§ By now oil prices have increased fivefold in just over a year. Oil is not only the most important single source of energy in the world; it has also become one of the most important industrial raw materials. So the effect of its price increase on inflation throughout the world needs little explanation. Britain, for example, is paying £2,500 million more this year for 5 per cent. less oil than she imported last year. The effects of this colossal sum feed through directly not only into the costs of energy, light, heating and transport but also into anything made of plastic, from packaging to kitchen equipment. The indirect effects are felt in the price of almost everything we buy.
§ It follows that the increase in oil prices has itself substantially reduced demand for other goods in the consumer countries. And this reduction in home demand has not been, and cannot now be, offset by a comparable increase in demand from the producer countries as a whole because many of them will not be able for many years to absorb goods and services to the new value of the oil they export. The size of this reduction in overall world demand corresponds to the size of the so-called petro-dollar surplus.
§ This year the total size of the petrodollar surplus is likely to be of the order of 60 billion dollars. Surpluses of stupendous size could continue for a number of years. I will not take time now to speculate on whether this prospect is inescapable. Market forces may well reassert themselves as consumer countries are driven by economic necessity to use less oil and as alternative sources of energy are exploited. But, unless or until this happens, a whole range of problems is going to press with increasing severity on the world economy and, indeed, to threaten its stability and that of the international financial system. This threat applies not only to oil consumers but to oil producers, and it is for this reason—our common interest—that we must develop a constructive dialogue with 243 them. Meanwhile there are more immediate implications for action in the consumer countries which must not now be ignored.
§
First, to the extent that the producer countries cannot import goods and services to the value of the oil they export, any attempt by the consumer countries to achieve an overall balance in their individual payments year by year can only, to quote Dr. Witteveen's words at the recent IMF meeting in Washington,
reallocate the deficit among the consumer countries
—at the cost of cut-throat competition in a trade war which would forfeit all the gains the world has made since 1945 in constructing an orderly framework for international trade and payments.
§ The consumer countries must therefore accept the inevitability of massive payments deficits on oil account for the time being, and finance these deficits by equally massive borrowing. In the end, the only possible source of such borrowing is the surpluses of the oil producers. So we must develop a range of measures by which to recycle these petro-dollar surpluses so that the consumer countries are able to import the oil they need to keep their economies at work. Otherwise the world is set for a slump at least on the scale of the 1930s.
§ Second, if we add to the cut in demand in the consumer countries already imposed by the increase in oil prices a further cut in demand in the belief that this will somehow cure cost-inflation we shall, as Dr. Witteveen warned the world, risk turning the "stagflation" already affecting so many countries into "slumpflation".
§ The indications already are serious enough. Over the last few months commentators here and overseas have been continuously' revising downwards their estimates of the growth in world trade and output in 1975. Earlier this year, for example, the OECD put the growth of world trade in the first half of 1975 at an annual rate of 8 per cent. The best estimate I can now offer is well below this, perhaps under 5 per cent. in 1975 as a whole. In Germany and the United States there are now predictions of large-scale unemployment.
244§ Yet there is no real evidence that in this situation the adoption of deflationary policies will produce a worthwhile impact on the rate of inflation—at any rate within a time scale that democracy will tolerate. In the United States the annual rate of inflation rose from 6 per cent. in 1973 to 12 per cent. in the third quarter of this year. Moreover, the combination of inflation and the threat of unemployment is beginning to subject many countries to serious social strains. The number of industrial disputes has increased sharply all over the Western world.
§ It is a sombre picture. But there are signs that many other Governments besides our own are coming to recognise the true nature of the problem and are treating the risk of mass unemployment more seriously.
§ Perhaps the most striking example is the interview of the German Federal Chancellor, Herr Helmut Schmidt, in Die Zeit last week. He foresaw the need for a deliberate redirection of the German economy at the turn of the year. Asked whether this meant the end of the Government's stability policy, he replied that the word "stability" was too often taken as applying only to prices. He was concerned with overall stability, including social and labour stability, and world factors could oblige the German Government to give first priority to ensuring that unemployment did not pass the 5 per cent. mark—that is in Germany something over 1 million unemployed.
§ This is good and important news, because, for most countries in the industrial world, the scope for further reflationary measures depends critically on the policies of the American and German Governments, since between them they account for two-fifths of world trade. The risk for the rest of us is that if we go too far towards reflating our economies before there is real prospect of a general increase in world trade, our imports may increase out of proportion to our exports, with unacceptable consequences for our balance of payments and ultimately for our battle against inflation, too.
§ I have offered this brief and oversimplified outline of the impact of the oil crisis on the economy of the industrial world—ignoring for the moment its even more tragic impact on the developing world where 800 million people are condemned to permanent hunger—because 245 nothing we in Britain do at home can succeed if the world as a whole does not adjust successfully to the impact of the increase in oil prices. That is why I have spent so much time in recent months discussing these problems with my colleagues from other countries. For until collectively we come to terms with the challenge it presents, there is grave risk that we shall once again be plunged into a depression on a scale as great as we encountered over 40 years ago.