The big economic question is not how much the oil price increase announced by OPEC will cost us in 1977. Secretary of Commerce Elliot Richardson has already estimated the price tag at $2 billion plus an additional one percent of excess inflation.
The real question, according to senior economists, is how to “survive” the disaster that our economy suffered when we lost the oil war of 1973. When the Arab oil-producing nations quadrupled their prices after the Yan Kippur war, they dealt a body-blow to the West from which we have never recovered.
The out-of-pocket price increase we pay when we drive into service stations for a fill-up is only the least of the economic costs. Brookings Institution economists estimate that the four-fold price hike also cost us more than two million jobs and more than $60 billion in Gross National Product in 1976.
These losses occurred because the oil price increase triggered a decline in real disposable income, which in turn resulted in a cut in consumption and investment spending.
The maintenance of our high standard of living in the United States and the solution to the problem of unemployment are both dependent on capital formation. It is our tremendous investment in capital, plant and machinery, that enables the American worker to turn out so much more with fewer hours of work than our hard-working neighbors in other countries.
The worst effect of the Arab oil increase is that American savings are no longer pouring into capital investment in sufficient amounts. Industry expansion that was attractive when oil cost $2.75 a barrel is simply not feasible with $12-a-barrel oil.
The shrinkage in capital investment means a shrinkage in jobs.
During 1975 and 1976, economists were predicting that the U.S. economy would “adjust” and “absorb”, catch its breath, and resume its steady progress. That didn’t happen. Now economists are saying that it is doubtful we can ever absorb the price increases we’ve already suffered, and that we are facing a bleak future of permanent lower living standards, caught between unemployment and inflation.
Underlying the whole problem is one little statistic that staggers the imagination. The OPEC nations have been selling oil to the West at $11.51 a barrel, f.o.b. the Persian Gulf, that costs them only 25¢ a barrel to produce.
The reason why we don’t dare do anything about this highway robbery is the spectre of Soviet military power that overhangs the world. Lt. Gen. Daniel O. Graham (ret.), now of the Center for Advanced International Studies at the University of Miami, reminds us that “Moscow has urged steady increases in oil prices … and use of the ‘oil weapon’ to further political ends.”
The Kremlin hasn’t even been subtle about its new economic strategy of “joining ranks with the oil-producing countries” in a worldwide “anti-imperialist struggle.”
The oil price problem is of such major dimensions that solutions should be forged on many fronts. One solution is to restore our military superiority over the Soviets so that we don’t have to acquiesce in their arrogant encouragement of the “oil weapon.”
Another solution is to promote collective bargaining among the major oil consuming nations: the United States, Western Europe, Japan, and Brazil. We can notify the oil producers that, any time they raise their oil prices, we will likewise raise the prices of the things they want to buy from us, including automobiles, trucks, air conditioning, and food.
