply constraints was
the October 1973 - March 1974 oil embargo and the
quadrupling in oil prices. This latter development
also caused significant changes in relative prices
within oil importing countries and thus influenced
their reported rates of inflation.
Peti’oleznn/Rel.a.ted ~, / /
With the announcement of higher oil prices, oil
importing countries became concerned about ensuing
oil payments and how to finance them. The fear was
that oil exporting countries would accumulate claims
on the output of all oil importers but would invest
their oil revenues in only a few industrial countries.
Furthermore, there was concern that the financing
burden of some countries would be so large as to
severely retard their future economic growth. Coin-
ciding with the development of these fears was the
implementation of an earlier U.S. decision to eliminate
existing controls on capital exports. Thus, if U.S.
financial markets would experience the anticipated
surplus inflow of funds from OPEC (Organization of
Petroleum Exporting Countries), U.S.
not be restricted in the intermediation
to other oil importers.
A further oil-related fear was that as a result of
projected trade deficits, countries might pursue poli-
cies aimed at coping with their own problems while
disregarding the possibly adverse effects on other
countries — generally referred to as beggar-thy-neigh-
bor policies. Thus, while one country might benefit in
the short run, in the long run all countries would
eventually lose if every country pursued such policies.
In response to such fears, the countries belonging to
the Organization for Economic Cooperation and De-
velopment (OECD) reached an agreement in May
1974 to refrain from implementing beggar-thy-neigh-
bor policies.
Provea .Sornewhat .i.~ess.ffitrdenscnne
The impact of the oil embargo, however, was not
as severe as initially anticipated and there was a
change in the pattern of demand for the world’s cur-
rencies. Some commercial banks, which had incor-
rectly anticipated exchange rate developments and
based their trading of individual currencies on earlier
projections, incurred unusually large financial losses
once their anticipations were not realized. This led to
the insolvency of some banks and increased the un-
certainty over how oil payments would be financed.
However, toward the end of the year, financial mar-
kets calmed, partly because the international banking
community began to understand the true impact and
proportions of the oil transfer problem.
Large merchandise trade deficits did emerge in most
oil importing countries, as expected, but the burden
of oil financing was handled almost entirely by the
private financial markets of the world. As a supple-
ment, members of OPEC provided loans to some less
developed countries as well as to Britain, France, and
Japan. Other intergovernmental financing arrange-
ments, such as the gold-guaranteed loan by Germany
to Italy, and the establishment of a special account
at the International Monetary Fund (IMF), were
undertaken.
Page 11
International Trade and Finanee
Under the Influence of 011—1974 and Early 1975
HANS H. HELBLING
banks would
of such funds~AL RESERVE SANK OF ST. LOUIS~ MAY 1975
Selected Short-Term Money Market Rates /
Unusually large capital movements occurred as a
result of the oil price increases and the subsequent
financing operations. Initially, many analysts both here
and abroad believed that tile U.S. economy was less
vulnerable than other countries to a cutback in hn-
ported oil, making dollar denominated assets attrac-
tive to foreign buyers. In addition, there was expec-
tation that the increasing receipts of oil exporting
countries would be invested mainly in dollar denomi-
nated assets. As a consequence, there was a rise in the
international price of the dollar early in 1974.
During the second quarter of 1974, after oil ship-
ments had resumed. the U.S. trade deficit increased
faster than initially expected, U.S. output declined
more sharply than expected, and inflation accelerated.
34
32
10
4
0
36
14
32
30
a
6
~ii~-~HE
Eurodollar
>~TP~
These factors all contributed to a decline in the inter-
national price of the dollar after the first quarter rise.
In mid-May 1974, the dollar depreciation halted
and began to reverse. Reduced rates of monetary
growth, rising interest rates in the United States rela-
tive to other countries, and the continuing large
accumulation of dollar denominated assets by OPEC
in Euro-dollar and U.S. financial markets contributed
to the renewed strength of the dollar. Beginning in
September, ho\vever, the international price of the
dollar declined again, probably in response to the
marked slowdown in U.S. economic activity, declining
U.S. interest rates, and reports that OPEC might slnft
from dollars and sterling into continental European
currencies.
U.K.
Per,,,?
— Ia
36
34
I2
10
if0
‘4
32
10
0
22
20
13
36
‘4
12
IC
i/t654/ ~ 1Ju~n~iii~
~ //,,(/ / ///S —
3973 3974 ‘975
C,,’d’—-2-,”,,h
U///,/~K!,,4’~/—1-,.~,thI//5~’/h’//’y
~2.,”,’h i~t,,b,/,kd,p,~i,.
4 Sth~,,----3.,..,,th,,i,,. i,d’,~
Page 12FEDERAL RESERVE BANK OF ST. LOUIS MAY 1975
The 1974 merchandise trade performance was
greatly affected by the sharply increased oil import
prices, despite the fact that oil import volume has
declined slightly since 1973. In fact, if oil imports are
excluded from these measurements, exports exceeded
imports by $19.2 billion in 1974.
A breakdown of U.S. international trade by coun-
tries reveals that while the volume of U.S. imports
from oil exporting countries increased, so did exports
to those countries. For example, U.S. merchandise
imports from OPEC increased from $5 billion in 1973
to $17 billion in 1974. U.S. merchandise exports to
OPEC, on the other hand, increased from $3 billion
in 1973 to $6 billion in 1974.
The dollar value of exports exceeded the dollar
value of imports for agricultural products, capital
goods, and chemicals in 1974, but the quantity of
agricultural exports declined by 9 percent. On the
other hand, the dollar value of imports of consumer
goods exceeded exports somewhat more than in 1973.
On balance, in 1974, merchandise imports exceeded
merchandise exports by $5.8 billion.
.1. -t-e-alni//i.t A/WOnl. atia~~peeia1I
Net investment income increased to $9.7 billion in
1974 from $5.3 billion in 1973. A large portion of the
1974 increase resulted from inventory profits following
oil price increases and receipts from a large volume
of U.S. bank loans to customers abroad. There were
also special bookkeeping transactions such as the $2
billion U.S. Government grant to India which was
used to repay previous loans.
~7ThT~
--, Y
U.S. Expars as a Percent ot
N’
-\
World Trade
U.S. Imports !‘ a Percent of U.S. 61W ,_7
- - ~--
—1—- -!/j; —C—.
8
Lot--Term CapUal — Long-term capital outflows
increased significantly in 1974. U.S. direct investment
abroad amounted to $6.8 billion in 1974, as compared
to the 1973 invesftnent of $4.9 billion, At the same
time a reduction of foreign purchases of U.S. stocks
and bonds significantly reduced inflows of long-tenn
capital. Inflows of foreign capital for direct invest-
ment in the United States fell slightly to $2.3 billion
in 1974, compared to $2.5 billion in 1973.
Sha-er-Tena Ca dial ----- Net oufflows of nonliquid
short-term capital, mainly U.S. bank loans to foreign-
ers, increased rapidly during the first half of 1974. A
number of factors contributed to this development:
increased loan demand to meet oil import payments,
the removal of U.S. controls on capital outflows early
in the year, and higher interest rates in many foreign
countries relative to those in the United States. Dur-
ing the second half of 1974, however, U.S. bank loans
to foreigners were considerably smaller than in the
first half. This may have been related to a narrowing
of the differential between U.S. and foreign interest
rates and a leveling-off in foreign loan demand as the
volume of oil shipments returned to more normal
magnitudes following the post-embargo rebuilding of
stocks,
It is apparent from this discussion that virtually all
major international transactions were influenced by
the greatly increased oil import prices. For this rea-
son, a more detailed analysis of the oil situation is pre-
sented in the next section.
so
Exchange Rote Movements -L
C6rr,e Ao.},s, u0 toll,, I,,,, Mt3 970 Otto,
F’,,,,,
30 Per,,,,
Selected Measures
of Internafional Trade Performance
A~T~oT Dot’
l6
Percent
— 20
12
‘974
JAN Pt0 MAR A” MAAYJNATTATAAGSEPT OCT NOT Ta JAN FAT MA’ APR OTAT JUNE
CA. F~/RATFA/T/~/—
IS
36
94
32
to
a
‘975
International Trade earl /:/(-/CAnCe in 1974
4
0
1951 5953 5955 3957 3959 1965 5963 9965 3967 5969 5971 1973 1975
45, O,pNT,T,’,,01 CAo~T,’,,,, 4 IMP
Page 13FEDERAL RESERVE BANK OF ST. LOUIS MAY 1975
ada Oil Sitnatian
In spite of all the rhetoric about reducing our de-
pendence on foreign sources of oil, during 1974 the
United States actually increased the proportion of oil
acquired from foreign producers. During 1974 U.S.
oil consumption averaged 16.8 million barrels per day
(MBD) while domestic production was 11 MBD. Im-
ports amounted to 6,1 MBD, or 36 percent of total
domestic consumption.1 In 1973, for comparison, oil
imports amounted to 35 percent of domestic consump-
tion. In order to put this development into perspec-
tive, U.S. oil consumption, production, and imports
are examined for the period 1950-1974.
C~S.011 CarA//atnt:T1-iaJA In terms of the pattern
of U.S. oil consumption, there are four distinct periods
between 1950 and 1974. Between 1950 and 1964, U.S.
consumption of oil grew at an annual rate of 3.8 per-
cent. From 1984 to 1971, consumption increased at an
annual rate of 4.7 percent and from 1971 to 1973 ac-
celerated to a 7.2 percent annual rate. In response to
the oil embargo, sharply higher oil prices, and the
economic contraction experienced by the U.S. econ-
omy, oil consumption in 1974 decreased at a 3.9 per-
cent annual rate.
011 Pradaetlat/. Again, the period 1950-1974
can be divided into four subperiods in terms of oil
production. Total production of crude and refined
oil in the United States between 1950 and 1984 in-
creased at an average annual rate of 3 percent. From
1984 to 1966 the rate of production briefly accelerated
1The difference between domestic production plus imports
and domestic consumption is due to the rebuilding of oil
stockpiles.
to a 4.6 percent annual rate of increase. Beginning in
1966 and continuing through 1972, however, the rate
of production increased at only a 2,8 percent annual
rate. Finally, since 1972 domestic production has de-
clined at a 2,8 percent rate. Thus, from 1966 through
1973, the difference between domestic oil consump-
tion and domestic oil production widened. In 1974,
the differential narrowed as consumption declined
more than production.
This state of affairs is partially attributable to the
fact that the expansion of oil production facilities was
hindered by a number of factors, Among these factors
were environmental and safety regulations which
hampered attempts to construct new, and expand
existing, drilhng and refining facilities, General price
controls, which affected the oil industry both directly
and indirectly, created bottlenecks in the production
of materials utilized in the construction of new facili-
ties. In addition, the existing dual price system for
oil — different prices for “new” and “old” oil — cer-
tainly was not conducive to providing the necessary
incentives for increasing production in 1974.
(PS. 01-1 traparts- —— During the period 1950-1984,
U.S. imports of oil increased at a fairly steady 7.2 per-
cent annual rate. From 1964 to 1967, reflecting the
increase in domestic crude oil production, U.S. oil
imports slowed to an annual rate of increase of 4 per-
cent. Beginning in 1967, however, U.S. oil imports in-
creased at a very sharp rate, For example, from 1967
to 1970 imports rose at a 10 percent annual rate and
between 1970 and 1973, as a result of absolute de-
clines in domestic oil production, and cyclical in-
creases in economic activity, accelerated to a 22 per-
cent annual rate of increase. Finally, in 1974, oil
imports declined 1.7 percent from 1973.
C if iJa~awp-raenlsin 1514 and Beyond
As was expected at the beginning of 1974, gross
receipts by OPEC for oil exports amounted to $90
billion last year (receipts for other exports amounted
to an additional $5 billion). However, OPEC expendi-
tures on imports amounted to $35 billion, or about
one-third of total receipts.
Net OPEC receipts (total receipts minus expendi-
tures for imports), amounting to $60 billion, were
disposed of somewhat differently than initially ex-
pected. For example, direct placement of OPEC funds
in the United States amounted to only $11 billion.
Placements in the (more anonymous) Eurocurrency
market, on the other hand, amounted to $21 billion.
It is probable, however, that some OPEC Eurocur—
5th, 5,a?e
MilIlo,, ol I.,e,I, F,, ety
20.0
ISO
50,0
United States Petroleum Supply and Demand
Otti, sate
MUll,,, at U,,,,?, Pr, 0,y
.0
5.0
3.0
2.0
5.5
It
-5
.3
1947 5951 1955 959 1963 1967 1971 5974
1N46- 1F55; A,,,,i~o, P.’,,IMT I’~’Jl”~. JETS-IRA C
M,TtT,~, 0’.U- IT?1-i973
Page 14FEDERAL RESERVE BANK OF ST. Louts MAY 1975
rency placements were eventually channeled to U.S.
financial markets also.2 The remainder was composed
of loans and investments to other countries and to
international institutions.
\—Vith respect to the absorptive capacity of OPEC
countries, it is now apparent that far more oil reve-
nues than had been initially expected will be
expended in the near future for the purpose of es-
tablishing or improving industries in oil exporting
countries. OPEC imports from the United States in-
creased by 90 percent during 1974 and, while such a
rate of increase is not sustainable, the level of OPEC
imports will surely exceed that of years prior to 1974.
With respect to the consumption of oil in both the
United States and abroad, it seems reasonable at this
time to expect little or no growth in the next few
years. For one thing, high oil prices and temporary
reductions in the growth of aggregate demand, both
in the United States and other countries, have re-
duced oil consumption in general, and imports from
OPEC in particular. Moreover, new sources of oil
have been discovered in many non-OPEC countries
and prevailing world prices are conducive to con-
tinued intensive exploration. The upshot of this ar-
gument is that the quantity of oil demanded from
OPEC may not increase as fast as previously expected
2
For a discnssion of this development, see the December 1974
issue of this Review, p. 14.
even when economic growth resumes. The accruals of
oil revenues by OPEC may therefore not rise, and
may even decline over the next few years. Consider-
ing that OPEC imports from the oil importing coun-
tries will grow, the previously predicted accumulation
of OPEC reserves is not likely to materialize. In fact,
some studies taking the above factors into considera-
tion now project OPEC balance-of-trade deficits as
early as 1978. It should be pointed out that such
projections do not consider the possibility of a
break-up of the OPEC cartel which would result in
further reduction of oil revenues.
S-n-ra.-rna’-rn a-na O-ntlorTk
Sharply increased oil prices have significantly influ-
enced the 1974 trade perfonnance. Excluding petro-
leum imports from and general merchandise exports
to OPEC, U.S. exports exceeded imports by $5 billion.
Even though U.S. merchandise exports to oil exporting
countries can be expected to increase in 1975, both
the value and the volume of total agricultural exports
can be expected to decline. In fact, some export or-
ders for agricultural commodities have already been
cancelled.
With respect to the emerging international eco-
nomic climate, the following observations may be
made. For some countries rates of inflation have al-
ready moderated, and for other countries the rates of
inflation can be expected to moderate at least in the
near term, For example> world commodity prices, ex-
cept for food and oil, have declined since May 1973,
the world food price index has declined since late
November 1974, and U.S. wholesale prices have de-
clined since December 1974. It is also likely that in
the second half of 1975 real economic growth in the
major industrial countries will resume.
A review of past and present economic policies
lends support to the prospective developments out-
lined above. For example, the response of an economy
to reduced monetary growth is first a slowdown in real
output and subsequently a reduction in prices. At the
same time, increased rates of monetary growth, which
are presently being experienced in the major indus-
trial countries, can be expected to lead to an expan-
sion in real economic growth. If the present monetary
stimulus is not too great, it is possible that the expec-
tations of both increased real economic growth and
reduced inflation may be realized.
41/
I—
U.S. Terms of Trade
Ratio 5,,?, Ratio S,,t,
1967°?00 A,R,,ID,,’ 1967°l00
515 915
ISO
los
too
9$
90
as
80
Is
70
65
60
195? 953 1955 1957 1959 965 5963 965 5967 5969 5971 5973 1975
S>AR1~!TA. D,pRR~~t~lRtRIC’RtR,.M,
L]U,JIl’I,,ARd,TRI,,p’,,, ~
‘UtJA,Md
Page 15

International trade and finance under the influence of oil-1974 and early 1975

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International trade and finance under the influence of oil-1974 and early 1975

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