New Internationalist

Inflation and OPEC

Issue 090

N. I. Issue No 69: November 1978 ‘Blame the Arabs’ has been the defensive cry of every beleaguered finance minister, central banker and business publication since 1973 when inflation joined death and taxes as one of the undeniable certainties of life. Every price meeting of OPEC oil ministers brings gloomy warnings about the threat of increased petroleum prices to the world economy. The cause-and-effect between OPEC price hikes and another round of higher prices is taken as gospel. Not surprisingly OPEC has a different story. But it’s one that is not often heard in the Western media. In a recent issue of Development Forum, Adnan AI-Janabi the head of OPEC’s Economic and Finance Department argues that the contribution of Arab oil to Western inflation is virtually nil. Much more important is the reluctance of industrial oil users in the West to cut back profit levels, instead of passing on increased costs directly to final consumers. In the tug-of-war between oil-rich nations and the West, OPEC members have been unable to keep pace with continued price increases of manufactured imports. Import prices have increased 400 per cent for OPEC nations since 1973. Between 1974 and 1978 the terms of trade between OPEC and OECD members deteriorated yearly.

Al-Janabi says there is no evidence to show that inflation would vanish if oil prices were suddenly frozen. The increase in oil prices (what OPEC calls ‘price adjustments’ to Western inflation) from $12.70 / barrel in 1978 to $18 / barrel in 1979 meant the cost of oil imports to the US rose by about 0.7 per cent of its GNP. Yet inflation hovered near ten per cent. An OPEC computer study shows that in 1979 imported oil accounted for only 0.5 per cent of the French inflation rate of 10.2 per cent and 0.7 per cent of Italy’s 15 per cent.

During 1978, in Europe the final average price of a barrel of oil the consumer was about $54. Nearly $22 of that was government taxes - as imported oil prices increase, governments also increase their share of the take. Al-Janabi says European taxes increased on average $4 a barrel during 1979, contributing about the same to domestic inflation as OPEC. Taxes may be one way of forcing people to cut back on energy consumption, but ‘it is not reasonable for economists in OECD countries to accuse OPEC of causing inflation and applaud their governments for hiking energy costs’.

In reply to critics who charge that OPEC price increases could spell disaster for the ‘NOPECs’ (the non-oil exporting Third World) Al-Janabi counters that imported inflation from the rich countries is the real culprit. And without a pivotal commodity like petroleum the NOPECs have little muscle power in the global market place.

At bottom the squabble between OPEC and the West is the most visible (and most important) battle to steer more of the world’s wealth to the poor nations. Inflation is an indication of the West’s tenacity in holding on to what it’s got and making sure it keeps it. Unfortunately for the NOPECs they are confined to watching from the sidelines. Aid as solace from both sides does little good. If they are to wrest any real wealth from the big boys the NOPECs are going to have to form their own Third World ‘trade union’. But when you are not even in the game, it’s hard to prove you’ve got clout.

This first appeared in our award-winning magazine - to read more, subscribe from just £7

Comments on Inflation and OPEC

Leave your comment