Excerpted from chapter 6 of the recent RFF publication, U.S. Energy Policy: Alternatives for Security, by Douglas R. Bohi and Milton Russell.
The long-run well-being of the United States may be best served by accepting a reasonable level of dependence on foreign energy sources, while at the same time creating for the oil-exporting countries a vested interest in facilitating a continuous flow of oil and capital throughout the world. Action to create a world of nations fully cognizant of their interdependence may provide meaningful energy security for the United States at a lower cost than through an autarchic policy. At the same time, establishing these conditions would yield benefits to the community of nations, including those for whom energy independence is impossible.
The United States is the world's leading financial center and the major force behind international monetary developments. The American economy represents to potential foreign investors a vast array of investment opportunities of differing liquidity, risk, and return. No other country offers the same depth and breadth of investment opportunity. It makes a great difference to the oil-exporting countries whether these opportunities become more or less accessible in the future. In turn, that accessibility directly affects their willingness to produce oil. Similarly, U.S. participation is required to facilitate the recycling of foreign exchange from the surplus oil-producing countries to the deficit oil-consuming nations. The dollar is the denominator for the bulk of international transactions, most oil transactions, and is the principal source of international liquidity. Close cooperation among central bankers, especially those of the United States, is required to accommodate exchanges of oil revenues. New institutional arrangements are doubtless required among official monetary authorities and between monetary authorities and private financial institutions. The active participation of the United States in meeting these new challenges is necessary if they are to be overcome.
A two-pronged approach seems appropriate to facilitate recycling of petrodollars: direct bilateral arrangements between the United States and countries with surplus foreign exchange, and multilateral arrangements between the major financial centers and the oil-exporting countries.
Direct bilateral arrangements cannot be patterned after past commodity trade agreements because, unlike commodities, asset transactions require ongoing communication and trust. Responsible appointed officials could act as intermediaries between foreign governments and prospective sellers of American private assets. In addition, the Treasury may be even more aggressive and imaginative in creating special U.S. government liabilities that may be attractive to the oil countries. The crucial domestic problem will be to convince the public that ownership of assets by foreign holders involves few significant economic or political dangers. The difficulty of this problem should not be underestimated, but the effort must succeed if foreign investment of an appropriate magnitude is to be achieved.
Multilateral arrangements could make use of existing international financial institutions. The International Monetary Fund (IMF) and the Bank for International Settlements (BIS) are obvious choices. Recycling foreign exchange to the lesser developed countries is a difficult issue. The oil-rich countries seem to prefer direct aid arrangements rather than acting through existing international institutions. It is unlikely that the United States would be in position to relieve the lesser developed countries' foreign exchange problems directly with a program of either independence or interdependence. These countries will continue to have a foreign problem unless oil prices fall substantially or OPEC countries provide substantial credits. It is suggested here that oil prices are more likely to fall and OPEC powers are more likely to extend credits if a policy of interdependence is pursued than if it is not.
The process of international trade and investment necessarily connotes interdependence. Trade in even the most important commodities need not constitute a serious threat to economic security. In fact, petroleum trade, if accompanied (as it must be) by external investment by the most important of the the oil-exporting nations, reduces the leverage of oil as an economic and political weapon. Oil exporters become increasingly dependent upon the consumers. The consuming nations provide a means to accumulate wealth and to generate future income based on non-oil assets. If oil were denied to a consuming country, the counterthreat of expropriation of the assets of the exporting country would exist. More importantly, if oil exporters have investments in consuming countries, any threat to the stability or continuity asset markets is harmful. Even if investments could be hidden and thus made safe from expropriation, the general effects of an embargo would affect all investors. Not only would an embargo reduce current income of oil exporters because of lower sales, it would threaten their accumulated wealth also.
Energy self-sufficiency, on the other hand, suggests that ownership of U.S. assets may be as unwelcome as control over oil supplies. To most of the oil-exporting countries, this attitude on the part of the United States would reinforce the traditional reluctance to channel oil earnings into nonliquid foreign assets. The incentive to increase current revenues would be dampened, and the desirability of restricting output to stay within overall cartel guidelines would be enhanced.
Pursuing a policy of interdependence does not mean ignoring the short-term U.S. security problem or abandoning the domestic energy industry. On the contrary, the self-interest of the OPEC countries in reducing prices and making oil available becomes all the more obvious if the United States pursues efforts in these areas. The important conclusion that follows is that energy security requires a balance of power between the oil-exporting nations and the United States, and a balance of imports and domestic production in the United States. Our security is no more enhanced by total dependence than it is by total independence; neither extreme creates the conditions necessary for true security.
Interdependence does mean a relationship that flows both ways. Oil-exporting nations and consuming nations alike would have a common interest in preserving a system of international trade in petroleum and capital. That common interest would not be based on good will (although friendly relations may help), but on the vital needs of individual nations that have a stake in making the system work. Other oil-consuming nations have little choice but to depend on foreign oil supplies. They have an even greater stake in securing the benefits of interdependence between consuming countries and producing countries. If the United States takes the lead in this endeavor, it is very likely that other consuming nations will follow.
Interdependence among oil-exporting and importing nations would require both time and innovative approaches. The mechanics of such an effort have not been explored in detail here, and the difficulties should not be underrated. It is basically a matter of constructing successful institutional arrangements among peoples with different interests. It is therefore regarded as feasible; there have been successes in similar endeavors.
A version of this article appeared in print in the June 1975 issue of Resources magazine.
