Petrodollar recycling

Petrodollar recycling is the international spending or investment of a country's revenues from petroleum exports ("petrodollars"). It generally refers to the phenomenon of major petroleum-exporting states, mainly the OPEC members plus Russia and Norway, earning more money from the export of crude oil than they could efficiently invest in their own economies. The resulting global interdependencies and financial flows, from oil producers back to oil consumers, can reach a scale of hundreds of billions of U.S. dollars per year – including a wide range of transactions in a variety of currencies, some pegged 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 both global finance and petroleum politics. The phenomenon is most pronounced during periods when the price of oil is historically high. The term petrodollar was coined in the early 1970s during the oil crisis, and the first major petrodollar surge (1974–1981) resulted in more financial complications than the second (2005–2014).

Capital flows

Background Especially during the years 1974–1981 and 2005–2014, oil exporters amassed large surpluses of "petrodollars" from the sale of oil at historically high prices. (The word has been credited alternately to Egyptian-American economist Ibrahim Oweiss and to former U.S. Secretary of Commerce Peter G. Peterson, both in 1973.) 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. The International Monetary Fund argues that these surpluses could not be efficiently invested in their own economies, due to small populations or being at early stages of industrialization. Instead, the IMF advocated for the surpluses to be invested in other locations, most notably the United States, or spent on imports such as consumer products, construction supplies, and military equipment. Additionally, the IMF also argues that global economic growth would have suffered if money was withdrawn from the world economy and stored in the reserves of developing nations, while the oil-exporting states needed to be able to invest profitably to raise their long-term standards of living. Alternatively, critics argue that the international monetary system, reliant on petrodollar recycling, exploits developing nations while advancing American imperialism.

1974–1981 surge While petrodollar recycling reduced the short-term recessionary impact of the 1973 oil crisis, it caused problems especially for oil-importing countries that were paying much higher prices for oil, and incurring long-term debts. The International Monetary Fund (IMF) estimated that the foreign debts of 100 oil-importing developing countries increased by 150% between 1973 and 1977, complicated further by a worldwide shift to floating 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." 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 their balance of trade due to the rise in oil prices, notably including Italy and the United Kingdom as well as dozens of developing countries. From 1974 through 1981, the total current 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 the Arab countries of the Persian Gulf and Libya, with Iran also accumulating significant oil surpluses through 1978 before suffering the hardships of revolution, war and sanctions. Large volumes of Arab petrodollars were invested directly in U.S. Treasury securities and in other financial markets of the major industrial economies, often directed discreetly by government entities now known as sovereign wealth funds. Many billions of petrodollars were also invested through the major commercial banks of the United States, European Union, Switzerland, and the United Kingdom. In fact, the process contributed to the growth of the Eurodollar 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 as Brazil and Argentina 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 leader Suleyman Demirel famously described the shortage as: "Turkey is in need of 70 cents." As political journalist William 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." In subsequent decades, many of these developing states found their accumulated debts to be unpayably large, concluding that it was a form of neocolonialism from which debt relief was the only escape.

2005–2014 surge

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