Here Comes the New Optimism

Wealth means power, and the sharp rise in oil prices promises to bring a great deal more of that to the producers' cartel. Last May the World Bank startled the international community with a grim forecast that oil country surpluses would reach $653 billion by 1980, and an incredible $1.2 trillion by 1985. Surpluses on this scale would mean deep deficits and an era of unprecedented political and economic strains among the consuming countries.

Lately, however, a kind of new optimism about the future size and strain-causing potential of OPEC surpluses has been gaining vogue. Several revisionist studies suggest that the OPEC surpluses may not be all that troublesome. The most sanguine of these, a "scenario" published last month by Manhattan's Morgan Guaranty Trust Co., estimates that OPEC's total surplus could peak at $248 billion in 1978, and diminish to $179 billion by the decade's end. The World Bank sharply revised its earlier prediction for 1980 down to $250 billion, expressed in 1974 dollars (that figure does not include inflation, while the Morgan figures do).

Otmar Emminger, vice president of the West German Central Bank, and Thomas Willett, a deputy assistant secretary of the U.S. Treasury, have offered similar views. Citing a study by Willett, Treasury Secretary William Simon told a Senate subcommittee two weeks ago that OPEC surpluses might amount to "only" $200 billion to $250 billion by the end of the decade. Simon's message: the burdens posed for the industrial countries by the flow of petrodollars to the OPEC nations could be more "manageable" than had been thought.

Two assumptions underlie the new optimism. The first is that world demand for OPEC oil will increase only slightly, if at all, through 1980. The second is that the 13 OPEC nations have a greater capacity to absorb exports from the consuming countries than anticipated. The optimists figure that many of the OPEC members will be importing more and more--and moving toward a payments balance and ultimately a deficit--as the decade progresses.

Consumption Cut. The assumptions are buttressed by recent trends. In Europe, oil consumption declined 7% in 1974; in the U.S. it fell by 3%. Last week 17 members of the International Energy Agency agreed to cut their total oil imports by two million bbl. a day this year. Exploration for oil in the North Sea, Alaska and Mexico, and research into alternative forms of energy, continue apace.

At the same time, imports by the oil producers have been growing phenomenally. Morgan Guaranty estimates that total OPEC imports jumped some 75% in 1974, a startling figure even when inflation is taken into account. The cartel countries spent $50 billion of their 1974 oil revenues of $105 billion on goods and services from the rest of the world. In the first nine months of 1974, Italy's exports to Iran and the Arab countries were 92% greater than in the same period the year before; U.S. exports were up a full 85%.

Underpopulated, oil-rich lands like Saudi Arabia, Kuwait and the United Arab Emirates are clearly less capable than countries like Iran and Venezuela to buy up Western exports, but they have been funneling loans and grants to other, more crowded Arab nations eager to join the shopping spree. Says Yale Economist Richard Cooper: "Once you start giving to Egypt, there's a lot of money that can be spent." The industrial countries, which are generally short of capital, could use OPEC surpluses invested in their economies to create additional goods and services for export.

There are, however, reasons to question the notion that the oil producers' surpluses will stop growing soon. Economist Rimmer de Vries, editor of the Morgan Guaranty study, forecasts a 20% average annual rise by volume in imports by OPEC countries. But as the volume of imports grows, such a rate might well become increasingly difficult to sustain, especially for countries with primitive domestic economies. Armaments made up about one-tenth of imports last year. Shipments of war materiel cannot continue to increase --unless the selling nations are willing to take even graver risks that a conflagration will erupt in the Middle East.

When estimating the surplus for 1980, the optimists tend to lump the cartel countries together. But the populous nations (Iran, Venezuela, Nigeria) may register payments deficits in several years, while the lightly populated countries of the Persian Gulf will be building ever bigger surpluses. The Morgan Guaranty report concedes that in 1980, Saudi Arabia's surplus will bulge at $100 billion, by far the world's highest.

Cartel Break-Up. The super-optimistic scenario is that some OPEC nations that run into deficits will try to increase revenues by stepping up oil production. If demand does not increase at the same time, they will ask Saudi Arabia and the other surplus countries to cut back their own output to keep the cartel's production constant. And that could break up OPEC.

The latest forecasts are based on some necessarily fragile assumptions. While Morgan Guaranty's de Vries is convinced that "the problem of the oil deficit will work itself out in the longer term," he warns that the immediate prospect for the consuming countries is still "a very serious financial gap" between income and outgo. Indeed, if Treasury's Simon is right, OPEC'S surplus of $200 billion to $250 billion by 1980 will give it incredible financial --and political--strength.

Because recycling of oil funds can no longer be handled adequately by the world's overextended banking system, de Vries favors early establishment of the so-called "safety net," the $25 billion international recycling fund proposed by U.S. Secretary of State Henry Kissinger to help consumer countries get emergency loans to cover their oil deficits. The danger of the new optimism is it will encourage political leaders to back away from difficult or costly measures--setting up the safety net, for instance--that will be needed to deal with an economic threat that is still very real.

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