The Petrocurrency Peril

The oil-supply emergency ended this spring with the lifting of the Arab petroleum embargo, but a different kind of world oil crisis is approaching with onrushing speed. It is a potential money crisis caused by the quadrupling of oil prices orchestrated last fall and winter by the Organization of Petroleum Exporting Countries. The threat that these increases pose to world financial mechanisms absorbed much of the attention of bankers and government officials from the U.S., Europe and Japan who gathered in Williamsburg, Va., last week, but their deliberations produced no clear solution.

The dimensions of the threat are simply stated. This year the twelve OPEC countries stand to run up a trade surplus of $65 billion, v. a mere $7 billion last year, and the money will come out of the financial hide of the rest of the world. Underdeveloped countries that do not happen to be oil producers, such as India, Kenya and Bangladesh, could run up a combined trade deficit of $20 billion or more--if they can beg or borrow the money to pay for oil. The industrialized nations of the non-Communist world, which enjoyed a combined trade surplus of $12 billion last year, likely will swing this year to a deficit of around $40 billion.

Costly Debts. Financing such enormous deficits puts a heavy strain on the Western banking system. Already, many European nations are having to borrow at interest rates of 10% or so to pay for their oil. Though most have good credit, Italy recently had trouble raising $1.2 billion; it wound up borrowing from no fewer than 110 banks. Franz Aschinger, economic adviser of the Swiss Bank Corp., warns that over the next eight years "the accumulated debt tof the industrialized oil-burning nations] would be $400 billion with annual interest payments of $30 billion."

European bankers worry that some day one government, most likely Italy's, will default on paying interest on its loans, putting several banks under and setting off a Continent-wide banking panic. Even if that is avoided, the most strapped nations will be sorely tempted to cut their imports of nonpetroleum goods so that they can save cash to pay for the oil, a strategy that could cripple world trade. Italy in April did in fact clamp restrictions on many non-oil imports, to the anger of its eight partners in the European Common Market, who fortunately did not follow suit.

The solution is to somehow "recycle" the oil money--or, more bluntly, get it back from the oil producers in the form of purchases, loans and investments. It is fairly easy in the case of four oil producers, Algeria, Indonesia, Iran and Venezuela, which have large populations and ambitious industrialization plans. They can be counted on to spend much of their wealth buying goods and services from the U.S., Europe and Japan. But the richest oil producers, Saudi Arabia, Kuwait, the United Arab Emirates and Libya, have small populations and preindustrial economies; they can spend on imports only a minor part of the $100 billion oil revenues that they will collect this year.

So far, the Arabs have been reluctant to put their excess cash into long-term investments, where it would help stabilize world finance. Western stocks and bonds, they believe, do not pay enough to be a good hedge against skyrocketing inflation, and real estate holdings could be seized by Western governments. Instead, the Arabs have been putting most of their money into the shortest-term investments possible: U.S. Treasury bills, New York and London bank certificates of deposit, and Eurodollar bank accounts--many of them "call" accounts from which the money may be withdrawn instantly without advance notice. That is a form of recycling that does little good; banks are understandably reluctant to make long-term loans out of money that may be swiftly snatched away. Indeed, the Arab strategy carries its own danger: that billions in Arab cash switching suddenly out of one currency into another could set off an international monetary crisis.

Several ways out of the bind are under consideration. H. Johannes Witteveen, managing director of the International Monetary Fund, is setting up an "oil facility" that would accept deposits from oil producers and lend the money at bargain rates of about 7% interest to nations that have trouble paying for petroleum. Unfortunately, he has collected pledges for only $3 billion in deposits, an amount far too small to be of much help.

Some European countries want to quadruple the $42.22-an-ounce "official" price of the gold stored in their central banks, putting it about in line with the free-market price of gold. That would in effect give Italy more than $10 billion, and France almost $13 billion, of new reserves to cover oil deficits. The U.S. opposes the idea, fearing that it might help restore gold to an unwarranted special position in world monetary affairs. Some highly technical compromises have been suggested that would hold the official price in theory while allowing countries in effect to pay for oil with revalued gold--a sensible idea.

The best solution of all might be for the Arabs to launch a massive program of loans and aid to poor countries that have no oil. The poor countries could then build up their economies with heavy purchases of industrial goods and machinery from the U.S., Europe and Japan. But the Arabs so far have shown " little interest in helping the Third World. Perhaps that attitude will change, and the reluctance to make long-term investments in the industrialized world will diminish as the Arabs become more sophisticated in handling immense wealth. The question is whether a change in attitudes will come quickly enough to avoid bankruptcy for some of the Arabs' best customers.

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