Finance : petrodollars : insider perspective


Richard Moore


October 16, 2005 
Economic View 

Waiting for the Petrodollars to Trickle Down 

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

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.

Copyright 2005 The New York Times Company 

"Apocalypse Now and the Brave New World"

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