Energy and International Monetary Problems
Authors: Merklein H.A. 
Published: December 2007

American Institute of Mining, Metallurgical, and Petroleum Engineers, Inc.

This paper was prepared for the 49th Annual Fall Meeting of the Society of Petroleum Engineers of AIME, to be held in Houston, Texas, Oct. 6–9, 1974. Permission to copy is restricted to an abstract of not more than 300 words. illustrations may not be copied. The abstract should contain conspicuous acknowledgment of where and by whom the paper is presented. Publication elsewhere after publication in the JOURNAL paper is presented. Publication elsewhere after publication in the JOURNAL OF PETROLEUM TECHNOLOGY or the SOCIETY OF PETROLEUM ENGINEERS JOURNAL is usually granted upon request to the Editor of the appropriate journal provided agreement to give proper credit is made. provided agreement to give proper credit is made. Discussion of this paper is invited. Three copies of any discussion should be sent to the Society of Petroleum Engineers office. Such discussions may be presented at the above meeting and, with the paper, may be considered for publication in one of the two SPE magazines.

Introduction

In May 1971, the U.S. dollar, and with it the international monetary system, was under attack. In a 3-day period, holders of U.S. dollars dumped what they considered an asset of questionable value at the rate of more than $1 billion a day. U.S. oil imports at that time, were running at 3.7 million B/D. At a posted price of approximately $2.50/bbl, this meant an price of approximately $2.50/bbl, this meant an annual gross dollar outflow of $2.9 billion.

On Aug. 15, 1971, the U.S. government abandoned its policy of keeping the U.S. dollar convertible into gold. The practice had been limited in its application to official foreign holders of U.S. dollars, mostly foreign central banks. Its suspension officially confirmed what leading indicators in the international monetary markets had already pointed to. The U.S. dollar was overvalued.

Two devaluations later (in Dec. 1971 and in Feb. 1973), things began to look up for the U.S. dollar. It is true that the international monetary system died after the second dollar devaluation, at least insofar as its original conception was concerned, as set up in 1944 in the so-called Bretton Woods Agreement. What was originally designed to be essentially a fixed exchange-rate system turned into a worldwide floating exchange-rate system. Still, the U.S. trade deficit was turned around and long-term prospects in mid-1973 were brighter than they prospects in mid-1973 were brighter than they had been in a long time, even though oil imports had risen to 5.8 million B/D.

The Arab oil embargo changed all that. The immediate impact of the embargo was to strengthen the U.S. dollar. With U.S. oil imports running at about 35 percent, compared with an almost complete reliance on oil imports in Japan and, to a lesser degree, in most Western European countries, the U.S. economy was hurt less. In fact, the U.S. dollar rose by 13 percent in relation to the Japanese yen in the period Nov. 1, 1973 to Feb. 1, 1974. The equivalent figures for other selected hard-currency countries are listed below.

Percent Country Currency Decline

Germany Mark 20 Switzerland Franc 10 Belgium Franc 18 Canada Dollar 0 France Franc 21 Holland Guilder 20 Italy Lira 15 England Pound 8

But the long-term impact of the embargo is different.