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Oil Market Outlook: Anotherfor<)PECr)-j
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lobal and Regional Developments National Developments %
Dealing With an Oil Pricej ^HLaBBBBBaaaasaaBBlal ^3
Problems Exporting Oil and GugVJflfll
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EconoaUc ValnerabUiual^PJal
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Internationalnergy Weekly^ b3
Synopiis
Oil Market Outlook: Aaotier Difficult Yearfor^1 ^
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. i The oil market outlook5 indicates that downward pressure on oil prices wOf continue, and another price reduction is likely, possibly as early as this
spring.
Oesbog Willi an Oilp
OECO govern meals would pass on to consumers the benefits of further declines in oilGNP growth aod lowering inflation. Although some govern merits would consider taxing away an oil price decline lo ease budgel deficits, they ptobably would wait io see the size and permanencerice cut before acting. |
Problems Exporting Oil sod Cssl
Soviets have subsuntially reduced oil and gas exports to tome West and East European customers. Tbe USSR should be able to meet its gas cxpor. commitments, but the the same may noi be true for
Economic Vnlnerabllitks
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Internationalnergy Weekly jltTj
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OHOutlook Atotker Difficult rt-x
Tbc oil market outlook5 indicates; that downward pressure on oilill continue and another priceikely, possibly as early as this sprint. Non-Communist oil coaiu motion is expected to Increase only marginal-ly this year. At the same time, non-OPEC oil production will againalbeitccrcasicg rale.csul' demand for OPEC oil probably will at best bold relatively Hat this^ywr.HH .'c't'-
The recent OPEC agreement on prices is generally viewed as too little too late. The move reduced the average OPEC oU price by lcssjhanents per barrel, noi enough to dampen increases in non-OPEC oil capacity orpur demand. Lower revenues will encourage some OPEC members to cheat on their production quous at the earliest possible moment. Put simply, the perception lhat. the organization has lent control of the oil market remainsJ
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The market outlook5 and the near few years indicates (hat OPEC faces formidableven if the organization manages to avoid another out this year. OPEC has not formulated an effective strategy to:
prorate its market share among membersarket where reduced stock usage exaggerates seasonal shifts in demand and pressures on Saudi Arabia. OPEC's swing supplier.
Deal with the uncertainty on production levels and revenue streams that hat resulted from the movement tway from term contracts.
Control prices on the growing volume of product
Aocceitmodaic Nigeria'spressure from othera higher,output level while also meeting likely Iraqi demandsuota increase, pet lisps later Ibis year. ^MM I1 -
Briefs
Eaeisj
ncnDespitediop of S6 pet barrel in world oil prices sincehe dol-
il* Coil' Riling lara appreciation acainst West European currencies hat more thanloarer prices, because crude oil cocu areollars, ike continued
auxofth of tbc US doUar has conuibeted tofarther delay in therecovery in oil demand In Western fcarooe. Data indicatenil consumption rose onlyercent ia the first three Quartersercent increase in the United Slates. Increasedu one of several factors that continue to slow the recovery of oilfat Western Europe. Japan with iu healthy economic recovery hasdemand Increaseercent In the first thtee4 despiteof the US
Local Currency Crude Oil Coil Per Barirt
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BiJJ.it/of South Korean Nuettor Plants
b ex peeled io solicit (coders for nuclear power plaatsndo (he second half of IMS. but ihc biticutg-caiguully scheduled fee lvt2-couWJ be scutilcd
New ausieriiy mcaiurcs annouoccd Lssi week appear designed to gainapproval for5 economic program. The government disclosed it
. will5 pubtic spendingS million, sell ortale ' companies, and freeze hiring, lo addition. Meiteo City plans to rely more on tariffs aad reduce use of licensing. The IMF. which has been negotiating *ith the administration liaccurrently In Mcako City reviewing the5 economic plan. In January the IMF rejected Metico's package for this year and aided for rougher steps on ihe budget and inflation Although
we believe (hese litest concessions will be sufficient for (he IMF. *cdo notMexico lo fully implement (hem. AlmoM all of5 budget "ill
probably be spent before the July elections, and (he government will attemptits pledgeainuln teal wages and cmploymcni. Moreover, unions arc
to fight closures of Urge state-owned factories. I
Portugalis asking international bankers0 million credit
Jumboto help finance Portugal's current account deficit, which is expected to
reach SI billionn arrangement worked out between Lisbon and (he lead"managers of (he loan sets upmixed facility: one-half of (he total credit willadditional syndicated loan for eight yean at five-eighths percentagepoint over UBOR; the other half willevolving credit at three-eighths percentage point over LIBOR. The deal probably requires participation in the short-lern^acilit^fbortks want to subscribe to the conventional syndicatedhe Portuguese chose this route to for tbe cheaper revolving standby facility. The heavy oversubscription of last month's credit for thewncd clectriciiy com piny and ihc dramatic improvement in Portugal's current account deficit during the last two years
suggest (hat Litbon probably will not encounter difficulties obtaining suffi-
cicnt commitments,
Loan Difficulties
aKempt toew and innovativeillion crcdii continues to face difficulty. The credit requires the lead banks to underwrite the successive issuance of short-term notes on (he Huromarketeven-year period. As of early February the syndication manager had lined up only0 million. Problems began surfacing late last year when several banks decided against participating. These bankers' pressured the Turkish Central Bank to abandon the so-called hybrid scheme in favorraditional bank syndication because Turkey's credi( rating is far below (hat of others, such as Sweden, that have successfully used (his (ype of facility. Turkey's Central Bank Governor, however, has predicted cotimisticaHy (hat the credit will be completed by the end of February. Failureinalize the deal could damage Turkey's reputation in the intcnutional financial
and Regional Dcdopmeols
LDCs Improve Reserve Positions
exchange reserves of tbe topDC debtors roseercent from) levels, reachingillion by the end of thirdhe most impressive gains were registered by Bra til and(wo largest LDC debtors. Argentine reserves grew to almostillion but were still below2 level. Substantial declines were registered by (he
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PhUippinci. Colombia, and PakifUn. Tbc neiue brady lo improved takes in rccovcriat developed-counlry markets. Moil of tbc debtor* tuve held iioporta close3 levels. For the croup, reserve holding* equal ovct four months ofone-half month cain
Tightercountries il their recent high-level meeting adopted tevertl roea-
luresighten strategic export controls. For the tint time, they agreed to
some restrictions on tales of COCOM-controlled products to Cuba,countries still will have wide discretion on enrorcement. Theto work more closely with other countries to prevent diversion- COCOM items through their territories. Tbey failed to resolveinvolving China and formed an ad hoc subcommittee to study the
problem. Exports to China now account for over SO percent offromercent five years ago. The meeting was lessthan the last one. reflecting the growing consensus that morecontrol is necessary. Many COCOM eountrics probabKrestraints on sales to Cuba, although not in coordination with
Hococoa producing and consuming countries meeting in Geneva next week
Expectednot likely to agreeeplacement for the International Cocoa
Cocoa(ICCA) that expires in September. Consumers arc proposing a
midpoint ofound within an as yet unagreed-upon targeto USess contentious issue will beto supplement the existing buffer-stock mechanism. Althoughfavor export quotas, they might agree lo some furm of theto withdraw cocoa from the market when prices fall to near theCocoa prices are several cents below the currenterminimum, and many producers believe an effective new pact willto prevent further price declines. Even though consumption has
outpaced production ta the last two seasons, most observers expect the
tioo surpluses this year will pot more downward pressure on prices,
National Detelo patents Dertloptd Canities'*
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increase in Spanish exports last year dramatically improved the
balance and allowed Madrid lo meet its GDP growth target, estimatct real exports roseercent.ercent. Export earnings rose about i4 billion, helping swing the currenteficitillion:3urplusovernment targetQ million dcficiti Export performance was tboalmost entirely responsible for raising real GDP growthercent, continuing the recovery begune believe the export boom stemmed mainlyain in competitiveness after2 devaluation, slumping domestic demand,ickup cf growth in tnajot tradingjyjgJJfJgJlMf/jj^jpxi.ligbt erosion of price competitiveness coupled with strengthening domestic demand to slow real export growthercent this year. Another Urge currentsurplus is anticipated, giving Madrid enough leeway to case monetary policy and encourage investmentH
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Less Developed Countries
BolivianPaz has devalued the peso byercent and raised food. fuel, and
Strikeprices by an averageercent. To blunt the effects of
these measures, workers haveercent pay hike. The labor confederation has denounced the adjustmenls and is considering
}an indefinite general strike. Labor leaders almost certainly will call for
the general strike in hopes of forcing President Sites to scale backA strike would heighten military concern and provide radicals inlabor movement with new opportunities for provoking violence. Theare likely to prove ephemeral, as financial concessions and repeated wage
continue to fuel theyperinfUtioo.
New Jama/can Economic Reverses
Conflicts Overrapidly deteriorating economy isew focus of anticov-.
Lebaneseactions that will add to the country's climate of vMenecj
| Meanwhile, "Islamicthe radicalaimed it bombed several Beirut banks two weeks ago to protest against those profiting from the fall of the Lebanese pound. The rapid fall of the pound in the last two months has caused prices to riseuch as the Increase for allilitias continue to siphon off customs duties, the govcramcnt's major source of revenue. The government has aggravated the situation by appointing governors of the central bank who have no financial experience.Ly>,
Austerity Measures
this week announced the impositionational dtought-relief tat, equaling one month's pay for all workers. Chairman Mengistu on Saturday announced plans to cutof automobiles, luxury goods, andto impose petroleum rationing. In addition, Mengistu declared that all Ethiopians will be called on to serve tours at relief shelters and
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.*5 esettlementovernment policies largely had proieetcd ihc urban ' population from the famine's efTccu. but ihc MM austerity mcuafa and devetcenng food shortages in ibe cities now will affect it adversely. Mcagnu ti * unlikelyoc measures. rerticnUriy the HJ end feci rat toning.he miliury. his primary power baic.
Papua Newfour-year-old. SI billion Ok Todi told and copper project in western
doits GoldNew Guinea will closeebruary by government order. The
was providingcrceni of the project's cosi in order io giin Ihe
'.[facjlkies and hydroelectric system associated with the cooper-mining
phase. For several months, the mining consortium of US. Australian, and West -Oemufti firms had been denying charges that, because of falling copper prices, ll olanned to abandon the project after stripping It of better* Ihan^xpected gold ores. Workers who have threatened to destroy the mine Iflosed have been pacified by tbc consortium's promises to renegotiate, but the government has yet to show signs of relenting. Portfriendly to foreign capitaintends the shutdownlrong warning that investors will be expected to live upriginal contract provisions,j,
C'ammuaisi
Hunforlanoving Toward. Convertibility
plans to make the forint penally convertible duringb-Vd peso period, possibly as earlyirst step, this Jaly the National Bank anil begin Tulare trading in forinu. which will allow Hungarian trading companies to hedge against foreign exchange rate fluctuations.ater phase. Western exporters coo Id uke payment either in dollars or in forinls. Such forint earnings will carry an exchange guarantee and cam favorable deposit rates al the National Bank. Restrictions on movements of capital, the hard currency allotment for loo rim traveling^broad, and Hungary's transactionsA would not be arTected^BBaVkaaaanaBaaBathowever, thatwould probablythese moves if US interest rates remain high and exchange markets stay volatile. Although these measures could potentially reduce Hungary'! need for Western currencies, it would also make management of (he country's money supply mote difficult.^3
Changes at China'sSdT Commission
to:
Sute Science and Technology Commission (SSTC) Minister, Songwill lead ihe Chinese delegation to the United States'for the April meetings on US-China SaiTappointed four new vice miniUtM.VJg^^BaannnnnnnnBannnnVBnnal All are younger, well educated men. with diverse backgrounds in industry as well as academic research. The new appointments should strengthen SSTC ties to important segments of the research and development community, and facilitate reforms designed to make research more responsive to industry needs. Beijing hat been working on reform of the SAT system for several years. Song Jun'i appointment* indicate
that the minister, who look over ;he SSTC only last September, is moving aggressively io surround himself wiih rcfern;-mindedajor policy statement outlining changes in the management and funding of scientific research is expected at the end of| ^
Rice
Crop In Laos : ..
harvest lastHH^^fl^^l
roughly matching domestic needs.xceeds3 crop byons. Earlieroor harvwl had spurred an appeal for international food aid at midyear, resulting inof0 tons of rice. The United Stalesons. Despite the record crop, distribution problems may still cause localized shortages over the next few months. I
OECD: Dealing YVjlh an Oil Price Drop.
Most OECD governments would pais on loIhe benefit* of further declines in oilGNP growih and loweringthey would not lake advantage ofnflation to stimulate their cconomiesl|
The I'olicy
Because the increased strength of tbe dollar largelyti (he decline in the price of oil since) for OECD economics other than (he Unitedost governmenis would now welcome the opportunity to pass on to consumers any decline in the price of oil. Although some governments would eoniadcr laungan oil price decline to catr budget dcftcils. they probably would watiee the sire and permanencerice cut before aeling. Although depreciation of the dollar wouldrop in oil prices, the gains would be reversed if ihc dolls' strengthened again. Because ofproblems with inflation and budget deficits, wc believe that few, if any, OECD governments would
USSR:Dorting
SovicU have substantially reduced oil and gas exportsome West and East European custom' era. largely because an unusually harsh winter in the USSR has caused spc4 Shortages of domestic energy. Latter (hit year, the USSR should again be able to meet iuport commitments. Tbe same may not be true for oil, however. The currently depressed level of oil output and sharply reduced stocks will make it difficult for the USSRis domestic and East European oil commitments while sustaining hard currency exports. Although reactions have been muted, this supply crunch could be causing concerns among some customers about the USSR's reliability as an energy supplier during tbef
Recent Energy Export Difficulties
In recent weeks, the Soviets notified several West European customers that the USSR will not export any crude oil or oil products io them durir month of I
In addition to the suspension in oil exports, the USSR this winter has reduced substantially natural gas deliveries lo several West and East European customers. Soviet gas deliveries to Austria, for example, were reduced byciecnt last month Cutbacks of similar proportions affected customersat least two other countries. Moreover, ibe cutbacks appear to have lasted far longer than normal during periods of peak demand In the SSF H
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UDdfriyioj Causes
The cutbacks have been caused or aggravated by several factors:
This year's winter weather has been unusually
Soviet oil production has fallen in recent months.
There is little room for increased domesticonce oil and gas commitments to East-em Europeand hard currency customers are
Normally, harsh winter weather at Soviet ports and oil and gas fields makes it difficult for Moscow to meet its energy export commitments without tome inlerruptioas in supply. Poor planning. Irani Dona-lion problems, inadequate storage capacity, and substantial seasonal increases in domestic demand are mostly to blame The USSR attempts to fully commit its oil and gas supplies, so Imbalances between supply and demand or impediments toas those caused by this winter's harshalways cause shortages for tome end users, domestic or foreign. In the case of oil, the shortages appear to be getting worse each
Buyers' Concerns ..
So far, the impact of the recent export cutoffs on affected countries has been marginal. Alternative supplies of both oil and gas arc still plentiful, even
a
the market has firmed somewhat recently.
How Soviet cancellations in energy deliveriesperiods of harsh weather and peak domestic demand arc affecting ihe USSR's reputation as a
reliable energy supplier is unclear. Some West European business concerns have complained in recent months about dependence on the USSR for energy supplies. Reactions in West European capi-tals to tbe recent delays have been
Because of the toft oil market. West Europeandependence on Soviet oil isrucial Usoc Nevertheless, Moscow is the largest single supplier of fuel oil to Western Europe, andsorncountriesarge portion of their oil needs from Use USSR. Finland andlceLuid, for example, eceiveercent aha" 'lu percent of Ibdr.oil needs, respectively, from the USSR. Six other Westnations buy at leastercent of their total oil imports from theajt
In contrast to.Westera Europe, theountries arc probably morebout the Soviet cutoff. All of Moscow's East European allies, except for Romania, depend on tbe USSR for at least three-fourths of their oil supplies. Most of these countries also reexport some Soviet oil to earn hard currency. In Asia, the USSR ishc sole source of oil for the economics of Vietnam,ongolia. Cambodia, and Afghanistan. In Latin :America, Cuba depends on Moscow for all of its oil Imports, and Nicaragua depends on the Soviets for over half of its oil.fffJ^ftff ..
Moscow has promised its East European alliesill not reduce oil exports to them0 as long as they meet their export and otherto Moscow on time. We have some doubt, however, that the USSR will live up to thisi i
Implications for Hard Currency Earnings
The suspensions of oil and gas deliveries will reduce nrsi-quartcr hard currency earnings, but ihefor the yearhole is less certain. In recent years. Soviet shortfalls during the Erst quarter have been offset by greater deliveries later in the year. In the past three years, the USSR managed to export record amounts to OECD countries by the end of
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year. Meat of Ibe increases2 were at tbc expense of deliveriesastern Europe.3owever, ihe reexports of OPEC oil accounted for much of the rebound. The USSR receives oil from OPEC nations mostly in return for arms deliveries. Sovicl Imports of OPEC oil have increased from1y thirdhese imports had increased era in. to. m|
Earnings from sales of oil and gas provide the USSR wiirTBTraxarrM percent of Its total hard
currency receipts from merchandise exportsarms safest Oil sales male upboutillion3 and* probably more than SIS billion again but year. This year, however, the USSR will have tosome unfavorable trends if ll is to maintain the value' of it* oil exports to the West without disrupting deliveries to Its socialist partners:
Exports arc offery 'low start during the first quarter.
Oil prices may continue to slide somewhat
Soviet oil production could well decline acais this year in the wake of tbcrop
Soviet reexports of OPEC oil will help sustain earnings from oil sales, but Ihey do notet improvement to the USSR's overall bardposition. Resale of this oil represents an extra step required of the Soviets to translate its arms deliveries into bard currency, Bpjpji fc^^)
Gas sales earned the USSR3 billionnd probably dosehe same amount last year. Contract deliveries to Western Europe arc scheduled to increase slightlyhe Soviets should have no trouble meeting thesegiven their considerable success ingas output in recent years. These sales should earn them aboutillion (his yc^rf^-MSB
Nic.Bra.8ua: Fxortomic
export prospectsorsening of Nicaragua's serious economic and financialManagua is virtually broke, has already spent the revenues from thisresold agricultural exports, and is likely to failake numerous promised delfvcTlev. TV main tain governmentand step up.military spending, the Sandinistas arc reducing subsidies to local exHuarners and producers and farther stalling internationalors.esult, arc expect the economic situation lo deteriorate as consumer good shortages worsen and more producer* face
Tbc Sandinistas fear ibey may be faced with economic sanctions and already have begun to diversify trade and to try to secure more financial support. Although US sanctions probably would result in foreign exchange losses ofManagua couldcosts probably would be substantial. Even if there arc no sanctions, increased Communistwould be needed to boliter Ihe troubled ccono-
At the same lime, governmcni mismanagement and harassment of the private sector has gutted but itcss confidence, led to steep business losses, and . erailed nrodnctoeBWaBaW ^ 1
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punitive exchance and price^eanSesercTJnvingToiinessmea to buck markets and smuggling to avoid bankruptcy
Huge budget deficits and growing shortagesconsumer price inflation soaring (awardlevels. The public"deficit jtuaped fromof GDP3 toercent in IW.same time, inflation more than doublednemployment, currentlyatercent, is
Public icrnce* have deieriorsic'. and. BgaVaaannnfl
water, elec j, and telepboncs function only sporadically. riaaBBaBBBBBBBBBaVaBBBfl severe shortages of such basics as milk. rice, beans, (oiki paper, soap, and
[oitiatirc!
Econecalc Situation
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Exports are in serious (rouble. Earnings from coITce andlargestto be as mech asercent below the Sandinis-ta's target this year. Insurgents have tni go-ern-mcnt plantations hard, and cofTcc beans and cotton on private plots arc rotting because of inadequate government prices and critical labor shortages. Private growers report thai chronic fertilizer and pesticide shortages and equipment problems are also hamtKiing agricultural output.
Recent measures to ration foreign exchange and cut the budget deficit will put further economic and financial pressure on consumers and businessmen:
ebruary Msnagua more than doubled prices on many consumer goods in an attempt to get tuples back into official channels.pcrceai wage hike given at the samefirst adjustment in twoonly partially restore purchasing power.
ebruary Managuaew series of eachangc rates. elTeciively devaluing the cor-dob* by half. Revised rates will further undercut
private-sector icccu io imported consumer and producer foods. Under ihe system, exchange riles will range frometrdooas lo the dollar for essential imports toordobat to tbe dollar forgovcramenl purchases. -
To finance increased defense spending, Managua has alsoreeze on government era-ployment and education speeding. and ain consumer subsidies.governmcnl ica.idrofh
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liitenulioaal iconooiic Lererage
Managua rccogniies lu economic vulnerabilities and has made an effort to diversify its markets and search for additional financial support. Its concerns probably have been heightened by the insurgents' calls for US trade sanctions one United States alone,doubt broad support from other Westernprobably would lead to foreign exchange lasses equal io lessercent of GDP. Trade with the United States has already fallen sharply from prc-revolution levels. Nicaragua's US sugar quota has been lifted; the United States has never imported much Nicaraguan cotton; and coffee sales have been ihifted to Western Europe and COMA coun-
We estimate Nicaragua wouldpercent increase in Communist financial support lofor export losses from unilateral trade sanctions. The Soviets, however, already havetheir willingness to assist the Sandinistas further by offering increased oil financing.also probably would be able partially to evade US sanctions through third party front operations by relying on Cuban^
The impact of unilateral US sanctions on imports probably would be harder for Managua toThe SIillion io critical intermediate goods, spare parts, and machinery imported from the United States4 would be difficult to replace in the mediumnilateral cuioff would, at least temporarily, add to consumerand idle US-made equipmentJ,
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l* SunavoosJca
Tbc indirect com ofstrain* onalready .hallow managerialwould be substantial. Sandiniita managers would have to assess' the impact of export and import cutbacks, locate alternative markets, set new sales terms and ihipping arrangements, coordinatedates, and line up new financing aad import priorities Moreover, sanctions would intensify tbc Sandinistas' siege taeataliiy and probably would cause tbc regime to shift resources lo defense toerceived US Invasion tbrtslflBk >
Even if there arc no sanctions, the Sandinistasincreased Cornrnunist support to sbore upIt is oocertam. however, whether Sovietwould ever be suft'.cient to assure
steady growth of the Nicaraguan economy. J Y> ->
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