Jared Bernethy
Walter J. Levy, “World Oil Cooperation or International Chaos,” Foreign Affairs, July 1974.
Main
Point
The
basic argument of this article is that a cooperative effort between
oil-producing and oil-importing countries must come about in order for the oil
crisis of the 1970’s to come to an end.
This cooperative effort along with a certain level of austerity is
essential to correct and end the oil and corresponding financial crisis.
Summary
Levy
begins the article by explaining the seriousness of the oil crisis and the
changes in the supply and price conditions in the early 1970’s. Beginning in 1970, oil-producing
countries began steadily gaining complete control over the oil industry in their
countries. Therefore, the
governments of these countries could control the supply and price they charge
for oil. Due to this shift of
power, oil costs of importing countries and oil income of producing countries
was inflated dramatically. Also,
the oil reserves of producing countries increased as well. As a result of the change in power, the
“position of the international oil companies has changed completely.” Up until 1969 the oil companies had
bargaining leverage and could still determine levels of production, exports, and
prices, but as of 1974 all their power was gone. Thus, the companies no longer possessed
any real leverage. Essentially the
only hope that these companies had was “to hold on to whatever tenuous residual
rights or preferences the producing countries might still be willing to
extend. The companies have no
choice but to acquiesce in virtually any kind of conditions imposed or
exacted.”
Next,
Levy goes into the financial crisis that importing countries were faced with,
due to this extreme increase in oil cost.
In late 1973, almost every importing nation was faced with major
balance-of-trade problems. As a
result, the majorities of these countries were in a financial bind and had no
way paying for the amount of oil imports necessary. The IMF and World Bank stepped in to
help relieve the oil-importing countries with this crisis, but with oil prices
staying high more changes were needed.
If oil prices were to stay high then oil-importing countries could face
“pyramiding interest or individual charges on top of mounting direct oil import
costs.” In reality the only way
these countries could possibly reduce the trade deficit would be to impose
austerity upon the people, resulting in lower consumption and lower standards of
living. Levy also believes that a
“cooperative effort” must take place between the oil-importing countries and the
oil-exporting countries. He says
that importing countries need to do three things in order to help turn around
the oil and resulting financial crisis.
First, importing countries “must establish and coordinate research and
development programs with regard to existing and new energy sources.” Next, they “must also establish a
concurrent and consistent program of energy conservation.” And finally, countries shouldn’t “have
on hand less than a supply equal to six months of its imports,” just in case oil
supplies were cut off. This
“cooperation” between oil-importing countries is essential in order to get
and/or develop cooperation with the producing countries.
As for
the oil producing countries, they try to justify the huge price increases that
were imposed. They say “the large
increase in oil prices are warranted by the alternative cost that would have to
be incurred if oil had to be replaced by other energy sources.” They also cite that “high oil prices
will result in oil conservation and encourage the use of oil for only the most
essential and valuable purposes.”
In reality it is known that oil-producing countries try to get as much
income as possible from their oil exports now, because they know that their oil
reserves will in time go away. On
the other hand, the producing countries couldn’t continue to take the position
that the economic situation of the major importing countries was no concern of
theirs, because taking this position could result in the destruction of the
developing oil-importing countries.
There is thus no alternative for oil-importing countries but to try to
convince the oil-producing countries that there must be some similar interest
between the two sides.
In
conclusion Levy argues that a combination of many things are needed to help
correct and prevent the oil crisis.
He says that a certain level of austerity is needed, “just adequate to
permit the major industrialized nations to maintain viable economic and
industrial operations, including continued growth but at a lower rate than might
have been projected.” Along with
the implementation of austerity a “far-reaching cooperation among the
oil-importing nations” is needed.
Also, “an understanding by the importing nations of the interests and
aspirations of the producing countries, and a recognition by the producing
countries that even in an austerity situation any attempt to hold prices high
must result in worldwide dangers to which they could not be immune.” To Levy, these four situations are
essential in order for this energy crisis to be corrected and remain stable.