It seems to me that has to be one of the most important centerpieces in the whole economic equation. My thesis is that long-term investment as opposed to the hot money, but long-term investment in petrol dollars in our economy is the only real solution for keeping the value of the dollar up, solving or at least ameliorating the balance of payments problem. Yet we have no policy at all on the investment of Arab petrol dollars. Nothing is prohibited specifically. Yet by the same token, nothing is permitted. I think there is a great deal of fear and trepidation on the part of the Arabs-namely, we don't tell them they can't buy the Alamo and when they try to, we get upset. I guess the same thing would be true of Pan Am or other investments. Now, my question is this. Three questions. But first, is investment, long-term investment of Arab petrol dollars in our economy, is that the balance of payments asset which I think it is? That is, is a dollar invested herein long-term investments almost as the dollar on the plus side of the balance of payments? Second, what are the dangers? Third, why haven't the Arabs invested in long-term investments in this country? Dr. Lichtblau uses the figure of $11 billion, I think all of that is short term. What Bill Simon calls hot money. So my first question is, will it cure the balance of payments problem on an almost dollar per dollar basis. Dr. COPPER. As it happens, Senator Johnston, I have written an article on this subject which, with your permission, I would like to submit for the record. The CHAIRMAN. Without objection, it will be included. [The article referred to by Dr. Cooper follows:] [From the Saturday Review, Jan. 25, 1975] 1975 INTERNATIONAL BUSINESS REVIEW-WILL ARABY BANKRUPT THE WORLD? The New Year finds the world economy reeling. The quadrupling of oil prices by the Arab nations has produced a domino effect of unprecedented impact upon the citizens of the world community. This latest international cartel now holds its cold hand upon the growth and progress of both industrial and undeveloped nations. All suffer, and the dizzy spiral of inflation and financial insecurity races unchecked. What are the Arabs seeking? What are their real goals and ambitions? The following special section explores the promise and peril posed by the Arab petrodollar and offers a prescription for U.S. energy self-sufficiency. THE INVASION OF THE PETROL DOLLAR ARAB OIL DOLLARS ARE LIKE BAYONETS YOU CAN DO EVERYTHING WITH THEM BUT SIT ON THEM. NOW THE WEST BRACES ITSELF AGAINST A BOMBARDMENT OF PETROL DOLLARS. (By Richard N. Cooper) Few world happenings in living memory have stirred up such a storm as has the recent petrodollar invasion of the West. But just how much of a threat to Western institutions is this tidal wave of Arab money? Despite all the scare headlines, the prospects are perhaps more reassuring than they are frightening. Indeed, there seems an excellent chance that this second great Arab irruption into Western history will, in the end, leave both the West But in the short run, huge Arab petrol dollar earnings can be alarming. The problem began during the Yom Kippur war, when the Arab states placed an embargo on oil sales to the Netherlands and the United States. This embargo was momentous. Above all, its success prove to the 12 members of the Organization of Petroleum-Exporting Countries (OPEC)—which includes such non-Arab states as Iran, Nigeria, and Venezuela-that by acting together to restrict oil supplies, they had the oil-consuming countries over a barrel. Now it was evident that dependence of the major industrial countries on imported oil was so great that, at least in the short run, they would stand still for paying very much higher oil prices. Emboldened, OPEC instituted the now-notorious fourfold increase in crude-oil prices on January 1 of last year. At one stroke, this price leap gave a further fillip to worldwide inflationary pressures and reduced real incomes in all oil-consuming nations. For ths reason, it introduced a strongly contractive force into the world economy-contributing to, if not causing, the current world recession. Ironically, while consuming nations worry about how to pay for their oil, producing countries are left with the pleasant task of worrying about how best to use their vastly increased earnings. Both concerns are the opposite sides of the same coin-because the world financial system is a closed process, the higher oil payments cannot leave it but must somehow be channeled and recirculated within it. As OPEC receipts flow back to the financial centers of the world, they are re-labeled "petrodollars." But petrodollars differ from other dollars only in that they owned by OPEC countries. Moreover, while most of world oil trade goes on in dollars, a significant amount also takes place in British pounds. So we have petro-sterling as well as petrodollars. How many petrodollars are there, and where do they go? Ordinarily small problems can be handled by modest measures. But the magnitudes in this case are not small. Current estimates suggest that oil receipts of the OPEC countries were about $30 billion in the final quarter of 1974, up from less than $10 billion in the third quarter of 1973, before the Yom Kippur war. On an annual basis, this increase represents about $80 billion. Even if the OPEC countries sharply increase their spending on goods and services, a very substantial surplus is likely to remain, now running over $60 billion a year. By comparison, the level of total world trade is running at about $750 billion a year, and the U.S. Treasury bill market, the largest single financial market and one into which many petrodollars will undobtedly flow, barely exceeds $100 billion in size. The increase in oil payments probably represents the biggest proportionate switch in payments flows that the world economy has ever seen in such a short time, not excluding major wars.1 This vast rearrangement of international-payments flows raises several important problems, some short-run, some long-run: (1) While the oil funds will sooner or later come back to the major financial markets of the world, will they get channeled to those countries that need them in order to pay for their oil? (This is known as the recyling problem.) (2) By shifting their large holdings of funds from place to place, can the OPEC countries play havoc with the world's financial and foreign-exchange markets, either willfully or inadvertently? (3) As payments surpluses pile up year after year, will the OPEC countries own a substantial fraction of the world's assets by the end of the decade? (4) By spending their vast new earnings, how much mischief (intended or otherwise) can the OPEC countries do to the rest of the world and to each other? Let's look at these problems in order: 1 Actual payments in 1974 were somewhat lower than these figures would suggest, because of substantial lags in tax and royalty payments to the producing countries; actual payments during the second half of the year were nearly twice what they were during the first half, perhaps explaining why the impact was not so sharp as many consuming countries had at first feared. All the payments must return to financial markets in one way or another. According to the U.S. Treasury Department, during the first eight months of 1974, roughly one-quarter of the total OPEC surpluses were lodged directly in the United States, and half were placed in the Euro-currency market, mostly in the form of relatively short-term dollar-denominated bank deposits. The remaining quarter was divided among sterling deposits in Britain, loans to the International Monetary Fund (I.M.F.) and the World Bank, direct loans to oilimporting countries, and small amounts of miscellaneous investments. These investments are of course made with funds from all oil consumers, but especially from Japan and Western Europe, which together have to pay about $50 billion a year more for their oil than they did before 1974; the increase in the American oil-import bill is roughly $17 billion. So there is considerable discrepancy between the source of funds and the immediate What about the recycling problem? OPEC funds rechanneled to financial markets will be available for borrowing, and indeed during 1974 a substantial amount of borrowing took place in order to finance oil deficits, especially by such countries as Britain, France, and Italy. But as the funds flowed in, mostly at short term, the major banks found their capital ratios increasingly strained. Banking operates on the principle of the law of large numbers. Banks like to spread the risk around. They worry about having large deposits concentrated in relatively few hands, and they worry about making large loans to relatively few borrowers. On both grounds, by the end of last year banks were turning away OPEC money. Formerly credit-worthy borrowers were having increasing difficulty raising enough money to pay for their oil bills, and the poorest of the less-developed countries never did have access to private channels of finance. It became apparent, therefore, that some form of governmental action would be necessary to facilitate the recycling. In November Secretaries Kissinger and Simon offered a solution: to create a new facility associated with the Organization for Economic Cooperation and Development (O.E.C.D.), which includes most of Europe, the United States, Canada, Japan, and Australia. The new agency would link credits to energy-conservation measures taken by the borrowing countries. This proposal has the weakness that, as envisioned, it is too small (roughly $12 billion of effective credits). Further, it does not deal with the problem of oil-consuming countries that are not members of the O.E.C.D. Finally, it would relieve the OPEC countries of some credit risk, although less so than another proposal-that principal reliance for the recycling be placed on the I.M.F.— because of the lower risk involved with the O.E.C.D. countries. There is the fear, expressed especially in Germany and in some congressional quarters here, that any new recycling facility would relieve other countries of necessary balance-of-payments "discipline." This fear is, however, misplaced in the present emergency: Credit can be related directly to increased oil bills to limit the amounts available, although this approach is not a feature of the Kissinger-Simon proposal. But it is better now to help finance these oil payments than to force foreign economies into deep depression or to adopt extensive controls on their trade with non-OPEC countries because of their inability to pay for the oil on which they have become so heavily dependent. In the long run, we must reduce dependence on imported oil, but in the near future we must see these countries through the difficulty. The funds for borrowing are available from the OPEC countries themselves. We simply have to find a way to get the funds to the countries that need them. A problem of great seriousness, though fortunately not of great magnitude compared with the total, is how to pay for the oil necessary for the poorest oilconsuming nations of the world. Of these, India is the largest, but there are also about 40 other Asian and African countries. Deepening world recession would worsen the plight of these countries by reducing demand for their export products. OPEC countries have pledged direct loans to a number of these countries-but not enough so far. If future defaults are to be avoided, some form of subsidy to these countries is necessary. Parliaments in the industrial countries will balk at having to pay higher oil prices twice over, directly and by additional assistance to the poor countries. An ideal source of additional aid, which would not strain the budgets of industrial countries, would be the annual sale of modest amounts of the I.M.F.'s large gold holdings, valued at $6.5 billion at official gold prices and worth about four times that at market prices. Sales of about $250 million a year (at official prices) would depress market prices somewhat but would still leave capital gains sufficient for providing substantial interest-rate subsidies or reserve funds for loans to the poorest countries. Now is an especially opportune time for such sales, because Americans have just been allowed to buy gold freely for the first time in more than 40 years. What about possible market disruption by OPEC? By suddenly withdrawing their funds from any particular market, the OPEC countries will certainly be able to disrupt financial or foreign-exchange markets. But the major financial countries can keep such disruptions from getting out of hand if they are willing to work together to do so. They must be prepared to recycle funds back to the market from which they were withdrawn, so as to smooth out the effect of the withdrawal. In the case of commercial banks, this means providing adequate rediscount facilities at central banks; in the case of short-term securities, it may in the case of foreign exchange, it will require use of the "swap arrangements" that already exist among the leading central banks. In each case some tidying up will remain to be done, but the massive movement of OPEC funds can be neutralized. Fortunately, there is no need for the West to take the "worst case" view of things. In fact, the OPEC countries are likely to be conservative and well behaved in their investment practices, except when they are strongly provoked politically or except when they are anxious about their investment and move quickly to unload particular assets. (In some cases strong price declines will themselves act as a deterrent to rapid sales; monetary authorities will have to judge the best time for supporting any given market.) Any change in practice by a major participant in the market can cause some problems, as when Saudi Arabia recently announced it would no longer accept sterling in payment for oil. Not all the market effects of OPEC actions should be resisted. But where disruption threatens to be severe, cooperative action can be taken to neutralize it and the necessary machinery should be put into place ahead of time. Quarterly Receipts of OPEC Countries (billions of U.S. dollars) October-December 1973 January-March 1974 12 02288 30 30 What if OPEC buys up huge chunks of the world's capital stock? With large annual-payments surpluses, the wealth accumulated by the OPEC countries will be enormous after relatively few years. Estimates of their overseas investments by 1980 vary from $250 billion to $650 billion. The major differences among estimates concern the success that consuming countries will have in reducing their imports of OPEC oil during this period and, more importantly, the speed with which OPEC countries spend their new income on imports of goods and services. The estimates assume that oil prices will remain high, however, until after 1980. Do these great accumulations not pose a major problem for the world? They do, but contrary to current thinking, the problems are likely to arise more from the disposition of income than from the ownership of foreign assets. First, OPEC countries are likely to increase their expenditures on goods and services more rapidly than most observers believe. Apart from the United Arab Emirates, per capita incomes in the OPEC countries remain modest even after the increase in oil prices. These incomes are not well distributed, but they are nonetheless likely to result in rapid increases in expenditure, both by private individuals and by governments. This likelihood suggests that the lower end of the range above is more plausible. Disposition of OPEC Investments, January-August 1974 United States Sterling in Britain_. Euro-currency Market Other Investments in Europe_ Loans to Developing Countries (including I.M.F. and World Bank). Second, the world's capital stock will continue to grow during the rest of the decade at least if the current recession is overcome-so that by 1980, OPEC wealth will still amount to only 2 to 4 percent of the world's capital stock and a smaller percentage of total assets, financial as well as real. To be sure, the wealth will be concentrated in relatively few hands, and the investments will not be spread evenly around the globe. But these figures suggest that at worst the OPEC countries will fall far short of owning everything in sight. Third, as the foreign investment of the OPEC countries increase, the relationship between them and the oil-consuming countries will become more symmetrical. Large investments are also effective hostages, as any foreign investor knows, and for that reason-as well as for reasons of investment prudence the OPEC countries are likely to be well behaved in managing their overseas invetsments. without it. Rather than sounding the alarm, it would be better to encourage the OPEC countries to invest their funds at long term. We should react negatively only if, as foreign investors, they behave badly by standards that are laid down jointly between the OPEC countries likely to do most of the investing and the countries in which most of the investment is likely to take place. How much mischief from OPEC spending? For balance-of-payments reasons, many oil-consuming countries will be strongly tempted to encourage exports to the OPEC countries. But should we really prefer exports to OPEC investment in the consuming nations? We would perhaps be much better off with the funds invested than spent, partly because investments will postpone the day in which standards of living have to be reduced in order to pay for the higherpriced oil in real goods and services. But mainly because it is spending, especially on military weapons and subversion, not investment, that really represents the unstable element in high OPEC revenues in the long run. That is, however, a matter that goes well beyond the simple economics of petrodollars. On balance, then, it seems fair to say that in the years just ahead lots of new flags and new faces will be evident in the world's power and investment circles. But this outlook does not mean that the West will be undone by malevolent forces from the East. Dr. COOPER. I agree with you, that we should do everything possible to encourage OPEC investment in this country. The short-term problem actually is not so much how to get investment into this countrythe United States-but rather how to get investment into some of the other leading oil-consuming countries who are much more heavily dependent on oil than we are and whose balance of payments difficulty is much more acute than ours is. That is the so-called recycling problem. It is a problem for 1975 and 1976. But for the long term, I think we should encourage OPEC investment. They will be accumulating these dollars at best for several years, and we should be encouraging investment in this country. I believe the fears that have been expressed in the press have been exaggerated. I think the OPEC countries, on the whole, will be relatively conservative, prudent investors, and they know perfectly well if they do get out of line in their behavior we have adequate instruments or can generate adequate instruments to deal with them. I would not borrow trouble from the future by trying to legislate against certain kinds of investments now. We can deal with any misbehavior when it comes. To answer your last question. I do not find it surprising that barely a year after a big increase in oil prices they are still putting most of their money into short-term funds. You can almost think of it in household terms. If you get a sudden windfall, you put the money in the bank or other short-term assets until you decide what to do with it. Long-term investment, particularly direct investment, is a complicated process and involves careful considerations. They are now moving out in maturity and, in the character of their investments, into these more difficult kinds of investments. But they want to be as surefooted as they can when they do that. In the meantime, it is quite natural for them to hold their funds at short term. Senator JOHNSTON. Don't we very badly need a national dialogue on this so the American people can consider what these dangers are and determine whether or not they ought to be permitted? I mean, is it wrong to buy a tract of land in Fairfax County, Va., where the people get upset? And if we want to prohibit it, let's bring it out and discuss it, and if we want to permit it, then bring that out and |