I
It is now exactly three years since the Organization of Petroleum Exporting Countries (OPEC) raised the price of their oil fourfold. The rise came in the aftermath of an embargo of sorts undertaken during the Yom Kippur War by the major Arab producers of the Persian Gulf. Taken together, these events represented the onset of what soon became known as the oil crisis.
If crisis is defined as a situation marked by pervasive uncertainty, and in which an established pattern of relationships has been challenged or overturned, the term was certainly appropriate. In the months following the OPEC price rise, the noted oil economist Walter J. Levy wrote: “Rarely, if ever, in postwar history has the world been confronted with problems as serious as those caused by recent changes in the supply and price conditions of the world oil trade.” At the time, Levy’s opinion was widely shared. In retrospect, it appears overblown to an increasing number of observers. Nevertheless, the question persists whether it is closer to the truth than the view that the consequences of OPEC actions have since been contained by an international system which remains essentially unimpaired.
We still know surprisingly little about the immediate events attending and conditioning the decisions the OPEC countries took with impunity three years ago. It is, of course, necessary and useful to view these decisions against the background of an international order that was showing many signs of serious strain. Largely the creation of America, this order rested upon and reflected America’s continued military, political, and economic supremacy. Even in the absence of Vietnam, the decline of the classic cold war was bound to challenge this supremacy by eroding the cohesiveness of the American-led alliance system. No longer perceiving the threat to their security they had once perceived, America’s major allies were no longer willing to accept American leadership in the manner they once had. They were no longer willing to do so because the question of American leadership now increasingly revolved around economic issues, which, to the degree they were dealt with in isolation from military-security issues, could not give rise to the compulsions of an earlier period. On the contrary, economic issues more often than not revealed growing conflicts of interest while providing no readily available means of resolving these conflicts. Although the earlier compulsions of the cold war were increasingly discounted, the disparities in economic capability as between this nation and its major allies had narrowed. Given these changes, many conflicts of interest between America and Europe (and Japan) went unresolved, since neither the incentives nor the power preponderance required to resolve them were present.
If these changes in America’s relations with its major allies would probably have occurred even without Vietnam, the same cannot be said of America’s relations with the developing countries. Though the precise impact throughout the developing world of the American failure in Vietnam remains a matter of uncertainty and controversy, it is only reasonable to conclude that the effects were considerable. The argument of liberal critics of the war had been that Vietnam demonstrated above all the triumphant force of nationalism in the Third World. Whether or not the argument was well-taken, Vietnam was seen by the new states as a successful challenge to the foundations on which the American-inspired postwar order rested.
It was in these general circumstances of the early 1970’s, circumstances in which American power came increasingly into question both at home and abroad, that a growing assertiveness of the major OPEC producers became manifest and took on a new significance. There was no lack of warning signs in the years 1970-73 that pressures for change in the international oil market were building up. One such sign was the Libyan price hike of 1970. Another, more ominous, sign was the Teheran negotiations of January 1971. The period from Teheran to the fall of 1973 was marked by a series of small price increases made at the insistence of the producers. It was also marked by mounting pressures of the producing countries for an even greater share of the power to set production levels, to determine investments and export destinations, and to set prices.
In the summer of 1973 the Saudis indirectly warned that in the event of a Middle Eastern conflict an oil embargo was likely. The warning does not appear to have been taken seriously by the American government. When the October war broke out the warning was repeated. Once again, it does not appear to have been taken seriously at the highest levels of the administration. At the time, the oil companies were again engaged in negotiations with the producers, negotiations that formed the immediate prelude to the events culminating in the OPEC decision to quadruple oil prices. Here, too, what evidence we have points to no more than a modest concern by the directors of American foreign policy over the outcome of the negotiations. Although a traditional policy was followed of urging the oil companies to make “reasonable” concessions to the producer countries, there is no evidence of strong pressures being put on the companies by the government.
We do not yet have a coherent and satisfactory explanation of the role played by the American government in the immediate events that led to the oil crisis. There are the valuable and extensive hearings held by the Senate Foreign Relations subcommittee on multinational corporations. But the hearings focus on the activities of the international oil companies. They are often less than illuminating when dealing with the government side. In particular, they do not really succeed in clarifying the role played by the man who, for all practical purposes, spoke for the American government in the fall and winter of 1973-74. Given a President increasingly preoccupied with his political survival, the position taken by the Secretary of State toward the events in question was critical. But precisely what that position was at the time remains unclear.
There are, of course, “explanations” of Mr. Kissinger’s position. None seems very plausible. Thus one explanation is that Kissinger was passive before the demands of Iran and Saudi Arabia because he feared that opposition to those demands would jeopardize the standing of their conservative ruling elites and perhaps lead to their overthrow by radical elements. But this explanation is unable to account for his apparent failure to put serious pressure on the oil companies to make substantial concessions to the major producers at the outset of the last round of negotiations which, along with the war, set the stage for the momentous price rise. These negotiations, as already noted, were going on when the war broke out. Yet there is no evidence that Kissinger regarded them as sufficiently important to intervene in a significant manner. On the contrary, he appears to have largely neglected them and the vital issues at stake in their outcome.
Another explanation is that this neglect was only apparent, that behind the appearance of drift there was a well-worked-out policy. On this view, Kissinger followed the cue given him by the oil companies who connived in, if they did not indeed engineer, the price rise. But such evidence as we have points to the resistance of the oil companies to substantial price hikes long past the time when resistance on their part was prudent or effective. The companies did indeed urge the government to modify its policy toward the Arab-Israeli conflict and to take a more “evenhanded” position. They did so, however, in the vain hope that this might strengthen their position in negotiations with Arab producers or, at any rate, moderate Arab demands.
If there was a deep design here, it is not discernible. Are we therefore forced back on sheer inadvertence? It may prove in the end closer to the mark than any other explanation. At the time, the Secretary of State seemed almost inattentive to the consequences likely to follow the actions of the oil-producing states—actions which, if he did not encourage, he did nothing to prevent. It may be that this inattentiveness was largely due to a failure to see the vast political implications of what otherwise appeared as little more than another dispute over “prices.” Why not appease the Arabs and curry their favor over an issue that was still seen as peripheral to America’s major interests in the Middle East? The Secretary of State’s outward equanimity even after the momentous price hike is perhaps to be explained by his initial skepticism over the durability of the actions taken by the oil cartel. The record shows that for almost a full year following the price rise Kissinger cherished the expectation, as did many others within the administration, that the oil cartel and the decisions it had imposed would not prove lasting.
Whatever the true explanation, it is not likely to enhance Kissinger’s record as a statesman. If anything, when his handling of the challenge mounted by the OPEC states is bared, it is likely to rank among the great blunders of recent history. Nor can his responsibility for failing to respond in time to this challenge be avoided by pointing to a domestic base that precluded an effective response. The domestic constraints of the time were untested and remain unknown. What is apparent is the failure to have tested those constraints. By his passivity, the man who has entertained as his prime purpose the conservation of American interests and power relinquished both to an extent we cannot as yet accurately gauge. One direct consequence has been to compromise as never before America’s Middle East policy.
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II
The broader significance of the actions taken by the oil-producing countries in the fall and winter of 1973-74 is that they called into question the issue of Western (and Japanese) security of access to an indispensaable source of energy. Henceforth, the security of oil-supply operations could no longer be taken for granted (as, short of a war involving the great powers, it formerly was taken for granted). This was the meaning of the embargo, however spotty and limited had been its actual application. Particularly in the Middle East the supply of oil would now depend upon political conditions the Western powers might not be able—and, even if able, might still be unwilling—to control.
It is necessary to emphasize the issue of security of access since it, and not the issue of price, ultimately defines the significance of the actions taken by the OPEC states—and most clearly by the Arab members. If the “full permanent sovereignty of every state over its natural resources and all economic activities,” to use the words of the UN General Assembly’s 1974 Declaration on the Establishment of a New International Economic Order, is an “inalienable right,” the exercise of which is not subject to any external “economic, political, or other types of coercion,” then clearly the oil-producing countries may define the conditions of access to their natural resources. The setting of prices is no more than a necessary corollary of this alleged basic assertion of right.
Was it only the corollary of the right rather than the basic right itself that a supine West accepted and, by so doing, legitimized? The answer remains unclear. It remains unclear if only for the reason that the 1973-74 embargo was never expressly condemned—let alone made the occasion of reprisals—by the major Western powers. The creation by the Western states and Japan of the International Energy Agency can scarcely be regarded as a challenge to the legitimacy of the oil embargo. Rather than challenging the right to resort to an embargo, the agency provides for defensive measures to meet its effects by obligating the nineteen-nation group to activate a burden-sharing program should one or more of them again face an embargo. Even so, the Arab states have viewed the IEA as an arrangement hostile to them.
It is true that high American officials have occasionally warned the Arab producer states of the consequences that might follow another embargo. These warnings have not challenged the legitimacy—only the expediency—of the measure. But the warnings have been redundant, since it is likely that states confronted by a cut-off of their source of energy will eventually strike back, including resort to military action, if they have the means of effectively doing so. This is, at least, a reasonable expectation if the economies of the embargoed states are being literally “strangled,” to use a now famous formulation. In this case, the ancient principle that necessity knows no law clearly becomes operative. What is still unclear, however, are the limits, if any, to a producer state’s right to dispose of its resources. The Western powers have not attempted to set meaningful limits to this right. By their reaction to the oil embargo of three years ago and by their subsequent behavior they have, if anything, conceded that these limits are dangerously broad.
Even if doubt persists over the basic assertion of the right to dispose of—and therefore to deny—natural resources, there is little doubt over the possessor’s right, whether acting singly or in combination with others, to determine the price of these resources. This right was all but confirmed at the very outset of the oil crisis. It was subsequently reinforced by the emphatic rejection on almost all sides in the West of proposals to take reprisals—including, in the extreme, forcible reprisals—in response to “prices.” To be sure, it was acknowledged by many who rejected reprisals out of hand that “prices” might have highly undesirable economic and political consequences. After all, there would have been no crisis had these consequences of “prices” not been judged very real. Even so, the resort to serious confrontation with the oil-producing countries was ruled out.
In part, this refusal even to consider serious forms of confrontation with the producing countries has reflected the sympathy and support of a significant portion of Western elites for the ostensible ends of OPEC actions. After all, by its actions the oil cartel was effecting a substantial transfer of wealth from those who had, yet were not prepared to give, to those who had not (or, more accurately, to those who had less). Among Western elites preoccupied with international inequalities of income and wealth and committed to reducing such inequalities, the measures taken by the oil cartel afforded no real grounds for opposition, particularly by those whose present affluence was presumably due in no small measure to the cheap energy heretofore provided by the producing countries.
True, the actions of OPEC could not be seen as an unmixed blessing, for the high oil prices bore heavily upon many non-oil developing countries and adversely affected their prospects of growth. But since the major consumers were the developed states, concern focused largely on the adequacy of adjustment mechanisms that would have to be employed in dealing with what were initially seen as financial problems of staggering proportions. This concern, let it be noted, was not so much over the amount of wealth to be transferred as over how it was to be transferred; and, to the degree that the OPEC countries (or some of them) could not absorb sufficient imports of goods and services to offset their earnings, how transfers of claims of unprecedented magnitude might be made in ways satisfactory to OPEC-country investors and their creditors in the developed world.
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On balance, however, the judgment made by Western elites strongly committed to promoting development and to reducing global disparities of income and wealth was favorable to OPEC’s cause. If nothing else, OPEC’s actions provided the dramatic event needed to give the challenge to international inequality a momentum and significance it had heretofore lacked. This it certainly did, as the elites of the new states were quick to appreciate. In the words of one group of developing-country spokesmen, the actions of the oil-producing states must be seen as putting “an end to an era which had begun with what the West calls the ‘great discoveries.’ For the first time since Vasco da Gama, mastery over a fundamental decision in a crucial area of the economic policy of the center countries escaped their grasp as certain peripheral countries wrested it from them.”
For all its rhetorical flourish, this statement cannot be dismissed as mere artless exaggeration. The OPEC states did wrest control over a crucial area of the economic policy of Western countries. Moreover, the OPEC states did set an example for others, an example they will try to emulate even if in different ways and on a far more modest scale. Finally, the oil-producing countries have been the cutting edge in the efforts of the developing states over the past three years to forge a New International Economic Order. Nor is the significance of this role diminished by pointing out that it has been assumed largely for self-interested reasons, and that if the major OPEC states could without disadvantage enter the circle of developed and capitalist states, they would very likely do so. Even if true, this does not diminish the role these states have in fact played in the North-South dialogue. In their absence, it is doubtful whether there would even have been a dialogue.
It is for these reasons that the proponents in the West of a far more egalitarian international system reacted, and continue to react, on balance favorably to OPEC. It is for the same reasons that what are in their eyes OPEC’s sins—above all, the failure of the oil-producing countries to afford substantial relief for the distress caused to most non-oil developing countries by the rise in oil prices—are nevertheless tolerated. Despite these sins, OPEC is seen as a necessary agent in effecting a great and long overdue transformation.
The views of those Western elites that have inclined them to react with tolerance and even sympathy to OPEC’s actions are not to be identified with the governing elites of most Western states—and clearly not the United States. The refusal of Western European states to entertain serious opposition to OPEC’s actions must be attributed primarily to a sense of impotence. Given their dependence on Middle Eastern oil, these states were in no position to confront the producing countries. With what could they confront them that might prove effective in the short run? At best, in any confrontation these states, and Japan, could only follow the lead taken by America. At the same time, it is true, a policy of confrontation undertaken by America was apparently viewed with disfavor. To the extent that this view represented the real sentiments of European governments, it reflected the fear—surely not an unreasonable one in the circumstances of the early 1970’s—that an American-led confrontation might prove abortive and Europe would then be left holding a very large and dangerous bag.
Nevertheless, if the actions of OPEC were to be rescinded, the responsibility for doing so was evidently an American one. In the American case as well, though, there was more than a hint of a sense of impotence, and certainly with respect to any kind of confrontation that held out the ultimate prospect of employing military force. Moreover, serious confrontation with the Arab producers scarcely fit in with the Secretary of State’s policy of conciliating the Arabs, displacing Russian influence in the Middle East, and establishing the United States as mediator of the Arab-Israeli conflict. Then, too, in the American government there was—as already noted—the conviction of many that the OPEC actions simply would not stick, that the cartel would fall apart, and that, in any event, the market would sooner or later work its inexorable way and force a break in price. This was the well-known view of Treasury Secretary Simon and for some time at least it was accepted by the Secretary of State. Given this outlook, there was no need to consider reprisal measures against the producing countries. By the time it was apparent that the cartel would not fall apart and that the market would not drive the price down, OPEC’s actions had been legitimized through Western inaction. But then—circa late spring 1975—it was argued that serious confrontation was in any case a moot issue since the dangers that many had believed very real had largely passed.
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III
In order to understand why these dangers were thought to have passed, it is necessary to recall the manner in which the oil crisis was initially defined by expert consensus. In essence, the problem raised by the sharp rise in oil prices dictated by the OPEC countries was defined in terms of devising satisfactory means for settling the huge transfers of claims that loomed ahead. On the one side, any satisfactory solution would have to insure that the consumers continued to receive at least minimally necessary supplies of oil. On the other side, the claims of producers would have to be met in a manner satisfactory to them. At the time, the fulfillment of these requirements seemed next to impossible. Many consumers simply could not be expected to meet their oil-deficit needs for the indefinite future and in order to do so would have to borrow. Yet the projected deficits of these countries—developed and undeveloped—were of such a magnitude when taken collectively that they seemed to exceed by far the capabilities of prospective lenders, public and private.
In theory, of course, the deficits could always be financed by those whose actions had created them in the first place. But the producing countries could scarcely be expected to look with favor upon the steady accumulation of financial holdings that might prove in the end to be quite worthless. The producing countries would seek the most profitable and the safest havens for their ever mounting petrodollar surpluses, and these havens would very likely be in countries that had the least need of OPEC funds. Even then, there was considerable worry that the producing states might recycle their funds mainly into short-term markets, an act that would add to the general climate of uncertainty. Indeed, the fear was frequently expressed that if opportunities for safe and profitable investments appeared too limited to the holders of large petrodollar surpluses—chiefly the states of the Arabian peninsula—they might simply decide to reduce production to roughly what they could currently consume in goods and services.
It followed from this definition of the crisis that the question was not how much the world should pay for OPEC oil, but rather how could the world pay for OPEC oil? In this manner, the principal issues became largely technical ones. How could the oil-deficit needs of the vulnerable among the developed and developing countries be financed? What was the capacity of the OPEC states to absorb in goods and services at least a substantial part of their burgeoning revenues? How might the surplus revenues of the producing countries be recycled—since some form of recycling was inevitable—to meet the world’s growing capital needs? These were the questions that commanded primary attention, at any rate among the experts. They reflected the view that the transfer of wealth exacted by the OPEC countries was secondary in importance to the ways by which this wealth might be transferred without dangerously disruptive effects.
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The crisis as thus defined did not issue in the dire consequences many had feared. The particular apprehensions of 1974 and early 1975 proved in the event exaggerated—or, at least, so it seemed to many from the perspective of 1976. In part, this was due to the global recession, a recession to which the oil-price rise itself made a significant contribution. In turn, the diminished level of economic activity resulted in a reduced consumption of oil in the industrialized states. Despite further rises in the price of oil to where it stood at five times what it had been in the early fall of 1973, OPEC oil revenues decreased slightly in 1975 and 1976 as compared with 1974.
More important, however, in reducing the anticipated surpluses of the producing countries was their unexpected absorptive capacity. At the outset of the oil crisis the consensus of the experts had been that the OPEC states would not be able to absorb in goods and services more than one-third of their revenues and that this limitation would hold for at least a period of five years and, in all likelihood, considerably longer. Instead, OPEC imports exceeded by far this forecast even in 1974 and came to almost 50 per cent of oil revenues. In 1975 this trend continued, with imports rising by some 60-65 per cent over 1974. And although current indications are that imports will have risen at a much slower rate in 1977, the current import levels defy almost all the predictions made only two years ago.
As a result of these developments, OPEC’s cumulative current-account surplus is a good deal lower than most earlier projections. Two years ago it was commonly estimated that this surplus would run at between $60-70 billion a year through 1980. The estimate was borne out only in 1974. In 1975 the surplus dropped markedly (to roughly $35-40 billion), and though it will undoubtedly have risen again in 1976, it will still remain considerably below earlier projections. These surpluses, it is necessary to add, are concentrated very largely in the states of the Arabian peninsula, with Saudi Arabia accounting for roughly half of the total.
Not only have the oil-producing countries’ surpluses been smaller than earlier forecasts, many present projections find these surpluses almost disappearing by 1980. Apart from the four Arabian peninsula countries, the remaining OPEC countries are even now scarcely more than meeting their rising import bills with revenues from oil. In the case of the Arabian peninsula countries—particularly Saudi Arabia—rapidly diminishing surpluses after 1977 are expected to result from the continued rise in imports as against oil exports that remain steady or even decline moderately because of an increase in non-OPEC world production. These projections, it should be noted, are all based upon the assumption of no more than moderate yearly increases in the price of OPEC oil (6-7 per cent).
Thus, if present import trends of the major OPEC states persist and if these states do not push for more than moderate increases in oil prices, the cumulative petrodollar surplus from 1974 may be on the order of between $200-250 billion in 1980.
The size of the OPEC surplus apart, its disposition to date has also generated a certain optimism. At the outset of the oil crisis, a major worry was the expected debt structure of the developed states. To be sure, concern was also directed to the developing countries and to the means by which they were to pay for their increased oil bills. But the prime concern was with the industrialized states that consumed over 75 per cent of OPEC oil. A mounting and intolerable debt structure among the latter would not only threaten the entire system at the core, it would make the prospects of many of the developing countries next to hopeless since it would strike hard at their export markets while making it impossible for them to borrow to cover even their oil-related deficits.
As matters turned out, however, it has not been the debt structure of the industrialized countries that has proved to be unmanageable—and this despite the continuing precarious situation of at least two of them. A rising level of imports by the oil-exporting countries, together with both the short-term and (increasingly) long-term investments made by these countries, has “recycled” the petrodollars, though primarily to such countries as America and Germany. In turn, the developing countries, though their debt structure has increased by 50 per cent in the past two years, in substantial measure because of increased oil prices, have been able to borrow either in private Western capital markets or, in the case of the very poor, from specially created international institutions designed to meet their oil-related deficits (primarily the International Monetary Fund’s oil facility). A form of “secondary” recycling of petrodollars has thus taken place, whereby the weaker countries—developed and developing—have borrowed in the capital markets of the stronger. So long as the export position of most of the developing states continued to show strength, as it has in the past year and a half, we are assured that their debt structure will not prove unmanageable and that it may even be expected to stabilize and, beyond, to show slow improvement.
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IV
In sum, the sudden unraveling of the international economic system that many feared in 1974 and early 1975 did not come to pass. And since the crisis had been seen largely in terms of the immediate dangers it posed to that system, the conclusion that it has been surmounted, at least in its more threatening aspects, has not seemed unreasonable. A crisis is perceived largely by the way it is defined. The manner in which the oil crisis was originally defined in no small way accounts for the widespread view today that it has markedly receded.
It is of course admitted on almost all sides that problems persist, some quite serious. There is still, after all, a growing surplus that must be watched. The OPEC states could still seek an exorbitant rise in the price of oil, if not this year then next. Indeed, since their revenue needs have become so large, and are almost certain to become much larger, it would appear that they have every incentive for raising prices again. The debt structure of the developing states—and the weaker of the developed states—could yet reach the point where it imperils both borrowers and lenders, dependent as it is not only upon the export position enjoyed by the developing states but, in varying measure, upon the price they must pay for oil. But these problems, though still seen as worrisome, are on the whole regarded as manageable. If we have come through the first three years of the changes wrought by OPEC, conventional wisdom appears to suggest that the worst is over.
Is it? Are the consequences to date of OPEC actions indicative of a crisis that has been transcended or of a crisis that simply persists, the eventual outcome being still quite undetermined? Instead of the rapid erosion initially expected, are we merely witnessing a slower erosion of Western interests and power, though one that may still have many of the consequences once feared and, in addition, some unanticipated consequences?
To raise these questions is not to betray a determined pessimism, for the record plainly shows that OPEC’s actions have already cost us a great deal. If the worst of the consequences that were feared in 1974 have not occurred, the consequences that have already materialized are not to be lightly dismissed. One consequence of OPEC actions was the added push thereby given to the recession. Estimates vary on the precise effects these actions have had on recessionary trends, but there is little disagreement that they contributed significantly to unemployment, inflation, and the slowing of growth, not only in the industrialized states but in the developing countries as well. There is no assurance that a similar cost might not have to be incurred again in the future.
It is not what the actions of the oil cartel have already cost us that is of primary interest, however, but the cost we may yet incur. In this respect, it is essential to contest the view that the past three years have been the most difficult ones we are likely to face. Instead, it may quite plausibly be argued that the past three years will turn out in retrospect to have been the easy—or easier—years, if only because the oil-importing nations that would otherwise have had great difficulty in financing their oil-related deficits were able to do so by means which are either no longer available or rapidly disappearing.
If this prospect is a real one for the few developed countries that remain in a precarious position today, it is doubly so for many of the developing countries. At the outset of the oil crisis these countries disposed of relatively large foreign-exchange reserves, the result of the 1971-73 boom in commodity-export prices. Moreover, these reserves were not only a cushion in meeting growing payment flows, they also facilitated borrowing in the Eurodollar market. For the very poor among the developing countries, there were the facilities, old and new, of the International Monetary Fund. Today, these means of financing the deficits of the developing countries can no longer be relied upon to meet the continuing deficits. Almost all of the developing countries have run very low in foreign-exchange reserves. This, together with the greatly increased indebtedness of a number of them (the so-called “middle-income” developing countries), has made it increasingly difficult to borrow further. As for the very poor nations, the special oil facility established for them by the IMF is coming to an end, and while they have enjoyed an increased capacity to draw on the compensatory finance facility of the IMF, it is clear that drawing rights cannot be extended indefinitely.
The prospect that lies ahead, then, is one of far greater difficulty in financing the deficits of the oil-importing nations—developed and developing alike. The margin that existed at the outset of the oil crisis has now been largely used up. At the same time, the Treasury Department’s estimate of the collective deficit of the oil-importing countries for 1977 is in the neighborhood of $50 billion. The question asked in 1974 remains relevant in 1977: how can the world (and particularly the developing world) pay for OPEC oil? Indeed, the question may prove more relevant—and more difficult—in 1977 than in 1974.
It will almost certainly prove more relevant and more difficult if there is a slow rate of growth in the industrialized countries. In this case, the effects on the position of the developing countries could well prove disastrous. During the past three years an otherwise very threatening situation of the developing countries has been substantially moderated, as noted, by their ability to finance deficits in Western capital markets. Whether the resulting debt structure of a number of developing countries is already too high for the safety of debtors and creditors is an issue that need not detain us here. Even if the argument of the optimists is uncritically accepted—that the debt structure is not dangerously high, whether for debtors or creditors, and that the level of debt may now be expected to level off if not even to decline moderately—this argument depends centrally on the assumption that the exports of the developing countries to the developed world will at least remain at their present levels (and, very preferably, will grow). But this assumption depends, in turn, upon the rate of growth in the industrialized countries. A slow rate of growth will almost inevitably lead to the marked decline of developing-country exports, to the increased deficits of these countries, and to the drying up of their capacity to borrow further (both because of their own deteriorating export position and because of the drying up of reserves from which to borrow).
Certainly, the OPEC countries cannot be held responsible if the principal industrialized states fail to pursue policies of economic expansion. At the same time, the oil cartel can surely influence the outcome of whatever policies that are pursued, however well-devised. Indeed, the present oil price already makes difficult the pursuit of expansionary policies that do not at the same time set off inflationary forces. A substantial further rise in the price of oil will clearly make this task all the more difficult. Its effect may well be expected to result in the worst of both worlds. While helping to lower growth rates in the Western countries and Japan (and thereby placing a damper on developing-country exports), it will also spur inflation in the industrialized world (thereby resulting in inflationary prices of exports to the developing countries). To the added direct costs of oil imports, the non-oil developing countries would, in these circumstances, find the terms of trade turning against them. Given their already tenuous position, it is not easy to see a tolerable outcome for them.
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As against these considerations the question has been insistently put: why should the OPEC states act so as to jeopardize the stability and health of the international economy? Why, in particular, should the oil cartel wish to kill—or, for that matter, even seriously to injure—the Western goose that lays the golden eggs? Obviously, it shouldn’t, since in doing so it can only strike at its own interests. But this is not to say that there is much mystery over why OPEC should wish to keep the goose reasonably lean so long as it is in a position to do so. The difficulty—or danger—is that the art of keeping the goose lean, though not sick, is a delicate one. It depends, to use an expression in current favor, upon “fine tuning.” But mistakes may be made.
What do we do if mistakes are made? The prospect of an oil embargo apart, what do we do should OPEC decide one day to raise the price of oil by 50 per cent—a raise the producing states may come to regard as no more than “reasonable” and, in view of the increasing revenue needs of most, even necessary? (The kingpin of the cartel, Saudi Arabia, might be induced to go along with such a raise for any number of reasons. It might do so on political grounds, in frustration over the lack of “progress” toward a desired resolution of the Arab-Israeli conflict. A sharp price hike, rather than an embargo, might come in the course of another round of hostilities or, perhaps, in the aftermath of hostilities. If an embargo appears too risky, the next best alternative is a kind of functional equivalent of an embargo—an exorbitant increase in the price of oil.) A dual pricing system might even be devised for the developing countries, giving them relief from the added costs of oil. And even if the effects of the raise on the developed economies proved injurious to the developing countries, as they almost surely would, the latter would still have no direct grounds for complaint against the cartel.
There are no apparent answers to the above questions, given our dependence—our growing dependence—on Middle Eastern oil. At least, there are no satisfactory answers. The threat or use of military force has been ruled out as a possible response to “prices.” So, too, the possibility of employing covert means against the governments of the major producers has long been excluded for fear that, if attempted and successful, the results would be to open the way for radical regimes. It is, in fact, this commitment to the stability of the governments of the major producers that defines the very limiting constraints on the countermeasures that may be taken in response to exorbitant price raises. There remain, of course, moderate economic responses to the actions of the producers, but it is difficult to regard them as serious constraints on the latters’ actions.
Not a few observers have professed to find in all this an illustration of an international system that is becoming increasingly interdependent. They urge that we draw the appropriate moral from the experience with OPEC and learn to adjust to the requirements of interdependence. But this turns out, on closer inspection, to amount to little more than the advice that we bravely adjust to a loss of power and a compromise of interest in the world of truly historic dimensions.
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V
For, of course, the significance of the changes brought about by the oil cartel is not only, or not indeed even primarily, economic in character. It is also political. Thus the recent erosion of governing coalitions in Italy and France, though due mainly to indigenous causes, cannot be understood without also taking into account the effects of sharply increased oil prices. Governments committed to the welfare goals now almost taken for granted by Western European publics can survive with great difficulty, if at all, the kind of blow to their economies represented by the actions of the oil cartel. The actual magnitude of the blow need not be all that great if these governments already find themselves operating on a narrow margin. Nor does it matter, as the cases of Italy and France have demonstrated, that charges of mismanagement of the economy by political opponents are based in part on external developments over which governments may have almost no control. The Left opposition in Italy and France has made considerable political mileage from the difficulties centrist governments have met in their attempts to deal with oil-related deficits. There is no little irony in the fact that the leftward political shift in southern Europe Henry Kissinger has found so ominous for the future of NATO is one that, by his passivity before the actions of the oil cartel, he has contributed to in no small measure.
It is in the Middle East, however, that the political price paid for the actions of the oil cartel has been the most striking. For it is here that the loss of American power and the compromise of American interest have been greatest. The prevailing judgment, it is true, is quite to the contrary. Of the few triumphs generally credited to the nation’s foreign policy in recent years, America’s Middle East policy ranks perhaps the highest. Since 1973, this judgment runs, we have largely displaced Russian influence in the area while establishing ourselves as the mediator of the Arab-Israeli conflict. Yet the Russians can always regain what they have lost if we fail to satisfy the Arabs. For this reason alone our role has been compromised from the start. It is only one side of the conflict—the Arab side—that can shift its political attachments should it feel dissatisfied enough. So long as American policy places a very high premium on preventing this shift, it will inevitably be driven to pressure only the Israeli side into making concessions (and this quite irrespective of the wisdom or folly of the concessions).
Still, it is not primarily the prospect of a shift in Arab attachment that conditions America’s role as mediator, important though this prospect undoubtedly is. Instead, it is the leverage the Arabs already enjoy by virtue of their control over the supply and price of oil and, of course, the added leverage they enjoy by virtue of the uncertainties that will necessarily arise in the event of another war in the Middle East. This leverage not only conditions but compromises American policy in the Middle East. It does so, first, because it places severe constraints on the freedom we would otherwise have—and, in a former period, did have—to act as we see fit, in accordance with our own interests; and it does so, too, because these constraints require us to respond to the side that may at any time make use of this leverage for such ends as it sees fit. This point, and it is critical, may be accepted irrespective of one’s attitude toward the Arab-Israeli conflict and American policy toward the conflict. It may be argued that it is desirable that our policy is thus compromised. That argument, however, does not affect the point that American power has been compromised. Nor does it affect the conclusion that, given the leverage the Arabs presently possess by virtue of the uses they have been allowed to make of their oil, it is the Israelis alone who will continue to be pressured into making the substantive concessions needed to keep the oil flowing and at a tolerable price.
This, at least, is the logic that now prevails and will, in all likelihood, continue to prevail unless there is a dramatic shift in American policy. At present, the primary axiom of America’s Middle East policy is that there must not be another embargo (or, it is necessary to add, the functional equivalent of an embargo). From this, it follows that there must not be another round of hostilities (or, if war should come despite all efforts at prevention, it must not issue in anything the Arabs may interpret as an Israeli victory). The conclusion, the only conclusion, to be drawn is apparent and elaboration would be merely redundant.
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What was once widely known as the oil crisis is, in sum, far from over. It may even be that we have yet to face the most serious effects of the actions initially taken by the oil cartel in the winter of 1973-74. If this prospect is increasingly dismissed, it is because the very persistence of a crisis over a prolonged period of time without visible disaster dulls the initial sense of danger and even becomes a kind of reassurance. Yet the grounds for apprehension in 1974 are, for the most part, still present. Moreover, in the course of the persisting crisis new grounds have become apparent.
One thing is certain. The actions of the oil cartel, and the passivity with which those actions have been met, have resulted in the marked loss of American power. This is—or, at least, should be—apparent enough in the Middle East. If it is less apparent and less dramatic elsewhere, it is no less real. Whether American acquiescence in this loss of power will continue remains an open question.
