Tape 142 - More on the energy crisis

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-	Welcome once again as MIT Professor Paul Samuelson	0:02
	discusses the current economic scene.	0:05
	This series is produced	0:07
	by Instructional Dynamics Incorporated.	0:08
	This program was recorded November 29th.	0:10
-	The only possible economic topic	0:13
	that I could take up today	0:16
	would be a continuation of the discussions	0:19
	concerned with the energy situation	0:22
	and with what that implies for the way of comfort,	0:26
	the way of life of the typical American family,	0:31
	and also of what it implies	0:35
	for the forecasters of business activity in 1974.	0:37
	And of course, more than that,	0:43
	going below the aggregate level,	0:45
	just what it implies for different industries.	0:48
	This is not a topic that will go away.	0:53
	On the contrary with each passing week,	0:59
	the numbers which are coming out of Washington	1:04
	and from across the seas and from the oil industry itself,	1:10
	are becoming more disturbing	1:16
	to the even tenor of business activity.	1:21
	It was just a little while ago that I was quoting to you,	1:26
	the first of the new computer runs made	1:29
	on what's going to happen to business activity in 1974	1:33
	based upon certain control run assumptions	1:37
	having to do with the fuel crisis.	1:42
	Now, let's roughly get the magnitudes in mind.	1:45
	The US economy uses about 18 million barrels of oil a day.	1:50
	That's a rough figure.	1:59
	It's also in normal years a growing figure.	2:01
	If we were to take other energy sources	2:06
	and put them into oil barrel equivalents,	2:10
	we're talking about at least as much again,	2:12
	so I think of 36 million.	2:15
	Well, out of the 18 million daily barrels,	2:19
	the first computer runs like those of the Wharton School,	2:23
	began to redo the picture,	2:27
	assuming there would be a shortfall	2:29
	of one million barrels per day for a certain period of time.	2:31
	Now, much of this, perhaps most of it,	2:36
	is related to the boycott	2:40
	by the Arab nations in particular, Saudi Arabia and Kuwait.	2:44
	And on that basis you'll recall,	2:51
	the typical macro economic model run	2:53
	comes out with reduction of the growth rate	2:57
	from 2.5% near to 1% in real terms	2:59
	for the four quarters of 1973.	3:06
	We have converted a growth recession	3:10
	into a quite stagnant growth recession,	3:14
	but we still haven't converted the situation	3:19
	into a full fledged recession.	3:23
	We also have somewhat worsened the outlook for inflation.	3:27
	And so if previously, the model thought	3:32
	that inflation was going to proceed	3:35
	on an overall aggregate basis at 5.5 to 6%,	3:38
	we're now talking about 6.5 to 7%.	3:43
	Then the new model runs began to come in	3:48
	with a two million shortfall.	3:52
	We've gone from about a 5% shortfall of the oil to 10%	3:55
	and so long as these changes stay small,	4:03
	you can almost just double the first effect	4:06
	to get the second effect.	4:11
	Now, the computer is more exact than my crude arithmetic	4:12
	and the results are not as simple as that.	4:15
	But you're in the ballpark if you use such rough methods.	4:20
	I should have said by the way that of course,	4:26
	unemployment goes up on this assumption	4:28
	from the last recorded level of 4.5%.	4:31
	Already we're getting reports from all over the country	4:35
	of layoffs, which must be sending	4:37
	those unemployment figures up.	4:40
	But paradoxically, I think as I mentioned,	4:43
	at least in some of the models, the amount of money profits	4:45
	does not go down.	4:49
	Well, when you cut off two million though,	4:50
	we're now beginning to go below 1% in real growth	4:54
	and we're getting quite near to the no growth dividing line	4:57
	between old fashioned bear recession	5:03
	and the growth recession.	5:07
	When the president spoke on TV, just a week or so ago,	5:10
	he had increased the estimate.	5:16
	He didn't give it in terms,	5:21
	I think of the millions of barrels per day,	5:22
	but I think he spoke of 17%	5:24
	and so it looks as if we're talking there	5:27
	about three million barrels a day	5:29
	and again, the computer has to make a new a run	5:32
	and again, this kills off something of real growth,	5:36
	add something to inflation	5:41
	and I would say, you shouldn't quite so blithely	5:43
	go on tripling the amount of increase in money profits	5:48
	that the earlier models had	5:52
	because although if you could charge	5:53
	what the traffic would bear, you could send up profits	5:57
	very handily in the oil industry.	6:01
	It's politically unthinkable, I would suppose	6:04
	that the oil industry will be able to charge	6:08
	what the market will bear in each region.	6:11
	The market could bear a lot in this New England region	6:15
	where I am and therefore, I think that you're likely to find	6:17
	something of a squeeze on the profit margins	6:23
	in comparison with what genuinely,	6:26
	competitive conditions would create	6:29
	in a time of scarcity like this.	6:31
	Well, what is the upshot?	6:34
	The upshot it seems to me must be	6:35
	that to the degree	6:39
	that the earlier assumptions were correct,	6:41
	that we were only going to have a growth recession	6:44
	and that the odds for a genuine, full fledged recession,	6:47
	even though in bare terms, couple of quarters of declines	6:52
	say in the real GNP in 1974,	6:55
	those odds previously were no more	7:01
	than perhaps 30%, 35%.	7:03
	Well, I think that the rational betting man	7:06
	has to begin to shade the odds towards the even money	7:11
	that we will have a genuine recession by that bear test.	7:15
	Now, I wanna make clear, I wanna reiterate	7:21
	what has been said before that it's an exaggeration	7:24
	to say as Senator Jackson once said on television	7:30
	that we're heading towards a great depression	7:36
	or something like the Great Depression.	7:40
	If you mean those words in their literal sense,	7:42
	then I have seen no estimates	7:44
	which suggests that we're in for that	7:48
	and I think that can be sad even if the boycott of oil	7:49
	from the Arabian part of the Middle East goes on forever.	7:56
	George Shultz, Secretary Shultz said at one point,	8:01
	perhaps we should be making all our plans	8:06
	and acting as if we expect the boycott never to end.	8:08
	And that's not a bad strategy, although of course,	8:13
	that's at the pessimistic range of expectations.	8:18
	On the other hand, you hear talk	8:23
	that the boycott could end very soon.	8:25
	All it will take is a little progress	8:28
	with respect to the peace negotiations in the Mid East	8:32
	and that we mustn't take at face value	8:39
	the demands, let's say that King Faisel made at some point	8:42
	that the boundaries have to go back	8:48
	to the pre 1967 boundaries.	8:50
	What we have to do is so to speak show willing.	8:52
	We have to show that there is pressure	8:56
	being put on all the parties in the Mid East	9:01
	toward some kind of a more tolerable settlement.	9:05
	And then the spigot will be opened up of oil	9:09
	from the Mid East.	9:14
	I think that we probably ought to distinguish	9:18
	in our thinking now between OPEC,	9:20
	which is the oil monopoly	9:24
	of the countries in the Persian Gulf,	9:26
	but includes quite a number of other countries	9:28
	outside of the Persian Gulf like Venezuela and Nigeria	9:31
	and O-P-E-A-C, OPEAC which is a subset	9:34
	of those countries in OPEC,	9:42
	which are entering into the Arabian boycott,	9:45
	it isn't even the subset	9:48
	consisting of all the Arabian people	9:50
	because I believe that as I speak now,	9:51
	Iraq is not part of the agreement,	9:55
	although it seems to be the general impression	9:57
	that the Iraqi oil is not going in large amounts	10:00
	to western Europe, but rather is going to eastern Europe.	10:05
	But Iran, which I think is a	10:12
	(mumbles)	10:16
	but not an Arabian country, is not part of OPEAC,	10:17
	although it's a very leading figure in OPEC.	10:21
	So, the big pinch comes from the OPEAC part of the problem.	10:25
	Now, as I've said, that pinch is much more severe	10:33
	on Japan and on western Europe	10:38
	than it is on the United States.	10:42
	And so, it's worthy of note that they would have	10:44
	a much more serious physical setback in their growth rates	10:49
	if the OPEAC countries were to be as tough on them	10:55
	as they say they're going to be on the United States.	10:59
	Perhaps they to ought make at least a point of terminology.	11:05
	We say that a short fall of oil if well handled,	11:10
	and there is only three million out of 18 million,	11:15
	will convert a growth recession into a bear recession	11:21
	with pretty good probability.	11:27
	It's not clear that a purist	11:30
	would want to use the words recession.	11:32
	I'm not thinking of how a person might weasel	11:36
	out of a bet, but I am thinking of the fact	11:39
	that usually we associate the word recession	11:43
	with a shortfall of our actual performance	11:46
	in a mixed economy in comparison	11:50
	with our full employment potential of performance.	11:52
	And since a decline in the available amount	11:57
	of necessary fuel, like oil	12:02
	represents a decline in the productivity	12:05
	of the American economy when fully employed	12:08
	and the decline in the rate of growth	12:11
	of the American economy, then the so-called	12:12
	recession of which we are speaking	12:18
	may be a misnomer because we may be in 1974	12:21
	as fully utilizing our reduced productivity as earlier.	12:25
	Now, I don't think we will be as fully utilizing it	12:33
	because the short run impact will certainly result	12:37
	in unevenness and the inefficiencies.	12:40
	We know that particular workers will be thrown out of work.	12:44
	We know that even with the reduced flow of oil,	12:48
	the system could adjust itself and provide them with work,	12:50
	not necessarily at as high real wages	12:53
	as would otherwise have been the case, in other industries.	12:55
	But that rearrangement takes a lot of time.	12:59
	And so, let's consider a particular example	13:02
	which we've read about in the newspapers	13:05
	and you're gonna read more	13:06
	of such examples in the newspapers.	13:08
	The larger cars of the American automobile manufacturers	13:10
	are not selling a very well.	13:15
	It's possible the Cadillac is an exception to that.	13:18
	But, you may have noticed that the advertisements	13:20
	for Buick, for Oldsmobile, in a degree for Pontiac,	13:23
	those are the General Motors cars,	13:30
	but you could add to this the Mercury	13:32
	and maybe continental in the Ford Line,	13:35
	and you could add the various Chrysler lines	13:37
	and the Imperial to that aren't selling all that well	13:40
	because people frankly, don't want a big gasoline consumer	13:43
	as they're moving into a period	13:49
	when they think they're gonna be rationed	13:51
	very severely for gasoline.	13:52
	So they're trading down.	13:54
	This means that when they turn in that old big car,	13:57
	they get almost nothing for it.	13:59
	It means that the showrooms	14:02
	in the big car agencies are empty.	14:07
	It means that there's depressive orders	14:11
	for the compact cars.	14:14
	Vegas, Pintos, Maverick,	14:16
	American Motors happens to be in a better position	14:19
	because the larger fraction of their line	14:22
	is in the small car area.	14:24
	However, just as you can't overnight	14:27
	convert swords into plows and prune shares,	14:30
	so you cannot in one model year	14:37
	and maybe not even in a two or three	14:40
	convert the capacity for producing an Oldsmobile	14:42
	to the capacity for producing a Nova Chevrolet'	14:45
	or the capacity to produce a Mercury	14:49
	into the capacity to produce a new Mustang II	14:51
	with a smaller motor and a shorter wheel base.	14:55
	The result is that you're getting congestion rationing.	15:01
	That's a technical expression in this small car area.	15:06
	It means you have to wait six weeks, nine weeks,	15:11
	12 weeks for a small car	15:15
	and that press could become more severe.	15:18
	Now, of course, under those circumstances,	15:23
	some of the demand will go abroad,	15:26
	because the European cars, Fiat for example	15:28
	is being an advertise more in our market.	15:32
	It has a very economical gasoline consuming car	15:35
	to offer the American public.	15:40
	The Toyota, the Datsun.	15:43
	We're beginning to get interested	15:45
	in the mileage performance of cars.	15:48
	The Volvo, the Saab and so forth.	15:50
	And so some of the business is going abroad.	15:52
	Well, what's gonna happen to the production lines	15:55
	of Oldsmobiles and Mercury's?	15:59
	Obviously there isn't storage space in Detroit	16:02
	to stack these finished goods up to any degree.	16:05
	Moreover, there is no desire on the part of anybody	16:09
	to keep producing in order to add to inventories	16:12
	of things which can't be sold	16:15
	and which if they had to be sold at a sacrifice later,	16:18
	would entail a considerable drop in price.	16:22
	The result is under the way we run our system	16:25
	that the assembly line stops.	16:28
	And so there's been a furloughing of workers	16:32
	from General Motors plants	16:36
	producing number of the larger cars.	16:38
	Now, that's not such a bad thing for those workers	16:41
	in the very short run, although it does send	16:43
	a chill of apprehension down their backs.	16:45
	Under the union contract, they have a quite favorable	16:48
	income maintenance scheme for a certain period of time	16:53
	provided that you're a worker with some seniority.	16:57
	Let's say, you've worked over a year	17:01
	and you were going to have a take home pay of $200 a week,	17:05
	then I'm quoting from very vague memory.	17:08
	Maybe you'd get the under this contract	17:11
	as much as $160 a week.	17:14
	Well, that's not too bad.	17:17
	You're getting a little vacation,	17:19
	you aren't working as hard.	17:20
	You can even now begin since you're getting worried	17:21
	to look around for some other employment opportunity,	17:23
	maybe with the American Motors	17:26
	or somebody who's producing a smaller car.	17:28
	But what about the fellow	17:31
	who hasn't a year of solid seniority?	17:32
	He goes off to unemployment compensation.	17:36
	Well, that's not so very bad in the very short run for him,	17:39
	because maybe that's $85 or something like that a week,	17:43
	so long as it keeps reporting as being available for work.	17:47
	But all those things run out.	17:50
	And so this is what the computer is picking up.	17:53
	In fact, this is what the computer can pick up very well.	17:56
	The displacement effects upon the flow of income	17:59
	of interruptions in job opportunity.	18:03
	What an aggregate model computer	18:08
	of a macroeconomic type cannot pick up well	18:11
	is the exact micro economic interruptions in production,	18:14
	which are occasioned by not having sufficient fuel	18:19
	or sufficient fuel of the right kind	18:23
	or sufficient fuel at the right place in the right region.	18:25
	And so, if you're going to have for example,	18:29
	a shortfall of employment in the Texas plastics industry,	18:33
	because they depend upon certain petrochemicals	18:38
	for their raw materials, the computer model builder	18:41
	can only guess at what those will be.	18:47
	Now it's true.	18:50
	He could use Professor Leon's input output Tableau	18:51
	and to make a more refined guess if he has the data,	18:55
	but you have to remember that Professor Leon's Tableau	18:59
	is based upon the assumption	19:03
	for the purposes of approximation for statistical estimation	19:05
	just to make the system manageable of fixed proportions,	19:09
	and that underestimates the amount of ingenuity,	19:13
	which is available in the longer run	19:17
	in readjusting the patterns of production	19:19
	to the now scarcer, usually more expensive raw materials.	19:25
	Well, we're getting a rash of such cases	19:33
	and what would be very crucial	19:37
	and here we're beginning now	19:40
	to turn to towards the policy area.	19:41
	What will be very crucial	19:44
	is exactly how the government handles the shortage.	19:45
	If you take some of the more optimistic estimates,	19:50
	which still lean towards the only a growth recession side,	19:53
	I'm thinking of Dr. Otto Eckstein	19:58
	of Data Resources Incorporated.	20:01
	His group has made out a new run on the GMP	20:03
	and they still aren't ready to throw in	20:08
	the sponge and speak as a chase econometrics is	20:10
	of a full fledged, a couple of quarters	20:15
	at least have a real decline.	20:18
	When I mention these numbers,	20:21
	don't take them too seriously	20:24
	because it may be that my mail next week,	20:25
	will reverse some of these assumptions.	20:28
	It's just indicative of what the trend is.	20:32
	Well, Dr. Eckstein who is a young,	20:36
	bubbling, enthusiastic, able fellow is an optimist.	20:41
	And although he's not a member of the administration	20:47
	and has been a member of some previous administrations,	20:51
	he's fairly optimistic	20:54
	that Washington will handle this well.	20:56
	I think there are a lot of people in Las Vegas	20:59
	are ready to give me money	21:01
	that that's not a safe assumption.	21:02
	And I have to say, being as dispassionate as I can,	21:04
	that so far the way the problem has been handled,	21:11
	the way information seems to have been gathered	21:16
	in Washington, the way it seems to have been processed,	21:18
	the way it's been released to us	21:21
	does not make me sanguine that we're going to have	21:23
	all this good handling.	21:28
	Now, let me illustrate some of the examples	21:30
	what I have in mind.	21:33
	When President Nixon went on TV	21:35
	for his evening chat with all of us,	21:39
	he said he's giving instructions	21:43
	for a six-points program, or was it five or was it seven?	21:46
	And part of that, was quasi voluntaristic.	21:50
	You can't call it completely voluntaristic	21:57
	because when he said to us,	21:59
	to be good civic citizens	22:01
	and keep our thermostats down by six degrees	22:06
	and six degrees in the climate where I live	22:11
	is beginning to be appreciable,	22:14
	it isn't completely voluntary because he said	22:17
	he was giving instructions to the oil companies	22:19
	to space out the deliveries to householders	22:23
	so that we really will have to do that	22:28
	or else before the oil truck comes back	22:31
	to replenish our depleted supply,	22:34
	we won't have any fuel at all.	22:36
	Now, I don't think the president	22:39
	had to give such instructions in New England,	22:40
	because they really wouldn't have enough	22:44
	just following the natural forces	22:45
	of our quasi mixed economy,	22:48
	to permit us to go along in the previous way	22:52
	at the higher temperatures.	22:55
	But in other parts of the country, this will be important.	22:58
	I now come to my point.	23:00
	Another part of his program	23:02
	was he's instructed the oil industry	23:03
	to do what seems to be technologically feasible.	23:06
	Namely, take the raw crude,	23:09
	and as you put it through the refining process	23:11
	with all the catalysts that are involved	23:14
	and you making a lot of joint products,	23:16
	he said you wanna shift the mix of output	23:17
	away from gasoline.	23:21
	This is during the winter, towards fuel, residual fuel oil,	23:22
	energy burning stuff and the number he gave	23:29
	was that there could be about a 15% shift of that kind.	23:34
	Now, I think that is probably getting near	23:39
	to the short run substitutability of the system.	23:42
	But let's now think of a part of the country	23:47
	like Louisiana or Texas or California,	23:51
	but not a part of the country like New England	23:55
	or the midwest or the northwest.	23:57
	These instructions go out.	24:01
	This is done.	24:03
	As a result, there is an increase in fuel oil there.	24:06
	How does that fuel oil come to New England?	24:11
	How does it get to the northwest?	24:14
	How does it get to the middle west,	24:16
	the places which are very much short	24:18
	because of their past reliance to put it very crudely,	24:20
	the Arabian oil imports.	24:26
	Well, we weren't told and since that message	24:29
	Congress has forced upon the president	24:36
	because it was put in a bill	24:38
	which he didn't feel he could veto.	24:39
	The powers to exercise allocations and rationing.	24:42
	Perhaps we're lucky that we have large oil companies,	24:49
	so few in number that their executives	24:51
	can be brought into one small room	24:55
	and perhaps a word to the wise is sufficient.	24:58
	They can be told, you move this stuff.	25:00
	Now, it's not quite that simple	25:03
	because there has to be a pipeline capacity.	25:04
	There have to be tankers and perhaps,	25:08
	some of those tankers, which no longer will be engaged	25:09
	in moving Arabian oil,	25:12
	maybe if they're suited for inland waters, put to this task.	25:14
	So there's a technological feasibility problem.	25:19
	Now mind you, if we ran the system a different way,	25:22
	the way the system would have been run 100 years ago,	25:26
	let's say at the time of the Irish potato famine,	25:30
	when the fungus killed off the potato crop	25:34
	and when you had a Victorian,	25:37
	capitalistically oriented government	25:39
	sitting in Whitehall in England,	25:42
	and they insisted that the price of wheat	25:44
	be permitted just to rise	25:46
	to whatever level would be necessary to clear the market	25:48
	and to coax out a little wheat,	25:50
	only little Alaska be coaxed out	25:52
	in the short run for the new world.	25:54
	If the system were run that way,	25:58
	England, New England would suck the surplus of oil	26:00
	without any presidential orders	26:05
	from Louisiana and Texas and California.	26:07
	What is this process of capillary attraction	26:11
	or osmosis which would suck it?	26:13
	It would of course be, the fact of sky high prices here.	26:15
	So that like Rhett Butler running the blockade	26:19
	and gone with the wind when the food was scarce	26:22
	in the south, the carrot dangled very high profits,	26:25
	which of course would make the profiteer, so-called,	26:35
	the Rhett Butler unpopular would move this stuff.	26:37
	The incidents would be very uneven as regions.	26:41
	Now, I hardly have to describe that process to you	26:43
	for any personal sophistication	26:47
	about the modern populist, pluralistic democracy	26:50
	to say nothing of the modern mixed economy	26:56
	will know that all hell would break loose politically,	26:59
	in Congress, in the elections which are going to come up	27:05
	if that route were followed.	27:10
	So, we're going to find ourselves	27:13
	unless the boycott ends very soon,	27:16
	even then, there's a certain number of days	27:20
	before the oil can be really brought on stream	27:23
	down here in the United States.	27:26
	We're gonna find ourselves	27:29
	with increasing need for allocations	27:30
	and I think most informed people	27:33
	think that some kinds of rationing will be inevitable.	27:35
	Now the question is whether the beleaguered president,	27:41
	has the time, the energy and the capacity	27:44
	to be on top of that situation.	27:52
	Because there are decisions which have to be made	27:54
	at the very top.	27:56
	You cannot have your Secretary of Interior	27:57
	quarreling forever with your Secretary of Treasury	28:00
	about the way that this is to be handled.	28:02
	And here, I'm afraid that those who know	28:06
	the working habits of President Nixon	28:10
	and his desire to deal with only very few people	28:13
	in the course of any one day,	28:17
	are of the opinion that he's handicapped	28:19
	in providing that kind of leadership.	28:21
	Doesn't help of course to have the sideshow	28:24
	if you regard it as that of missing tapes	28:29
	and the need to defend oneself in front of grand juries	28:33
	and the courts even at the second or third hand.	28:39
	Well, it would be very easy	28:45
	to become an over reactor to this situation.	28:49
	A lot of people are raising the question	28:56
	whether the stock market which has been going down	28:57
	in jumps that are closer to 10 points	29:01
	on the Dow Jones average per day,	29:06
	than the old familiar two or three points	29:09
	on the Dow Jones average.	29:12
	There can be raised the question as to whether	29:15
	given the long run outlook for the American economy	29:19
	for the profitability of plant and equipment in America,	29:23
	which stocks represents a title to,	29:26
	whether this is overdoing the situation.	29:29
	And I think the art of investment judgment	29:33
	will come in trying to decide	29:37
	just where that dividing line would be.	29:40
	I would hesitate to offer any words of advice on that topic.	29:42
-	If you have any comments or questions	29:46
	for Professor Samuelson,	29:48
	address them to Instructional Dynamics Incorporated.	29:49
	166 East Superior Street, Chicago, Illinois, 60611.	29:52

Item Info

Title:

Tape 142 - More on the energy crisis

Date:

1973

Contributor:

Samuelson, Paul A. (Paul Anthony), 1915-2009

Subject:

Format:

audiocassettes

Language:

English

Digital Collection:

Paul A. Samuelson papers, 1933-2010 and undated

Source Collection:

Paul A. Samuelson papers, 1933-2010

Series:

Economics Cassette Series: Paul Samuelson

Rights:

Limited Re-Use

CC BY-NC 4.0

Rights Note:

This material is made available for research, scholarship, and private study. Copyright in this material has not been transferred to Duke University. For reuses of this material beyond those permitted by fair use or otherwise allowed under the Copyright Act, please see our page on copyright and citations: https://library.duke.edu/rubenstein/research/citations-and-permissions.

Identifier:

RL10082-CS-0136
ref2411_cie
samuelsonpaul
duke:325159
pstau001136
ark:/87924/r4988339k
d289bac8-885d-412d-b4fb-8822445b7eec

Permalink:

https://idn.duke.edu/ark:/87924/r4988339k

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Tape 142 - More on the energy crisis

Transcript

Item Info

Economists' Papers Archive

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