-------------------------------------------------------- http://www.nytimes.com/2005/10/16/business/worldbusiness/16view.html October 16, 2005 Economic View Waiting for the Petrodollars to Trickle Down By EDUARDO PORTER REMEMBER petrodollars, those oil riches that sloshed around the world after the price of crude soared in the 1970's and 1980's? Well, they're back. As oil prices have charged ahead, the United States and other oil importers have transferred hundreds of billions of dollars to oil exporting countries like Saudi Arabia and Venezuela. What these countries do with their new wealth could have substantial implications for the American economy. The petrodollar stash is enormous. According to estimates by the International Monetary Fund, oil export revenues of Middle Eastern countries will reach nearly $400 billion this year. On an inflation-adjusted basis, that is double the amount of those revenues in 1980, when oil prices surged after Ayatollah Khomeini came to power in Iran, and more than three times the figure of 1974, when the price of crude spiked after the Arab oil embargo. This time around, it's not just Arab countries that are making a lot of money from oil, but also countries like Mexico, Russia and Canada. Ted Carmichael, chief Canadian economist at J. P. Morgan in Toronto, estimates that the 19 big energy exporters will reap $781 billion this year, compared with $549 billion in 2004 and $324 billion in 2002. What ultimately happens to this windfall - whether oil exporters decide to spend it or salt it away - will help determine how the pain caused by expensive energy is distributed throughout the American economy and the rest of the world. At first glance, the implications are straightforward. If energy exporters spent the bulk of their newfound treasure on things like new oil exploration gear and fleets of limousines, for instance, much of the money would make a round trip, financing imports from the industrialized oil importing countries from which it came. If, on the other hand, oil exporters saved their stash by, say, building up reserves invested in United States Treasury bonds, they would be effectively draining the money away from investment and consumption in the industrial world, delivering a potentially big blow to demand and employment. But there's a twist to the story. Pumping tens of billions of dollars in savings by oil exporters into American government bonds and similar assets would help keep the lid on interest rates in the United States, adding support for the housing market and bolstering consumer spending by already over-stretched Americans. "Oil exporters could spend the money directly or help others increase spending, for example, by giving loans," said Hossein Samiei, head of the commodities unit in the I.M.F.'s research department. So far, oil exporting countries have set much of the money aside. Russia's current account surplus - the broadest measure of its balance of trade - will swell to $102 billion from $60 billion last year, the monetary fund says. The surplus in Middle Eastern countries will rise to $218 billion this year from $57 billion in 2003, according to the I.M.F., almost double China's daunting surplus. Economists reckon that this pile of savings has softened the impact of higher oil prices in the industrialized world, helping keep interest rates low. According to the I.M.F., more expensive energy will have only a modest impact on global growth, which should slow slightly to 4.3 percent this year from 5.1 percent in 2004. Still, the situation is fluid. The monetary fund has said that Middle Eastern countries seem more cautious than in the 1970's, when they spent lavishly on public works and made many ultimately unproductive investments. But there are other profligate spenders among oil exporters, places like Venezuela and Nigeria. "Oil exporters have a lot of useful ways to spend the money," said Kenneth Rogoff, a professor of public policy at Harvard University and a former chief economist at the I.M.F. And the Middle East's apparent frugality may just reflect the difficulty of spending such a large windfall quickly. Michael Dooley, an international economist who works as an adviser for Deutsche Bank , said: "In the past, what has happened is that when oil prices stabilize, oil producers find ways of spending money quickly. There is a lag of a couple of years between the increase in revenues and consumption." Some of the money is already being consumed. For instance, while exports from OPEC members to the United States increased $20 billion in the first seven months of the year compared to 2004, American exports to the nations of OPEC, the Organization of the Petroleum Exporting Countries, grew $6.5 billion in the same period. As more of the oil money is spent, the American economy may be left in a precarious position. Maurice Obstfeld, a professor of economics at the University of California, Berkeley, said, "If oil exporters lower their current account surplus, we will have to reduce our current account deficit." This dynamic has a positive side. American exporters will get vibrant markets for their goods and services. But the nasty part is that a reduction in savings will mean higher interest rates. IN the 1970's, Middle Eastern oil kingdoms squandered much of their new wealth. Much of what they saved was recycled via London and New York banks into sovereign loans to Latin American countries, which generally misspent the money, too. This set the stage for a string of financial crises in the 1980's when interest rates rose sharply as monetary policy was tightened to stave off inflation. "Last time the money was recycled, it was considered a good thing," Jeffrey Frankel, a professor of economics at Harvard, said. "It gave us a debt crisis a few years later." This time around, the financial world looks mostly like a safer place. Developing countries in Latin America and beyond are managing their accounts much more prudently. But as the new petrodollars slosh through the global financial system, there remain some weak links, which are likely to suffer after the oil money reaches them. Debt-engorged American consumers and their expensive houses come to mind. 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