Nation: The Economy Becomes a Hostage
TIME magazine article, Nov. 26, 1979
Troubles in Iran threaten higher energy prices and slower growth
Beyond the fate of the hostages in Tehran, a new worry loomed last week: Was the energy-squeezed and inflation-dazed world economy about to fall victim to the crisis between the U.S. and Iran? Though the U.S.'s cutoff of imports from Iran and its seizure of that nation's assets in U.S. banks was a necessary response to irrational provocations, the actions also transformed petrodollars and petroleum itself into even more dangerous weapons in economic brinksmanship. That, in turn, added a new and alarming element to the crisis. Tremors of foreboding spread through money markets from Tokyo to Bahrain. The dollar plunged steeply on initial reports that Iran would withdraw its deposits from U.S. banks, then rebounded in nervous surprise at the news that Washington was freezing the assets before they could be withdrawn. When rumors circulated in Europe and New York that Iran would counteract the move by refusing to accept dollars as payment for its oil delivered to any nation, the U.S. currency began to gyrate all over again. Brokers and traders passed the week wearing looks of astonishment at what might come next. In the U.S., concern focused primarily on what effect the boycott of Iranian oil would have on the domestic economy. Would long gasoline lines return? Would prices for fuels of all sorts take another breathless leap? Would inflation surge, interest rates rise and the economy slip deeper into recession? Under normal circumstances, neither of the U.S.'s actions should lead to such results. Oil imports from Iran amount to a scant 4% of total U.S. consumption. In theory, at least, those purchases could be easily replaced by swapping: oil companies could exchange Iranian crude with other companies that have equal amounts of non-Iranian petroleum. Nor in theory should the freezing of Iranian bank assets prove especially disruptive to money markets or the banking system. The Tehran government's estimated $6 billion in petrodollar holdings is only a fraction of the more than $150 billion that big international banks move back and forth among each other every day. Withdrawing the Iranian funds would, by itself, hardly cause much more than a momentary ripple. In fact, the rising stakes in the Iranian mess are almost certain to put alarming new stresses on both the U.S. economy and the world financial system... |
Since January, gasoline prices have risen by about 45%, to a current national average of $1.01 per gal. Daniel Lundberg, whose Lundberg Letter is widely regarded as the most reliable gauge of gasoline marketing trends, figures that prices are poised to jump to $1.18 per gal. by year's end, a startling 17% rise in a little more than a month. Reason: with the troubles in Iran, big industrial users of oil as well as gasoline will now begin building up their stockpiles and tightening the market, sending prices soaring. That will put a pinch on the already strained budgets of families everywhere, but especially for people whose homes are warmed by heating oil...
Though the immediate crisis facing the world is the direct responsibility of the Ayatullah Khomeini and his pseudo-government in Iran, the danger would not be nearly so grave if the U.S. had not allowed itself to become so dependent on foreign oil. Under the circumstances, there is no guarantee that economic disruption can be avoided no matter what steps the nation takes. But the best hope for avoiding real trauma is to cut consumption, conserve supplies and, at the very least, make do with 700,000 bbl. less of crude per day. Such an effort would put some slack in worldwide petroleum supplies and help restrain prices. More important, it would also show Iran and the world that the U.S. can start breaking its addiction to the demon oil. |
Read the complete TIME article here.