The loot is now smaller, and oil producers will invest more in their own countries, or diversify risks
High energy prices, triggered by the invasion of Ukraine, will see OPEC earn $907 billion from oil exports this year, according to the US Energy Information Administration (EIA), up from $577 billion. average since 2000. Saudi Arabia, the United Arab Emirates, Qatar and Kuwait will collectively have a current account surplus of $409 billion, according to Capital Economics: almost three times that of 2021. Russia’s current account surplus so far in 2022 will also It has tripled in year-on-year terms.
In previous petrodollar booms, energy producers have recycled their profits into the Western financial system. Arabia, for example, ran a current account surplus of $160 billion in 1974-82, according to economist David Lubin’s book The dance of the trillions, which went almost entirely to the Eurodollar market, a term that designates deposits denominated in dollars that are held outside the US, for example in European banks or in the European branches of US banks. The entities, in turn, lent those deposits to Argentina, Chile and other countries in an emerging debt boom.
When energy prices rose again in the early 21st century, fossil fuel producers funneled the proceeds into Western financial assets, through central bank and sovereign wealth fund reserves. The Middle Eastern oil exporters and Russia together increased their holdings of US debt and equity by nearly $500 billion in 2003-08, five times more than before, and a figure second only to China and the Cayman Islands in absolute terms. . This bolstered demand for US stocks and bonds, while oil exporters and tycoons also splurged on European soccer clubs and department stores.
These financial flows, known as petrodollar recycling, mean that the money Westerners spend on fuel ends up flowing back into their economies through financial investments from energy producers. It’s happening again. The Saudi Public Investment Fund (PIF) has opened new offices in London and New York, and this summer it launched a share purchase in the US market, acquiring shares in Alphabet and Microsoft. The Abu Dhabi Investment Authority has recently hired Drew Goldman, a New York-based Deutsche Bank expert, to handle its real estate investments.
But the loot may disappoint Western financiers with long memories. First, it is smaller in relative terms. Adjusted for inflation, OPEC revenue was higher in 2010-14 than it will be this year, according to EIA data. Saudi Arabia, the UAE, Kuwait and Qatar’s projected current account surplus in 2022 will be equal to 1.6% of their GDP, up from 2.5% in 1974, we calculate using data from Capital Economics, the Fed and the Bank from England.
Second, producers can choose to save part of their profits elsewhere. The sanctions prevent Russia, for example, from investing in US and European financial assets, even if it wanted to. And the West’s decision to freeze Moscow’s foreign exchange reserves may encourage the Gulf countries to spread their bets, lest they one day find themselves in Russia’s place. Global central bank foreign exchange reserves denominated in dollars and euros had already fallen to 79% of the total in March 2022, down from 85% six years earlier, according to the IMF.
Finally, OPEC countries face huge domestic investment needs to reduce their reliance on fossil fuel sales as the world moves toward renewables. In the case of Saudi Arabia, that could mean spending more on education to boost its service sector, or developing the non-oil part of its manufacturing industry, such as solar power.
The kingdom’s human rights record has undermined its long-awaited foreign direct investment boom, but energy gains could serve as a proxy. For the second year in a row, the IMF expects the PIF to make more local investments this year than the central Saudi government. Finance Minister Mohammed Al-Jadaan said in May that the country would spend its 2022 surplus where it would have “the greatest positive impact on the economy,” including the National Development Fund, a vehicle designed to help stimulate investment. from the private sector.
Of course, Riyadh may not invest its surplus wisely. If anything, it would mean that Westerners would miss out on some of the spoils from the new petrodollar boom. Banks, buying barons, and high-end real estate agents may regret it, but not everyone should.
Previous episodes of petrodollar recycling coincided with damaging asset bubbles. The Latin American lending boom of the 1970s quickly turned into the Latin American debt crisis of the 1980s, with many countries unable to service their foreign loans. Demand for petrodollars helped keep US borrowing costs low in the run-up to 2008, even as the Fed raised rates, possibly contributing to the pre-crisis glut. The lesson is that huge financial flows, while enriching Wall Street and City brokers, often also destabilize the economy. After all, a more subdued boom in the petrodollar might not be such a bad thing.