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?
This archive was generated by hypermail 2b30 : Tue Oct 02 2001 - 00:00:06 EDT