Recent Developments in Oil Pricing

In view of the recent quadrupling of the price of oil, it is legitimate, then, to raise the following question: Was the increase in the price of oil since the last quarter of 1973 unmanageable? Before we attempt to answer this question, it is interesting to note that if the price of oil were gradually increased at the compounded rate of inflation of the European countries since 1947, it would have been equal to $10.24 per barrel of crude oil in 1973.

Be it as it may, the actual increase in the price of oil results in a redistribution of monetary wealth. Some international economists conclude, however, that such an increase will cause inconveniences as well as reallocation of monetary assets from Western Europe, Japan and the United States as well as from all other net oil-importing countries to oil-exporting nations. Yet, such inconveniences are, in my opinion, manageable since the increment in the oil bill resulting from the 1974 increase in oil prices constitutes an insignificant fraction of the overall national income of the industrialized advanced countries. AIt is not a crushing burden@, as Professor Haberler stated, Ait would simply mean a drop in GNP [Gross National Product], but growth will continue and make up for the loss@.6 In my view, the impact of the rise in the price of oil on rate of unemployment on the one hand and the rate of inflation on the other hand in industrial advance countries seems to be also negligible. The rate of unemployment in the US economy is mainly affected by internal macroeconomic variables as its Gross National Product is mainly derived from aggregate internal demand while the foreign sector amounts to even less than ten percent of its GNP. In the meanwhile, high rates of inflation in the United States and in Europe were the result of expansionary monetary policy in the late 1960's and early 1970's before the rise in the price of oil. I found that international monetary reserves have been increasing at a rate of 14.2% per annum during the period 1966-1973, the matter which had contributed to high rates of inflation before the rise in the price of oil. Because of high rates of inflation in United Kingdom, it devalued the sterling in November 1967. The high rates of inflation in the United States prompted President Nixon on August 15, 1971 to close the gold window, to put a temporary freeze on all prices and rents and to establish price guidelines long before the rise in the price of oil by the end of 1973.

Yet, less developed oil-importing countries may not be able to cope with this new development in oil pricing without outside help. Oil-exporting nations through existing aid institutions such as Kuwait Fund for Arab Economic development and many others in the process of being established in Saudi Arabia, the United Arab Emirates and others will contribute a larger percentage of their national incomes to development assistance than what advanced industrialized countries have done. Early estimates of the flow of official development assistance from the advanced countries amounted to less than one quarter of one percent of their Gross National Product falling short of the one percent goal set by Robert S. McNamara the President of the International Bank for Reconstruction and Development. In contrast, they may be in excess of ten percent from Kuwait, Saudi Arabia and the United arab Emirates.

Foreign aid from the oil-exporting nations granted to the less developed countries is by no means sufficient to cope with the latter=s additional hardship if they are oil-importing. I firmly believe that oil-exporting countries should significantly participate with industrialized countries in a comprehensive aid program to help develop agricultural and industrial projects in the less developed parts of the world. In addition to capital extended in the form of aid from oil-exporting countries, technological know-how, managerial talents and material from advanced countries - such as the United States, Canada, Western Europe and Japan - are badly needed. With more economic cooperation, joint ventures between oil-exporting countries and those of the industrial advanced ones can be an effective method in helping develop many countries in the third world.

In summary, while the quadrupling of the price of oil from 1973 to January 1974 constitutes a manageable situation in the industrialized advanced countries, it is a severe problem in the less developed oil importing nations. Real concern and effective programs of aid to be extended from oil-exporting countries may reduce the severity of the problem.

Introduction Pricing of Oil Demand and Supply

Recent Developments in Oil Pricing A Case for Higher Prices of Oil

Oil Revenues Allocation of Petrodollars Concluding Remarks/Notes