petrodollars - Whither?(what OPEC members will do with increased profits)(Brief
Article) Economist (US)
v357, n8196 (Nov 11, 2000):95.
Pub type: Brief Article
[Long Display]
COPYRIGHT 2000 Economist Newspaper Ltd.
WHENEVER a big lottery winner appears on
television, the first question he is asked is, "How are you going to spend
it?" It is surprising that few people have asked the same of the Organisation
of Petroleum Exporting Countries (OPEC)in the past few months. Having won the
world's latest commodity lottery, through a tripling of oil prices since the
end of 1998, OPEC members are salting away huge new surpluses. And what they
are choosing to do with them could have a big impact on global markets.
Because oil is traded for dollars, rising oil
prices can, by themselves, increase demand for the American currency: it
simply takes more dollars to perform all those
high-priced transactions. But what the recipients of these extra
"petrodollars" have been doing with them is what
counts most.
In OPEC's case, governments have used the money to
pay off dollar- denominated debt, much of it incurred maintaining
the huge capital projects that were undertaken
with the last big wave of petrodollar surpluses. And it has also used the
money to bump up foreign-currency reserves, almost
all of which are held in the form of American Treasury bonds.
Private firms in OPEC countries have funnelled
their money into American and European banks, as well as into a small
amount of imports. But all in all, most of the
funds have stayed as they began--as greenbacks. And with American
Treasury bond prices falling now that the markets
believe the Fed is no longer about to cut interest rates, OPEC seems
unlikely to end its bond-buying spree for some
time.
That is not good news for the troubled euro.
Petrodollars may not be the most powerful force moving the single
European currency, but the change in OPEC's
holdings of US Treasuries during the past year has been of much the same
magnitude as the European Central Bank's
interventions in support of the euro. If OPEC members continue to convert
their petrodollars into American Treasury bonds at
the rate of $1 billion a month, the ECB could be kept busy.
What happens to petrodollars that end up in banks'
coffers is of particular interest to emerging economies that do not
export oil. During the last extended period of
petrodollar surpluses, in the 1970s, western banks lent their new deposits to
developing countries, most of them in Latin
America and Asia. This time, the surpluses have not yet reached a size at
which those countries will notice the difference.
Recovering Asian economies, for the moment, are relying more on bond
issues and funds from private portfolio investment
than on bank loans.
Janet Henry, who monitors oil producers' finances
for HSBC, says that oil prices would have to rise to some $70 a barrel
before symptoms similar to those of the 1970s--big
movements in currencies and big loans to the developing
world--began to appear. And not even a prolonged
conflict in the Middle East may bring about such an inflated price. The
man who coined the term "petrodollar", Ibrahim
Oweiss of Georgetown University, doubts that the oil price will continue
to rise. A veteran of the Egyptian cabinet in the
years of huge petrodollar surpluses between 1974 and 1980, Mr Oweiss
maintains that oil prices will fall because the
world actually has an oversupply of the black stuff. The real problems, he
says, are a shortage of storage capacity and the
refineries' inability to deal with big volumes. Once those parts of the
supply chain catch up, prices should drop.
Until then, the winnings from the oil lottery will
continue to affect world markets. For one thing, with credit tight in
America as corporate profits there tumble, they
could add some welcome liquidity to America's thirsty markets.
WebRubric Oil-producing countries are racking up
massive, dollar- denominated trade surpluses. Where are these
dollars going?
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