Adding Up the Bill from OPEC Oil

Ever since the Organization of Petroleum Exporting Countries quintupled the price of oil, economists and bankers have expected the U.S. balance of payments deficit to grow steadily worse. And it has. Higher petroleum prices have drained increasingly large sums from the U.S. and produced ever bigger payments deficits since early last year All the same, last week's report of a record deficit in the final quarter of 1974 was a shocker. It dramatized the extent of the financial hemorrhaging that has hit the U.S. since OPEC boosted prices.

The $5.87 billion fourth-quarter deficit, which was more than 50% higher than the third-quarter shortfall, brought to $10.58 billion the total gap for all of 1974.* There were several reasons: U S direct investment abroad rose because restrictions on them were dropped and foreign purchases of U.S. stocks fell because of the bear market. But, worst of all, the Commerce Department's statistics underscored the fact that the nation's bill for petroleum imports soared by $18 billion last year. This more than offset exports of soybeans, jet planes computers and myriad other products' and led to a merchandise trade deficit of $5.88 billion.

Irksome Dilemma. The huge shortfall was aggravated by the global recession, which slowed the growth of world trade. Some economists argue that the numbers are no cause for alarm contending that the U.S. will attract more foreign capital when its economy perks up. Nonetheless, the nagging, $10-per-bbl. question remains: How fast can an economy recover when it is forced to send abroad a large share of its income to pay its oil bills?

For U.S. policymakers, the payments deficit pointed up one especially irksome aspect of this dilemma. Low interest rates--along with a bigger money supply and a tax cut--are needed to spur business and consumer spending and help put the jobless back to work. Yet the same low rates that speed recovery also drive money out of the country, aggravating the payments deficit and eroding confidence in the dollar. In large part because interest rates in the U.S. are lower than in Europe the dollar lately has been depressed on world markets, and it remains undervalued. Observed Salomon Bros' Henry Kaufman, a leading Wall Street economist: "If the dollar continues to weaken, we may be forced to reintroduce currency restrictions such as the Interest Equalization Tax, or perhaps some other measures."

There are unmistakable signs that confronted with a hard choice, the U.S is opting to stimulate the domestic economy, by reducing interest rates, instead of protecting the dollar in foreign money markets. New figures confirm that the money supply is being substantially expanded. Few bankers and economists are ready to predict that Federal Reserve policy will shift any time soon toward stiffer interest rates, even though the Fed views the dollar's weakness as an important constraint on U.S. monetary policy.

Competing for Cash. A growing number of corporations are betting, however, that interest rates may decline very little further. Corporate borrowers rushed to Wall Street in March with nearly $5 billion in bond offerings, a record for a single month. Last week, in history's largest fixed-income offering by a manufacturer, General Motors managed to raise almost $600 million. It did so even though the U.S. Treasury was also floating $1.25 billion of its own bonds, which caused furious bidding, broad fluctuations in prices and many worries over whether all the money could be raised. The turbulent week in the bond market seemed a portent of further wild trading in the months ahead, when industry will be competing with Government for available funds.

The 1974 payments deficit, too, pointed up the need for cooperation among oil-consuming nations in finding ways to loosen OPEC'S stranglehold on their economies. On that score, there was reason for hope last week. Meeting in Paris to lay the groundwork for preliminary talks with the petroleum-producing states, the International Energy Agency, a group of 18 of the largest oil-importing nations, agreed on a plan to safeguard investments in alternative energy sources. One of its main features: a minimum price, of still undetermined size, for oil imports.

Secretary of State Henry Kissinger had insisted on such an agreement before the U.S. would participate in a summit meeting between oil producers and oil consumers. At week's end it seemed certain that the U.S. would decide to join in preliminary negotiations with OPEC in Paris on April 7, with the aim of stabilizing and eventually reducing the price of oil. Those negotiations will go a long way toward determining how--and how much--the U.S. can hope to cut its oil-payments deficit.

*This "basic" payments deficit--the most closely watched indicator of international payment trends --reflects most trade and investment but excludes very short-term flows of "hot money."

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