[OPE-L:6024] petrodollars

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Sat Sep 29 2001 - 04:18:30 EDT

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 

                             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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