Petrodollar recycling
Encyclopedia
Petrodollar recycling refers to the phenomenon of major oil-producing states mainly from OPEC
earning more money from the export of oil than they could usefully invest in their own economies. It was a phenomenon of the late 1970s and early 1980s with the peak years for petrodollar surpluses.
During this period, states such as Saudi Arabia
, Kuwait
and Qatar
amassed large surpluses of petrodollar
s which they could not invest in their own countries. This was due to small populations or being at early stages of industrialization. These petrodollar surpluses can be defined as net US dollars earned by those nations which were in excess of the internal development needs of those nations.
These surpluses could be profitably invested in other nations. Alternatively, the world economy would have contracted if that money was withdrawn from the world economy while the exporting nations needed to be able to profitably invest to preserve their wealth for the future.
While recycling petrodollars reduced the recessionary impact of the oil crisis, it caused problems especially for oil-importing countries that were paying much greater prices for oil and incurring debts. The International Monetary Fund
(IMF) estimates that the foreign debts of 100 developing countries increased by 150% between 1973 and 1977. Johannes Witteveen, the Managing Director of the IMF, said in 1974, "the international monetary system is facing its most difficult period since the 1930s."
From 1974 to the end of 1981, total current account surpluses for all members of OPEC amounted to $450.5 billion. Ninety percent of this surplus was accumulated by the Arab countries of the Persian Gulf and Libya with Iran also accumulating oil surpluses prior to the revolution in 1979.
The petrodollars were invested by commercial banks in the US and Europe. As the recessionary condition of the world economy made investment in corporations less attractive, bankers lent the money to developing countries especially in Central and South America such as Brazil, Argentina and Mexico as well as other developing countries like Turkey. The 1973 OPEC crisis had created a vast dollar shortage in these countries, however, they still needed to finance their oil imports. In 1977, Turkish Prime Minister Suleyman Demirel
summarized this shortage as "We're even in need of 70 cent." In subsequent decades, some of these nations have had difficulty in repaying these debts, leading to charges by anti-globalisation activists that it was a form of neocolonialism
. This process also contributed to the growth of the Euromoney market as a rival to US monetary markets.
In an alternative view of petrodollar recycling, based on balance of payments and banking data from the 1970s and 1980s, David Spiro shows that a large portion of Arab petrodollars were invested directly in US government securities, and in the financial markets of the largest five economies. OPEC countries were net lenders to commercial banks, but this was not the primary channel for petrodollar recycling. (See David E. Spiro, The Hidden Hand Of American Hegemony (Cornell University Press, 1999).
Arab oil-exporting countries also used their surpluses to fund foreign aid programs, with Arab nations being one of the largest donors of foreign aid since 1973. The IMF also introduced a new lending facility during this period called the Oil Facility. Funded by oil-exporting nations and other lenders, it was available to nations suffering from problems with their Balance of trade
due to the rise in oil prices.
OPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...
earning more money from the export of oil than they could usefully invest in their own economies. It was a phenomenon of the late 1970s and early 1980s with the peak years for petrodollar surpluses.
During this period, states such as Saudi Arabia
Saudi Arabia
The Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...
, Kuwait
Kuwait
The State of Kuwait is a sovereign Arab state situated in the north-east of the Arabian Peninsula in Western Asia. It is bordered by Saudi Arabia to the south at Khafji, and Iraq to the north at Basra. It lies on the north-western shore of the Persian Gulf. The name Kuwait is derived from the...
and Qatar
Qatar
Qatar , also known as the State of Qatar or locally Dawlat Qaṭar, is a sovereign Arab state, located in the Middle East, occupying the small Qatar Peninsula on the northeasterly coast of the much larger Arabian Peninsula. Its sole land border is with Saudi Arabia to the south, with the rest of its...
amassed large surpluses of petrodollar
Petrodollar
A petrodollar is a United States dollar earned by a country through the sale of petroleum. The term was coined by Ibrahim Oweiss, a professor of economics at Georgetown University, in 1973...
s which they could not invest in their own countries. This was due to small populations or being at early stages of industrialization. These petrodollar surpluses can be defined as net US dollars earned by those nations which were in excess of the internal development needs of those nations.
These surpluses could be profitably invested in other nations. Alternatively, the world economy would have contracted if that money was withdrawn from the world economy while the exporting nations needed to be able to profitably invest to preserve their wealth for the future.
While recycling petrodollars reduced the recessionary impact of the oil crisis, it caused problems especially for oil-importing countries that were paying much greater prices for oil and incurring debts. The International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) estimates that the foreign debts of 100 developing countries increased by 150% between 1973 and 1977. Johannes Witteveen, the Managing Director of the IMF, said in 1974, "the international monetary system is facing its most difficult period since the 1930s."
From 1974 to the end of 1981, total current account surpluses for all members of OPEC amounted to $450.5 billion. Ninety percent of this surplus was accumulated by the Arab countries of the Persian Gulf and Libya with Iran also accumulating oil surpluses prior to the revolution in 1979.
The petrodollars were invested by commercial banks in the US and Europe. As the recessionary condition of the world economy made investment in corporations less attractive, bankers lent the money to developing countries especially in Central and South America such as Brazil, Argentina and Mexico as well as other developing countries like Turkey. The 1973 OPEC crisis had created a vast dollar shortage in these countries, however, they still needed to finance their oil imports. In 1977, Turkish Prime Minister Suleyman Demirel
Süleyman Demirel
Sami Süleyman Gündoğdu Demirel, better known as Süleyman Demirel , is a Turkish politician who served as Prime Minister seven times and was the ninth President of Turkey.-Life:Demirel was born in İslamköy, a town in Isparta Province...
summarized this shortage as "We're even in need of 70 cent." In subsequent decades, some of these nations have had difficulty in repaying these debts, leading to charges by anti-globalisation activists that it was a form of neocolonialism
Neocolonialism
Neocolonialism is the practice of using capitalism, globalization, and cultural forces to control a country in lieu of direct military or political control...
. This process also contributed to the growth of the Euromoney market as a rival to US monetary markets.
In an alternative view of petrodollar recycling, based on balance of payments and banking data from the 1970s and 1980s, David Spiro shows that a large portion of Arab petrodollars were invested directly in US government securities, and in the financial markets of the largest five economies. OPEC countries were net lenders to commercial banks, but this was not the primary channel for petrodollar recycling. (See David E. Spiro, The Hidden Hand Of American Hegemony (Cornell University Press, 1999).
Arab oil-exporting countries also used their surpluses to fund foreign aid programs, with Arab nations being one of the largest donors of foreign aid since 1973. The IMF also introduced a new lending facility during this period called the Oil Facility. Funded by oil-exporting nations and other lenders, it was available to nations suffering from problems with their Balance of trade
Balance of trade
The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...
due to the rise in oil prices.
See also
- PetrodollarPetrodollarA petrodollar is a United States dollar earned by a country through the sale of petroleum. The term was coined by Ibrahim Oweiss, a professor of economics at Georgetown University, in 1973...
- Petroeuro
- Petroruble
- Petrodollar warfarePetrodollar warfareThe phrase petrodollar warfare refers to a hypothesis that one of the unknown, driving forces of United States foreign policy over recent decades has been the status of the United States dollar as the world's dominant reserve currency and as the currency in which oil is priced. The term was coined...
- Monetary hegemonyMonetary hegemonyMonetary hegemony is an economic and political phenomenon in which a single state has decisive influence over the functions of the international monetary system...
External links
- Petrodollar Problem at International Monetary FundInternational Monetary FundThe International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
- Recycling Petrodollars at International Monetary FundInternational Monetary FundThe International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...