1. "Behind closed doors one now hears open discussions of the printing of money"

It seemed like a fantastic challenge.

There is in our economic future a threat of disorder, change, and a sense of entropy. People feel it unconsciously, instinctively. They no longer have the warm postwar feeling that this is the American century and we control our destiny. Instead, there is a visceral malaise, like a dark shadow in a half-remembered dream. So I set out to explore possible and future dislocations: energy, inflation, the way the governors of policies react to the organic bubbling of events. What would they mean to sensible money managers? To me, and my neighbors? To the society?

There was, first, the real energy story: the cost of imported energy and the transfer of wealth to the Middle East. I had an opportunity to talk with some of the oil producers when I took a trip with the Secretary of the Treasury through the Middle East, and I reported that trip in these pages last February. Has the money recycled its way back to us? When the current lull is over, will there be another fierce recession like the one five years ago, and a burst of inflation?

Why is the dollar held in such contempt abroad?

And why are people hoarding houses?

I am part of the way through this exploration. I have gathered statistics, academic and professional papers. I have hired able and experienced researchers. But the task is very difficult. The target moves. The spoor disappears in the forest floor. Some days I think no one is telling the truth. My anxiety about the 1980s, the near 1980s, is not diminishing.

Why, for example, is Robert Anderson worried? Anderson is the chairman of Atlantic Richfield—not one of the seven sisters, but a major oil company. Anderson is a stocky, balding, articulate man. He has been in recent years the moving factor behind the Aspen Institute, and he bought, through Atlantic Richfield, the Observer in London when it was in trouble, just to keep it alive. Anderson came from an oil family, built refineries, built the Atlantic Richfield Company, $11.5 billion in sales. He loves to ride the range; he owns large ranches in the West.

If I were Robert Anderson, I think I would feel well hedged against inflation. Atlantic's oil in the ground is appreciating, borrowed money will be repaid with cheaper dollars, ranchland is booming. So Anderson is not personally worried; he is worried as a citizen. He circulated an anguished paper. Here is a paragraph:

As the global reserve currency, the dollar plays a dual role—one at home and the other abroad. To many of us the problems appear academic and relatively unimportant. To the rest of the world the massive and growing dollar-related liquidity and general abuse of the monetary process are threatening the collapse of the system itself. Liquidity and dollar-related reserves outside the U.S. are approaching the trillion dollar level. Behind closed doors one now hears open discussions of the printing of money. Once a forbidden topic among central banks, it is now a routine conversational item.

Behind closed doors one now hears open discussions of the printing of money.

That sure as hell scares me. I visualize the Bank for International Settlements in Basel, opposite the railroad station, a heavy iron grille across the door. Inside, they are drinking cups of coffee that cost $3 in American currency. The Swiss inflation rate has been so low that the dollar has ballooned, as tourists know. It's not Swiss money they're talking about printing. A trillion dollars in dollars.

Printed money, a great deal of printed money. The Germans had an experience with that in 1923; it has made them phobic about inflation. The dollar keeps falling against the mark. I once bought a Porsche, back when the mark was four and a half to the dollar. It cost $5520. It would cost $20,000 today. I can live without a Porsche, but rising prices scare me. Supermarket checkout counters and doctors' bills keep surprising me.

Some sophisticated folk do not share my apprehensions when I wave the Anderson paragraph at them. Anderson is an alarmist, they say. He always has been, they say, and he wants the controls on oil removed. And anyway, say the sophisticated folk, Britain lived through a rapid inflation—and look at Brazil, prices going up 25 percent a year and the place is booming. Societies don't always shake apart with inflation.

Maybe I am easily scared.

Lord Keynes sat glumly in his study in 1919, adding up the numbers. He had been to the Paris peace talks. The Allies were to take away the German navy, merchant ships and all. Had not the Germans sunk a lot of ships? And the German coal mines—had not the French mines been damaged in the war? And the Germans were to pay reparations—had not the war cost a lot of money? Keynes added up all that the Germans were to pay, and the numbers did not come out. Keynes had no computers; economics was still an art, not a statistical science. Maybe it was more in touch with reality. Germany had become an important industrial country. If you removed the elements which would permit Germany to earn, but still made them pay, what would you get? Paper money. Keynes wrote The Economic Consequences of the Peace, but the peace went ahead as planned. The paper money arrived about three years later, in huge quantities, so huge they wiped out the German middle class, laid the groundwork for a dictatorship, and changed the course of history.

But the analogy is false; certainly the "hyper" part of hyperinflation is out of scale. No one is talking about carting wheelbarrows of paper money to the post office for one stamp. But the gnomes behind the iron grille opposite the Basel railroad station are not chuckling, even with their francs so hard the dollar is funny money. "The collapse of the system itself," says the Anderson paragraph. Diminished world trade, because the buyers and sellers don't know what their future contracts mean, in what currencies.

I think I have read or heard every available argument. Even importing energy as we do, we do not have to suffer the inflation we do. We could export more. We could control the money supply. We could excuse the dollar from its role as a reserve currency. All complex arguments that need not be detailed here. There is even the argument that inflation is not so bad: unions get raises, Social Security is indexed, everything rides up together, except for, well, pockets of dislocation.

And the cost of imported energy is only one factor in inflation. I am told that most of the participants in the debate cry wolf. Discount for wolf-cries, I am told.

And in fact, after all the brouhaha, is there really an energy crisis at all? Energy costs are said to have kicked off, five years ago, the latest wave of inflation, but how much villainy can be there? Peter Odell, a Dutch adviser to the British government's North Sea project, says, "The crisis talk came from the oil companies' trying to create the environment in which their own best interests are served." The Wall Street Journal crows: "The energy crisis is a snare and a delusion. Worse, it's a hustle."

2. Establishment Dire

I was mulling Robert Anderson's angst about printed money and its centerpiece, the cost of imported energy. I would have to go back, I thought, to Saudi Arabia, because the Saudis are so important in the equation of energy and money, and so little understood. But going to the Kingdom is not like going to London or Frankfurt. It is difficult to get a visa. It is difficult to make appointments to see people, and sometimes when you turn up for the appointment, your minister, you find, has left for Zurich. A week go. A different time sense, a different sense of priorities, and no secretaries to ease communication. And, with the world coming to sell things, no empty hotel rooms. Did not a partner of Morgan Stanley borrow, in desperation, the warm and not very clean bed of the cook at the Intercontinental, while German businessmen slept on the floor of the lobby?

The phone rang. It was Dick Hubert, whose company, Gateway Productions, was about to do a television special on the financial impact of energy imports. Hubert is a slight, handsome, award-winning television producer. He had read my article "Arabs, Their Money. . . and Ours" in this magazine. Could we do an interview? Would I be interested in narrating the show? Capital Cities Broadcasting would put together an independent network for the special, nationally.

Fortuitous. We could go back, indeed, to Saudi Arabia. We could interview Sheikh Ahmed Zaki Yamani—he may not make policy but he is urbane, articulate, and he has become the symbol of that policy. We could talk once more to Muhammad 'Ali Aba al-Khayl, the finance minister, and to the Saudi Arabian Monetary Agency. We could talk to the Petroleum Council. With corporate clout, we might even get a hotel room.

So I began to sketch the way in which we would dramatize the Saudi influence on the price of oil, how, because their revenues are so much greater than their needs, the Saudis can shut down enough of their production to establish the price. Just like the Texas Railroad Commission tried to do in the good old days. I dusted off my memorized Arabic phrases. Allah yittowwil umrak, ya ma'ali al-wazir. May God lengthen your life, O Eminence the Minister.

There are no full-time correspondents in Riyadh or Jidda, and the Saudis do not share our awe of television. A CBS crew once sat in Lebanon for weeks waiting for visas, and then went home. Our Saudi contacts assured us that all was well, but the producers had to put the show together quickly, and our Saudi visas never appeared. The Saudis were to be only a part of the show anyway; we wanted to show how the oil price rise had affected the job market in the United States and prices everywhere, from auto showrooms to supermarkets. We sent crews to Japan and Brazil. Those countries increased their exports to pay the higher oil prices. The Japanese have been so spectacularly successful at exporting that their surpluses are still increasing. We visited a nuts and bolts factory in Japan that was booming, and one here that was half shut down because of the inroads of Japanese competition. We interviewed over a hundred people; then we tried to put the pieces of the puzzle together. The president of an American steel company said that if any worker drove a Japanese car onto the lot, he might find it melted down in the furnace. An influential congressman said that his constituents were losing their jobs to imports. The Secretary of Labor said that if some of that competition didn't moderate, something would have to be done.

We trooped through the Senate Office Building with four cameramen and two cameras. Unlike in Riyadh, you can generate a certain respect in the Senate Office Building if you are followed by four cameramen.

Senator Javits was a real pro. "Because of payments for the oil," he said firmly, "we face a possible banking collapse, and a serious depression. The debts of Third World countries—"

"Excuse me. Senator." said a cameraman. "I have to reload."

Senator Javits chatted with an aide, read a memo, answered a phone call.

"Okay, Senator, could we have that again, about the banks collapsing?"

Senator Javits's voice rose effortlessly to its previous pitch: "—possible banking collapse, and a serious depression." I was grateful for his pithiness, and for the way he glared at the camera as he described how our country was hostage to the Arabs. I knew the Senator's piece would survive cutting. Most of the interviews did not. Even though I pushed and prodded and rephrased, most of the economists rolled verbal beads of statistical jargon in their mouths. I could feel channels being switched as they spoke.

The producers looked at the first interviews on film. It was decided that the anchorman was a bit lifeless and dull. Granted, he had to say abstract sentences: "Thus, the balance of payments deficit rose to forty-five billion, up 18 percent." Not exactly the thrill of sudden-death overtime on the sports program.

The anchorman was sent at night to a drama coach.

"Let's hear your script," she said.

"—balance of payments deficit, forty-five billion—"

"No wonder," she said. "Read this."

"If you have tears, prepare to shed them now!" Shakespeare.

"Better. Try this. Let go. It's only videotape."

"I see you stand like greyhounds in the slips,/Straining upon the start . . . Upon this charge—"

"Now put that in your script."

"Into the balance of payments deficit?"

"Try it."

The anchorman loved his drama lessons. But there were only two. Cronkite slept soundly.

We turned the lights on John O'Leary. O'Leary is Deputy Secretary of Energy. He has been in the energy business—or rather, the regulation of the energy business, another matter—since the early 1950s. He wears rimless glasses. He is cool and very much at home with television. He has faced these lights before: coal strikes, oil crises, confrontations at nuclear plant sites—all of these have brought O'Leary to the seven o'clock news.

"The dollar is falling, Mr. O'Leary, and imports are rising, and without an energy bill, you say—"

"We will have massive unemployment, accelerating inflation, and a possible change in our political structure."

"A change in our political structure? What do you mean?"

"If inflation increases rapidly, if unemployment also increases, if the real income of Americans goes down we may stop believing in a hopeful future. If a part o our population believes things are only going to get worse, we may have a repetition, more extreme this time, of the disturbances of the 1960s. To keep order, we may have to give up some of the liberties and ease we take for granted." -

This is a scenario. I have come to call it Establishment Dire. It resonates through the government, the foundations, and some of the leading universities. Most energy scenarios are variations on Establishment Dire.

The time is the 1980s, and we don't have enough oil. The industrial nations are scrambling for oil, kissing the hems of the robes of the oil-rich and arrogant Arabs, who hold us for ransom. (Establishment Dire does not use such language, nor does it single out the Arabs among OPEC producers. Its language is abstract and dry. But the music is there.) Brownouts in the cities are regular. There are shortages of many items. Gangs of disaffected youths roam the streets; looting the remains of charred buildings. Some National Guardsmen still patrol, without enthusiasm, Dire.

And we cannot get more oil by using muscle. There was in the dark days of 1974 a contingency plan for a paratroop drop on Middle Eastern oil fields. Henry Kissinger said nobody was going to strangle us. But then, there are always contingency plans.

I don't know what the present contingency plans are, but I doubt that Establishment Dire still includes such bold options. Not after billions of dollars in arms have gone to the Middle East, and there are signs of a fragile peace.

Our television show was called The Forty-Five Billion Dollar Connection, the numbers referring to the balance of payments deficit and the cost of oil imports, and "connection" being our addiction to easy energy. The show was well received. Kindly John Chancellor called with praise. (The anchorman, said the Sunday Times, was "not just another pretty face." The anchorman was ambivalent about that comment.) The Times's daily critic, after his praise, had some reservations. Don't we know all this, about the oil and the days of Dire? The show had been advertised as "The Crisis No One Believes," and indeed, the critic didn't believe it. He cited a column that he must have read that morning: "The world wallows in a glut of oil. . . there is always too much oil and gas in the world." Now that is a fresh point of view

In other words, not only is the energy crisis boring, but the real news is that there isn't one. We have been surfeited with scenarios: the lights going dim, the sunbelt states squatting on their energy—or, the Middle East in its own crisis. Do we depend on Saudi Arabia? What if a bad crowd took over in Saudi Arabia, a bad prince, a tough character like Qaddafi in Libya? What if the shah dropped atomic bombs on the oil fields? (The current Saudi intelligence chief, Prince Turki al Faisal, has all the scenarios on his desk, according to a friend of mine who recently visited him.)

My suspicion is that there has been so much noise, so many alarms, that the scenarios have become like "white noise." With white noise, everything blends and you can't hear anything at all. McLuhan's global village gets the message very quickly, but it also fatigues very quickly. Through the technology of electronics it heard the story of the coming days of Dire. Now it wants another story.

Is that why Congress took so long to get an energy bill together? The congressional staffs must certainly have read the CIA report (tight oil supplies by 1984, nations scrambling for the remaining oil), and those of the International Energy Agency (same thing, more or less), the Workshop for Alternative Energy Strategies at MIT, and the Rockefeller Foundation.

Congress may have believed, but it was split on what to do about the oil shortage. More regulation or less? Elections were coming up. The Energy Department exhorted one way, the oil companies another. Would the crisis disappear if the regulation disappeared?

Energy is pivotal; it will determine much about the way our economy runs. I believed, to begin with, the


scenarios of the coming days of Dire, but I was confused. If the Establishment was so convinced, would it not have taken some action that would forestall or modify the dire end? Did it really lack the political power? I now suspect that no one knows the future, or, as Energy Secretary James Schlesinger said, "There are no facts about the future."

There is, it turns out, no unanimity on the days of Dire. The Petroleum Industry Research Foundation wrote: "Our overall findings are that an oil shortage before the late 1980s is unlikely [my italics], that an oil shortage before the end of the century is a possibility but not a probability, and that a gradual transition . . . is more likely than an extended oil shortage of crisis proportions."

What? No freezing in the dark? No paramilitary on the street corners, keeping some semblance of order while the buildings burn? Sure? What the hell is going on?

"You can't have a crisis that everyone sees ten years ahead of time;" said John Lichtblau, the economist who did the Petroleum Industry Research Foundation report. "This is not Greek tragedy."

No? I brought that up when I did a television show with Paul Erdman, who wrote The Crash of '79 (takeover in Saudi Arabia by bad prince, shah drops atomic bombs on oil fields). "You can't see a crisis coming?" he said. "No? In the thirties, many people saw a drift toward war as the Hitler years progressed, while day by day the press reported that Hitler had no further' ambitions. The pessimists were right, and those who acted on it survived."

3. "This time the wolf is here"

Why the indifference and disbelief in one of the most widely announced crises of the century? Could it really be a comic-book plot of the oil companies? If the energy cost is so significant in our future, why can't we deal with it?

Maybe the failure of past extrapolations destroyed credibility. A generation ago, it was calculated that the world would go right on with cheap energy as it had been doing. The predictions of tighter supplies had always been wrong. Meanwhile, OPEC was around for years, studying how the Texas Railroad Commission controlled the oil in the United States. OPEC had half a generation in which its consultants—American-trained consultants—could finger the variables: How much does demand fall if the price goes up? Libya's Qaddafi executed a neat dress rehearsal in 1970 when he raised the oil price unilaterally. The appearance of OPEC power during the Yom Kippur War was a surprise. James Akins, a controversial ambassador to Saudi Arabia, wrote an article early in 1973 in Foreign Affairs with the provocative title, "This Time the Wolf Is Here." Oil, he said, could go to $10 a barrel under some circumstances. It was then $3.30. A staff member of the National Security Council told a group of bankers three years before, in l970, that oil might go to $12 a barrel in the next decade; one of the bankers, he reported, almost fainted before they dismissed him.

When the OPEC ministers first raised the price of oil in l973, they were tentative. The first move was to $5.40 a barrel. A deputy minister from one of the secondary OPEC states told one of the Middle East section hands from the Bank of England: "We doubled the price, and unconsciously we waited for the sound of jets overhead. Nothing happened. We doubled the price again." The Western countries greeted the action with indignation, simultaneously scrambling for supplies of oil.

So the money began to flow to the Middle East in quadrupled amounts, and the worry was that the world would slide into depression, the banks would collapse. Less developed countries had to borrow to pay for their oil-what if they defaulted? One World Bank official projected that $1.2 trillion would pile up in the Middle East, leaving the rest of the world cash-dry. But the OPEC states began to spend their money for development. In three years, the Middle Eastern states increased their surpluses by $100 billion, and the less developed countries increased their debts by roughly the same amount. In the middle, taking deposits from one and making loans to the other, were the Western banks. Wasn't this a recipe for disaster? The deposits were for ninety days and the loans were for ten to fifteen years. What if depositors took out their money to buy custom-built 747s, or to indicate political displeasure? What if a developing country defaulted?

It didn't happen. Even the two major bank failures, Franklin National in the United States and Herstatt in Germany, did not cause any slides; they were well contained. The Federal Reserve and the Comptroller of the Currency knew the phone numbers of the Bank of England and the Deutsche Bank, and while there were plenty of late-night phone calls, the cooperation was there. Presumably it would be again. And the less developed countries worked themselves out of their oil deficits.

In the dark days of 1974, The Economist feared that OPEC could buy half the Fortune 500 companies, half the London stock exchange, and so on. It is true that Arabs have bought a lot of real estate in London, because Beirut is out of business. But the world has not collapsed with all the petromoney sloshing around. The wolf came and went, and if the experts are crying wolf again, they don't have much of an audience.

4. Winners and losers

In any cataclysmic event there are winners and losers. The OPEC price quadrupling was certainly a watershed event. The cunning quickly learned to top their gas tanks, at the time of the embargo, and to have an extra gas container. The more cunning looked at the longer-term implications. The new oil price added one to two points of inflation, which doesn't seem like much. But on a 6 percent rate, it was a one-time, 30 percent jump.

One hundred billion additional dollars went out of our pockets for gasoline and heating oil and industrial fuels. The winners among us got some of it back. There were the large banks that got the deposits; indeed, usually the money never left the country—it went from private wallet to Mobil to the Chase Manhattan Aramco account, and then to another Middle Eastern account. Oil at $12 a barrel made it economic to develop the North Sea and the North Slope, so under winners list the makers of drilling rigs and oil logging instruments, and the bankers who floated the bonds for the pipelines. Add some arms and aircraft makers; Iran is downed $19 billion in arms, and Saudi Arabia's programs will cost nearly $15 billion. Under winners you could certainly put the state of Texas, which has 12 billion barrels of oil of its own, and the city of Houston, which has become an energy center. Everybody with oil in the ground became four times richer overnight when the price quadrupled.

Add the builders on Saudi Arabia's multibillion-dollar construction contracts: Bechtel, Fluor, and Ralph Parsons Inc. The Saudis new Jidda airport will help serve pilgrims to Mecca and certify in concrete and air conditioning Saudi Arabia's place in Islam, the way Vatican City certifies Rome's place in Christianity. Add the Washington lawyers like Fred Dutton, the former Kennedy aide, and Gerald Parsky, who was once Assistant Secretary of the Treasury on the joint U.S. —Saudi commission. Some of the fees for servicing the oil moguls are said to be $1 million year. Even Spiro Agnew is commuting to Riyadh, pacing the lobby floor at the Intercontinental, waiting for his contact. We don't know how he's doing.

The cash flow of Exxon is approximately $3 billion a year. The total cash flow of the major oil companies is $17 billion a year. The watershed event certainly increased their cash flow. They argue that they should be allowed to develop coal and nuclear industries, because only they have the capital resources to do the job.

The Department of Energy has a budget of $12 billion this year.

As for the royal family of Saudi Arabia, it will not lack. If the Phillips-Erickson group won a $3 billion telephone contract for Saudi Arabia, then their Saudi agent, Prince Muhammad bin Fah'd, is down for $300 million, even if he must disperse much of that to subsidiary agents. Still, a $300 million fee must be the world's nicest, on an hourly basis.

And the losers? There are all those small pockets. I have to count myself; my utility bills have more than doubled. So have most people's. Where I live there are houses built before World War I that have five or six servants' bedrooms, and since servants have vanished, these houses are too big and must be broken up into apartments. Similarly, the houses built with the assumptions of the energy costs of the 1950s will become too expensive to operate within another generation.

The losers are those without a stake in energy, because the increasing cost of that energy must come out of the income that was going to something else. Taxes go up with inflation, tax revolts cut the services supplied by cities and states. The library closes earlier and the high-school roof will not be repaired until next year at the earliest. In other words, the standard of diving of the losers must come down, if this is a game of equilibrium.

Once again, the connection between the cost of energy and inflation is not neat, simple, and total. The oil price quadrupling did give inflation an immediate steep boost, but since then the price of imported oil has declined in terms of constant dollars. Inflation has many other causes. They have been well rehearsed. There are the entitlements built into the political structure. It is said that five productive workers now support one unproductive worker, and that in ten years that ratio will be three to one. Monetarists think the money supply has bulged unnecessarily. One could go on through labor contracts and farm price supports and currency relationships. The management of an economy is political. Economics brings a false preciseness with its quantitative techniques. Politics is not so easily quantified.

If rising utility bills have diverted some of the income of householders, most homeowners still have to be counted as winners. In fact, the safest and most extraordinary speculation of the past decade has been in single-family housing. Mortgage rates have not been very far from the rate of inflation, so the savers have in effect been subsidizing the borrowers on a free tide. The equity of the owners has more than doubled.

I had dinner with one of President Ford's former advisers. "I could see that inflation was running," he said, "even under our administration, and I thought if we lost the election, it would be even worse. I couldn't be in anything that approached a conflict of interest, so I bought expensive houses where rich people live. Rich people's assets increase even faster, and there are areas where the supply of desirable houses is limited."

That proved a charmed formula. Every real-estate broker in such high-demand areas can cite the $70,000 house that sold within three years for $140,000, and within another four years for $250,000. If the original $70,000 had a $50,000 mortgage, the equity is up tenfold, which is well ahead of any inflation. Beverly Hills is the peak point of this boom. There the house with three bedrooms on a quarter-acre selling for $250,000 is not uncommon, and pleasant, larger, cheek-by-jowl houses sell for $1 million. That acceleration is even greater than it is in Santa Barbara, La Jolla, Aspen, Santa Fe, and River Oaks. The real-estate agents are on the right side of inflation. A 7 percent commission on a million-dollar house is $70,000.

The assetless get further behind. Real incomes have gone up, but because of the leverage of mortgages, housing has gone up even faster. An editor in his early thirties came into my office. "I thought I was doing well at $30,000 a year," he said, "but every time I get almost to the down payment for a house, the price goes up again. I may never have a house."

Indeed, the advantage of the borrower over the saver has become such common knowledge that many banks, even savings banks, are turning down loans, or requiring down payments of 50 percent. Consequently, new houses and condominiums do not always reach the market; they are sometimes hoarded by brokers and speculators. Under ordinary circumstances, one would have to term this a speculative bubble ready to burst. Eventually there will be too many houses, and the last house to sell will have to come down in price. But if building costs have gone from $30 to $50 a square foot, the marginal house will not fall much in price.

5. The perilous future day of Crossover

The price of oil is dictated by a cartel of governments, so it does not come down, even in a period of oversupply like the current one. The surplus will someday burn off, and then the pressures of demand will move the price higher, even without the control of the cartel. If part of our current wave of inflation was initiated by the burst in oil prices, do we face that again at a future date? And wouldn't that further threaten our fragile international monetary system?

Right now, the supply line on the graph is running ahead of the demand line. At some point they cross, and in energy circles this point is known as "Crossover." Nothing pleasant is in store for us after Crossover. When is that?

Numbers: numbers become litany. Numbers, dates, and oil fields. OPEC—North Sea—North Slope—Mexico, 48-52-60. The key letters are mbd, millions of barrels per day. The numbers travel back and forth, from government agencies to oil companies, from the Petroleum Intelligence Weekly to the CIA and back again.

In 1976, the world needed 47.6 mbd. What will it need in 1980? 1985? That depends on how much it conserves, and how much it grows. Europe has been wallowing in a recession, using less oil, but the world economy keeps growing. The difference is in the rate. Low demand in 1980 would be 52 mbd. High would be 55 or 56. By 1985, the low demand might be 58, and the high demand 66.

When the lines cross, times will get tougher, except, naturally, for those who are sitting on the oil. The producers will not likely move from $13 a barrel to $40 a barrel, because $40 a barrel would throw the world into a depression. The object of the producers' game must be to raise the price just enough not to dampen the demand. They have sophisticated economists now, who can do their own computer runs. If the consuming nations are cool, statesmanlike, and work together, then the increases may be small. If the consuming nations scramble against each other, prices may go up faster. The Japanese, for example, are totally dependent on Middle Eastern oil; will they slide into Riyadh offering discounts on Toyotas and Sonys and tankers and power stations? Will the French make their own deal on whatever Mirage is then in production, to insure a supply of oil? When is Crossover, in 1984?

If you raise the price, does that coax more oil out of the ground?

That question brings forth passions like those stirred by the theological debates in sixteenth-century Germany, Martin Luther at Marburg or Leipzig. The arguments themselves are complicated by an instinctive tendency of the participants to bend the numbers to their own purposes. Oil companies have never seen any advantage in full disclosure. Some countries exaggerate their reserves, to make it easier to borrow. Some underestimate their reserves, to avoid envy. Aramco, the Arabian-American Oil Company, which is made up of four U.S. companies, has always been conservative, and the nature of the Saudis whose oil they operate is also to be conservative, a residue of a desert culture of scarcity.

I went to see Good News John at his institute in Manhattan. I was filled with the paranoia of early Crossover. Good News John is quite real.

"Things are bad," I suggested.

"Maybe not so bad," he said. "First of all, there is more conservation than the early estimates suggested. Industry is retrofitting to the new situation because it pays. Some houses are getting insulated. Cars will get smaller, by law. By 1985, you remember, cars will get "The twenty-seven miles to the gallon."

"But that's the easy part," I said. "We've probably done more than half of the easy things already."

"True," said Good News John, "but you're importing seven, eight million barrels a day, and my figures show you only need ten in 1990. You're most of the way already."

"The government said eleven million barrels a day in 1985," I said.

"That's the government," he said. "You have to realize it's a different world. The big, exploding, pent-up demand that followed World War II is over. It's a structural change: How many TV sets and cars can you have? You have an aging population, so unemployment is temporary. You don't need as much growth. If you grow at the rate of 4 percent, I grant you that you've got a serious problem. But 2.5 percent would give you a smooth transition to other energy sources."

"Good News," I said, "they say the easy oil has all been found."

"Oil isn't any different from other commodities," he said. "If coffee goes up, more coffee gets planted and it harvested. If oil goes up in price, people look for more oil. Before OPEC did its number, oil was less than $3 a barrel. Mexico wouldn't have made an effort at that level. Sure, the oil is finite, but the two biggest finds have been in the past ten years, the North Slope and Mexico, and Mexico's going to be even bigger than the North Slope. And the developing world hasn't been extensively drilled."

"You're more cheerful than the government," I said.

"The government's scenario is possible, but it's the worst-case scenario. Mine is the likely scenario. Other energy sources are coming."

"That's not what they tell me," I said. "Four years ago, people used to put nuclear power into the figures. It takes ten to fifteen years to get a plant into places and the demonstrators are still lying down on the sites. There are twenty plants in the pipeline, and after that, I hear, there won't be any more. So nuclear is way behind. And coal is behind."

"That's true. But there's also a lot of natural gas, and it's being flared, burned off. As oil goes up in price, it becomes economical to use that gas. The gap theory—the gap after Crossover—ignores a kind of axiom of behavior: Something always happens. A period of shortage would bring on an overcorrection. And down the road, maybe further down the road, is the gasification of coal, and oil that can't be used now, like the heavy sands in Orinoco, Venezuela." I took the good news from Good News back to the Department of Energy.

"There is North Slope oil sitting all over the place in California," I said. "In the ports, the tanker crews are playing backgammon. The glut goes on like a Mississippi summer."

"The California surplus is fifty thousand barrels—maybe thirty thousand barrels, a hiccup, a good summer's day of driving," I was told.

We went back through the first stages of debate.

"The scale is different from what it used to be," said John O'Leary. "A bonanza isn't what it used to be. When our economy used a million barrels a day, a strike in Texas of a 100,000-barrels-a-day field would rock the industry. Oil could go down to ten cents a barrel. But now we have an economy that uses seventeen million barrels a day. There are no bonanzas big enough to rock it; we've only found one [on this continent] in 120 years of looking, the North Slope."

"Mexico," I suggested. "Mexico has just hit ten for ten on the drilling. The president of Mexico says he's going to have more oil than Saudi Arabia."

"It's natural to embrace Mexico. We have Mexico down for two and a half million barrels a day in 1985, Will it be more? Everybody forgets the lead times, and he enormous investment that's required. If they have the money earmarked for the society, they may not be able to plow it all back."

"But they could borrow, surely."

"They could. But even if Mexico comes in stronger than expected, what could it be? A million barrels a day? That could help. I just don't think there are any big surprises coming on the supply side. Half of our oil comes from a hundred oil fields. We found the bulk of the oil thirty and forty years ago. Just throwing money around doesn't make a major field appear. There's a geometric relationship between finding the resource and using it. Technology has improved, but if you have ten years of gas, you can't produce it in a year. There are limitations on the behavior of the reservoir. If we want to go from twenty to thirty trillion cubic feet of gas, we would have to find thirty or forty trillion feet to get the ten trillion cubic feet of new production"

I could feel the euphoria of my session with Good News slipping.

"William Simon says," I said, "that if you just freed he price, the market would take care of it. The oil Companies say that too."

"Well, they would."

"Simon says we don't need a department of energy. It just gets in the way."

"That's an agricultural observation, that is, an obser-vation from the economics of agriculture. Agriculturce goes season by season. Here, we have a finite resource. You have to plan. You have to have a managed economy. You can't just import all the oil you feel like burning."

You can't import all the oil you feel like burning if those desires are based on the old cheap energy. And you can't import all the oil you want if that's going to threaten the whole international monetary system. If you stepped up your exports—aircraft, soybeans, computers—that would help. And part of what you spend might come back as "invisibles," that is, deposits in banks by oil producers, or purchases of government bonds by oil producers. But if you have a deficit in your balance of payments, dollars are going to pile up abroad.

The theory is, then, that the dollar will get cheaper in terms of, say, the yen and the mark. That's inflationary because as Volkswagens and Toyotas get more expensive, for example, General Motors and Ford do not have to worry quite so much about foreign competition, and if a Toyota goes up $500, there's room to raise the price of a Chevette. Nonetheless, the theory says that at some point the dollar gets so cheap that our exports start to move, and so the gap narrows again.

So far, the theory hasn't worked. It will by next year, the Treasury says. The balance of payments deficit will narrow and maybe our inflation will abate. And the dollar will get stronger. If people want dollars. People must want to save a currency, especially a reserve currency in which the world trades. If they don't, economics, as always, begins to affect politics. We may not be able to keep an army in Germany if that gets too expensive. We are already seeing taxpayer revolts and hearing cries to cut social services.

It would help if we had control of the economics of energy before Crossover arrives like New Year's morning.

"There are only two main question marks in the entire oil situation," said John O'Leary. "One is, what will the demand be? And the second is, what will the Saudis do? Because what the Saudis will do determines the supply. The North Sea, the North Slope—we can see the limits to these. We can see the capacities of most major fields. But the Saudis have the capacity to take us through a decade. They're the only country with the reserves."

The Saudis are currently delivering six to seven million barrels a day, and they have an excess capacity of four or five. By 1982 they will be able to go to fourteen million barrels a day. But they may not have the need for the money. Will they pump the oil anyway? And what about the sixteen or eighteen million barrels a day they could deliver through the l980s? Will they do that?

6. The Saudi Connection

It would be hard to find another time in American history when we were so dependent on a specific part of the world or on a single country, let alone one that is sparsely populated and is still tribal. And it is ironic to contemplate that that country should supply us a commodity we need for a cur-rency that it does not need, though it does need our banks and our friendship. Economics veers quickly into politics.

Few places on earth have changed as rapidly as Saudi Arabia. In the 1930s, when it was possible to take a train from Tel Aviv to Cairo, when Cairo itself was a relatively civilized center, the Saudis still lived largely as they did in biblical times. Perhaps a quarter of the population was nomadic; half were small cultivators or shepherds, tribesmen who followed animals only a small distance, and village craftsmen. And a quarter lived in the small cities. The traveler might take the train from Tel Aviv to Cairo, but in Saudi Arabia he would be riding a camel, and warily. The mud-walled brick towns closed their doors at sunset; the gates were barred at nightfall. If you were traveling and saw a stranger, you looked for some prearranged signal, waving a headcloth, throwing up handfuls of sand; otherwise you galloped away. Raiders and feuding tribes made journeys hazardous.

'Abdul 'Aziz ibn-Saud, the king who united Saudi Arabia, grew up in exile in Kuwait. He grew up also in the austere, puritanical form of Islam derived from the doctrines of an eighteenth-century reformer, Abdul al Wahhab. Ibn-Saud was six five and loved desert sports and desert warfare. In 1901, at the age of twenty-one, with forty men, he recaptured the Saudi home city of Riyadh from the rival Rashid tribe. In the name of Wahhabism and in battle he gradually conquered the country, and in 1932 he renamed it Saudi Arabia. He had to restrain the tribes who pledged him allegiance from engaging in holy war and war as sport; he had also to decide whether to permit the first incursions of the twentieth century: radio, telegraph, and automobiles. Ibn-Saud's conquests of the holy cities of Mecca and Medina alarmed the Islamic world outside of Arabia, lest Wahhabism change those traditional seats of learning, but he did his best to reassure the alarmed delegations that came to visit, and he made the Hajj safe for pilgrims.

The Saudi role in the world economy began in 1937. Oil had been discovered on the neighboring island of Bahrain in 1922 by Major Frank Holmes, a New Zealander. Holmes also got an option for his syndicate in Saudi Arabia, but allowed it to lapse. Then, in 1933, Standard Oil of California bought a concession and! sold a half-interest to Texaco in 1937.

Damman Number 7 hit pay dirt at 4727 feet, in 1937, and the first tanker was loaded in 1939. By 1946, Standard of California and Texaco had admitted Exxon and Mobil to the Arabian-American Oil Com-pany. Within thirty years, Aramco had found crude oil reserves of at least 180 billion barrels, or a quarter of all the oil reserves in the world. In those same thirty years, Saudi Arabia developed into the world's biggest oil exporter. It produced a fifth of all the oil in the non-Communist world.

For a major industrial enterprise, Aramco was relatively enlightened. It produced its oil and stayed to itself. It arranged for some of the Saudi Arabian royal family to have schooling in the United States, largely in those western and southern schools where the Aramco executives had studied. When not on the job, Aramco employees stayed largely in their Dhahran compound.

Because the Wahhabi Moslems who rule Saudi Arabia are fanatically opposed to communism, they have had to align with the anti-Communists. Because Aramco was relatively enlightened, it did not generate ill will as times changed. Because the United States was never a physical presence in Saudi society—as, say, the Belgians were in the Congo, or the French in Algeria—a "special relationship" with the United States could flower.

This is, admittedly, very neat and classical. The history is neat, but the assumptions should be tested. Does "Islamic" always equate with "anti-Communist"? Hardly. Libya's Qaddafi is an ascetic Moslem, and after he deposed a religious king he called the Russians. The Soviet presence in Moslem Iraq is pronounced. And the strongest of the opposition to the shah in Iran has come not from the leftist students studying abroad, but from the traditional religious leaders resisting change. Still, we must depend on the "special relationship" and hope, with the Saudi leaders, that stability prevails in their country.

In the dangerous game of Crossover, the first element is supply. The second is demand, the rate of growth of usage. The extraordinary element is made up of the intentions and capabilities of the Saudis and of their Persian Gulf neighbors, who usually follow their lead.

The Venezuelans, the Nigerians, the Iranians. the Kuwaitis, the Algerians all supply oil. Most of the OPEC countries need the proceeds of the oil sales for development. If the Nigerians have shut in a million barrels a day of capacity, as a recently returned friend reports, we know it will not be shut in forever. We know that the Nigerians do not want to sell into a glut, that they have had trouble managing their resources, and that they would rather borrow development money in the world markets and leave the oil in the ground. But there is a limit to how much they can continue to borrow. Someday soon the present glut will be gone, they will assume control of their development, and their needs will press hard enough to force them to pump and sell their oil.

The Saudis also have an ambitious development program. They propose to spend $142 billion in five years to build industrial cities, petrochemical compIexes, a $4 billion university, airports, housing. But the Saudis have at most seven million people, if that. If they produce seven millions barrels a day, as, roughly, they do now, they may barely be able to spend the revenues they take in. But at fourteen million bar-rels a day, which is what many experts have them down for in the early 1980s, they will in no way be able spend the revenues. Will they produce the oil anyway, bank the proceeds, become the banker to the world?

That is a critical question for the international economy. The Saudis, who get more and more sophisticated, now tell us that we consume too much. Oil in the ground, they say, appreciates more rapidly than the money produced by the oil. (There are academics who dispute that accepted axiom, who maintain that the compounded income from investment would outstrip the simple price rise of oil. But let it stand.)

In Washington, the assumptions are that the Saudis will continue to produce, at least for the near term. The Saudi government has tentative plans to expand capacity to fourteen million barrels a day in 1982, and a U.S. General Accounting Office review says that the conditions exist to produce at that level. Some other intelligence services are not sure that the Saudis are ordering the capital equipment quickly enough to meet that goal.

Presiding over a vast area with a small population with a great treasure, Saudi leaders value nothing so much as stability. They write checks to radicals and conservatives alike within the Arab world. A Middle East peace is part of that stability. ("We depend on you to bring the Israelis into line" they say to Washington.)

Seen from Riyadh and Jidda, however, the Middle East does not look very secure. A Marxist-oriented government staged a coup in Afghanistan. South Yemen, on the Saudi southern border, is the People's Republic of Yemen. The ubiquitous Cubans are there, advising. Across the Red Sea, a Marxist-oriented group of lieutenant colonels assumed power in Ethio-pia. The help of a powerful anti-Communist friend must be part of the stability. And their own handling of their wealth must be part of the stability.

"We worry about the impact of material wealth on the society. Everyone can now get a government loan, or grant, for a house. Every taxi driver can be an investor. We have $60 or $70 billion in surplus, but what about the life inside, the inner life?" This from a talk I had with Prince Muhammad bin Faisal, a thoughtful, moustached Saudi entrepreneur.

What about the "inner life"? If devotion to Islam has made the Saudi and American "special relationship" possible, do we not have to measure that as well?

Young Saudi technocrats, on the first meeting, do not seem like their Wahhabi grandfathers. They wear business suits; they have come back from USC and UCLA easygoing and likeable with their American colloquialisms and their passion for college football. But in Riyadh, religious police still patrol, enforcing the five-times-a-day call to prayer, rapping on the shutters of shopkeepers who are tardy in closing for prayer. Since alcohol is forbidden to Saudis and foreigners alike, a post in fundamentalist Saudi Arabia can be like a post in the southern United States during Prohibition. Cultural differences abound. Two British businessmen were flogged for making and attempting to sell some home brew, and two Americans are scheduled to be punished for the same offense.

And then there is the story, heavily played up in the British press, of Princess Mashall bint 'Abdul 'Aziz, granddaughter of King Khalid's elder brother, Muhammad, who took himself out of the succession, it is said, because of his temper. The princess met a young Saudi, Musleh al-Shaer, in Lebanon, and asked to marry him. When the request was refused, she attempted to leave the country with him, disguised as a man. On the orders of her own grandfather, the princess was executed by rifle fire in the central square of Jidda, and her luckless swain was beheaded after witnessing the execution. This story is brought up here not to be lurid, but as a reminder of how difficult perception is and thus of how doubly difficult it is to predicate the economic future on current assumptions. As we think we come to know the Saudis, we may find we do not know them at all, but see only the side they present to us.

In a fundamentalist Islamic society, stability is provided by allegiance to the Koran and to the king as head of the tribe. The limitations on Saudi growth are those of manpower. Women do not attend classes with men; those who reach university level can see the lecturer on closed-circuit television. If women serve in the government, there will have to be separate build-ings for them; women working with men would be contrary to doctrine. But can the Saudi society grow without taking women into the work force, or so many foreigners that its homogeneity is destroyed? Now seminars are being conducted in American universities to ponder the stresses on Saudi society.

Sheikh Yamani has said that the Saudi relationship with the West is like a Catholic marriage: with disagreements, but basically indissoluble. But he has also cited the analogy between a rapidly changing society and a speeding car. A well-designed car may start to shake at a hundred miles an hour, and shake apart at some speed above that. Saudi Arabia is already traveling at a hundred miles an hour. Can anyone, then, see, beyond fourteen million barrels a day? Or what happens if even that does not materialize?

7. There is no panacea

What was I thinking? Follow all these complex lines to a point in the future? When there are so many variables? What arro-gance! What hubris! What folly! Let someone else try. I have the goods to critique him. It is risky to publish such ruminations as these. Establishment protocol calls for trumpets of certainty. Later, if wrong, one can say modestly that 51 percent correct is all that can be expected, or one can own up to one's mistakes with candor and charm.

Energy crisis? It is, as we now know, a crisis of will, politics, and money; we have heard endlessly of how we have four hundred years' worth of coal. But the cheap energy we are used to is not here. It is somewhere else, abroad. We have to pay the owners for it. My suspicion is that we will not freeze in the dark, but we will not continue to live the way we live now. Maybe that is not so bad. We do not live the way we once lived in rural America, before World War I. Is the pattern of the splayed suburb and the decaying city so worth preserving?

Perhaps the period from 1950 to 1973 was one of unusual economic stability, and hiccups are the natural order of capitalism. I am not about to join Robert Heilbroner, or the Marxist economists, in predicting the final and fatal contradictions of capitalism. But for the first time we have an economic dependence on the pricing policies of one country. Wassily Leontief, the Nobel prizewinning economist, maintains that the crossover in oil will be followed by crossovers in minerals and other critical materials if growth should continue. Leontief's study also indicates a crossover in food, but the food economy has been more resilient. The doomsday forecast made by the Club of Rome has not disappeared, it has only retreated in time.

The dollar glut has made our money funny to the hard-currency countries. The Japanese take cheap vacations in Hawaii, and German real-estate hawks patrol the Sunbelt, paying high prices with cheap dollars, reselling America back in Germany. Foreign bankers say we have to strengthen the dollar. Domestic economists, polled by Paul Samuelson at a convention, say the mechanism is working just fine.

But if it was imported energy that produced Robert Anderson's original angst, energy is obviously not the entire inflation story. Fifty years ago, government spending (federal, state, and municipal) was 8 percent of the gross national product. Now it is 33 percent. Powerful unions can win raises that anticipate inflation. Powerful companies can raise prices to levels that more than compensate. The rest of us are left to scramble. It does not make for a sense of community. Condoning inflation not only means condemning those on fixed incomes or those who are not indexed to inflation, it means increasing government control, and not necessarily that of a benign government.

Inflation has become imbedded. Expectations of inflation add momentum to the inflation.

President Carter has a meeting in the Cabinet Room, attended by, among others, a friend of mine. They sit around the elongated oval table in high-backed dark brown leather chairs. On the wall are portraits of Lincoln, Jefferson, and Truman. The President sits in the middle, on the window side. His chair is three inches higher than the others. Cabinet officers have their names and posts on plaques on the backs of their chairs. Secretary Schlesinger actually has three plaques on his, for the three Cabinet posts he has held.

In essence the meeting goes like this:

The President says, You are my advisers, my economic advisers, tell me what to do about inflation.

Well, wage and price controls won't work, Mr. President, and there are political difficulties in an election year.

We could have guidelines, says one sage.

That's no panacea, answers another sage.

We could encourage capital for reinvestment and productivity.

That's no panacea. The comment this time is from another part of the table. We'll have an energy bill.

We could cut the budget deficit.

That's no panacea, is repeated again.

My friend leaves, depressed and discouraged. Each suggestion has been met with the comment that it is not enough, and that together, all the suggestions are not enough.

If inflation stands at 7 percent, prices will double in ten years. Maybe they will begin to anticipate themselves and accelerate.

Malaise. I am a member of the board of directors of an airline. We are sitting around a long table at a directors' meeting. The staff has presented the figures and requirements for new aircraft. Regulation is changing and new routes are opening up. The marketing people have done studies of where we need new aircraft, on which routes. A new DC-9 costs $8.265 million. But there aren't any available. A DC-9 delivered in 1979 will cost $9.226 million, and in 1980 a DC-9 will cost $10 million Without spare parts, and subject to adjustment. As for the 727-200s from Boeing, they will cost $13.5 million apiece next year, and $14.6 million the year after. Without spares. The senior members of our board remember the waves of overcapacity in airlines, when equipment was ordered with too much enthusiasm. We know another airline that still, even with air travel booming, has some Lockheed L-1011s to lease. Bank economists say that consumers are buying big ticket items before they need them, anticipating price rises. That kind of enthusiasm can vanish overnight. If the economy turns down, do we really need the planes?

The rising prices are an influence. Hell, our whole used fleet could be sold now in the open market for more than we originally paid, and some of those airplanes are not very new. We vote to buy all the new aircraft. We are down for some bigger aircraft, which can't be delivered for a year, and other airlines are pushing for our place in the line. Why? It can't just be the "animal spirits" that Keynes said motivated entrepreneurs and businessmen. Keynes worried about lifting depressions, not about the flight from paper into tangible assets.

As a director, I think we made the rational decision. Stocks are selling at less than they did in 1965. You could buy the common stock of a whole airline in the market for less than its fleet value in the aircraft Marketplace. But as a citizen, I get worried. Something is going on that is not understood. If this happens in our boardroom, it happens in many boardrooms, and in labor conference rooms, and ih farm co-bps.

I am sitting with an investment banker in a gloomy downtown dining room. On the walls are pictures of New York in the early 1800s. The banker leans over his lamb chop and says that when we loosed the dollar from gold we lost a valuable discipline. Not so unusual a remark from a banker, but heresy to most academic economists, who have demonstrated many times the terrible tyranny of gold as a monetary base. The anomaly in this story is that the banker is also an economist who worked in the Treasury some time ago, before the Treasury—and events—sepatrated the dollar and gold.

"But you were one of the people who took us off!" I said.

"I know," he said glumly.

Visually, things look the same. Britain still has red double-decker buses and green country fields. Britain has had a high rate of inflation (coming down now), and though its middle class has lost ground—it is taxed at rates up to 80 percent—and affluent Arabs have taken over central London, Britain is still here. And there will be cars on the freeways here in the United States even as our money cheapens.

It is not only the change of a mechanical system that is worrisome. If the currency bloats, what does that do to the people? Do high-school students change their outlooks? If paper money makes fools of savers and rewards the speculator instead of the worker, what replaces those Protestant-ethic bastions of work and saving? Is it tithe, anyway, to move to something else?

No one is talking about taking a $10,000 bill to the supermarket, even though behind closed doors they may now be talking of the printing of money. But I am haunted by a paragraph in a report written years ago by Pearl Buck, as quoted in Fritz Ringer's The German Inflation of 1923: "The cities were still there, the houses not yet bombed and in ruins, but the victims were millions of people. They had lost their fortunes, their savings; they were dazed and inflation-shocked and did not understand how it had happened to them and who the foe was who had defeated them. Yet they had lost their self-assurance, their feeling that they themselves could be the master of their own lives if only they worked hard enough; and lost, too, were the old values of morals, of ethics, of decency. Would prosperity last long enough to restore them?"

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