The Oil Shock Plus 5! A Reassessment

Wriston, Walter B.


It appears that a company chairman had been given tickets for a performance of "Schubert's Unfinished Symphony." He could not go and passed them on to his work study consultant. The next morning the chairman asked him how he had enjoyed the performance; and instead of a few plausible observations, was handed a memorandum which read:

"(A) For considerable periods the four oboe players had nothing to do. The number should be reduced, and their work spread over the whole orchestra, thus eliminating peaks of activity.

"(B) All the 12 violins were playing identical notes. This seems unnecessary duplication, and the staff of this section should be drastically cut. If a large volume of sound is really required, this could be obtained through an electronic amplifier.

"(C) Much effort was absorbed in the playing of demi-semiquavers. This seems an excessive refinement, and it is recommended that all notes should be rounded up to the nearest semiquaver. If this were done it should be possible to use trainees and lower grade operators.

"(D)No useful purpose is served by repeating with horns the passage that has already been handled by the strings. If all such redundant passages were eliminated, the concert could be reduced from 2 hours to 20 minutes. If Schubert had attended to these matters, he would probably have been able to finish his symphony after all."

It is a truism to say that the progress of the world never runs in a straight line. In reality, all of life is a series of crises, some of which can be foreseen but many of which cannot. Pundits would prefer that the world were more predictable, but their straight-line projections are almost always upset by the untidy balancing of competing forces at work. These adjustment processes of the world work to achieve rough equilibrium because most sectors of society have a vested interest of one kind or another in making them function.

At this moment in history, the nation states of the world have become almost totally interdependent and yet everywhere we see the rise of the competing forces of protectionism and nationalism. It is a paradox, but old ideas die hard and the world learns only very slowly. The principle of the division of labor has been applied in so many ways and so many places as to make our global interdependence one of the most conspicuous facts of modern life. Despite the evidence around us, sometimes when the international fabric of the world is stretched by some horrendous event, it is tempting to ignore the fact we live in a global village. At such times it may be attractive to pick out one trend in the intellectual tides of the world and ignore all others in order to explain a phenomenon that flies in the face of conventional wisdom. This technique has the virtue of simplicity, but the defect of being almost always wrong.

A lot of printer's ink has been spilled over the probable consequences of some dramatic event that excites the imagination of the world and for which no ready solution presents itself. Disaster scenarios are always exciting. By contrast the long, most uneventful adjustment process that balances the forces abroad in the world does not lend itself to ominous stories. There is no dramatic denouement on which to hang a headline. Examples abound, but the great OPEC oil crisis is a classic case in point. In 1974 when our Board of Directors visited Brazil, less than seven months had passed since OPEC had first embargoed some oil shipments while abruptly and dramatically lifting crude oil prices. The air was heavy with the forebodings of doom. The schism between economic interdependence and political independence was thrown into stark relief. There was a horror movie for every taste, ranging from the specter of a world-wide blackout to the more modest suggestion that massive defaults would occur in loans to less-developed countries. Front-page stories in respected newspapers suggested that these massive defaults would in turn pull down international financial institutions. The world we were told would return for a rerun of the great depression of the 1930's. This doomsday story was told with great skill and over and over again. It sold a lot of newspapers and not a few books, but it was wrong for the same reason other straight-line projections have turned out to be wrong. It overlooked the fact that individuals and nations can and do act and react to protect what they perceive to be their own self-interest. This is what makes the adjustment process work.

Despite the high noise level of public concern that the problems of the OPEC embargo and subsequent price increases were unmanageable, my Citibank colleagues and I were convinced that somehow the world would be able to cope. During our meetings here in 1974, we said as much in a very straightforward manner. We put our faith in the extraordinary strength and flexibility of the global marketplace in which literally hundreds of millions of people express their distributive judgment.

There was no doubt that the process would be severely tested since the size and suddenness of the oil shock were almost unique. Despite these characteristics, it was not the first, nor will it be the last dislocation in our global economy which produces headlines. All of these events immediately trigger a series of actions which put the infinitely complex adjustment process in motion. Equilibrium is restored in the system in ways that planners could never foresee. It is difficult to conceive of a computer program which could even record, let alone factor in the infinite variety of actions and reactions which will be taken by individuals and nations in their own self-interest. During the early days of the crisis, anyone who did not join in the cry to "do something" was perceived as either a person who did not understand the problem or as a Pollyanna. In the case of Citibank, our attitude was explained by some as being governed by our huge vested interest in loans to less-developed countries. The latter was a fact but the former judgments were not valid. Being a Pollyanna and a successful banker are mutually exclusive. Sound banking is based on assembling as many reliable facts as possible. Instead of joining the chorus of despair, we examined and re-examined our cross- border lending criteria. We watched and studied how the markets were adjusting. Other responsible international bankers did the same. We stayed in the business and together with the international monetary agencies supplied funds to buy time for the adjustment process to work. It is now five years and the oil problem is still very much with us, the doomsday prognosticators have moved on to new and more promising topics. Not only have there been no massive defaults of loans to LDC's, but their credit record has been good. Because projections of disaster were so pervasive at the time of the oil shock, even some of the greatest professionals in the business have expressed mild surprise at the speed and relative smoothness of the adjustment process. The just retired Managing Director of the International Monetary Fund, Mr. Johannes Witteveen, recently said "The world situation has changed remarkably since then. The problem of the oil crisis has been overcome in a large part and rather better than we thought possible at the time."

One reason the world, albeit battered, has survived is that the enormously flexible and complex global financial system was able to handle the largest transfer of financial assets in the shortest time frame in history. It was a remarkable achievement. Almost no one foresaw the massive volume and turnover that would develop in this marketplace. This enormous volume and churning was successfully handled by the marketplace with only minor casualties along the way. The scope and complexity of the global financial market beggars description. Literally billions of transactions are initiated, consummated and cleared through the system by thousands of intermediaries in more than a hundred countries. Despite the slowdown in world trade which followed the oil shock, trade is now moving once again at an annual rate of almost one trillion, two hundred billion dollars a year. The foreign exchange markets of the world are handling an estimated thirty trillion dollars per annum or an amount equal to about fifteen times the gross national product of the United States of America.

While markets were straining to handle the unprecedented transfers of financial reserves and doing it successfully, each nation reacted to the oil crisis in its own way. No one decision or policy was right for every nation stunned by the oil shock. Some oil importing countries retrenched their economic development plans to ride out the storm. 0thers, like Brazil, turned to global capital markets for financial support to permit the internal policy adjustments to take effect. Not every nation had in place the requisite economic policy that could attract and hold private capital to bridge the gap. But those that took on the added burden of the oil crisis, yet pressed ahead with sound internal economic development plans have not regretted it. While each nation reacted in its own way, each learned from others. This is so because every nation on this earth which is successful in advancing the welfare of its people borrows heavily on the experience, technology and capital of others. What cannot be borrowed, of course, is the determination, the self-confidence and the courage to manage the crisis.

One of the most reassuring omens for the future of this hemisphere has to be the abundant self-confidence and determination demonstrated by the oil dependent economies of Latin America in meeting the challenge of higher energy costs.

It is instructive to observe that despite predictions to the contrary, all the wealth of the world has not wound up in OPEC hands. The international reserves of the non-oil producing LDC's did not decline but rather increased. The rate at which OPEC countries are adding to their current account surpluses is falling rapidly and some countries are already in deficit. This reality is very different from the conventional forecasts of doom made only five years ago.

Even with the necessity of financing higher oil bills, non-oil developing countries world-wide managed to show an 8 percent increase in their international reserves in 1974. By the time world-wide recession overtook the large industrial nations which are their best export customers, the developing countries had been able to cut down on their own non-oil imports and to control their domestic spending.

Specifically the non-oil-producing developing countries increased their export earnings from 67 billion in 1973 to 132 billion in 1977. In the course of this extraordinary explosion of exports, they added some 23 billion dollars to their total international reserves. Once again the conventional fears of the prognosticators have turned out to be wrong.

There is instead a rather different problem that has developed. The counterpart of oil import dependency is, of course, oil export dependency. As we have been struggling with our problems of import dependency, oil exporting countries have perceived a need to reduce their excessive dependence on oil exports. In 1977, oil accounted for about 97 percent of all commodity export revenues for the Gulf states and almost 85 percent for the other OPEC countries. Awareness of this heavy reliance has led various OPEC countries to undertake costly industrial development programs, while they still have enough oil in the ground and assured markets around the world.

The complex global adjustment process is not the stuff of headlines, but in its own way is nevertheless one of the most dramatic stories of modern times. The latest annual report of the Bank for International Settlements throws it into stark relief. It relates that non-oil countries, as a group, have added more to their total international reserves during the past two calender years than did the oil exporting countries.

In fact, international reserves of the entire oil importing world--developed and developing--rose by $21.3 billion in '76 and then took a quantum leap in '77 of an additional $47.9 billion. These are not figures to validate the end of the world scenario which crowded the pages of learned journals and dominated the front pages of the world for so long.

One reason the numbers turned out this way is that almost everybody underestimated the ability of governments to spend money--a mistake experience should have taught us to avoid. As OPEC's annual spending on imported products, consultants, freight, contractors and other services began to exceed its rate of increase in oil revenues, its so-called oil surplus shrank accordingly. What could not be usefully spent on imported goods and services was made available for investment. By the year-end 1977 about 160 billion dollars had been reinvested directly or indirectly in the economies of other countries.

The central lesson to be learned by looking at the early days of the oil crisis from the limited perspective of five years is that it proves once again that tomorrow will not simply be today 24 hours older. Tomorrow will be the product of a vast number of pragmatic decisions, random events, and minor moves all of which when taken together will build or destroy our global economy. Our options are now more limited than they used to be. We have long since passed the fork in the road of history where the world can return to economic nationalism and isolationism. We know with great clarity that a major event anywhere in the world will impact us all. Our fates are inextricably intertwined and the beggar-thy-neighbor policy of times past lost whatever doubtful utility it may once have had.

The reality of economic interdependence in no way lessens the importance of independent initiative by men and by nations. Each nation has to evolve its own system which is right for it in bettering the human condition of its own people. We now have on this planet every kind of political system from a tribal council in some of the newer countries to centralized pervasive government planning in others. In between these two extremes one can find functioning governments reflecting every shade of the political spectrum. The only constant factor is change, as each society moves at its own pace along the curve of its own history. We have moved a very long way in my own country from the collectivism expressed in the Mayflower Compact which governed absolutely the lives of some of our first settlers, to our current complex pluralistic democracy. In between the Mayflower Compact of 1620 and today we have experienced in the United States everything from a destructive Civil War which brought with it martial law, to decades during which whole areas of our western frontier had no law at all. The oceans which helped to protect our isolation have long since ceased to be barriers. In short, the luxury of economic independence is substantially gone from the world and all kinds of political and economic systems are caught in the same web of interdependence.

What then is the lesson of the last five years? Certainly we cannot assume that tomorrow will be any more safe and uneventful then yesterday. On the contrary, all history validates the prophecy in Scriptures that "in the world ye shall have tribulations." The shape of coming events is unknown, but we have all learned that the balance of the world's economy can be suddenly and severely disrupted. But we have also come to realize that even under crisis conditions the global adjustment process works; it is what saved us in the past and gives us confidence in the future. This is the real lesson of the oil shock.

  • The document was created from the speech, "The Oil Shock Plus 5! A Reassessment," written by Walter B. Wriston for the U.S. Chamber of Commerce of Sao Paulo on 14 September 1978. The original speech is located in MS134.001.003.00027.
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