Oil in Norway’s Balance of Payments and the prospective impact of privatization on the krone

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Speech to the Norwegian Shipowners’ Association, August 17, 2000

by Dr. Michael Hudson, ISLET ©

The debate over whether to privatize Norway’s oil, telephone system and other national assets has focused on considerations of whether private management would be more efficient than government management. The discussion to date has turned more on political ideology than on calculations of the quantitative impact of privatization on the balance of payments, tax and monetary policy.

Arguing over management efficiency is a blind alley, theoretically speaking. Economic observers evaluating Britain’s privatizations of the 1980s quickly came to the conclusion that ownership has little inherent impact on managerial efficiency. Government agencies can manage enterprises in the same way that private managers do, if instructed to do so. The major effect of privatization concerns the diversion of revenue away from the government budget to the buyers, and the removal of public regulatory oversight.

This paper focuses on the broad economy-wide impact of privatizing North Sea oil. I will concentrate on the impact on Norway’s exchange rate, and hence on the ability of domestic labor and industrial capital to compete in world markets. My objective is to provide a framework to analyze how the government may invest the sales proceeds of assets being privatized. My conclusion is that if the government cannot invest the proceeds in imported capital goods and related tangible capital formation, it would be better off not privatizing its public assets.

I would like to frame this discussion by jumping to the later stages of the privatization process, and ask just what Norway will do with the sales proceeds of its public enterprises. For in the final analysis this will be the determining consideration of any cost/benefit analysis.

Unlike many third world countries selling their public domain under pressure of foreign debt, Norway is an international creditor. It already has substantial foreign exchange reserves, and its currency is not in danger of weakening; just the opposite. The central bank can create domestic money and credit at will, and does not need foreign exchange as counterpart backing. Under these conditions the only virtue of holding Treasury bonds is to earn the interest revenue of about 6 percent.

In the case of privatization sell-offs, the balance of payments effect of a capital inflow by foreign investors buying public assets of the magnitude of North Sea oil will push the currency sharply upward. As a petrocurrency, Norway’s krone already suffers from overvaluation, impairing industrial competitiveness in much the say way that is plaguing Britain. Selling off its major public enterprises would exacerbate the situation by a quantum leap.

What will Norway’s government – and its central bank – do with the sales proceeds? If neither the government nor private investors use the capital inflow to undertake new tangible capital investment, these proceeds will remain in the central bank. More specifically, Norges Bank will keep them in the form of U.S. Treasury bonds. Norway will lend even more to the U.S. Government than it already has done.

This return is less than the government would get by keeping North Sea oil, the telephone system and other public enterprises in the public domain. The reason is that foreign investors would only bid for such assets if they could make more from them than could be made by investing in U.S. Treasury bonds. (Otherwise, foreign investors would continue to hold U.S. Treasury bonds.)

The logic of privatization is that “the marketplace is right.” But if this is true and investors prefer to buy Norwegian public assets than to buy U.S. Treasury bonds, why should the central bank not make this same decision? An appeal to market forces would dictate that Norway can maximize returns by keeping its public enterprises in government hands than by selling them off and investing the sales proceeds in dollar-loans to the U.S. Government or in foreign stock and bond markets.

This is the verdict of the global marketplace to which privatizers themselves appeal. The logic can be filled out by showing the investment situation before and after oil privatization. But first, I will discuss some more immediate problems that privatization will cause.

How much would privatization sales push up the krone’s exchange rate?

Privatization would have a major impact on Norway’s balance of payments. Sale of major public assets to global investors would push up the krone’s exchange rate even further than already has occurred in the years since it became a petrocurrency. This would have adverse effects on Norway’s export industries, including its tourism and transport sectors, by raising the international price of its labor.

The smaller a nation’s balance of payments and national income, the more sharply it will respond to fluctuations in foreign demand for its currency. Oil plays so large a role in Norway’s balance of payments that it already has pushed up the krone to levels where domestic labor and the goods and farm products it produces cost more than those of its neighboring countries. The sale of public assets to foreigners would have an even more disruptive an effect on the exchange rate, because of the much larger magnitudes involved in foreign capital inflows to purchase shares in the companies being privatized.

In today’s booming global stock market the price of a revenue-producing asset is between 15 and 20 times earnings. This means that the inflow of capital into Norway may be ten times as strong as the inflow of export revenues from oil sales themselves. Unless this money is spent abroad, it will push up the exchange rate and price Norwegian exports (including its tourist services) out of most markets.

A balance-of-payments impact study would calculate the likely volume of capital inflows, their upward effect on the exchange rate, and the effect further currency appreciation would have on the nation’s industrial competitiveness, that of its tourist sector and other affected sectors in terms of their pricing. Under the “old” trade-oriented theorizing, currency levels are not set by relative product prices – the “Macdonald’s hamburger” principle. In today’s world the magnitude of capital flows has grown to overshadow the balance of trade. Prices for imports and exports are more likely to follow stock market and bond prices than to settle at levels that produce an international parity of product prices.

This means that under privatization the krone’s exchange would tend to fluctuate in keeping with the global price of the Big Seven oil companies such as Exxon, BP, Shell and Texaco. What would be equalized in exchange transactions would be the price of stock market shares, not the price of food, manufacturers or housing. Norwegian import and export prices would become the “tail” wagged by the “dog” of its stock-market securities issued for the companies being privatized.

Rising currency values also have a balance-sheet effect. Norwegian companies with foreign assets would have to write down their book value as denominated in krone. Depending on the accounting practices being followed, this might reduce reported earnings by the amount of foreign exchange loss.

What will Norway do with the proceeds of oil and telephone privatization?

There is little that Norway can gain by acquiring more foreign exchange reserves. It may create domestic kroner as counterpart funds to the foreign-exchange assets that mount up in the central bank. But of course, it can create krone credit with or without foreign exchange. There is no inherent need for credit to require counterpart dollar reserves, unless one assumes that every additional krone credit will be spent abroad.

This means that sale of public assets only will make economic sense if Norway invests its foreign-exchange inflows in tangible capital formation to replace the assets being depleted (oil) or sold off (oil and the telephone system). This problem can be traced back to antiquity, long before income and sales taxes were levied. Athens, for instance, possessed rich silver mines at Laurion, which it leased at auction to private operators for a stipulated payment. The citizens were asked to vote on whether to distribute this leasing revenue to them as a dividend (as been done most recently by the state of Alaska with the proceeds of its own oil wealth) or to use the money to build up its naval force. The citizens voted for the latter, and the ships successfully defended the city-state against the Persians at the battle of Salamis in 490-89 BC.

Norway has little need of military spending. The question is thus whether it can use the foreign exchange to purchase foreign capital to improve the productivity of the economy and its labor force.

Norway’s post-privatization balance of payments and fiscal position

At present the government owns the oil and phone system, and their prospective revenues produce a trade surplus that the government also records as a budget surplus. After privatization, foreigners will own these assets and the revenue that previously accrued to the government. In the case of public utilities such as the phone system, it will grow over time. This will increase the remission of dividends and interest payments abroad, and hence will weaken the balance of payments.

The government will take payment ultimately in the same way that China and Japan have used their balance-of-payments surpluses, by buying dollar-denominated U.S. Treasury bonds yielding about 6 percent. Norway’s oil revenues thus would finance the U.S. federal budget deficit rather than be invested to create Norwegian capital to replace the depletion and sell-off of its public domain.

The bonds bought by Norges Bank will be sold by U.S. private investors (as the U.S. federal budget is presently in balance). In effect, global investors (primarily U.S. mutual funds and retirement funds) will buy shares in the Norwegian companies being privatized because they decide that owning Norwegian oil and the phone system will provide higher returns over the long term than will U.S. Treasury securities. Otherwise, they would not make the switch.

If this is the market’s evaluation, then why should Norway’s government choose to be on the selling end rather than the buying end? Why should it move from its present position to one that the market itself deems to be an inferior position?

Privatizers argue that the reason for selling these enterprises is that assets under private management will perform better (at least in terms of their stock-market price) than will assets in the public domain. But just what do they mean by “perform better”? Looking at privatization experience over the past twenty years, one can see that the gains in operating revenue have come mainly from the following three considerations:

  1. shifting from unionized labor to non-unionized labor;
  2. reducing public services of the type (or to areas) that elected representatives had deemed to be in the public interest; and most important
  3. borrowing the funds to undertake new capital investment to modernize, under conditions where government entities were legally blocked from raising the needed funds.

If Britain’s government needed to undertake more tangible investment in still-public enterprises, all it would have taken was a rule permitting “productive” borrowing, defined as bonds that may repaid out of the added earnings to be financed by investing the proceeds. Either governments may be empowered directly to undertake such borrowing, or public enterprises may be set up as independent agencies and be managed as efficiently as private firms. The difference, of course, is that these enterprises will remain subject to political oversight by elected officials, which may indeed impose certain public-interest constraints on their operations.

In this way, the gains inherent in natural resources such as oil, or in natural monopolies such as the telephone system, may be retained in the public domain to supply future revenues to fund government operations. The existence of such revenues may free Norwegian direct investment from taxation, helping make the economy more competitive over the longer run.

On balance, American investors will sell their Treasury-bond holdings and buy stocks in Norway’s North Sea oil assets. At present, Treasury bonds pay a bit over 6% interest. Norway’s North Sea oil assets are to be priced to yield a higher total rate of return. The result will be a free transfer of revenue from Norway to U.S., European and other global investors.

This subsidy of the U.S. Government would be a curious policy for neo-liberal ideology. If Norwegians believe that private enterprise is inherently more efficient than public enterprise, then why shouldn’t it use the proceeds to buy some enterprise more productive than oil and gas? If it cannot identify such an enterprise to purchase, then perhaps it should hold onto its oil revenues.

This colloquium has begun with a discussion by Erik Reinert of the “Spanish Curse” of receiving a flow of unearned revenue from abroad. Whether this revenue is the result of military conquest and plunder or the exploitation of nature (as in the case of North Sea oil), or even the monopoly earnings of public enterprises (such as the telecommunications system and the commercial value of the electromagnetic spectrum), revenue without work and ongoing modernization investment tends to sap the productive powers of the passive rentier. Historical studies, novels and films have described how the phenomenon of inherited wealth tends to cripple heirs, who then dissipate the family fortune. And conversely, history is filled with examples of tribute-paying regions that generated economic surpluses by building up their own productive powers to a point where this enabled them to overtake their former imperial masters. The history of the Netherlands under Spanish oppression is one example – and as Dr. Reinert has pointed out, the Dutch in turn became rentiers themselves.

The problem is age-old. Two thousand years ago Pliny the Elder wrote that the two greatest curses of civilization were the discovery of silver and gold. He was referring to their corrupting influence, and to the fact that the possessors of rich mineral wealth tended to be conquered and turned into hapless suppliers of these metals to outsiders. Throughout history the economies that have risen to dominant positions have been those “downstream” that have worked up raw materials into finished products, not the regions that that originally were endowed with natural wealth. Pliny’s statement may have been rhetorical hyperbole, but perhaps one should now add oil and gas to the list of natural wealth that ends up economically polarizing and ultimately impoverishing populations in regions rich in subsoil resources.

It seems ironic that subsoil resources and natural monopolies that belong in principle to the people as a whole should be turned into a lever to render Norwegian labor and capital uneconomic by pricing them out of world markets. Selling the North Sea oil would create an even stronger capital inflow into the krone than the sale of the oil itself. The sales proceeds would increase the exchange rate so sharply as to render Norway’s export industries, tourist industry and other services uncompetitive. Is it worth doing this in order to pursue the mainly ideological goal of privatizing Norway’s natural resource rent?

The objective should be to transform natural wealth, nature’s gift, into manmade capital. As long as these enterprises are kept in the public domain, they may serve as a source of fiscal revenue that frees governments from the need to tax tangible capital investment, labor and its investment in education and other “human capital” formation.


At the broadest level of policy-making, one may ask what an economy gains by running a balance-of-payments surplus in today’s world. Traditionally the objective was to build up savings, in the form of gold, an asset held in the central bank to back the money issued to expand production and new investment, to maintain employment, and for many centuries to sustain the expenses of foreign wars. Accumulations of gold reserves enabled nations to stay out of foreign debt, and hence to remain free of interest payments to foreigners. For debtor countries, such payments threatened to lead to currency depreciation, and hence to lower terms of trade for the economy’s labor vis-à-vis that of other countries.

But the world has changed since the U.S. Treasury went off gold in 1971. Today’s central bank savings are built up in the form of dollar reserves that take the form of U.S. Government debt (Treasury bills and bonds). As economies build up their reserves to back their own rising trade and investment levels, the volume of U.S. Treasury bonds held by central banks has grown so large that American citizens no longer need to finance their own national debt. The growth in debt is financed exclusively by foreigners, led by the central banks of Japan, China and Taiwan.

American economic officials have won the hearts and minds of foreign leaders to support this financially U.S.-centered world by a concerted campaign using think tanks, diplomatic peer pressure and academic endorsement, backed by carrot-and-stick diplomacy. In the aftermath of the 1972 oil-and-grain crisis, in which prices for both commodities were quadrupled following America’s withdrawal from the London Gold Pool, the Trilateral Commission was formed to co-opt Japanese, European and Near Eastern political figures to advocate what has become a free ride for the U.S. economy. The U.S. objective was to make its Treasury bonds the vehicle for the world’s excess savings by warding off a return to gold as the basis of central bank monetary reserves. The ensuing Treasury-bill standard has enabled the United States to reduce taxes for its own economy – its businesses, and especially its wealthiest personal tax brackets – and to raise the money for spending by borrowing, mainly from foreign central banks.

Unlike the case with other nations, this government borrowing did not siphon liquidity out of the economy, for the buyers were foreign central banks that needed these bonds as a means of holding their reserves. Treasury bonds thus replaced gold reserves. (The IMF’s Special Drawing Rights were issued on the basis of these bonds, and IMF proceeds as well as World Bank working capital were invested in them.)

The United States benefited disproportionately from this arrangement. Americans were able to invest their savings in business and in the purchase of tangible assets rather than finance the government deficit. There was no “crowding out” of the private sector. Property values soared, along with stock and bond prices after 1980. This rise in security and real estate prices attracted yet more money from Europe and Japan, fueling a self-feeding American affluence.

The more non-U.S. savings are invested in the U.S. financial markets – and the more foreign central banks use their foreign exchange reserves to buy U.S. Treasury bonds – the more the U.S. dollar rises against the euro, the yen, the pound sterling and other foreign currencies. This provides global investors with a foreign-exchange gain on their balance sheets over and above the dollar rise in their stock and bond holdings. Many European and OPEC investors have made money shifting their savings into the U.S. stock and bond markets, doing better on paper than they would have done in their own domestic markets.

Meanwhile, the U.S. economy has obtained a low-interest supply of funds via the world monetary system. This liquidity has inflated financial markets, enabling buyers to bid up bond and stock prices as the inflow of foreign funds keeps U.S. interest rates down. A substantial block of this money has been made available to private U.S. companies to buy foreign firms and the public assets that have been privatized by governments throughout the world since 1980. The world’s central bank savings thus find their counterpart in U.S. purchases of fuel and mineral wealth, telephone systems and other public utilities from debtor-country governments. These governments are forced to borrow to sustain their own capital transfers (including capital flight) and their inability to balance their budgets by taxing their own populations.

The artificially created demand for U.S. securities and currency as the vehicle for central bank saving has become a major factor in the relative strength of the dollar vs. the euro, yen and other non-dollar currencies, providing the U.S. economy with a free ride.

What is important to realize is the extent to which U.S. diplomats have blocked other economies from investing in key U.S. sectors, while demanding free access for American investors abroad. To explain the background, I would like to draw attention once again to the situation as it stood after the United States quadrupled its grain prices in 1972, to see the conflicting national interests at work.

OPEC insisted on charging higher oil prices so as to maintain price parity for their oil sales with U.S. food exports. Viewed in retrospect, the “oil shock” was their way of maintaining parity for their own terms of trade. (I provide the relevant documentation in my 1978 book, Global Fracture: The New International Economic Order).

U.S. oil companies were not unhappy to see this OPEC action, but naturally wanted to place the blame on Arab oil sheiks, not on themselves. The U.S. Treasury was not concerned so much with the higher prices that consumers were paying as with what this meant for the U.S. balance of payments and the strength of the U.S. dollar as the world’s key currency.

In 1972 I left academia to join Herman Kahn at the Hudson Institute, a policy think tank mainly for the U.S. Government but also for major U.S. corporations and a few foreign governments (mainly in Asia). Partly because I had worked for Continental Oil Company after completing my balance-of-payments analysis on Wall Street for Chase Manhattan and, subsequently, the accounting firm of Arthur Andersen, one of my major contracts was from the White House to examine the balance of payments of the oil. Kahn and I went down to Washington to meet with the Treasury’s Under-Secretary for International Affairs, Jack Bennett. He was an old acquaintance from New York, when he was Treasurer for Exxon.

Mr. Bennett was adamant that Sheik Yamani and the OPEC countries could charge as much as they wanted for oil, as long as this did not adversely affect the U.S. balance of payments. But however much they charged, they were to keep all their savings in the form of loans to the U.S. Government, that is, in Treasury bonds.

OPEC sheiks and other investors initially wanted to use their money to buy tangible U.S. assets. They wanted to buy leading U.S. companies, as well as forests, oil properties and key industries. Henry Kissinger and other U.S. officials replied that such behavior would be viewed as an act of war, at least economic war. It was made clear to the Near East, Japan and even to Europe that holders of surplus dollars would be permitted to buy stocks in major U.S. companies, and even minority ownership, but under no conditions could buy key U.S. industries.

The amazing thing is that foreign leaders acquiesced. They followed U.S. advice. The world has now become familiar with Japan’s disastrous venture into the U.S. real estate market. Instead of buying key U.S. industries, the Japanese concentrated on trophies such as Rockefeller Center. They lost their shirts, and ended up walking away from many of their investments, losing tens of billions of dollars in the process.

At least OPEC’s private investors and government embezzlers were more successful in channeling their surplus dollars into the U.S. stock market, a process that has not abated even today, nearly thirty years later. Individuals got rich, but they did so by funding the U.S. financial markets and banks, and hence indirectly U.S. purchases of foreign companies. Most important since about 1980, American affluence has been recycled abroad to buy up the national patrimony of foreign economies that is being privatized, largely to pay off the foreign debts of countries that have become dependent on the creditor nations (who simultaneously are the food-surplus, high-technology economies).

The policy question for Norway concerns how a further influx of dollars in payment for its oil reserves or telephone system will benefit the nation over time. In a nutshell, what will Norway do with the money? If it converts its dollar receipts from privatization into kroner, the currency will rise so high as to price many Norwegian exports (of tourist services as well as manufactured goods) out of world markets. On the other hand, if Norges Bank keeps the foreign (mainly dollar) inflow in foreign currency, this will take the form of loans to the U.S. Treasury.

Such a policy would be justified only if holding U.S. Government bonds was a higher-yielding investment, over time, than extracting oil and operating the public telephone system.

Obviously, foreigners do not believe this to be the case. If they did, they would use their money to buy U.S. Treasury bonds instead of Norway’s hitherto public assets. Thus, selling off these assets means that Norway is giving foreign economies the initiative, letting their investors making the choice rather than starting by discussing what is best for the Norwegian economy over time.

How privatized companies may avoid tax liability

There is a popular assumption that the Norwegian government will receive a flow of tax revenue in addition to the initial capital payment for selling its oil and other public enterprises. But a look at how the global oil industry works should raise some red flags regarding this assumption.

Almost no government that does not directly own its own national oil reserves has a clear understanding of the net balance-of-payments effect of oil operations. The exportation of oil has so many linked transactions across the current (trade and service) account and capital account (investment and its associated flows of earnings or payments remittances) that only an inside view can provide the understanding to re-combine the mass of seemingly unrelated transacrtions.

Such an occasion was afforded in 1965, when the U.S. balance of payments was plunged into deficit by the Vietnam War. The Johnson Administration imposed capital controls in February 1965. Foreign investment and bank lending were limited to only a 5 percent annual growth from the December 1964 level.

The oil industry complained that this was economically suicidal over the relatively short term, to say nothing of the long-term sacrifice of future revenue inflows. But when they tried to make their case, they found the Treasury and Congress simply did not believe them. After all, the oil industry had not reported taxable profits for many years. The industry seemed almost to be a charitable operation, investing billions of dollars in exploring and drilling for oil, building refineries and putting together vast shipping networks, all without making a profit. (It did, however, pay substantial dividends to its stockholders.) The oil industry was as profitless as the real estate industry. So it was hardly surprising that President Johnson did not choose to make an exception to his balance-of-payments controls for the oil industry.

The industry went to its major bank spokesman, David Rockefeller at the Chase Manhattan Bank, and asked him to prepare a study of oil’s impact on the U.S. balance of payments. They promised the co-operation of all the oil majors, that is, the major U.S. international oil companies: Standard Oil of New Jersey (now Exxon), Socony, Socal, Ashland Oil, Arco and even companies that had long stood outside of the old Standard Oil group, such as Texaco.

I was Chase’s balance-of-payments analyst, and Mr. Rockefeller and the oil industry executives placed me in charge of the study. My immediate task was to design a statistical questionnaire to send to the companies to report every transaction that involved international payments, including international transactions that did not actually involve payments. One of the first things I discovered was that many U.S. international oil industry transactions did not involve actual foreign-exchange dealings at all. For instance, U.S. parent companies bought drilling equipment from domestic manufacturers such as Hughes Tool Company, and shipped this equipment abroad to their foreign branches to use in their oil extraction. The U.S. balance of payments statistics reported this as an “export,” but the U.S. economy never received foreign payment. The export was balanced by an equal “investment outflow,” so that the transaction washed out. But the trade account was credited, and the capital account debited, as if actual offsetting payments were involved.

The U.S. economy reported heavy oil imports, but 100 percent of these imports were by U.S. companies from their own foreign branches. My statistics showed that in balance of payments terms, the U.S. economy only paid about 40 cents on the dollar for these imports. This is because the import price was offset by the profits made by these companies, and also by the many U.S. inputs made to oil production (in the form of equipment, salaries paid to U.S. executives, interest and other charges paid to U.S. firms, transport payments to international shippers under U.S. control, and so forth). Thus, the trade accounts gave the illusion that the U.S. economy was falling more deeply into deficit, without any indication of how much money came back in on capita” account in the form of earnings on these imports.

I found that about 80 percent of the oil industry’s reported balance-of-payments investment “outflow” never left the U.S. economy at all. The money was merely transferred from one U.S. bank account to another, having no balance-of-payments impact.

What was critical was how much money was “earned” on oil, especially in view of the fact that statistically speaking, the oil industry didn’t appear to earn any money at all. This general problem will be of critical importance to Norway in evaluating its policy options from oil.

Puzzled by what the statistics seemed to indicate – a kind of parallel universe in which nobody in their right mind ever would invest a penny in oil production or refining – I paid a visit to the treasurer of Exxon, Jack Bennett, and asked him just where the profits were made. Were they made at the oil production end, or “downstream” in the refining and marketing operations? And in what countries were they made?

He told me that the profits were made right there in his office. I asked him what he meant, and he explained that his job as treasurer was to decide where global earnings would be taxed at the lowest rate. This turned out to be in two dollar-area tax havens, Liberia and Panama, which also had conveniently set up “flags of convenience” for international shippers. Oil shippers in particular.

To make a long story short, U.S. oil companies sold their low-cost oil produced in Saudi Arabia and other Near Eastern countries, as well as in Venezuela and elsewhere in Latin America, to their shipping affiliates in Liberia and Panama. In the U.S. balance-of-payments statistics these transactions showed up under the distinct category of “international” rather than any particular country. This meant that Saudi Arabian and other OPEC oil ministers could not look at the U.S. statistics and say, “Look how much you are valuing the oil produced in our country. We’re going to tax you on it.” The transactions seemed invisible to the untrained outside investigator.

The shipping affiliates turned around and sold the oil at a very high price to refineries in Europe and North America (including offshore refineries in the Caribbean). The transfer price was so highthat despite the fact that U.S. oil majors had invested billions and billions of dollars in European refineries, these refineries did not show any profit at all, and hence were not liable to pay any taxes to European governments!

The profits nominally were made in Liberia, Panama and a few other tax havens with their own flags of convenience. And conveniently, these havens did not have national currencies of their own to complicate matters and introduce any degree of risk. They used the U.S. dollar. The U.S. oil companies used foreign branches of U.S. banks in these countries, which coordinated the transfer payments ranging from production through the shipping, refining and distribution stages through their head office, under the direction of the oil companies’ head offices.

The companies duly assigned all the profits from their billions of dollars of oil-well and refinery investment to their shipping affiliates, and reported these profits in the tax havens in which these “international” affiliates were registered. Of course, no taxes were owed on them. In this way the U.S. oil industry managed to avoid paying income taxes either in Europe or America.

OPEC countries didn’t levy an income tax. (If they had, they wouldn’t have collected a penny.) They took royalties, at a fixed share of the value of the crude oil extracted. (At that time, I believe, the typical share was about one sixth.)

The bottom line, I found from my statistics, was that the average dollar of U.S. oil company foreign investment was returned to the United States in balance-of-payments terms in only 18 months! It was not returned simply as profits, but on a balance-of-payments basis. A large portion of the reported foreign investment was defrayed in the form of domestic U.S. expenditure on equipment, management and dollar-denominated shipping. A large proportion of the oil industry’s revenue was not taken as earnings (“profits”), but was expensed as payments to U.S. suppliers, managers, shipping affiliates, as interest to money or materials “lent” by parent company financial affiliates domiciled in the same group of offshore banking centers where their shipping and tax-avoidance operations were registered.

Prior to this time the oil industry had “cried poverty” as a political tactic to avoid taxation in the United States. But for the first time it found its interest to lie in explaining to Congressional policy makers, and those in the U.S. Treasury and elsewhere in the Executive Branch, just how remunerative oil industry investment really was. Copies of my report and its methodological appendix were printed by Chase Manhattan and placed on the desks of every senator and representative by the oil industry lobbyists in Washington.

The report had its intended effect. The Johnson Administration saw the light and exempted the oil industry from the national overseas investment limits imposed by the President’s Balance-of-Payments Program.