Oil Glut, Price Collapse Spread Across World’s Economies : As Producers Squirm, Other Nations Rejoice

Sleeping without heat has become routine to Japanese apartment dwellers. Someone flicks a switch every night at 11 p.m. And for the next seven hours, residents of Japanese apartment buildings with central heating have to do without heat.

It has been this way for 12 years--ever since the 1973-74 oil crisis and accompanying utility bill hikes brought a new conservation consciousness to average families in Japan. Nor is there any end in sight--despite the sharp drop in world oil prices since November.

To discourage consumers from returning to their gas- and oil-guzzling ways of a decade ago and prevent the conservation back-pedaling that many energy specialists around the world fear,Japan and other nations have pledged to continue conservation measures that seem extreme to many Americans even during oil crises.

Nor is it the intention of several industrialized and developing nations to pass on the savings directly to consumers. Brazil, the developing country that will reap the greatest benefit from declining oil prices, keeps gasoline pricesartificially high in order to discourage waste, and says it will continue to do so.

So, unlike their counterparts in America, consumers in Japan and many other industrialized nations that will benefit from the latest round of price-cutting aren’t anticipating any big price cuts at the gasoline pump or sharply lower household energy bills. In fact, their daily living habits aren’t expected to change much at all.

What they can expect, however, are some long-range benefits. Other than those nations that remain heavily dependent on oil revenue--Mexico, Saudi Arabia and the Soviet Union, to name a few--mostindustrialized countries expect to emerge from the oil-price collapse with faster economic growth and lower inflation. Some international analysts assert, in fact, that the price decline already has reduced the inflation rate in industrialized countries such as Britain by 1.8 percentage points.

Down the road, what this could mean is more jobs, more spending money and more stable prices--all good news for consumers.

For the world’s oil producers, the picture is far less rosy. Falling prices for the oil they export means that they have less money with which to make payments on their debts, a major concern for big oil exporters such as Mexico, Venezuela, Nigeria and Indonesia.

Mexico already was on the verge of defaulting on $950 million of its huge $96.4-billion foreign debt before last September’s earthquakes. Bankers permitted Mexico to defer the payments. But now, it faces the loss of billions of dollars in oil income, casting a pall on about $10 billion worth of interest and principal obligations due this year.

Oil income generates about 41% of Mexico’s total revenue and more than 70% of its foreign income. According to Banco de Mexico estimates, about $13.2 billion worth of oil products were exported by Mexico last year.

Assuming oil prices hold at their current levels and Mexico continues to export roughly 1.3 million barrels of oil daily, it can expect to generate only $7.1 billion from oil exports this year, a loss of more than $6 billion.

One course the administration of President Miguel de la Madrid isn’t likely to take to replace the lost income is cutting government payrolls. It tried that approach after oil prices dropped last summer and was promptly subjected to demonstrations by tens of thousands of unemployed civil servants. The cutbacks were halted.

Large Financial Cushion

For Venezuela, a member of the Organization of Petroleum Exporting Nations, the situation isn’t nearly as critical because it has a large financial cushion--$8.3 billion in cash reserves. But because of the oil-price collapse, it expects to lose 30% of its oil income this year, which in turn means it still won’t be able to emerge from the recession that has gripped that nation for eight straight years.

In the Soviet Union, the world’s largest oil producer and exporter, falling oil prices aggravate an even bigger problem: Declining oil output due to inefficiency, bad management and faulty drilling methods. The Communist Party newspaper Pravda reported on Jan. 11 that Soviet oil production fell short of the target again in 1985, despite warnings by Soviet leader Mikhail S. Gorbachev that the shortfall was hurting the economy. One Western diplomat specializing in energy matters says Soviet oil exports declined 20% to 25% in 1985 because of falling production.

Already hard-pressed for foreign currency, the Soviets will be forced to turn to sources other than oil if they want to continue buying the same amount of goods from the West. They reportedly have already been forced to lower their price for oil to western customers. And the price drop has already cost them an estimated $5 billion to $6 billion a year in lost oil revenue. Last year, the Soviets received $15 billion for oil sold to the West.

Cushioning the blow somewhat for the Soviets is the fact that they trade about $15 billion worth of oil to the Eastern Bloc countries for other goods and the price for that oil is governed by a five-year, moving average price. Thus, the price decline won’t be figured in for some time.

Bloc Won’t Benefit

That is bad news, of course, for the Eastern Bloc nations, which depend on the Soviet Union for 80% to 90% of their oil, or a combined total of about 1.9 million barrels a day as of 1984. Under terms of that oil-pricing plan, they won’t benefit from the price slump for several years.

Of course, when world oil prices were soaring during the 1970s, this pricing plan was a boon worth several billion dollars to Eastern Europe. By averaging the price over five years, the Soviet Union cushioned these countries from abrupt price shocks.

But when prices fall, they feel no immediate price relief. In fact, while the rest of the world is now paying about $18 for a barrel of oil, these countries are believed to be paying between $25 and $30.

The only exception is maverick Romania, which produces half of its own oil and buys most of the remainder on the world market. It is the only Warsaw Pact nation likely to benefit from the world price decline.

But there is little reason to expect this windfall to trickle down to hard-pressed Romanian consumers, who eke out a living on rationed food and fuel under the most drastic austerity program Europe has seen since the end of World War II.

Although Romania is under no pressure from its western creditors, President Nicolae Ceausescu--as close to an absolute dictator as remains in Europe--is squeezing the economy to fulfill a personal pledge to pay off a $6-billion foreign debt by 1990, seemingly without regard to hardships at home.

Nor are the Soviets expected to pass along price declines to consumers there. Gasoline prices in the Soviet Union were doubled in 1982, to about $2.50 a gallon, an increase widely resented at the time.

Both Lose, Gain

Less clear-cut is the overall effect on two other major oil producers--Canada and Britain. As oil exporters, both lose from the price cuts. But as wealthy industrial nations, they benefit.

British consumers, for example, already have seen gasoline prices fall to $2.60 a gallon from $2.77 in recent weeks. And Britain’s National Coal Board recently cut prices to its main customer, the Central Electricity Generating Board, which should cut electrical rates for consumers.

The British government also predicts such long-term benefits as a lower inflation rate, increased consumer spending, greater industrial output and a decline in Britain’s record-high jobless rate.

The downside is that Britain, which depends on oil revenues for 6% of its gross national product, expects to lose $500 million for each $1 drop in world oil prices.

For Canadians, it is even more of a mixed bag. Since 73% of that nation’s exports are manufactured goods, cheaper oil means lower costs at the factory, bigger profits for manufacturers and a boost to the economy through continued low inflation, which has remained at a stable 4% for almost two years.

But consumers haven’t yet seen gasoline prices budge from their $1.60 (U.S. dollars) a gallon level--and aren’t likely to anytime soon. Government officials there blame the continued high pump price on the slow speed with which the new, lower-cost gasoline is moving into the system and the higher taxes Canadians pay to help support that country’s extensive health and welfare systems.

Depressed Canadian Dollar

The drop in oil prices also had an immediate, and largely unexpected, negative effect on the Canadian dollar. Because Canada depends on oil and other raw commodities for about 60% of its export earnings, currency traders assumed that Canada is overly dependent on exporting natural resources and would be devastated by the oil-price collapse.

So, the value of the Canadian dollar plummeted to just 70 U.S. cents before the government stepped in to stop the free-fall. The dollar has since recovered somewhat, but at the price of higher interest rates.

On another front, some Canadians have lost their jobs because of lower oil prices, and further layoffs are feared because relatively high energy prices lie at the heart of Canada’s overall economic strategy.

Five years ago, Canadian energy experts predicted that oil prices would reach $54 a barrel by this year, high enough to justify pumping billions of dollars into costly and high-risk energy projects in the North Atlantic off Newfoundland, the Beaufort Sea above the Arctic Circle and in tar sands. Instead, oil prices have dropped to below $15 a barrel, jeopardizing the future of those projects and the jobs they created.

Also uncertain now is the future of the so-called Husky upgrader, which converts sludge into light oil. The consensus among political experts in Canada at the moment is that most of the projects will go on, although there may be some delays.

There is none of this ambivalence over the price slump in Japan, Brazil and Italy. All three countries see visions of banner years. But not so consumers of those countries.

Price Kept High

Since the mid-1970s, the price of gasoline at pumps in Brazil has been kept at an artificially high level--more than $2 a gallon--to discourage wasteful consumption and to help the government finance exploration.

The government concedes that for political reasons it would be tempting to ditch that policy for the time being and pass along some of the savings to consumers. But Brazil was so badly burned by the oil shocks of the 1970s that it refuses to do so, fearful that the hard-won conservation steps taken since then would be eroded and its national target of oil self-sufficiency seriously set back.

Consumers, too, still remember the severe rationing required during the 1970s oil shock and the elaborate trading system the country was forced to set up with other countries in the aftermath of that crisis.

To prevent running short of oil again, Brazil buys oil from Iraq in exchange for arms, from Saudi Arabia in exchange for frozen chickens and from China in exchange for steel.

For the nation as a whole, however, the expected savings are substantial. This country of 135 million people imported nearly $4 billion worth of oil and petroleum products in 1985 and will save $1.5 billion this year if the price of a barrel of oil averages $20.

The savings will help Brazil pay the interest on its foreign debt, estimated at between $10 billion and $11 billion; increase imports of capital goods and finance the state oil company’s energy self-sufficiency projects. Through expanded domestic oil production, hydroelectric power and conversion of automotive engines to alcohol, Brazil has reduced its oil-import bill to $3.9 billion last year from nearly $10 billion in the early 1980s.

Alcohol Replaced Gas

So much attention has been devoted to the development of alcohol as an alternate energy source, in fact, that it is now more important for the big Brazilian automotive industry and for auto owners than gasoline is. Alcohol is the power source for 85% of the 800,000 new cars produced there last year.

Italy, too, suffered mightily after the Iranian revolution sent oil prices skyrocketing. And it, too, now stands to profit from the decline--even more so, in fact, than Brazil because it invested less in alternative energy sources and thus remains more oil-dependent.

For every manufactured product, Italy consumes 25% more oil than France and 29% more than West Germany.

There have been immediate and visible effects at the gas pump. The price has dropped to $3.04 a gallon from $3.31 in slightly more than a month and more cuts are likely in coming weeks.

Other beneficiaries are the country’s electric energy producers, of course, and its chemical and textile industries, both of which rely heavily on oil.

Somewhat surprisingly, Italy’s auto makers--notably Fiat and Alfa Romeo--aren’t expected to reap much from falling oil prices. The industry spent heavily in 1985 to achieve an unprecedented 6.8% increase in car sales and expects to spend just as heavily this year in advertising, special deals, discounts and trade-ins to maintain the 1985 sales level, thus offsetting any energy savings.

It is difficult to predict what falling oil prices will mean for prices on Japanese-made cars sold in the United States. Complicating the situation is the sharp appreciation of the yen against the dollar and a recent decrease in Japanese interest rates unrelated to oil prices.

Raised Car Prices

Largely because of the yen’s escalating value, Japanese auto makers recently raised their car prices in the United States an average 3% to 5%. That is far less than the 24% climb in the yen’s value since last September, but enough of an increase to prompt an ebullient Chrysler Chairman Lee A. Iacocca to crow recently: “That’s leveling the playing field; now watch our smoke.”

Nevertheless, the plunge in oil prices is handing Japan its second windfall in less than six months--the first being the huge jump in the value of the yen against the sliding value of the dollar.

Assuming the yen’s value stays as high as 190 yen to the dollar, Japan expects to slash its oil bill by $15.8 billion this year when both the oil slump and the stronger yen are factored in. Considering only the drop in oil prices, Japan expects to cut its import bill by $10 billion for every $5 reduction in the per-barrel price of oil.

Daiwa Securities predicts that a $5 drop in the per-barrel price also would boost corporate profits by 5.2% and raise the gross national product by 0.25%.

Similarly, in South Korea, the semi-governmental Korea Development Institute predicted that a $5 drop in the official OPEC price of $28 a barrel to $23 would improve the GNP in that country by 0.45% over the 7% forecast earlier for 1986, enable South Korea to trim its oil-import bill by at least $400 million and boost exports by $250 million.

South Korean consumer prices, the institute predicted, would fall by at least 0.7%.

May Bloat Surpluses

If there is any bad news emerging from the oil slump for Japan, it is that it can expect renewed criticism from the United States and Western Europe about the bloated surpluses the oil price plunge promised to add to already staggering overseas earnings: $56 billion in trade and $49.3 billion in current accounts surpluses last year.

Even before the plunge in oil prices, the Japan Economic Research Institute predicted a $64-billion surplus in current accounts for fiscal 1986, which begins April 1. The government itself, in what was regarded as a conservative estimate, forecast a $56-billion trade surplus and a $51-billion current accounts surplus, also before the plunge in oil prices.

For Japanese consumers, this means the lowest increase in consumer prices since 1961. Even before oil prices began their slide, private and government economists were forecasting that consumer prices would rise by only 1.9% in fiscal 1986 and that wholesale prices actually would decline by 1.8%.

Nonetheless, Japan’s deficit-burdened petroleum-refining industry tried over the New Year’s holiday to raise, not lower, gasoline prices. That move was fiercely opposed and failed. But prices there are already three times higher than in the United States--in part because of a higher tax base--and aren’t expected to drop anytime soon to reflect lower world prices.

Japanese consumers pay between $2.59 and $2.77 a gallon at the pump. The industry had tried to set the price sold to gas stations at about $2.70 a gallon, for ultimate sale to customers at $2.99 a gallon.

Affects Nuclear Power

The price slide also has prompted Japanese electricity firms to reevaluate the relative merits of nuclear power. With oil at $15 a barrel, petroleum-generated electricity would be less expensive than nuclear power, even considering the longer life of nuclear power plants, according to Japan’s Resources and Energy Agency.

France, like Italy, expects a boon from falling energy prices because it is still heavily dependent on oil for its energy--44% in France’s case.

Gasoline, which had averaged $3.05 a gallon at the pump a few months ago, is now selling for about $2.50 and is expected to fall to $2.36 soon. Part of the decline is due to the government’s deregulation of gasoline prices in recent months.

Consumers also will benefit from an expected decline in the rate of inflation, which stood at 4.7% in 1985. Premier Laurent Fabius recently predicted a 1986 inflation level of 2%, in part because of falling oil prices. Some economists, however, believe there will be strong pressure to lift many price controls later this year, preventing the inflation rate from dropping that low.