The international bankers were so euphoric at the prospect of all the big bucks coming their way that they predicted the money cycle would go on forever, with the banks, oil companies, and OPEC profiting endlessly.
This was a very tricky game the bankers were playing, and recent results show that they did not know how to play it nearly so well as they thought they could. The recycling apparatus has begun to break down under the sheer weight of OPEC’s deposits.
OPEC’s latest price increases are expected to give the oil-producing nations at least a $130 billion surplus from 1979 and 1980 production alone, with other huge surpluses in the years ahead. (The oil companies, of course, are floating high on the same sea of cash. In 1978 the major companies had a stunning $26 billion combined cash flow, and the decontrol of domestic oil-pegged to OPEC prices-is expected to dump an extra $49 billion to $80 billion, after taxes, in their pocket by 1984. That’s $49 to $80 billion on top of present record profits.)
Once delighted to wallow in such riches, now the oil bankers are afraid that they may drown in them. The glut has become almost unmanageable. “Increasingly,” says Ann Crittenden, financial writer for the New York Times, “individuals close to those [money) markets are warning that the private banking system may not be able to handle the new stresses.”
One of the closest observers of the “new stresses” is Rimmer DeVries, senior vice-president and chief international economist for the Morgan Guaranty Trust Company. He warns that “the oil numbers [OPEC money surpluses) are getting to a point where we may be on the brink of severe trouble.” He thinks that OPEC’s foreign investments and cash assets will probably reach $500 billion by 1983. “Amounts of that magnitude feeding into the system could produce enormous exchange rate instability, particularly as the oil producers have shown that they want to switch their funds as much as possible out of the dollar.
“There is also concern within the banks — and here I have to be careful, for I am a banker — about those deposits. There is a growing concern with… bloated balance sheets, and a question whether the banking system itself can accept a great increase in these deposits.”
The bleak question confronting the bankers is this: To whom will they lend these enormous new surpluses?
Banks cannot stay in business by holding money and paying interest on it. They must lend it and earn interest or go out of business.
Ah yes, for a few years the “recycling” of the oil money seemed to go beautifully. No sooner were OPEC’s surpluses deposited than they were borrowed at a high interest rate; much of the borrowing was done by the smaller consuming nations — the non-OPEC Third World nations that don’t have much money but have a pitiful need for oil. As OPEC prices climbed, these nations literally would have been driven back to the Dark Ages if they had not been able to borrow the difference.
The trouble is, they have borrowed so much during the past six years that they are dangerously in debt. As borrowers, they are beginning to look very risky. The oil bankers are afraid — with good reason — that one of these days the shoeless nations, being unable to pay the interest on their mounting oil debt, much less the principal, will simply declare bankruptcy, leaving the oil banks with such a mountain of IOUs that the banks themselves will go bankrupt. As of this year, the commercial banks of the industrial world are holding an estimated $150 billion in IOUs from some very shaky Third World debtors, and of this, U. S. commercial banks are holding nearly $80 billion — $41.6 billion from Asia, $3.6 billion from Africa, and $33.8 billion from South America and the Caribbean. And that debt is expected to climb by at least $10 billion a year from now on. What if some of these nations, weary of struggling with their “recycling” oil debts, were to say to hell with it? Our commercial banking system would be in very, very deep trouble.
The recycling breakdown means that the banks will sooner or later drop the rate of interest they pay to OPEC depositors in the hopes that this will drive them away. When that happens, the Arabs will undoubtedly cut production. Why sell oil for dollars that are declining in value and then deposit the dollars in banks that are lowering their interest rates? Obviously, it would make more sense for the producers to keep their oil in the ground until a better business day dawns. And that’s exactly what the Arabs will do. Saudi Arabia has already told the world to prepare for that day.
This is the cloudy precipice to which the oil-banking complex has brought us. Where will they take us next? Over the edge? Who will stop them from taking that step? “Governments,” noted Walter J. Levy, the oil economist, “are still watching a continuous erosion of the world’s oil supply and financial systems, which, if nothing is done, could be comparable in its potential for economic and political disaster to the Great Depression. The time is late; the need for action, overwhelming.” But what action? Driven by greed, the oil producers and the oil bankers have brought us to a unique moment in history when one crisis — take your pick, oil or monetary — cannot be helped without exacerbating the other to intolerable proportions.