Price Vs. Policy: A Tale of Two Markets

Wriston, Walter B.


Oil for Ski Resorts in July


There could scarcely be a sharper contrast with what has happened then, and since, in the world's oil markets. The entitlements program enacted in 1973, for instance, was supposed to distribute the benefits of low-cost domestic oil to all refiners. One of the first results was to subsidize the importation of foreign oil and remove most of the incentive for oil refiners to search for new domestic sources because they believed that, in the end, the government would effectively make crude oil available to all refiners at roughly the same price.

Every year some 2,500 ships discharge crude oil into more than 600 U.S. refineries and import terminals. Just moving the crude around to get the right grades to the right locations requires dozens of trades. If the government continues down the path of substituting central planning in Washington for the interplay of forces in the market, the lines in front of the gas stations we witnessed last spring may be remembered as part of the good old days. The gas lines, you may recall, were largely the result of the government's Energy Department first mandating the refining of too much heating oil instead of gasoline, then allocating the available gasoline to politically influential groups such as farmers, and finally allocating what was left in such a way that ski resorts were awash with gasoline in June but nobody could drive to the beach.

This is the same wisdom that many would like to see brought to the world's financial markets. So far, however, the world capital markets have managed systematically to readjust themselves and preserve the world's economic balance without waiting for governments to tell them how to do it. That is extremely fortunate, because what can be done by a free market is almost always far more than the planners and regulators believe possible.

That is as true today as it was six years ago. In 1980 the OPEC current-account surplus, in 1974 dollars, will be equal to what it was in 1974. And despite the most recent round of oil price increases, the ratio of the LDCs long-term debt service to exports will not be greatly higher in 1980 than it was back in 1972 and 1973, before all the trouble began.

The reason is that these countries' exports, and thus their capacity to service foreign debt, have expanded enormously in the interim. Between 1973 and the end of 1979 their real growth rate averaged well over 5 percent a year.

As matters stand today, the debt situation of the main LDC borrowers is clearly manageable. The bulk of the adjustment process this time around will fall on the advanced industrial countries, not the LDCs. Furthermore, the LDCs are in a much better situation to cope with the problem. Their exports have increased from $67 billion in 1973 to $185 billion, and their international reserves have risen from $33 billion to some $78 billion. That's in addition to the 100 million ounces of gold they are fortunate enough to own and on which you can put your own value.