U.S. International Transactions in 1979 Another Round of Oil Price Increases Laurence R. Jacobson of the Board's Division of International Finance prepared this article. In spite of a dramatic rise in oil prices during 1979, the U.S. trade deficit decreased slightly from 1978 and the current-account deficit was es - sentially eliminated. An increase in the volume and prices of U.S. exports more than offset the increase in the value of imports, which mainly reflected rising import prices with volumes up only slightly. A large increase in direct invest- ment receipts, an important element of the nontrade current account, resulted from rising profits by U.S. oil and manufacturing companies operating in foreign countries. However, the trade deficit is likely to deteriorate in 1980 as the full impact of oil price increases affects U.S. trade accounts. Slow economic growth in the United States relative to other industrial countries (chart 1) ac- counted for some of the increase in export vol- ume relative to import volume in 1979. The price- adjusted weighted-average foreign exchange value of the dollar fluctuated within a relatively narrow band during 1979 (chart 2). However, lagged adjustment to the decline of the dollar since 1976, and especially since 1977, exerted a positive effect on exports in 1979, particularly exports of machinery and industrial supplies. In the second half of the year both the price and the volume of agricultural exports were raised due to drought in Eastern Europe and the Soviet Union. Along with the improvement in the current ac- count in 1979 compared with 1978, recorded net private capital outflows were greatly reduced and unrecorded transactions showed a much larger net inflow. The major features of the change in private capital were the net shift of $23 billion in bank-reported capital and an increase in net U.S. direct investment outflows of $7 billion. U.S. bank borrowing from branch offices in foreign countries resulted in a substantial capital inflow, although the inflow was partially reversed in the fourth quarter following the imposition by the Board of Governors of reserve requirements on increases in managed liabilities. Foreign official asset holdings in the United States declined more than $15 billion in 1979, compared with an increase of $34 billion in 1978. A slight rise in dollar holdings by countries of the Organization for Economic Cooperation and De- velopment (OECD), other than Japan, was more than offset by Japanese dollar sales in support of the yen. U.S. official reserve assets changed only slightly during the year, as net sales of dollars by the Federal Reserve and the Treasury in the first half of 1979 were almost offset by purchases to support the dollar during the second half of the year. 1. Changes in real GNP in major countries Changes are from previous quarter, seasonally adjusted at annual rates. “Foreign” is the weighted average of 10 countries. Percent United States Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis April 1980
Transcript
U.S. International Transactions in 1979 Another Round of Oil Price Increases
L au ren ce R . J a co b so n o f the B o a rd 's D ivision o f In tern a tion a l F in an ce p re p a re d th is artic le .
In spite of a dramatic rise in oil prices during 1979, the U .S. trade deficit decreased slightly from 1978 and the current-account deficit was essentially eliminated. An increase in the volume and prices of U .S. exports more than offset the increase in the value of imports, which mainly reflected rising import prices with volumes up only slightly. A large increase in direct investment receipts, an important element of the nontrade current account, resulted from rising profits by U .S. oil and manufacturing companies operating in foreign countries. However, the trade deficit is likely to deteriorate in 1980 as the full impact of oil price increases affects U.S. trade accounts.
Slow economic growth in the United States relative to other industrial countries (chart 1) accounted for some of the increase in export volume relative to import volume in 1979. The price- adjusted weighted-average foreign exchange value of the dollar fluctuated within a relatively narrow band during 1979 (chart 2). However, lagged adjustment to the decline of the dollar since 1976, and especially since 1977, exerted a positive effect on exports in 1979, particularly exports of machinery and industrial supplies. In the second half of the year both the price and the volume of agricultural exports were raised due to drought in Eastern Europe and the Soviet Union.
Along with the improvement in the current account in 1979 compared with 1978, recorded net private capital outflows were greatly reduced and unrecorded transactions showed a much larger net inflow. The major features of the change in private capital were the net shift of $23 billion in bank-reported capital and an increase in net U.S. direct investment outflows of $7 billion. U.S. bank borrowing from branch offices in foreign countries resulted in a substantial capital inflow,
although the inflow was partially reversed in the fourth quarter following the imposition by the Board of Governors of reserve requirements on increases in managed liabilities.
Foreign official asset holdings in the United States declined more than $15 billion in 1979, compared with an increase of $34 billion in 1978. A slight rise in dollar holdings by countries of the Organization for Economic Cooperation and Development (OECD), other than Japan, was more than offset by Japanese dollar sales in support of the yen. U.S. official reserve assets changed only slightly during the year, as net sales of dollars by the Federal Reserve and the Treasury in the first half of 1979 were almost offset by purchases to support the dollar during the second half of the year.
1. Changes in real GNP in major countries
Changes are from previous quarter, seasonally adjusted at annual rates. “Foreign” is the weighted average of 10 countries.
Percent
United States
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2. Average exchange value of the U.S. dollarMarch 1973=100
“Price-adjusted dollar” is “ weighted-average dollar” multiplied by relative consumer prices (U.S. divided by foreign consumer prices).
W o r l d O il M a r k e t D e v e l o p m e n t s a n d U .S . O il I m p o r t s i n 1979
U.S. payments for oil imports were greatly enlarged by the rise in world oil prices during 1979 (chart 3). After the sharp increases of 1973-74, the price of oil rose only $2.30 per barrel, or 21 percent, between 1974 and 1978 (table 1) and actually fell relative to the aggregate price level. In contrast, the import price jumped from $13.36 per barrel to $25.00 per barrel between December 1978 and December 1979. While the volume of oil imports in 1979 was close to the 1978 rate, the total value of oil imports increased 42 percent from $42 billion in 1978 to $60 billion in 1979, and increased 75 percent between the fourth quarter of 1978 and the fourth quarter of 1979.
1. Imports of petroleum and products1International accounts basis
1. Includes imports into the U.S. Virgin Islands.2. Annual averages.Source. U.S. Department of Commerce.
Unlike the 1973-74 oil price hikes, which were a result of concerted actions by the Organization of Petroleum Exporting Countries (OPEC) to set a high price even though available supply exceeded current demand, the establishment of world oil prices in 1979 occurred in an environment of constrained and unstable supply. In this environment a wide differential between spot market prices and contract prices emerged; there was a large increase in the volume of sales between governments and state-owned companies with an accompanying decrease of sales through the major multinational oil companies; and significant price differentials were established among OPEC producers, even after adjustment for quality differences.
3. Import price of petroleum and productsDollars per barrel
Quarterly averages derived from monthly free-alongside-ship (f.a.s.) data from the U.S. Department of Commerce.
A major element in these developments was the almost total cessation of Iranian oil exports in early 1979. During the remainder of the year, Iranian production was 2 million barrels per day lower than its previous peak. The cutback in Iranian production is insufficient in itself to explain the almost doubling of oil prices during the year, because increased production by other OPEC members and non-OPEC suppliers more than compensated for the shortfall (table 2). However, the growing fear by consumer nations of future supply cutbacks and perceived supply shortages led to a scramble for purchases of crude oil to supplement national strategic stock-
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U.S. International Transactions in 1979 285
2. Free world crude oil production, by countryMillions of barrels per day
1. Data for 1979 are preliminary.2. Neutral Zone production assumed divided equally between
Saudi Arabia and Kuwait.Source. Central Intelligence Agency, International Energy Sta
tistical Review, March 12, 1980.
piles, adding to demand pressures and allowing price leapfrogging by individual producers. Increases in production by OPEC were in part a response to rapidly escalating spot market and official prices.
Before the end of 1978, sales in the spot market in Rotterdam and other locations consisted mostly of refined products and accounted for less than 3 percent of total world petroleum exports. The spot market existed primarily to balance small inventory shortages or surpluses of refiners. The minimal importance of this market between 1973 and 1978 was attributable to the ability and willingness of OPEC producers (particularly Saudi Arabia) to adjust production to meet demand at cartel prices. The spot market price for crude differed little from contract prices and was often at a small discount, except during the 1973-74 oil embargo.
Although other OPEC countries did increase output as a result of the fall in Iranian production, that increase was insufficient to meet demand at established cartel prices. Unlike the 1974-78 period, when they let production adjust to meet demand, the oil countries set production limits. Saudi Arabia was unwilling to act as a swing producer and actually cut production substantially during the second quarter of 1979 before returning to a rate of 9.5 million barrels a day during the second half of the year. Since OPEC cannot set prices and production independently, the trend during 1979 was to permit prices to float by selling at prices above the contract level. The spot price of a barrel of crude
was $10 or more above the official price during most of the year (chart 4).
The differential between official and spot prices apparently resulted from the conception that official prices set at the spot price level could not be sustained in the long run, particularly if Iranian production recovered to its previous high level. However, official prices climbed rapidly during the year, and retroactive increases also were imposed to recoup a portion of the profits collected by contract purchasers through resale of crude oil and products at prices that reflected conditions in the spot market. Additional official price increases in 1980, combined with a drop in spot market prices, have dramatically reduced the spot market premium for most producing countries.
The extent of the impact of spot market purchases on the average U.S. import price per barrel can be deduced from trade data. By comparing the actual unit value of oil imported by the United States with OPEC contract prices, about 15 percent of U .S. imports were purchased at spot market prices in the second half of 1979,
4. Official and spot prices for oilDollars per barrel
Based on data reproduced by permission from Petroleum Intelligence Weekly, copyrighted 1980 by Petroleum and Energy Intelligence Weekly, Inc.
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resulting in an average cost of almost $2 per barrel more than contract prices during the autumn of 1979. Thus, the impact of spot market purchases on the U .S. import price was considerable.
By midyear, OPEC producers were unable to agree on a unified price structure. Official prices varied as much as 35 percent after adjustment for quality differentials. Libya, Nigeria, Algeria, and Iran formed a high-price tier. Saudi Arabia consistently offered the lowest price, although some of the differential was reduced through retroactive price hikes. Kuwait, Iraq, Venezuela, and others priced their oil about $2 a barrel above that of Saudi Arabia. A nonunified price structure had existed only once before, during the first half of 1977, and Saudi Arabia was able to force a compromise then by increasing production and putting pressure on countries with higher prices. Because it had established a production ceiling, Saudi Arabia was not able to play this role again in 1979.
The year 1979 also was marked by an acceleration of the trend by oil exporters to reduce sales through multinational oil companies and to increase sales directly to governments or to state- controlled oil companies. Saudi Arabia reduced the proportion of its sales to Aramco (a consortium of four major U .S. oil companies), and Iran virtually eliminated the major U .S. oil companies from contract purchases. Because the oil companies attempted to maintain deliveries to their home countries, there is little evidence that the United States was affected disproportionately by the cutback of Iranian production. Countries, such as Japan, that had previously obtained much of their crude from the major oil companies began to increase substantially their purchases through direct negotiations by state-regulated companies with OPEC governments and through large acquisitions in the spot market.
N o n -O il M e r c h a n d i s e Tr a d e
Despite the large increase in the oil bill in 1979, the U .S. trade deficit narrowed slightly, from $33.8 billion in 1978 to $29.5 billion in 1979 (table3). However, the deficit widened from the first to the fourth quarter of 1979. The reduction in the
3. U.S. merchandise trade, international accounts basisBillions of dollars, seasonally adjusted annual rates1
1. Details may not add to totals because of rounding. Source. U.S. Department of Commerce.
deficit year over year occurred because of the strength of exports, both agricultural and nonagricultural. Increases in the value of imports (both oil and non-oil) were attributable almost entirely to price changes, whereas exports increased significantly in volume as well as price.
Agricultural exports increased $5 V2 billion to $3 5 V2 billion in 1979. Higher volume accounted for about one-quarter of the 18 percent increase in value. Agricultural exports remained at about the average 1978 level through the first half of 1979. Both agricultural prices and the volume of exports jumped in the second half of the year, as the severity of the drought in Eastern Europe and the Soviet Union placed pressure on world demand. In the fourth quarter of 1979 the value of agricultural exports reached $42 billion at an annual rate, 40 percent higher than during 1978. Shipments of U.S. grain and soybeans to the Soviet Union were valued at a record $2.7 billion in 1979. The United States shipped 19.1 million metric tons of corn, wheat, and soybeans to the U .S.S.R ., up from 13.6 metric tons in 1978.
Nonagricultural exports in 1979 responded vigorously to the strength of economic activity abroad and also reflected a lagged adjustment to the depreciation of the dollar between mid-1976 and 1979. The strength of exports in 1979 was widely spread across commodity groups and countries. Some of the largest increases were in machinery and industrial supplies, particularly chemicals to Western Europe. Aircraft exports also were strong. Significant increases were recorded in exports to Japan, Canada, and non-oil developing countries, as well as to Western Eu-
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U.S. International Transactions in 1979 287
rope. Exports to OPEC members declined mostly because of reduced sales to Iran; the U.S. share of OPEC imports remained about 21 percent.
A strong rise in gold exports (from $1 billion in1978 to $5 billion in 1979) occurred as the Treasury continued auction sales throughout most of the year, and the price of gold rose from $220 per ounce in January to more than $400 per ounce in December. While gold imports also rose, net gold transactions in 1979 yielded a $2 billion surplus in contrast to the deficits of previous years.
Non-oil imports expanded gradually over the year. The increase was largely in terms of price. Volume is estimated to have risen about 2 percent, approximately the same as the real growth rate of GNP in the United States year over year. A broad range of commodities, particularly capital goods, cars and trucks, and foods contributed to the overall expansion in imports in 1979.
The U.S. trade balance with other developed countries shifted to a small surplus last year after an $11 billion deficit in 1978. The deficit with non-OPEC developing countries was reduced almost $2 billion, and the surplus with Eastern Europe was $2 billion larger. However, the U.S. deficit with OPEC members increased sharply to $30 billion, from $18 billion in 1978.
I n v e s t m e n t I n c o m e a n d t h e C u r r e n t A c c o u n t
Although the trade deficit has been quite large since 1977, net investment income has grown substantially and has raised the services component of the current account sufficiently to offset the trade deficit in 1979 (chart 5). Although both payments and receipts increased rapidly in1979 (table 4), net direct investment income increased $10.0 billion, or 46 percent.
The spectacular gain in the earnings of foreign affiliates of U .S. firms was concentrated in the petroleum and manufacturing sectors. Conditions in world petroleum markets produced large profit margins between the market prices of products and the original acquisition costs of crude oil. These forces were reflected also in the gap between spot market and official prices (discussed earlier).
5. U.S. trade and current-account balances
Balance on current account includes goods, services, and private and government transfers.
Annual data from the U.S. Department of Commerce.
Rising profits of manufacturing companies occurred partly because economic activity abroad was strong and partly because current accounting procedures raised nominal profits by measuring depreciation charges and inventory costs at historic costs and exchange rates. Profits were also affected substantially by a change in tax laws in the United Kingdom in the third quarter, which eliminated certain accrued tax liabilities of U.S. companies to the United Kingdom.
The rapid increase in direct investment payments in 1979 reflected the continued expansion of foreign investments in the United States as well as the impact of inflation on nominal profits.
4. Direct investment income receipts and payments Billions of dollars1
Net receipts ................................. 17.3 21.7 31.7
1. Details may not add to totals because of rounding.S o u rce . U.S. Department of Commerce.
Billions of dollars
20
10
+ 0
10
20
30
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C a p i t a l F l o w s
While the U.S. current-account balance varied little from quarter to quarter in 1979, private and official capital flows varied widely. The dollar- support measures on November 1, 1978, were followed by a strong net inflow of private capital through banking channels during the first half of1979, and the statistical discrepancy in the international accounts also showed sizable net inflows. Foreign authorities sold large amounts of dollars in this period to moderate depreciations of their currencies, and U.S. authorities were able to reverse the large sales of foreign currencies that had occurred in the final months of 1978.
By midyear the dollar was again subjected to downward pressure as the market reacted to an acceleration of growth in the U.S. monetary aggregates, rapid U .S. inflation, and another surge in oil prices. This pressure was met by heavy intervention on the part of U.S. and foreign authorities and was reversed in October when the
5. U.S. international transactions Billions of dollars1
Federal Reserve took actions to restrict the growth of money and credit.
Net intervention by the United States was small for the year as a whole, and U .S. official reserve assets increased $1 billion (table 5) largely through the receipt of an allocation of special drawing rights (SDRs). Foreign official asset holdings in the United States were reduced $15 billion primarily as a result of intervention to support their currencies. This reduction contrasts strongly to the $34 billion increase in such holdings during 1978 that occurred mostly because of dollar-support measures. Japanese sales of dollars accounted for the bulk of net change in foreign official accounts in 1979 as the yen fell almost 24 percent against the dollar.
A net capital inflow of $6.6 billion was reported by U.S. banking offices during 1979, compared with a capital outflow of $16 billion in 1978. This inflow had reached nearly $18 billion by midyear before being partially reversed in the second half. The bulk of the recorded net inflow was accounted for by increases in U.S. banks’
Private capital flows .................................................................................. -27.1 -9 .4 7.6 .4 -8 .2 -9 .3Bank-reported capital net (outflow, - ) .............................................. -16 .0 6.6 13.7 3.8 -4.1 -6 .8U.S. net purchase ( - ) of foreign securities ......................................Foreign net purchase (+) of U.S. Treasury securities ....................
-3 .52.2
-5 .04.7
-1 .12.6
- .6- .2
-2 .21.5
-1 .1.9
Foreign net purchases of other U.S. securities ................................ 2.9 2.9 .8 1.2 .6 .3U.S. direct investment abroad4 ............................................................ -16 .7 -24.8 -6 .0 -7 .5 -6 .8 -4 .5Foreign direct investment in United States4 ..................................... 6.3 7.7 1.0 2.0 2.8 1.9Other corporate capital flows, net ...................................................... -2 .2 -1 .6 -3 .4 1.8 0 n.a.
Foreign official assets in United States (increase, +) ......................... 33.8 -15.2 -9 .4 -10.0 5.7 -1 .5
U.S. official reserve assets, net (increase, - ) ....................................... .7 -1.1 -3 .6 .3 2.8 - .6
U.S. government assets, other than official reserve assets,net (increase, - ) ..................................................................................... -4 .7 -3 .8 -1 .1 - .9 - .8 - .9
Allocation of special drawing rights ........................................................ 0 1.1 U 0 0 0
1. Details may not add to totals because of rounding.2. Current account seasonally adjusted; other accounts not
seasonally adjusted.3. Data for fourth quarter are partial and preliminary.
4. Includes reinvested earnings.
Source. U.S. Department of Commerce, press release, March 20, 1980.
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U.S. International Transactions in 1979 289
liabilities to related foreign banking offices. U.S. banks borrowed $30 billion from their foreign branch offices during the first three quarters of 1979. Following the October 6 actions by the Federal Reserve, which imposed reserve requirements on increases in managed liabilities and raised the discount rate, U.S. banks reduced net liabilities to their foreign branches by $9 billion.
Other U .S. private capital flows in 1979 were marked by a net direct investment outflow of $17 billion, which exceeded the outflow in 1978 by about $7 billion. Much of this outflow represented higher retained earnings on the substantially increased profits of U.S. companies in foreign countries. Reinvested foreign earnings of U.S. corporations increased $6 billion in 1979 (table4). In the fourth quarter, the flow of funds from U.S. corporations to their foreign affiliates slowed substantially, as the relative cost of borrowing funds in the United States increased dramatically.
The statistical discrepancy in 1979 is estimated at nearly $29 billion compared with $11 billion in 1978. The explanation for the widening gap in the statistics probably lies in unmeasured purchases of financial assets by foreign residents or unmeasured net reduction of foreign claims to U.S. residents, including changes in terms of payment for U .S. merchandise exports and imports.
O u t l o o k
Since the turn of the year, the dollar has been under upward pressure in foreign exchange mar
kets, and intervention sales of dollars by foreign authorities resisting depreciations of their currencies have been large. At the same time, U.S. authorities have also sold dollars and have used the proceeds to retire debt incurred when the dollar was under downward pressure.
The dominant factor supporting the dollar has been the mounting evidence that U .S. monetary policy is firmly aimed at reducing inflation and the associated rise in interest rates in dollar-denominated assets. Moreover, though the sharp increase in oil prices is expected to raise the U.S. trade deficit and make the task of controlling inflation more difficult, other industrial countries, especially Germany and Japan, are suffering large current-account deficits and inflation rates in other countries also have accelerated.
As the full impact of higher oil prices is reflected in the U .S. trade accounts, the U .S. trade deficit is likely to rise. Thereafter, as the economy in the United States slows down relative to the average of other industrial countries, the trade deficit is expected to level off or decrease. The current account as a whole is expected to show only a moderate deficit in the year ahead, as a rising volume of receipts on investment income and services will offset much of the enlarged trade deficit.
The enormous increase in oil prices has added substantially to inflationary pressures in industrial and developing countries and has increased the strains on the international economic system. Policymakers in all countries have the task of reducing inflation to tolerable levels while maintaining sufficient momentum in world activity to avoid a serious recession. □
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