How the Money Rolls In

No oil well ever gushed black gold as rapidly as foreign currency and other forms of monetary reserves are pouring into the treasuries of the countries that quadrupled oil prices in the past year. According to figures released last week by the International Monetary Fund, the 13 members of the Organization of the Petroleum Exporting Countries had piled up by Sept. 30 more than $38 billion of monetary reserves, or an awesome 19% of the world total, v. $13 billion, or 7% of the global total, a year earlier. Nigeria's reserves multiplied nine times, to $4 billion; Iran's six times, to $6.3 billion. Saudi Arabia's reserves nearly tripled, to $11.5 billion, making it fourth in the world behind West Germany, the U.S. and Japan.

The oil cartel members, of course, are accumulating this wealth at the expense of the countries that buy their petroleum. Largely because of inflated oil prices, Britain this year is running a deficit of about $10 billion on trade in goods and services, Italy $9 billion, and France $6 billion. The U.S. too is slipping deeper into the red. Surprisingly, some oil-importing countries have increased their monetary reserves slightly this year --but largely by borrowing, from banks and each other, to pay their oil bills. The huge and growing debts put a crushing interest burden on some nations. Italy will pay out nearly $1 billion in interest on its international debts this year. Many underdeveloped nations are hurt even worse because they have to spend their small amounts of foreign earnings for oil instead of other basic necessities.

So far, the Arabs are depositing most of their oil wealth in banks. Early this year they considered only about ten of the biggest American and European banks worthy of holding their cash, but now they deem about 50 banks, including several in Japan, to be acceptable. Some banks, however, are either turning down oil-money deposits or paying 2% to 3% less interest on them than on other money. The problem: the conservative Arab governments keep much of their money in very short-term deposits, and the bankers feel that they cannot make long-term investments or loans to such needy candidates as cashstrapped oil importers out of Arab money that might be snatched away.

Middle Eastern officials tirelessly insist that they have no desire to cause a collapse of the Western financial system, and they have begun lending a bit of their new money to the governments of oil-importing nations. The Saudis, for example, have bought large quantities of U.S. Treasury bills, and Iran has extended a credit of $1.2 billion to Britain's nationalized industries. Such loans may slightly and temporarily relieve the strain on Western treasuries, but in the long run, the present situation is unsustainable. Eventually the Western nations will have to cut oil imports--at the cost of damage to their economies-- unless the oil producers cut the price of petroleum to a level that their customers can afford.

So far, there is no sign that the oil producers are willing to do so. The Saudi and Iranian governments have talked of shaving the price a bit, but the most optimistic estimate of how much they might cut is 10%. A reduction of that size would not give the oil importers any significant financial relief; some bankers even think that it would do more harm than good because it could discourage conservation and development of alternate sources of energy such as nuclear power. In any case, there is no certainty of even a small oil price cut. The outlook is for a continued flood of cash to the oil producers and continued severe strain for the rest of the world.

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