Global Growth Is Hit Anew

By Christopher Byron

Oil jitters, higher interest rates and more inflation on the way

Like some hibernating monster that has roused itself to feed, the Western world's oil-fed inflation once again has national economies in a bear hug. Last week the squeeze grew tighter. There were reports from the Persian Gulf that the damage inflicted on Iraqi and Iranian oilfields during the current fighting would take months, and perhaps years, to repair. As a result, oil-importing countries are soon likely to see tightening oil markets and then higher crude prices.

That was glum news for members of the International Monetary Fund and the World Bank, who gathered for four days in Washington last week for their annual meeting to survey the state of the world economy. Highlight of the meeting was an impassioned speech by World Bank President Robert McNamara, who retires next June after 13 years at the post. He pleaded with industrial nations to do more to ease the economic problems caused in the less-developed countries by seven years of soaring energy costs. Yet, ironically enough, as a result of the Middle East conflict the industrial nations themselves now also face the prospects of more inflation and slower growth--perhaps by early next year. Indeed, IMF Managing Director Jacques de Larosiere warned darkly about "continued stagflation around the world" and the "interrelated problems of inflation, slow growth and energy" that confront both developed and industrialized countries.

In the U.S., another factor will impede growth: a new round of soaring interest rates. The Federal Reserve, which has been struggling for a year to control the growth of money, has once again slammed on the credit brakes (see following story). Chase Manhattan Bank, the nation's third largest, last week pushed the prime rate --interest it charges its best corporate customers--from 13% to 13 1/2%. Citibank, the No. 2 bank, quickly leapfrogged that rate and set its own at 14%. Lenders like California's Great Western Savings & Loan also hiked the interest level on home mortgages last week from 14% to 14 1/2%.

The tighter Federal Reserve policy and higher interest rates provoked President Carter to lash out at the man he nominated 14 months ago to be Fed Chairman--Paul Volcker. For the past year the White House has steadfastly supported Volcker's policy of fighting inflation even at the price of high interest rates. Carter, now concerned about the impact of those interest rates on his re-election bid, last week labeled such a policy "ill advised." Volcker, in turn, said that banks had "jumped and anticipated too much" by raising rates so quickly.

On Monday the Dow Jones industrial average plunged 18.17 points, its steepest drop in more than six months. But later in the week the index rallied to close at 950.68, about a 10-point rise from the week before. A key reason was that many investors rushed to buy oil stocks in expectation that the turmoil in the Persian Gulf would soon push up petroleum prices.

Until the righting began two weeks ago, worldwide petroleum production had been exceeding demand by approximately 2.5 million bbl. per day as a result of recession in the U.S. and heightened conservation efforts in nations everywhere. World petroleum inventories now exceed 400 million bbl.

Yet the war is already pinching off 3.9 million bbl. per day in exports from Iran and Iraq, and the continuing resulting shortfall will completely exhaust the surplus in about three months. To help ease the squeeze, Saudi Arabia last week temporarily boosted its own production by 900,000 bbl. daily, to 10.4 million. Hardline OPEC members like Algeria and Libya, however, have threatened to cut back their own output in order to keep the market tight.

As a result of the fighting, Iran's elaborate refinery complex at Abadan, its tank farms at Kharg Island and Iraq's aging Kirkuk production fields have been so badly damaged that repairs could take three to six months under the best of circumstances. Remarked one top energy expert in Brussels last week: "If Iran and Iraq kiss and make up tomorrow, the market would still have to reckon with a profound impact--a price increase no matter how you cut it."

In fact, prices have already begun inching up for such high-value petroleum products as diesel fuel, naphtha and heating oil. The increase is slower than the breakneck pace that characterized the pay-any-price panic of 1979, when the spot cost of crude oil shot up from $13 to $40 per bbl. In Rotterdam, hub of Europe's volatile crude-oil spot market, small cargoes last week were selling for anywhere from $4 to $5 per bbl. above the long-term average rate of approximately $32 per bbl. that the 13-nation OPEC cartel is now charging.

Petroleum markets remained calmer than in 1979 largely because the world's oil-importing nations have bulging inventories. Japan has a 111-day supply, some of it stored in tankers swinging at anchor in Japanese ports. Observes one top oil industry executive in New York City caustically: "The Japanese would like to panic, but they have no place to put any more oil."

Administration officials, fearful of starting another run at the gasoline pump, issued soothing reassurances about the cushioning effect of the U.S.'s own stockpile. This country holds a 100-day supply at current rates of consumption. Meanwhile in Paris, members of the 20-nation International Energy Agency pledged to refrain from plunging into a destructive round of bidding against one another for supplies on the spot market.

Another global petroleum price explosion would be bad enough for the U.S. and other industrialized countries. The pain would be far worse for the financially strapped countries of the developing world. Some of the nations needing the largest amount of assistance are Turkey, South Korea and Brazil, which have already climbed up from abject poverty and now desperately need imported oil to fuel their industrialization.

To pay the ever escalating costs, those countries will be forced to boost their exports of raw materials to the industrial nations and go hat in hand to banks and foreign governments for billions of dollars in tide-me-overs. During 1981, the oil deficit of the twelve leading developing nations that lack their own oil reserves is projected to total about $45 billion, or 5% of their combined gross domestic product. In many economies the mounting burden of imported oil has reached dimensions that make real growth all but impossible. During 1980, Brazil will spend nearly 50% of its entire export earnings, which are expected to be nearly $20 billion, just to pay for imported oil; India will shovel out about 72% of its own export income for that purpose.

As McNamara pointed out in his valedictory to the World Bank, the non-oil-exporting nations of the developing world face painful economic adjustments and much slower growth in the years ahead just to keep from sinking any deeper into the petroleum bog. Aid from the industrial nations, complained McNamara, "remains a minuscule and insignificant fraction of their gross national product and is wholly inadequate to the urgent needs at hand."

Yet the responsibility to help get the poverty-ridden nations of the world out of the petroquagmire does not rest entirely with the industrial countries. Third World governments themselves must adopt policies designed to generate growth, exports and the increase of national wealth. Moreover, the OPEC countries, whose current account surpluses will soar to approximately $110 billion this year, in contrast with $5 billion in 1978, must provide more substantial assistance to the Third World.

Oil, inflation and slow growth have become an intertwined dilemma for the world's economies. With the renewed prospect of rising oil prices, it is more imperative than ever for the nations of the industrial and developing worlds to shake free of their dependence on high-priced oil. --By Christopher Byron. Reported by William Blaylock/Washington and Bruce Van Voorst/Brussels

With reporting by William Blaylock/Washington, Bruce van Voorst/Brussels

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