Mr. ROBINSON. The discussions in the IEA have not been definitive in nature, but the general feeling is that a minimum price level in the range of $6 to $7 may be a realistic goal. I want to make it clear that this does not mean the price at which oil is purchased, but merely the price at which imported oil would be sold in the domestic markets of the participating IEA countries. Mr. DIGGS. Mr. Enders also stated that our Government will make, as he put it, “a major commitment to the development of relatively expensive energy." What did he mean by "relatively expensive energy?" Mr. ROBINSON. Perhaps, Mr. Enders could answer that better, himself. I am not quite sure what he did mean, but I would mean by that, energy such as liquefaction of coal and the development of oil from shale by techniques which are still in the process of development. Mr. DIGGS. What was meant by "major commitment?" I assume that he was authorized to use this kind of adjective, and it would seem to suggest something pretty big. Could you give us the parameters? Mr. ROBINSON. Well, not in financial terms, and I don't know whether he was thinking in financial terms. The administration has been dedicated to the principle that we should encourage significant investments in the development of some of these alternative sources, not only to increase our insulation and reduce our dependency on Middle East oil, but also to support the research efforts to develop commercially viable techniques that can be applied to gas, oil, shale and for sands. So, there is a research and development element in that investment prior to major commercial development. I don't know that we have any specific order or magnitude figured, but it would call for a significant investment if we are to proceed with these developments. Mr. DIGGS. As you know, the President of Algeria is quoted as having stated-and I am reading from a report in the Wall Street Journal on March 6-"If rich nations like the United States expect cooperation from OPEC concerning oil, then they must enable the developing countries to mobilize their raw materials for the benefit of their own economies, which implies that the selling price for them shall be raised and their real value safeguarded and that the industrialized countries shall desist from obstructing action," as he put it, "by producers' unions in the developing countries." I was interested in getting your response to that position. How does the U.S. position impact upon the ability of developing countries to combat global inflation, including the high prices both of the West's manufactured goods and of petroleum products? Mr. ROBINSON. The statement of the President Boumedienne is consistent with the position that Algeria has taken for some time. I met with the President about 2 months ago, in Algeria. We discussed this issue Mr. DIGGS. But this statement doesn't just reflect Algeria's position. Mr. ROBINSON. That is true. They are very sensitive to the growing needs and desires in the developing world, and they are responding to that and have cast themselves in the role of leader of the developing world. I believe that we are moving into an era of relative scarcity of basic industrial raw materials to meet our expanding requirements. I think that, if we take a close look at the way in which our industrial economy and the economies of all of the industrialized nations are to continue to grow and develop, that we will conclude that we must build a new relationship with the developing countries. We must find a way to establish a great degree of stability in prices and assure the continuity of supply. And I think the time has come when we must take a positive and constructive look at this problem. The volatility of demand for basic raw materials is increasing in my judgment, and this is imposing very serious hardships on many of the developing countries. It creates a situation in which they cannot carry out long-term development programs. This will not only place a burden on the industrialized nations, but it will create economic conditions within which it will be much more difficult for us to achieve our own goals. There is an increasing degree of interdependence, and we must reflect that in a constructive, imaginative, new relationship that I feel certain will be developing over the next few years. I say this, I might add, based on 25 years of experience throughout the developing world, developing resources, which was my experience prior to coming into Government service. So that this is not an academic view, but one based on the practicalities of developing resources and establishing the kind of relationship between the developing and the developed world which assure both worlds that our interest are going to be properly protected. Mr. DIGGS. There are some statistics that we would like to have submitted for the record, Mr. Robinson. First of all, the figures on the balance of trade of non-oil-producing countries for the past 5 years. (I noted in the April 8 edition of the Guardian, that the current account deficit of these countries rose from $8 billion in 1973, to about $22 billion last year, and could reach $25 to $28 billion this year.) [The information requested follows:] TRADE BALANCES OF NON-OPEC COUNTRIES, 1970-74 (EXPORTS F.O.B. MINUS IMPORTS C.I.F.) 2 Austria, Belgium-Luxembourg, Canada, Denmark, France, Federal Republic of Germany, Italy, Japan, Netherlands, Norway, Sweden, Switzerland, United Kingdom, United States. 3 Australia, Finland, Greece, Iceland, Ireland, Malta, New Zealand, Portugal, South Africa, Spain, Turkey, Yugoslavia. 4 Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, Venezuela. Includes the following oil-producing or exporting countries: Angola, Bolivia, Colombia, Ecuador, Egypt, Gabon, Netherlands Antilles, Syria, Trinidad and Tobago, Tunisia. Excludes Bahrein, Brunei, Oman, Qatar, and United Arab Emirates because of lack of statistics. Also excludes the U.S.S.R., the Eastern European countries, the People's Republic of China, North Korea, North Vietnam. Source: National statistical publications; IMF data fund and staff estimates and projections. Mr. DIGGS. Second, we would like to have, from the Department, an analysis of the impact of worldwide inflation, including the increased price of manufactured goods, food, and oil, and any other relevant economic factors, and the figures for each year of the last 5 years. [The information requested follows:] EXPORT AND IMPORT PRICES (INDEXES OF PRICES EXPRESSED IN U.S. DOLLARS; 1970 EQUALS 100) 1 Include oil producing countries listed in footnote No. 5 above. Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, Venezuela. The most significant economic change during the past two years of economic dislocation has been the unprecedented increase in the price of petroleum. Since the beginning of 1973, members of the Organization of Petroleum Exporting Countries-OPEC-have concerted to impose several sharp increases in international oil prices. As a result, in the space of one year international prices more than quadrupled. The posted price of Iranian Light 34 degree (Kharg Island) increased from $2.58 a barrel on January 1, 1973 to $11.88 on January 1, 1974, for example. During the same period, the posted price of Saudi Arabia Light 34 degree (Ras Tanura) moved from $2.59 to $11.65 and that of Venezuelan 26 degree (Tia Juana) jumped from $3.09 to $13.67 a barrel. These sharp increases in posted prices were accompanied by similar changes in the average revenues per barrel collected by OPEC governments: Sources: Petroleum Intelligence Weekly; International Crude Oil and Product Prices, Parra, Ramos & Parra; Middle East Economic Survey. IMPACT ON OIL IMPORTING COUNTRIES These increases in price have been passed on to consumers in nearly every country in the world. When the sharpest oil price increases were imposed, late in 1973 and early in 1974, most of the major developed countries were already experiencing inflation caused by generally expansionist policies and record high commodity prices. Oil supply disruptions and the huge increase in oil prices last winter added impetus to another round of inflation. Government econometricians have used input-output techniques to estimate the inflationary impact of high oil prices in several major economies.* In following this procedure, analysts assume that changes in costs are passed through, dollar for dollar. Assuming that the pass-through of the major price increases had been completed by mid-1974, increased oil prices were responsible for from one fifth to one half or more of the large increases in wholesale prices in major economies during the first half of 1974. For several reasons, estimates derived from input-output analysis, such as those cited above, are likely to understate the aggregate impact of oil price increases on prices in major industrial countries. First, while a certain proportion of increased oil costs may in some cases be absorbed by the producer of a certain product, it is more likely that such an increase in cost is not merely passed on, as is assumed above, but amplified under a system of markup pricing. Second, by contributing to rises in consumer price indices, higher oil prices have added strong impetus to wage demands, many of which are directly tied through escalator clauses to increases in the price level. Finally, increased oil prices boost demand for substitute sources of energy, such as coal and natural gas. Since supplies of these substitute commodities are inelastic over the short to medium run, their prices will also rise, contributing to still further increases in the overall price level. These inflationary tendencies are not captured in the input-output analysis employed to derive the earlier estimates of the inflationary impact of oil price increases. *Notes on these techniques are found in the annex. 53-813-75—2 Another consequence of the price increases has been a serious deterioration in trade balances of oil-importing nations. Aggregate net imports of oil in 1974 will be valued at more than $100 billion, compared with about $25 billion in 1973. This enormous shift has caused a sharply adverse change in the trade balance of nearly every oil-importing nation. Though net oil imports into the United States have been slightly smaller in 1974 than in 1973, their cost has nearly quadrupled, and the overall U.S. trade balance worsened by $1.3 billion during the first 8 months of 1974 against the same months of 1973. Estimates of the net oil import bills of the major consuming countries illustrate the magnitude of payments problems: NET OIL IMPORT BILL OF MAJOR CONSUMING COUNTRIES The developing countries as a group will pay $8 to $9 billion more for petroleum imports in 1974 than they did in 1973. This increase is equivalent to 2 to 3 percent of their aggregate GNPs. The share of export earnings that the developing countries as a group must devote to necessary oil imports in 1974 is more than double the 8 percent spent on petroleum imports in 1973. The developing countries have few opportunities to switch to alternative energy sources or to squeeze oil consumption without affecting output. Studies by the World Bank Group have calculated the magnitude of cost increases in the developing countries attributable to recent rises in petroleum prices. The cost of producing and distributing electric power from the oil based systems common in developing countries will increase by 15 to 50 percent. In the major industrial branches, the increase will range between 5 and 30 percent or more. On the average, transport costs may increase by 3 percent for truck and rail service to nearly 30 percent for air cargo. Higher petroleum prices are also likely to raise the cost of farming based on modern gasoline-consuming technology, according to the World Bank. Unable to decrease the volume of their petroleum imports significantly, the developing countries are left to cope with higher oil prices by drawing on reserves, increasing their indebtedness and curtailing other imports. IMPACT ON OIL EXPORTING COUNTRIES The primary beneficiaries of the price increases have, of course, been the oil exporting nations themselves, principally Venezuela, Indonesia, Nigeria, the OPEC members in the Middle East-including several important Arab producers and Iran-and Canada. Together they will earn more than $100 billion from their oil exports in 1974. Most of these earnings will accrue to the governments of the producing countries, which began steadily increasing their unit earnings from petroleum exports even before the dramatic price increase announced in 1973, as shown in the first table. COMPARISON WITH PRICE TRENDS IN OTHER COMMODITIES The recent increases in petroleum prices have been imposed during a period in which other prices have been rising too, and the argument has been made that oil producers were justified in raising their prices as a defense against other price increases. Such an approach. applied to a basic commodity like petroleum carries the seeds of further inflation, but even if one were to accept it as a basis for discussion the actual figures show that recent changes in the price of oil bear little relationship to other price trends. The following indices are calculated on the |