Petrodollar recycling

Fluctuations of OPEC net oil export revenues since 1972, showing elevated inflation-adjusted levels during 1974–1981 and 2005–2014^[1][2]

Petrodollar recycling is the international deployment of a country's revenue from petroleum exports. It generally refers to the phenomenon of major petroleum-exporting nations, mainly the OPEC members and Russia, earning more money from the export of crude oil than they could feasibly invest in their own economies. The resulting global interdependencies and financial flows, from oil producers back to oil consumers, can reach a scale of hundreds of billions of US dollars per year across a variety of currencies, heavily influenced by government-level decisions regarding international investment and aid. The phenomenon is most pronounced during periods when the price of oil is historically high.^[3] The first major petrodollar wave (1974–1981) resulted in more financial complications than the second (2005–2014).

Capital flows

Background

Especially during the years 1974–1981 and 2005–2014, oil exporters amassed large surpluses of "petrodollars" from historically expensive oil.^[1][2][4] (The word has been credited alternately to Egyptian-American economist Ibrahim Oweiss and to former US Secretary of Commerce Peter G. Peterson, both in 1973.)^[5][6] These petrodollar surpluses could be defined as net US dollar-equivalents earned from the export of petroleum, in excess of the internal development needs of the exporting nations.^[7] The surpluses could not be efficiently invested in their own economies, due to small populations or being at early stages of industrialization; but the surpluses could be usefully invested in other nations, or spent on imports such as construction supplies, defense systems, and consumer products. Alternatively, global economic growth would have suffered if that money was withdrawn from the world economy, while the oil-exporting nations needed to be able to invest profitably to raise their long-term standard of living.^[8]

1974–1981 period

While petrodollar recycling reduced the short-term recessionary impact of the 1973 oil crisis, it caused problems especially for oil-importing countries that were paying much higher prices for oil, and incurring long-term debts. The International Monetary Fund (IMF) estimated that the foreign debts of 100 developing countries increased by 150% between 1973 and 1977, complicated further by a worldwide shift to floating exchange rates. Johan Witteveen, the Managing Director of the IMF, said in 1974: "The international monetary system is facing its most difficult period since the 1930s."^[9] The IMF administered a new lending program during 1974–1976 called the Oil Facility. Funded by oil-exporting nations and other lenders, it was available to nations suffering from acute problems with their balance of trade due to the rise in oil prices.^[10]

From 1974 through 1981, the total current account surplus for all members of OPEC amounted to US$450 billion, without scaling-up for the subsequent decades of inflation. Ninety percent of this surplus was accumulated by the Arab countries of the Persian Gulf and Libya, with Iran also accumulating significant oil surpluses prior to the Iranian Revolution in 1979.^[7]

Large volumes of Arab petrodollars were invested directly in US Treasury securities and in other financial markets of the major industrial economies, often directed discreetly by government entities now known as sovereign wealth funds.^[11][12] Many billions of petrodollars were also invested through the major commercial banks of the US and Europe. In fact, the process contributed to the growth of the Eurodollar market as a less-regulated rival to US monetary markets. As the recessionary condition of the world economy made investment in corporations less attractive, bankers lent the money directly to the governments of developing countries, especially in Latin America such as Brazil and Argentina^[7] as well as other major developing nations like Turkey. The 1973 oil crisis had created a vast dollar shortage in these countries; however, they still needed to finance their imports of oil and machinery. In early 1977, when Turkey stopped heating its prime minister's office, opposition leader Suleyman Demirel famously described the shortage as: "Turkey is in need of 70 cents."^[13] As political journalist William Greider summarized the situation: "Banks collected the deposits of revenue-rich OPEC governments and lent the money to developing nations so they could avoid bankruptcy."^[14] In subsequent decades, many of these developing nations found their accumulated debts to be unpayably large, concluding that it was a form of neocolonialism from which debt relief was the only escape.^[15]

2005–2014 period

Inflation and interest rates surged with oil prices in the 1970s, but not in the 2000s.^[16]

In the 2005–2014 petrodollar wave, financial decision-makers were able to benefit somewhat from the lessons and experiences of the previous cycle. Developing economies generally stayed better balanced than they did in the 1970s, and global inflation and interest rates were much better contained. Oil exporters opted to make most of their investments directly into diverse global markets, and the recycling process was less dependent on Western intermediaries such as international banks and the IMF.^[17][18] Thanks to the historic oil price increases of 2003–2008, OPEC revenues approached an unprecedented US$1 trillion per year in 2008 and 2011–2013.^[2] Norway and Russia also experienced substantial surpluses,^[4] and sovereign wealth funds worldwide amassed US$7 trillion by 2014–2015.^[19] Most of the large exporters had accumulated enough financial reserves to cushion the shock when oil prices fell sharply again from a supply glut in 2014–2016.^[20]

Foreign aid

As an example of "checkbook diplomacy", oil-exporting countries have used part of their petrodollar surpluses to fund foreign aid programs, with certain Arab nations becoming some of the largest donors in the years after 1973,^[7][21] including through the IMF and the OPEC Fund for International Development. Oil exporters have also aided poorer nations indirectly through the personal remittances sent home by tens of millions of foreign workers in the Middle East.^[22] Likewise, high-priced oil allowed the USSR to subsidize the struggling economies of the Soviet bloc for a time, and the loss of petrodollar income during the 1980s oil glut contributed to the bloc's collapse in 1989.^[23] During the 2005–2014 petrodollar wave, OPEC member Venezuela played a similar role for Cuba and other regional allies.^[24]

Gallery of notable examples

These images illustrate the diversity of major petrodollar recycling activities, in roughly chronological order:

• 
  American-built F-15 fighter, one of dozens owned by the Royal Saudi Air Force since 1981^[25][26]
• 
  Harrods department store in London, under Arab ownership since 1985^[27]
• 
  London's Chelsea Football Club, Russian-owned since 2003 through the Sibneft oil fortune^[28][29][30]
• 
  "Oil for doctors" program, with thousands of Cuban physicians anchoring the Venezuelan health system from 2004^[31]
• 
  New York's Chrysler Building, 90% owned by Abu Dhabi Investment Council since 2008^[32]
• 
  Cézanne painting, purchased by the Royal Family of Qatar for more than US$250 million in 2011^[33]
• 
  UAE construction boom during 2003–2014, primarily built by imported foreign workers and contractors^[34]

See also

• Petrocurrency
• Resource curse

References

Further reading

• Clark, William R. (2005). Petrodollar Warfare. New Society Publishers. ISBN 978-0-86571-514-1. 
• Smolyar, Leonid (2006). Petrodollars: Tracking the Flow and Investment of Oil Windfalls (PDF) (B.Sc. thesis). New York University. Archived from the original on April 25, 2012.  CS1 maint: Unfit url (link)
• Staats, Elmer B. (1979). "The U.S.–Saudi Arabian Joint Commission on Economic Cooperation". U.S. Government Accountability Office. Retrieved January 31, 2016.