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International Socialism, July/August 1975


Sue Clegg

Oil and the Crisis


From International Socialism, No.80, July/August 1975, pp.21-22.
Transcribed & marked up by by Einde O’Callaghan for ETOL.


THERE ARE two widely held theories on the causes and consequences of the present crisis of capitalism.

The first holds that the increase in oil prices triggered the recession and is the cause of the current crisis. Crudely, this theory claims that our present problems are the responsibility of some super rich sheikhs who are threatening the stability of the system. The second theory is that the increase in oil prices will result in a shift of power from the consuming countries to the producing countries. This theory is usually generalised from the OPEC (Organisation of Petroleum Exporting Countries) countries to all other primary product producers. It points to a fundamental change in world power. The OPEC countries will help bring this about through massive aid to the Third World and support for other producer cartels. The West will be bled dry and its ill gotten spoils will be returned to the producers of raw materials. I will argue that both these theories are false.

What Happened?

UNTIL THE late 1960s the problem for the oil companies (who dominated the industry) was not one of increased prices, but of falling prices. They were worried that if too much oil was produced prices and profits would fall, and they took measures to ensure that in this situation it was the producer countries, not they, who suffered. Indicative of this situation was the fact that the value of Britain’s fuel bill in sterling in 1972 was the same as it had been 15 years earlier despite increased consumption. By the 1970s this situation was changing. Alaskan oil production was delayed by the environmentalists, the Gadhafi regime in Libya was regarded with suspicion by the oil companies and in 1972 Kuwait decided to conserve its resources and place a limit on production. The American oil companies were not unduly disturbed however, since they had vast concessions in Saudi Arabia and were relying on Feisal to curb OPEC militancy. This situation was changed radically by the Yom Kippur war and pressure from OPEC. The Arabs were able to put pressure on the Saudis in a war situation and at the same time inflation was driving OPEC to take a firm stand on prices. When the Middle East war was two days old the OPEC countries met the oil companies in Vienna to discuss the price of oil. The old price of three dollars a barrel had been fixed by the 1971 Teheran agreement and had been outstripped by inflation. The oil producers asked for five dollars a barrel. The oil companies left the conference to consult their headquarters as they regarded this as an unworkable price. The conference never re-convened. The oil companies, clearly worried by the war, wrote to President Nixon warning that any increase in aid to Israel ‘will have a critical and adverse effect on our relations with the moderate Arab producing countries’. Nixon ignored them.

By this time it was too late. In October the OPEC countries unilaterally raised their prices to 5.12 dollars a barrel and voted to cut production by five per cent a month until Israel withdrew to her 1967 frontiers. Saudi Arabia announced a cut back of 10 per cent and an embargo of oil to the US and the Netherlands. By December 1973 the Gulf countries had raised their price to 11.65 dollars; over twice the price the companies had rejected only two months before. The days of cheap oil were over.

Effects of the Price Increase

ONE OBVIOUS immediate effect of the price increase was inflation, a pushing up of prices in all sectors of the US and European economies, which were dependent on cheap oil. The price increases also plunged the major industrial countries into debt, with heavy balance of payments deficits. This debt represented the increased amount that the consumers were having to pay and that the producers, certainly in the short term, couldn’t spend.

It is in this context that the whole debate about recycling began. Very crudely the consumer countries needed to borrow back the money they had paid out in order to cover their debts. In other words the petro-dollars (dollars used to pay for oil) had to be recycled back into the coffers of the Western states. If this did not occur a major recession was bound to follow as the consumer countries drastically cut back in order to try and balance their budgets. If the money couldn’t be recycled it was in effect taken out of the system and this in turn was bound to lead to a world recession because some of the purchasing power, corresponding to commodities produced, would be destroyed.

All would have been well if the major financial institutions could have dealt with this money, since two-thirds of the oil surplus money of the OPEC countries was deposited in US banks. This money was deposited on a short term basis, since it represented a poor investment and the interest earned didn’t keep pace with inflation and a devaluing dollar. The banks make their money by lending, but lenders wans money for a long time for industrial investment. Thus the bank were faced with the unhappy prospect of huge deposits on which they had to pay interest but which they couldn’t actually use for other than short term loans.

Further problems arose because most deposits were either American or British banks, denying other countries who needed recycled funds. It is in this context that both Healey and Kissinger presented proposals for recycling that favoured their own countries’ interests, the Americans reluctantly and after various veiled threats about military invasion. What is significant about these plans is not so much their details, as that once the crisis had begun the oil companies faded into insignificance. The problem was one for the consuming states and it was they who undertook to solve the problem. The other highly significant factor is that until recently no attempt was made to include the OPEC countries in these plans. Negotiations stayed firmly in the arena of the Western capitalist states, the producers have hardly been consulted.

Did the Increase in Oil Prices Cause the Present Crisis?

IN 1971 all the major industrial countries (with the exception of Canada) went into recession. By 1972 they were beginning to reflate. In 1973 all except Italy entered a boom. In the first three months before October 1973 average inflation in the OECD (Organisation for Economic Co-operation and Development) states had reached a state of 11 per cent a year. The OECD includes all major industrial states except the USSR. This was before the oil price increases. In the recession that followed, inflation increased to 15 per cent average increases (the first half of 1974 from second half of 1973).

The explanation of the current crisis of a recession and raging inflation cannot be found in the increased oil prices. It was the existence of inflation that made it necessary for the producers to put up their prices, since they were losing their value at an alarming rate. At the same time it was the boom, causing bottlenecks and shortages, that made it possible for the producers to raise their prices. The oil producers merely joined in the rush. The explanation of the crisis is to be found in the breakdown of the Permanent Arms Economy, which had acted as a stabiliser in the 1950s, and in the emergence of state capitals. In the past, recessions had cured inflation by bankrupting firms. But now the state prints money to stop firms going bankrupt. The implications are different. In the past capital restructured itself by larger, more efficient firms buying up smaller bankrupt firms, but now if British Leyland goes bankrupt British capital goes bankrupt. No state can contemplate this so they continue to fuel inflation by printing money even in a recession.

The international monetary system which might conceivably put a curb on the inflationary activities of individual states is in shreds, thanks largely to the increasingly destabilising effect of the Permanent Arms Economy and the role the dollar has played in this process. So inflation rages uncontrolled while at the same time the world is in a recession.

The oil crisis undoubtedly fuelled the present world crisis; but it didn’t cause it. It is a symptom of the deeper crisis, which would have happened even if oil prices had remained stable.

The significance of the theory that it was increased oil prices that created the present crisis is ideological. It attempts to disguise the real nature of the crisis and its depth. It encourages the view that it can be solved tech-nically – if only the details of the recycling arrangement can be got right – or if any of the sheikhs will co-operate. In fact to talk of the oil crisis diverts attention from the real crisis which is one of capitalism as a whole.

Will Power Change Hands?

THE ARGUMENT about power moving from the capitalist centres to the producing nations is of importance for our politics. We have argued in the past that capitalism can only be overthrown . from the centre. We have also argued that the system is stagnating, that it cannot expand, and hence that there is no road to industrialisation and prosperity for the rest of the world without the overthrow of capitalism.

The counter argument is that if control of the national economy can be won, then industrialisation can take place by forcing the consumer countries to pay an increased amount for their products and then using this wealth to industrialise. We have argued in the past that this is not possible. Will the OPEC countries prove us wrong? Certainly the argument that the OPEC countries are giving vast amounts of aid to the Third World is entirely spurious, since this aid is not even enough to compensate them for the increased oil prices. The increased aid is merely being used to buy the same amount of oil at increased prices, so in fact it ends up where it came from, in the oil producing countries. But if this is predictable, what about the OPEC countries themselves, surely they will industrialise?

There are some straight-forward arguments about why this will not happen in some of the smaller and richer oil states. Kuwait for example has a per capita revenue from oil of 11,200 dollars (i.e. dividing the total revenue by the population gives you 11,200 dollars each). Rigid class division, in these countries mean that the distribution is not equal, but nonetheless industrialisation in such circumstances would prove most difficult. The population is simply not big enough. However this argument does not apply to the larger OPEC states.

The main argument centres on the viability of developing independent capital, one that can exist and survive independently of support from another state capital, and that will not be destroyed by a recession generated in the centre of the system.

There are two major obstacles. The first is the high level at which it is necessary to enter the system. To industrialise means to enter the system as an advanced state capital, in which the size of the unit of production is enormous. To compete effectively, for example, in motor cars means setting up a huge mass production plant (British Leyland is smallish), it means creating a components industry, a steel industry, a machine tools industry. Without starting at this high level the products produced will not be competitive and at the first sign of recession will be badly hit. This has all to be done in a situation where the expertise in such areas is the advanced countries, and aid has to be obtained and in a way that doesn’t leave control in the hands of other capitals. It seems unlikely at the moment that the OPEC countries can overcome these difficulties, but there is a more fundamental problem. Creating a mass capitalism implies that the system is expanding, unless it is to simply replace and take over an old one, say Italy going bankrupt. Is the system expanding? Kidron provides massive evidence in his article on waste that this is not the case. (See Chris Harman’s review in IS 76). Increasingly competition is in waste, noteably arms production. It is not accidental, for example, that India, having failed conspicuously to compete industrially attempts to compete in waste by exploding her own atomic bomb. There is already strong evidence that the OPEC countries will follow. In 1975/6 the Iranian Government intends to treble its expenditure, increasing its arms spending by 41 per cent to 87,860 million, which is 29.4 per cent of the total and by far the largest allocation. It would appear that the OPEC countries will be forced to compete in waste and this will divert resources away from creating productive potential. The outlook for industrialisation does not look bright.

The increased oil revenues will undoubtedly produce a class of extremely rich men, but these will be assimilated into the ruling classes of the existing powers. With their investments in the Western capitalist countries, and with no independent base at home, they will become a part of the existing power structure rather than form an independent challenge to it. Only if an OPEC country can form an independent capital will there be a fundamental change in power relations. Indicative of this is the way the OPEC states as such have been virtually ignored in the deliberations between the EEC and US about the financial arrangement that should be made to cope with OPEC money.

At the moment there appears no clear evidence of a fundamental shift in either industrial or political power in favour of the OPEC countries and what shift there is appears tactical and not economic.

What Next?

HIGHER OIL prices are likely to be here to stay, not least because the cost of alternative sources of oil are vast. North Sea oil is 12 times as expensive as Middle East oil. Having invested large sums in these sources of oil the consumer states, as Kissinger has already indicated, are likely to insist that the price be maintained at a level which will allow these investments to be profitable.

In the meantime recycling will ensure that British capital is propped up by the smaller OPEC states who can’t spend their money. Any transfer of real resources will be at the expense of British workers, who will in effect be forced to consume less. But even when the immediate effect of the increased oil prices have worked its way through the system the crisis will still be here.

It will be European and American workers who will have to solve the crisis, by destroying the system from within. The oil sheikhs neither created the crisis nor will they solve it. Even with their vast amounts of money they will remain locked within the world capitalist system and its fate will be theirs also.

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