Petrodollar recycling is the international spending or investment of a country's revenues frompetroleum exports ("petrodollars").[3] It generally refers to the phenomenon of majorpetroleum-exporting states, mainly theOPEC members plus Russia and Norway, earning more money from the export of crude oil than they could efficiently invest in their own economies.[4] The resulting global interdependencies and financial flows, from oil producers back to oil consumers, can reach a scale of hundreds of billions ofU.S. dollars per year – including a wide range of transactions in a variety of currencies, somepegged to the U.S. dollar and some not. These flows are heavily influenced by government-level decisions regarding international investment and aid, with important consequences for bothglobal finance andpetroleum politics.[5] The phenomenon is most pronounced during periods when theprice of oil is historically high.[6]
The term petrodollar was coined in the early 1970s during theoil crisis, and the first major petrodollar surge (1974–1981) resulted in more financial complications than the second (2005–2014).[7]
Especially during the years1974–1981 and2005–2014, oil exporters amassed large surpluses of "petrodollars" from the sale of oil at historically high prices.[1][2][8] (The word has been credited alternately to Egyptian-American economistIbrahim Oweiss and to formerU.S. Secretary of CommercePeter G. Peterson, both in 1973.)[9][10][11] These petrodollar surpluses could be described as net U.S. dollar-equivalents earned from the export of petroleum, in excess of the internal development needs of the exporting countries.[12] The surpluses could not be efficiently invested in their own economies, due to small populations or being at early stages ofindustrialization; but the surpluses could be usefully invested in other locations, or spent on imports such as consumer products, construction supplies, and military equipment. Alternatively, global economic growth would have suffered if that money was withdrawn from the world economy, while the oil-exporting states needed to be able to invest profitably to raise their long-term standards of living.[13]
While petrodollar recycling reduced the short-termrecessionary impact of the1973 oil crisis, it caused problems especially for oil-importing countries that were paying much higher prices for oil, and incurring long-term debts. TheInternational Monetary Fund (IMF) estimated that the foreign debts of 100 oil-importingdeveloping countries increased by 150% between 1973 and 1977, complicated further by a worldwide shift tofloating exchange rates.Johan Witteveen, the Managing Director of the IMF, said in 1974: "The international monetary system is facing its most difficult period since the 1930s."[14] The IMF administered a new lending program during 1974–1976 called the Oil Facility. Funded by oil-exporting states and other lenders, it was available to governments suffering from acute problems with theirbalance of trade due to the rise in oil prices, notably including Italy and the United Kingdom as well as dozens of developing countries.[15]
From 1974 through 1981, the totalcurrent account surplus for all members of OPEC amounted to US$450 billion, without scaling-up for the subsequent decades of inflation. Ninety percent of this surplus was accumulated by theArab countries of thePersian Gulf andLibya, withIran also accumulating significant oil surpluses through 1978 before suffering the hardships ofrevolution,war andsanctions.[12]
Large volumes of Arab petrodollars were invested directly inU.S. Treasury securities and in other financial markets of the major industrial economies, often directed discreetly by government entities now known assovereign wealth funds.[16][17] Many billions of petrodollars were also invested through the majorcommercial banks of the United States, European Union, Switzerland, and the United Kingdom. In fact, the process contributed to the growth of theEurodollar market as a less-regulated rival to U.S. monetary markets. As the recessionary condition of the world economy made investment in corporations less attractive, bankers and well-financed governments lent much of the money directly to the governments of developing countries, especially in Latin America such asBrazil andArgentina[12] as well as other major developing countries like Turkey. The 1973 oil crisis had created a vast dollar shortage in these countries; however, they still needed to finance their imports of oil and machinery. In early 1977, when Turkey stopped heating its prime minister's office, opposition leaderSuleyman Demirel famously described the shortage as: "Turkey is in need of 70 cents."[18] As political journalistWilliam Greider summarized the situation: "Banks collected the deposits of revenue-rich OPEC governments and lent the money to developing countries so they could avoid bankruptcy."[19] In subsequent decades, many of these developing states found theiraccumulated debts to beunpayably large, concluding[by whom?] that it was a form ofneocolonialism from whichdebt relief was the only escape.[20]
In the 2005–2014 petrodollar surge, financial decision-makers were able to benefit somewhat from the lessons and experiences of the previous cycle. Developing economies generally stayed better balanced than they did in the 1970s; the world economy was less oil-intensive; and global inflation and interest rates were much better contained. Oil exporters opted to make most of their investments directly into a diverse array of global markets, and the recycling process was less dependent on intermediary channels such as international banks and the IMF.[22][23][24]
Thanks to the historicoil price increases of 2003–2008, OPEC revenues approximated an unprecedented US$1 trillion per year in 2008 and 2011–2014.[2] Beyond the OPEC countries, substantial surpluses also accrued to Russia and Norway,[8] and sovereign wealth funds worldwide amassed US$7 trillion by 2014–2015.[25] Some oil exporters were unable to reap the full benefits, as the national economies of Iran, Iraq, Libya, Nigeria and Venezuela all suffered from multi-year political obstacles associated with what economists call the "resource curse".[26][27] Most of the other large exporters accumulated enough financial reserves to cushion the shock when oil prices and petrodollar surpluses fell sharply again from anoil supply glut in 2014–2017.[28]
Oil-exporting countries have used part of their petrodollar surpluses to fundforeign aid programs, as a prominent example of so-called "checkbook diplomacy" or "petro-Islam". TheKuwait Fund was an early leader since 1961, and certain Arab states became some of the largest donors in the years since 1974, including through the IMF and theOPEC Fund for International Development.[12][29][30] Oil exporters have also aided poorer countries indirectly through the personalremittances sent home by tens of millions offoreign workers in the Middle East,[31] although their working conditions are generally harsh.[32] Even more controversially, several oil exporters have been majorfinancial supporters of armed groups challenging the governments of other countries.[33][34][35][36]
High-priced oil allowed theUSSR to support the struggling economies of theSoviet-led bloc during the 1974–1981 petrodollar surge, and the loss of income during the1980s oil glut contributed to the bloc's collapse in 1989.[37] During the 2005–2014 petrodollar surge, OPEC memberVenezuela played a similar role supportingCuba andother regional allies,[38] before the 2014–2017 oil downturn brought Venezuela to its own economic crisis.[39]
The termpetrodollar warfare refers to a theory that depicts the international use of theUnited States dollar as the standard means of settling oil transactions as a kind ofeconomic imperialism enforced by violent military interventions against countries like Iraq, Iran, and Venezuela, and a key hidden driver of world politics. The term was coined by William R. Clark, who has written a book with the same title.[40] The phraseoilcurrency war is sometimes used with the same meaning.
According to critics, the use of dollars in international oil transactions increases overall U.S. dollar demand by only a tiny fraction, and the dollar's overall status as the majorinternational reserve currency has relatively limited tangible benefit to the United States economy as well as some drawbacks.[41][42]
These images illustrate the diversity of major petrodollar recycling activities, in roughly chronological order:
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In March 1973... Two weeks after Dr. Oweiss had used the word – at an international monetary seminar held at Columbia University's Arden House in Harriman, New York – it was picked up by a prestigious economics commentator inThe New York Times.According to theOweiss andNYT websites, it appears that these events actually occurred in March 1974.
He thinks the U.S. should give more study to ways in which the excess funds – he calls them petro dollars – can be soaked up.
Georgetown University economics professor Ibrahim Oweiss has written about petrodollars and is credited with the word's coinage by Wikipedia, but there is insufficient documentary evidence that he used the term first in 1973. Former commerce secretary Peter G. Peterson was credited with using 'petrodollar' in a July 1973Washington Post article.
{{cite book}}: CS1 maint: bot: original URL status unknown (link)Dubai is capitalized just as much on cheap labour as it is on expensive oil, and the Maktoums, like their cousins in the other emirates, are exquisitely aware that they reign over a kingdom built on the backs of a South Asian workforce.
High oil prices in the 1970s propped up the regime so well, that had it not been for Soviet oil sales, it's quite possible the regime would have collapsed a decade earlier.
The KIA... is the largest shareholder in Daimler.
From a 14.6% stake of around US$329 million acquisition in December 1974, the KIA is now the largest consistent shareholder in Daimler over 40 years where our 6.9% stake is currently valued around $7 billion.
International bankers... began to invest huge amounts of those petro-dollars in Brazil and other developing countries..., allowing them to finance gigantic infrastructure works like the Itaipu Hydroelectric Plant.
Most of its cost (pegged at about US$120 million today) was a gift from King Faisal of Saudi Arabia.
The former head of the Soviet planning agency, Nikolai Baibakov, recalled that 'what we got for oil and gas' was $15 billion in 1976–80 and $35 billion in 1981–85. Of this money, the Soviets spent, respectively, $14 billion and $26.3 billion to buy grain, both to feed the cattle on collective farms and to put bread on the tables of Soviet citizens.
The price of the arms sale gives increased weight to an argument that in part it should be approved because it helps to 'recycle petrodollars'.
This was a dream come true for the family, which built its fortune... first in the oil-rich countries of the Persian Gulf.
Since the Russian oligarch began pouring petro-dollars into Stamford Bridge, he has turned one of English football's underachieving clubs into an established powerhouse.
It should not escape notice that this is the first true title showdown, and first genuine title race, between the petrodollar clubs.
In return for oil, Cuba is sending Venezuela between 30,000 and 50,000 technical staff. As many as 30,000 Cubans in Venezuela are presumably medical doctors.
Since the Dubai-based airline began its wine program 12 years ago, it has spent more than $500 million to develop the best wine list in the sky... 'It's an investment. We look at it like a commodity.'
'... a long-term investment, not only in the future of Turk Telekom but also in Turkey,' Hariri said. The sale of Turk Telekom's controlling stake is a key element of Turkey's IMF-backed privatization program.
These funds, which maintain passive investment positions, will perform a crucial petrodollar-recycling function.
A U.N. sanctions committee expressed 'grave concern' Thursday about what it called apparent Iranian violations of a U.N. ban on arms exports.
Mohtashami Pur, a one-time ambassador to Lebanon who currently holds the title of secretary-general of the 'Intifada conference', told an Iranian newspaper that Iran transferred the missiles to the Shi'ite militia.
The money is there: the United Arab Emirates region is home to nearly 10 percent of all the world's oil reserve.
In 2015, Japanese carmaker Toyota retained its long-held local market leadership..., over three times its nearest rival Nissan.
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