Book reviews

THE ECONOMICS OF THE OIL CRISIS

edited by T.M. Rybczynski, Macmillan for the Trade Policy Research Centre, London, 1976, pp xxxvi + 202

The so-called energy and oil 'crises' of the early 1970s have generated an ex- tensive literature, though much of the comment in Britain consists of superficial statements about the more obvious aspects of the situation. In par- ticular, demands for governments and international institutions to 'do something' are a favourite refuge of those who have never learned to ap- preciate the substantial, though im- perfect inherent adjustment capacities of economic systems: in response, the politicians and national and inter- national civil servants have been only too ready to give the appearance of be- ing busy in 'solving' what are popularly believed to be massive problems requir- ing many mandarin-years of attention. Against this unpromising background, the Trade Policy Research Centre should be congratulated on collecting a number of the more perceptive essays on the crisis, which appeared originally in some of the less accessible sources. These reprinted papers, all of which have been somewhat modified, appear along with two new contributions - one by Alasdair MacBean and one by Harry Johnson. At the beginning of the volume there is also printed the 'Bellagio Memorandum' issued in June 1974 under the auspices of the Trade Policy Research Centre.

After some background notes on the crisis by T.M. Rybczynski and George Ray, there follow three papers which provide some much-needed economic analysis of the implications of the crude oil price increases of 1973-75. Max Corden sets out a framework within which such implications can be assessed, distinguishing among cases in which the OPEC group holds its extra income in foreign currency or in gold, or spends it on goods and services from the oil importers causing an additional transfer loss. A complementary paper by Max Corden and Peter Oppenheimer discusses the impact on demand and employment in the oil-consuming coun- tries, explaining that increased oil prices in effect redistribute income towards

relatively high-saving countries and so raise the world propensity to save. Corden and Oppenheimer make the crucial point that oil importers who borrow should ensure that the borrowed funds are invested so as to provide a real rate of return sufficient to service the debts - borrowing to maintain con- sumption (even if, as in Britain's case, it might appear justified in anticipation of North Sea oil) is both misguided and unsustainable for many years. The cost of North Sea oil, in real terms, is likely to exceed the price of imported OPEC oil prior to October 1973, so there is no case for borrowing to maintain the pre- existing level of consumption in the hope that gains from the North Sea will pay for debt service. In fact, since the Corden/Oppenheimer paper was written in 1974, the prospects of Britain's becoming a substantial net oil exporter in the 1980s have improved, but that does not disturb the main lines of their argument as regards policy in the mid- 1970s.

The third analytical paper by Jan Tumlir uses the theory of the transfer problem to distinguish between real and financial transfers, showing in somewhat more detailed form than in the first Corden paper the differing effects of various uses by oil exporters of the financial transfers to them which resulted from increased oil prices. Un- fortunately, the statistics used in the em- pirical part of the paper are now very out of date - 1973 for world crude oil exports and 1972 for imports by the oil exporters. Tumlir argues cogently that adjustment should be allowed to take place through increased oil product prices both in countries which import oil and those which do not.

In three further chapters, some of the practical issues which will probably arise from oil price increases are dis- cussed. Alasdair MacBean explains how higher prices are likely to hit individual oil importers in the developing world, both directly and indirectly (for in- stance, through slower world economic growth and the effect of higher energy costs on agricultural inputs such as fer- tilisers). His general conclusion is that in the 1970s the poorest countries with the largest populations are likely to do worst. George Ray traces the growth in Western Europe's dependence on oil in the 1960s and early 1970s and the cor-

responding decline in indigenous coal output. He points out that differences in energy policies among European coun- tries are to some extent explicable in terms of the presence or absence of a coal-mining industry in any given coun- try. Though he argues that the recent energy crisis was the most serious yet faced by Europe, he is reasonably op- timistic about the prospects both of achieving the technological advances necessary to avoid energy shortages in the long-term future and of reducing Europe's dependence on OPEC oil in the medium term.

T.M. Rybczynski deals with possible capital requirements of developing energy sources as alternatives to OPEC oil. His paper was originally written in 1974 at a time when people believed that the United States would significantly reduce oil imports by the 1980s. It is a measure of how rapidly opinions change that few would now agree with his statement that ' . . . the new energy policy means that payments for imported fuels, which amounted in 1974 to some $25 000m, can be ex- pected gradually to decline, thus strengthening the United States balance of payments'.

The star attraction of this volume will, for many people, be Harry John- son's paper on the impact of higher oil prices on the international monetary system in which, in typically concise and highly readable fashion, he covers an enormous amount of ground in twenty pages. After a potted history of postwar international monetary developments, he makes some percep- tive comments on the security aspects of the crisis: ' ... small, feudally-governed, non-industrial nations [are] suddenly able, through the caprice of the sub- terranean distribution of natural resources vital to the easy continuance of affluent industrial standards of living, to buy ultra-modern military armament in quantities sufficient to start a local war of ultra-bush-fire dimensions ... '. At the same time, military equipment is a highly profitable export for the in- dustrial countries. Professor Johnson then turns to the causes of inflation, pointing out that the increase in oil prices had nothing to do with world in- flation and arguing that it suited governments to confuse the inflation issue so as to avoid making policy

368 ENERGY POLICY December 1976

choices about how to adjust to income- redistribution effects. After some pointed comments on the attitudes of governments towards inflation in general, and to the oil price increase in particular, he produces some especially wise words about recycling - 'The idea that a great effort of intergovernmental cooperation is necessary to make the normal financial processes perform is seductive but superfluous; and it lends itself only too easily to providing free rides for certain countries at the expense of others, including the investing oil- exporters'.

The Economics of the Oil Crisis is a wide-ranging title and not everyone will find in it all that he expects. For in- stance, there is no proper economic analysis (in terms, for example, of resource depletion theory) of the un- derlying causes of the crisis. Some of the statistics are not as up-to-date as one might like. But these are relatively minor criticisms of a book which is to be welcomed as an important contribu- tion to what is in Britain the relatively empty field of energy economics.

Colin Robinson University of Surrey

Guildford, UK

ENERGY AS A FACTOR IN SOVIET FOREIGN POLICY

Jeremy Russell, published for the Royal Institute of International Affairs by Saxon House/Lexington Books, Farnborough, UK, pp xix + 241. Price: £7.50.

This timely publication brings together two major current concerns facing those engaged on energy policy questions. First, as previous contributions to Energy Policy have revealed, there is much interest in the West with the energy prospects of the Communist bloc. Second, given the recent major changes in the pattern of relationships between producers and consumers of natural resources, strategic energy issues must be seen, now more than ever, in the context of international political and economic relations.

Some commentators have seen the USSR as possibly the only country in the world to enjoy almost limitless

degrees of freedom in its energy options, enabling it to maintain great flexibility in its overall economic planning and ex- port strategy. Others see the USSR fac- ing a serious range of constraints (not so much energy resource constraints as those of skilled manpower, investment and advanced technology) with the result that it is currently presented with a critical choice - whether to maintain the present level of Soviet oil exports outside the Comecon bloc, allowing Eastern Europe (which it has traditionally supplied virtually in full) to obtain oil from elsewhere; or else giving them priority to maintain a strategic strangle-hold in the event of divergence from 'the Moscow Line', whilst sacrificing much-needed convertible currency from energy exports to the West with which it could buy more technology and equipment. Such issues are central to the analysis provided by Jeremy Russell.

As for the structure of the book, Chapter One provides a succinct intro- duction, including a survey of recent documentation and a summary of the historical background, primarily since 1960. Chapters 2-8 in turn examine Soviet energy developments from 1975- 80 in the oil, natural gas, coal, elec- tricity and minor fuel industries (shale, .peat, etc) together with somewhat shorter sections on the fuel balances and resources of each of the Eastern Euro- pean countries. The second part, com- prising Chapters 9-15, ranges over an a s se s smen t of i n t r a - f o m e c o n relationships, the implications of d+tente, and an evaluation of Soviet relations with Japan, China, the USA, Western Europe and the Middle East, all vital constituent elements for an assessment of the realities of Soviet in- tentions.

In estimating the likely Soviet pro- duction and consumption of energy, the author had to proceed without the benefit of information contained in the recently announced 1976-80 Five Year Plan. He concludes that total Soviet production could reach 2160 million tons of standard fuel equivalent (mtsfe) in 1980, on the usual Soviet basis of 7000kcal per kg, and consumption 1920 mtsfe, leaving a net export balance of some 240 mtsfe. This would provide the Soviet Union with an export capability of at least 120m tons of oil and 40

Book reviews

billion m 3 of natural gas, most of which is now fully committed until at least 1980 under recently negotiated con- tracts.

Russell adds that if the internal sub- stitution of coal by oil is delayed, if fuel conservation efforts are successful, and if oil imports are increased from the Middle East for geographical and logistical reasons, then the oil export surplus could be somewhat higher. Nevertheless, bearing in mind the supply commitment to Comecon, it is clear that the Soviet Union will not have emerged as a major oil source for the West by 1980.

The author estimates that energy pro- duction in 1980 will include a minimum of 640m tons of crude oil with domestic consumption of about 517m tons. Of the export surplus, Russell believes that Soviet exports (including re-exports) to East European states will require some 80m tons, with a further 10m tons destined for non-European Comecon states (Cuba, Mongolia, North Korea and North Vietnam). This would leave an oil export residual to the West of only some 35m tons, compared to 55m tons in 1975, representing a substantial loss in hard currency earnings, although this would be offset to some extent by rapidly increasing natural gas sales to Western Europe.

The most useful survey of energy developments in Eastern Europe highlights the crucial problems facing this region. Although these countries were, as a whole, essentially self- sufficient in energy in 1960, they moved into a deficit in 1963, and their import dependency increased from 11% in 1970 to 20% in 1975; it may well reach 25-30% by 1980. The growth in energy consumption has also been accom- panied by a qualitative shift from coal to oil and natural gas, exacerbating the problems of import dependence. Whatever the future might hold with respect to diversification of oil import sources, it must be borne in mind that their energy infrastructure (eg, pipeline routes, refinery locations, etc) are almost totally geared to the Soviet supplies, and a substantial share of their energy investment is directed to joint development of Soviet resources, such as the Orenburg gas project. In addi- tion, the author stresses that the USSR is likely to insist on eventual re-

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