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.