Cloudy forecast for economic climate

1979 Washington, D.C

Chemical producers will find small comfort in views expressed by several economists and other business ana­lysts at the ACS national meeting. The long-range outlook for energy supplies in particular and for the overall national economy in general is beset with problems, according to speakers at a symposium on the present and future economic impact of the energy crisis held by the Divi­sion of Chemical Marketing & Eco­nomics.

The consensus was pretty well summed up by Roy N. Levitch, eco­nomic support manager for Shell Oil in Houston. "The world oil economy is extremely fragile," says Levitch. "Oil-consuming nations must realize that the current crude oil situation is not going to improve. Shortages will be more frequent in the next decade, and they well may be more severe."

Central to this issue is the increas­ing dependence of the U.S. on foreign oil supplies. U.S. production and re­serves of crude have been declining since 1970. As a result, imports now account for 43% of total requirements, up from just 23% 20 years ago. And the cost of imports has risen to about $50 billion a year—compared to a mere $3 billion in 1970, and is likely to double again by about 1985, accord­ing to Edward L. Flom, manager of industry analysis for Standard Oil (Ind.).

Adding to such concern, moreover, is that these imports are a slender reed on which to base long-term reli­ance. For example, a typical recent oil industry forecast is that world pe­troleum output (excluding that from the communist bloc countries) will increase about 13% (to nearly 59 million bbl a day) by 1985. But that forecast assumes increased crude production from the members of the Organization of Petroleum Exporting Countries (OPEC), particularly Saudi Arabia and Iran. If these producers do not increase output or even cut back slightly—a prospect that is not un­realistic—crude supplies will expand only 5 or 6%, resulting in a 4 million bbl-a-day shortfall.

This fear is emphasized by political scientist Charles F. Doran of Johns Hopkins School of Advanced Inter­national Studies. Doran states bluntly that "we are in the midst of a latent

energy crisis, one whose dimensions are not widely known." With no major breakthroughs in alternative energy sources likely in the next five years, the U.S. will remain largely on a petroleum economy and bound to OPEC for its supplies. What has mitigated the crisis so far has been the willingness of some members of OPEC, especially Saudi Arabia, to expand their production of crude oil. But the margin remains very thin, Doran argues, and our energy system could easily and quickly move into disequilibrium.

Doran notes two developments that he thinks point up the special precariousness of the U.S. energy situation. One is that "quietly and without much visibility, producer attitudes have changed regarding optimal petroleum output levels. A number of producers now wish to develop their reserves more slowly." Meanwhile, political pressures, both internal and external, have been building up in recent months on Saudi Arabia to limit its output.

These two developments, in Do-ran's opinion, "spell the makings of crisis." He contends that several ex­ternal events have served to shatter Saudi confidence in its relations with the U.S.: the successful revolution in Iran, the about-face in U.S. relations with Taiwan and China, and the emergence of the Israeli-Egyptian peace agreement in particular. At the same time, Saudi Arabia increasingly has become the focus of Middle East tensions, as well as the target of leftist activity and discord and of demands that it use its oil wealth to support Arab aspirations. In addition, youn­ger members of the Saudi govern­ment are beginning to suggest that oil production be reduced for political and long-term economic reasons.

The real issue now, Doran states, is not whether Saudi Arabia can or will expand its production to 12 million bbl a day or more. Rather, it is whether output there even will be sustained at the present level of about 8.5 million bbl or will be reduced, perhaps by as much as half. Doran fears that the present Saudi regime is much more fragile and delicate than many people in the western world realize, and its durability is increas­ingly in question. The "latest crisis" may not become a real one if the U.S. handles its relations with the Saudis with finesse, he adds. But that will require a policy of coordination and codependence and continuing U.S. support of the present regime.

Shortages and rising costs of oil are not the only factors that will affect the U.S. economy during the 1980's. Economist Marilyn G. Cernosek of Shell Oil, like many other business

Continued slow economic growth likely for 1980's Gross national product, $ billions, constant (1972)

2000

600

1960 65 70

Source: Shell Oil Co.

75 80 85 90

forecasters, predicts a generally slower rate of economic growth during the decade ahead than has been the case during the previous post-World War II period in general. After two years of little or no growth in real gross national product in 1979 and 1980, she looks for a growth rate av­eraging about 3.0% a year through 1990. That's a bit higher than during the 1970's but well below the 4.1%-a-year pace of the 1960's. A key factor will be a labor force that will be ma­turing and growing more slowly dur­ing the middle and late 1980's. That trend may give a boost to labor pro­ductivity, but it also will be a drag on demand for housing and other high-priced items.

Cernosek is especially pessimistic about the outlook for inflation. Al­though she thinks the rate of price increases will drop from this year's 9% level to 8% in 1980, she expects infla­tion to run at an uncomfortably high 7%-a-year clip for the rest of the dec­ade. As a result, prices will be double today's level by 1990. Rising prices for oil and other imports will be partly to blame.

But a major cause of persistent in­flation, Cernosek believes, is the self-defeating manner in which indi­viduals and institutions have reacted to past inflation. Consumers and businesses, expecting a continuing rise in wages and prices, try to hedge inflation by buying before prices go up further, thereby heating up de­mand. Labor unions negotiate pay increases indexed for past inflation, forcing up costs. "As long as we expect inflation to continue at high rates," she says, "and behave accordingly, it probably will." D

Sept. 24, 1979 C&EN 17

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