Oil and the Money Drain

...Where laws exist limiting the creation of money, these would undoubtedly be suspended...

...As long as the Faisals and Qaddafis maintain diversified portfolios, the only conceivable serious threat would be a selling spree...

...Nobody who appreciates the risks which dependency on foreign, and especially on Arab, oil constitute for the United States, Europe and Japan-in foreign as well as domestic affairs-can be satisfied with the measures that have already been taken or envisioned in official programs...

...Numerous schemes of confrontation or collaboration between the oil producers and oil consumers are now being discussed to relieve any possible danger...

...We are looking at 20-30 commodities," he recently told the importers, "manufactured goods as well as raw materials, agricultural products as well as the more sophisticated electronics, so eventually it would be a very meaningful basket, representative of your inflation or deflation...

...In all probability, however, the funds from oil sales will far exceed the absorptive capacities of the producers...

...We are unlikely ever to reach this stage, though, because in spite of their grievances over our Israel policy, the most important oil producers arc fearful of the Soviet Union and do not wish to weaken the United States' military capacity...

...It is also undesirable for the oil consumers to be forced to look upon inflation as a tool for alleviating economic distress...

...Yet this is a fairly remote risk because a selling spree, drastically reducing the level of security prices, would destroy a large part of the wealth the Mideast rulers had invested in stocks...

...foreign policy goals, and could well tempt the Arabs to take a more intransigent stand on Israel...

...a commodities index, if realized, would only maintain the value of revenue being paid for oil at a particular moment, not that of funds held as deposits or fixed-interest securities...

...Saudi Arabia, Iran and others have indicated that they wish to use their earnings for industrial development, in order to go on living affluently after their great natural resource is exhausted...

...This means that the dangers to the advanced countries are not as acute as the alarmists have alleged...

...But we would obviously not permit them to buy land near missile sites or other important military or naval installations...

...Some of the oil states have already offered nominally large amounts of aid to the developing countries as a partial compensation for the enormous burden high oil prices have placed upon that part of the world...

...The mitigation, though, may be more substantial than the pessimists assume: Saudi Arabia, for instance, will have to buy a large quantity of transportation facilities to become a modern country, since its huge distances would otherwise gravely impede industrial operations...

...backing of Israel, for instance, may induce the Arabs to throw vast sums of dollars on the world currency markets at a time when the appropriate defensive actions by the Western central banks are delayed by legalistic or diplomatic quibbling...

...indeed, the alarmists are warning against the danger of an American enterprise entirely controlled by a foreign, and not necessarily friendly, country or bloc of countries...

...The limits are narrower still for Kuwait and the Arab emirates...

...The riyal, dinar, Libyan pound, etc...

...What is true of stocks is true as well of other assets, real estate for example...

...For if they wanted to sell dollars for Deutschmarks, the Bundesbank could, and presumably would, increase Germany's money supply to prevent the mark from rising significantly against the dollar...

...and aside from small quantities that might be obtained from the Soviet bloc, these would necessarily be procured in the United States, Canada, Europe, and Japan...

...The situation would be only slightly more difficult to handle should the Arabs, after withdrawing their dollars-or Swiss francs or Deutschmarks or yen-try to convert them on the world money markets...

...In fact, this threat may even be enhanced once the Arabs fully realize that the various modes of investment accessible to them will not yield the benefits they expect, that the very magnitude of their funds makes the situation far different from the one a more modest investor has to face...

...Similarly, there is little sense in disputing whether the solution should be sought in conserving energy or in increasing its availability...

...This fear grows out of a 19th-century mystique of property that has little place in the 20th, since the rights and privileges that property confers on its owners in our time are subject to control by the state...

...these are innocuous forms of recycling...

...Nonetheless, it does not mean that no dangers exist...

...But there is room for much more assistance, and from the point of view of the industrial nations, employing a major portion of the oil wealth in this manner would be the best way to recycle the most money...

...Suppose, though, that the Arabs wanted to convert the withdrawn dollars, francs or marks into their own currencies...

...Laws to prevent such purchases exist or can easily be enacted...

...A HARD LOOK AT Oil and the Money Drain BY CARL LANDAUER Since last winter, when the members of the Organization of Petroleum Exporting Countries (opec) discovered that price riggings could yield immense dividends, the industrialized nations have been haunted by the fear that they will be bled to death or have their freedom severely restricted by the nouveau-riche sheiks and shahs...

...But the peril of politically motivated withdrawal has been overrated...

...they can simply turn off the faucet...

...Were the Arabs to suddenly call back their deposits from New York to influence American policy in the Mideast, the Federal Reserve could make up the losses...

...would become very dear, and the exports of Saudi Arabia, Kuwait, Libya, etc., which consist primarily of oil, would be priced out of the market...

...If these were established Carl Landauer is Professor of Economics Emeritus at the University of California's Berkeley campus...

...For one thing, the growth of indebtedness to the oil producers is bound to have a psychologically unsettling effect on the industrialized world, even if its true significance is diminished by inflation...

...Nor can one base one's hopes for a resolution solely on the exploitation of the Alaskan, North Sea and recently discovered Mexican oil fields, or on other non-Arab sources...

...Large assistance grants would solidify black African and Asian support for the Arab cause in the struggle with Israel, and blunt the accusations that the oil producers are exploiting the Third World to a greater degree than the Europeans and North Americans ever did...

...But whatever the Arabs and other opec states choose to do, one can gain the correct perspective on the monetary crisis only by recognizing the profound issue that confronts them: in what form to hold their new wealth...

...For this reason, apparently, some American banks are reluctant to accept more than a moderate amount of opec funds in short-term deposits...

...The operation would be tantamount to an oil boycott, no more and no less...

...Were the Arabs to take over General Motors and then act against American national interests-perhaps by refusing defense contracts-we could play the nationalization game against them as it has so often been played against us...

...The oil magnates, of course, are aware of all this, and the Shah of Iran, for one, has announced his desire to tie oil costs to an inflation index...

...We do not yet know how ample the oil from new areas will be, and in any case global demand can be expected to grow along with supply...

...In a sense, therefore, what would emerge is a race between Western inflation and opec accumulation...

...or Israeli diplomatic interests...

...Yet in the light of the recent UN actions, we seem to be close to this situation anyway-without enjoying the advantages of increased Third World aid or recycled petrodollars...

...For another, in the immediate future we may have to face most unpleasant "in-between situations.' Sudden anger at U.S...

...Even if Saudi Arabia wants to turn itself into a second West Germany, its 8 million inhabitants can install and operate only a modest amount of equipment...

...banks widely cited in newspapers and on television is that the Saudis and Kuwaitis, say, would have the power to ruin our financial community by withdrawing their money without notice...

...And while Iran, Venezuela and Nigeria have a greater need for capital goods, straightforward recycling, it seems certain, can merely mitigate the current monetary problem...

...At that point they may decide to stop selling their oil for a while-particularly if they feel the West is obstructing their political efforts...

...Surely some of the money will be invested in this way, and to the extent that it is, the crisis will be defused: The oil producers will buy machinery and technical know-how from the advanced nations, thus "recycling" their riches back into the industrial economies...

...The effect would be to depress the value of the oil consumers' currencies in relation to those of the Arab countries...

...And to do so we must accept much more severe inconveniences, and perhaps hardships, than our political leaders have thus far been willing to admit...

...The greatest danger of all, however, and the strongest argument for moving toward self-sufficiency in energy, despite the huge costs, is the continuing chance of an oil embargo...

...Thus huge monetary withdrawals by the Arab rulers as a hostile action can be effectively neutralized...

...On the other hand, Arab stock purchases would offer a genuine advantage in that the Western capital market would be improved, and urgently needed investments in both energy-producing and energy-conserving industries would be facilitated...

...It should be pointed out that this reluctance is wholly in keeping with good banking practice, whatever the source of the revenue: No bank should accept too large an amount of short-term deposits, since these funds often have to be loaned on longer term to the bank's customers...

...But if the Arabs think such a boycott is in their interest, and that they can afford it economically and militarily, they do not have to go through a complex monetary manipulation...

...In short, as long as conversion of one "Western" currency into another is attempted, a modicum of cooperation between the affected nations would preclude any catastrophe...

...a proper ratio between short-term obligations and less liquid assets is essential...

...But first one must ask, what can the oil monopolists do with their enormous wealth...

...As a writer for he Monde recently put it: "What the Arab countries are skimming off is having exactly the same effect on France this year as though the state had tripled income taxes and done nothing with the revenue...

...Yet assuming the oil states hold their excess wealth in money or certificates of indebtedness, they cannot protect themselves against the adverse effects of rising prices...

...Because the "Fed-created" funds would replace resources withdrawn by foreigners and thus no longer in circulation in the United States, there would be no inflationary effect...

...One danger of huge Arab deposits in U.S...

...We must commit ourselves to both...

...Alternatively, the Arabs could decide to concentrate their investments, buying up, say, the whole of General Motors...

...Quite obviously, these political gains would be achieved at the expense of U.S...

...The dollars, Deutschmarks, yen, etc., that the opec nations cannot spend on development projects could be held in the form of bank balances...

...In addition, the very increase in the availability of loan capital resulting from the oil producers' investments would rapidly bring interest rates down, thereby minimizing the producers' effort to avoid inflationary erosion...

...as time deposits, they would earn interest, but not enough to compensate for the eroding effects of inflation-brought on, in large measure, by the high oil prices...

...Are there any real dangers from Arab investments in Western stocks...

...After all, any central bank can print its own money...

...Every answer to this question necessarily either reduces the value of the accumulated riches or directs the bulk of the money back to the oil purchasers...

...Such a posture would inevitably paralyze their efforts to stem the depreciation of money...

...The developing countries would use the funds to buy food, chemicals, machinery, transportation equipment, and expert advice...

...An inflation rate as low as 7 per cent would shrink any accumulated funds to relative unimportance within a short period...

...As for the Arabs, they would find their reward essentially on the political side...

...Moreover, what is possible for America's Federal Reserve Bank is equally possible for central banks of the other oil consumers...

...The technique for this is well known and would not be too difficult to apply...

...This possibility alone would justify very direct efforts in the United States, Western Europe and Japan to lessen their dependency on foreign oil...

...Let the opec governments acquire vacation land in Florida or California, or skyscrapers in various American cities...

...Should the Arabs later decide to return their money, the Fed would have to mop up the surplus cash to prevent a rise in inflation...

...Yet another option is open to the oil producers, one that would, on balance, be the most desirable for the international economy (although not, I hasten to add, for U.S...

...What applies to bank balances also applies to government securities...