Oil Problems Shake the World’s Economy
EARLIER this year, the Arab oil embargo against various Western nations was lifted, and a more normal flow of oil from North Africa and the Middle East resumed. Many people breathed a sigh of relief. They hoped that this would mean the end of oil shortages.
While the oil cutbacks ended, it was not the end of oil problems. There are related problems involving oil that may even overshadow the previous shortages. In fact, almost overnight, because of such problems, the world’s economy has been thrown into turmoil.
The economic problems center on what has happened to the price of oil, especially since the Arab-Israeli war of October 1973. That price has quadrupled in recent times. The oil-producing lands of the Middle East and North Africa were the first to raise their prices sharply. Then other major oil producers followed, such as Indonesia, Nigeria and Venezuela.
What are the consequences of such higher-priced oil to a world that had based its economy on cheap oil? Are the results really catastrophic for some nations, as many authorities say? And is this all a plot by the oil companies to make more money?
There are many people who think that the oil shortages and higher prices were part of a conspiracy by the oil companies. In a poll taken by Business Week it was found that the American public’s attitude had grown sharply skeptical. It reported that:
“62% believe oil companies held back supplies to raise prices
“68% are not satisfied with the industry’s efforts to relieve it
“55% now doubt that the crisis is really a long-run problem.”
One reason for the skepticism was that the oil companies reported huge profits in 1973 and early 1974, much higher than in 1972. This came at the very time when there were growing shortages, especially after the Arab embargo. Many persons reasoned that if the shortages were as bad as reported, then why the huge profits?
The oil companies answered that their profits only looked that high in 1973 and early 1974, percentagewise, because 1972 profits were unusually low. Also, they claimed that their profits were no higher in relation to their investment than those of many companies in other fields.
Regardless of how much truth there was in the claims and the counterclaims, in a period of shortage and public sacrifice the oil companies reaped a vast treasure. Yet, what was to be expected? In most countries, companies are not in business just to please the public. They are in business to make money, and this is permitted by most governments.
The profit motive is uppermost in the minds of those who run businesses in such societies. As an executive said to editorial writer Leonard Silk of the New York Times:
“When a business statesman makes public speeches, he has to talk in terms of social responsibility and long-term profit maximization, but the truth . . . is that he is a short-term profit maximizer.”
This businessman was saying that company executives work for their company’s interests. They want to make the greatest amount of profit in the shortest amount of time. That is what they are in business to do. The editorial also noted:
“Acceptance of this simple fact of life should spare one a great deal of moral indignation and surprise—surprise that after years of receiving huge tax breaks and oil import quotas allegedly to avoid a domestic oil shortage, there should be a horrendous domestic oil shortage.”
No, in such societies there should be no surprise that oil companies, and others, do what they consider to be best for themselves. The fact that millions of ordinary people are inconvenienced and suffer is part of the system. It testifies clearly to the injustices built into the system when a problem can cause grief to so many, yet at the same time be very profitable for others.
Yet, in the United States there had been shortages of oil products even before the Arab oil embargo. Why did this happen? After all, the oil companies received favored treatment on taxes, and the competition of imported oil was limited. Should these facts not have been incentives to greater production, avoiding shortages?
The oil companies answer that the price of oil produced within the United States was kept too low by government regulation. This, it is said, did not allow the oil companies to make the profits needed to warrant drilling enough new wells to increase production. Thus, in time, much less oil was produced in the country than was used. The rest, about a third of all requirements, came from imports. However, those imports were also regulated by the government to avoid undue competition.
Because of these factors, the oil companies claim, they were not assured of getting all the crude oil they would need within the United States. So for years they did not build any new refineries to process crude oil into gasoline, heating oil and other petroleum products.
Instead, much of the oil companies’ profits were spent outside the United States where the return on their investments would be greater and the supply of crude oil more certain, it was thought. There would be no problem of demand, since Europe and Japan had seen a huge surge in the use of oil products in recent years.
Thus, domestic production and imports did not quite meet the rising demand inside the United States. That is why there were shortages of heating oil and gasoline even before the Arab oil embargo. The embargo late in 1973 merely made a troublesome situation worse.
The lifting of the embargo in 1974 relieved the worst shortages temporarily. But it did not really solve the supply problem, because the United States and many other countries use much more oil than they produce. And the demand for oil in those lands keeps growing. For the present and immediate future most of this increasing demand must be met by imports from the Middle East and Africa, where about 80 percent of the non-Communist world’s proved oil reserves are located.
Dr. Wilson M. Laird, director of exploration for the American Petroleum Institute, says: “It doesn’t take much of a mathematician to realize that we will be forced to import huge volumes of oil until we can either develop more of our own oil and natural gas, or develop alternate energy sources.” However, alternate sources are years away and will cost a vast fortune.
But while demand keeps growing faster than many officials anticipated, it is not at all certain that the supply will grow fast enough. Oil consultant Walter J. Levy writes in Business Week: “The oil-producing countries want to use the oil resources they have to develop future industrial and economic basis independent of dwindling oil reserves. However rich the reserves are, they are limited.”
Hence, the 130,000-member American Association for the Advancement of Science warns that energy problems are ‘serious and enduring.’
The Other Worry
While getting enough oil is a major worry, especially for the highly industrialized nations, there is another. It is the price that they will have to pay for oil products.
The price of oil quadrupled on world markets, resulting in price increases for all oil-based products. While prices may fluctuate, even going lower at times, there is no hope of their returning to the very cheap cost of years gone by. What that means was described by a petroleum research engineer who said: “There is not going to be any more low-cost energy. You have to accept the truth of the situation.” And economist Paul A. Samuelson warned: “The prices we now pay for gasoline may seem high, but they are not yet adjusted to anything like the world price level for oil.” In most countries gasoline prices had already jumped sharply since last year.
Yes, the consensus is that the age of cheap energy has ended. Harpers magazine reports:
“Historians may see 1973 as a year dividing one age from another. The nature of the changes in store for us is symbolized by the Shah of Iran’s announcement last December that the price of his country’s oil would thenceforth be $11.87 per barrel . . .
“The Shah accompanied his announcement with a blunt warning to the industrialized nations that the cheap and abundant energy ‘party’ was over. From now on, the resource on which our whole civilization depends would be scarce [and costly].”
World’s Economy Changed
The higher oil prices have shocked the oil-hungry nations. Many regard it as a greater problem than shortages. The Wall Street Journal observed:
“The biggest problem, though, isn’t shortages but the skyrocketing prices for oil and oil-related products. Such increases are going to be a strain for all consuming nations—and even more so, of course, for those with weak finances.”
The additional cost of oil for the importing nations is truly staggering. Gerald A. Pollack, an official of the huge multinational Exxon oil company, says, in Foreign Affairs, that for Europe, the United States and Japan “oil imports this year may be nearly $50 billion more than in 1973.” He notes that by 1985 the cost to those nations would approach $150 billion more than in 1973.
The oil-producing nations will reap vastly higher incomes from the increased prices. They may have surplus oil incomes of 50 to 60 billion dollars in 1974 alone; some put the figure higher. Exxon official Pollack feels that these nations could accumulate about $500 billion in surplus funds by 1980. He adds: “These magnitudes would seem to be enough to scuttle any monetary system.”
That is why a financial expert called the oil price rise “the most profound economic development of the post-World War II period.” And Chancellor Helmut Schmidt of the Federal Republic of Germany said: “No matter what action the industrialized countries may take to wipe out balance-of-payments current-account deficits, the fundamental problem as such will remain unsolved. A process of shifts in patterns of income has been set in motion on a huge scale.”
The higher oil prices threaten the very existence of the poor nations. Statisticians of the United Nations estimate that even the poor countries will have to pay about $14 billion more in 1974 for the oil they use. That extra money will have to be diverted from other necessary things, such as farm equipment, food, fertilizer and consumer goods.
Do the world’s leaders have solutions for the enormous problems arising from price inflation, particularly of oil products? Chancellor Schmidt said:
“It would be wrong, of course, to believe that the oil price explosion was the only cause of instability. But the massive increase in oil prices has clearly revealed the actual fragility of this elaborate system of economic relations among the nations of the world, from the structure of their balance of payments to their trade policy. . . .
“Oil has shaken the very foundations of the present world economic system. . . . oil may shatter the laboriously built structure of the world economy.”
In Harper’s magazine, author William Ophuls, commenting on the inability of governments to cope with these new developments, says: “The political system inherited from our forefathers is moribund [dying]. We have come to the final act of the tragedy.”
It becomes more and more apparent that the present system of things now dominating the earth is not able to handle mankind’s problems. What is needed is an entirely new system, one that will not be ripped apart by greedy commercialism and divisive nationalism. Who can provide such a new order? Surely not human leaders, for they have tried and their failures are apparent to all.
Only the Creator of man and this earth can construct such a new order for mankind. And God’s inspired Word, the Holy Bible, foretells such a new arrangement, calling it a ‘new heavens and a new earth in which righteousness is to dwell.’ (2 Pet. 3:13) The “new heavens” means a new government for all the earth, operating from heaven under God’s direction and in the hands of his tried and trusted Executive Officer, Christ Jesus. The “new earth” means a new human society.
That heavenly kingdom of God will usher in a new system for controlling and distributing earth’s plentiful resources. It will not work to the advantage of some and at the expense of others, for “when there are judgments from [God] for the earth, righteousness is what the inhabitants of the productive land will certainly learn.” (Isa. 26:9) Nor will such a new order be a long time in coming, for Bible prophecy clearly shows that the present corrupt system of things now managing earth’s affairs is near its end.—2 Tim. 3:1-5.