Petrodollars
From the Economist:
This year, oil exporters could haul in $700 billion from selling oil to foreigners. The International Monetary Fund estimates that oil exporters' current-account surplus could reach $400 billion, The combined current-account surplus of China and other Asian emerging economies is put at only $188 billion this year.
The rise in oil prices represents a big redistribution of income from those who buy oil to those who produce it. Oil producers tend to save more per capita than oil consumers, therefore a transfer of income from oil consumers to oil producers will lead to a slowdown in global demand.
If they save their windfall, but invest it in global capital markets, they can finance oil importers' bigger current-account deficits—in effect, lending the increase in fuel bills back to consumers. And by increasing the demand for foreign financial assets, they can boost asset prices and push down bond yields in oil-importing countries.
Most of the windfall will stay at home to satiate the rapidly growing population. As well as spending more on health, education and infrastructure, the oil producers need to invest in oil production and refining capacity, to ease future supply shortages and so stabilise prices.
Despite the lack of hard data, around two-thirds of petrodollars are thought to have gone into dollar assets, pushing down American bond yields. Because oil is traded in dollars, rising prices initially increase the demand for greenbacks.
Middle East oil exporters' currencies have tracked the dollar—mainly downwards—since 2002, even as oil revenues have soared. By raising the relative price of foreign goods, this has discouraged imports. Equally perversely, economies were hurt in the late 1990s when the dollar rose at the same time as oil prices sank.
By pegging their currencies to the dollar, these economies have in effect had to adopt America's monetary policy. With interest rates too low, excess domestic liquidity has stoked inflation and asset prices. The broad money supply of the Middle East oil exporters has grown by almost 24% in each of the past two years and the average inflation rate has risen to almost 9% this year.
Russia officially operates a “managed float” for its exchange rate. But the rouble's rate against the dollar has been held relatively steady over the past couple of years by heavy intervention. Consequent excess liquidity and a boom in domestic consumption have pushed inflation to 12%.
If oil prices remain high, so will oil exporters' surpluses. The IMF forecasts an average annual current-account surplus of $470 billion over the next five years (assuming an average oil price of $59 a barrel). The oil exporters will have to play a role in helping to reduce global imbalances. Importing more and letting their currencies rise, as well as increasing government spending and liberalising their economies, would be steps in the right direction.
This year, oil exporters could haul in $700 billion from selling oil to foreigners. The International Monetary Fund estimates that oil exporters' current-account surplus could reach $400 billion, The combined current-account surplus of China and other Asian emerging economies is put at only $188 billion this year.
The rise in oil prices represents a big redistribution of income from those who buy oil to those who produce it. Oil producers tend to save more per capita than oil consumers, therefore a transfer of income from oil consumers to oil producers will lead to a slowdown in global demand.
If they save their windfall, but invest it in global capital markets, they can finance oil importers' bigger current-account deficits—in effect, lending the increase in fuel bills back to consumers. And by increasing the demand for foreign financial assets, they can boost asset prices and push down bond yields in oil-importing countries.
Most of the windfall will stay at home to satiate the rapidly growing population. As well as spending more on health, education and infrastructure, the oil producers need to invest in oil production and refining capacity, to ease future supply shortages and so stabilise prices.
Despite the lack of hard data, around two-thirds of petrodollars are thought to have gone into dollar assets, pushing down American bond yields. Because oil is traded in dollars, rising prices initially increase the demand for greenbacks.
Middle East oil exporters' currencies have tracked the dollar—mainly downwards—since 2002, even as oil revenues have soared. By raising the relative price of foreign goods, this has discouraged imports. Equally perversely, economies were hurt in the late 1990s when the dollar rose at the same time as oil prices sank.
By pegging their currencies to the dollar, these economies have in effect had to adopt America's monetary policy. With interest rates too low, excess domestic liquidity has stoked inflation and asset prices. The broad money supply of the Middle East oil exporters has grown by almost 24% in each of the past two years and the average inflation rate has risen to almost 9% this year.
Russia officially operates a “managed float” for its exchange rate. But the rouble's rate against the dollar has been held relatively steady over the past couple of years by heavy intervention. Consequent excess liquidity and a boom in domestic consumption have pushed inflation to 12%.
If oil prices remain high, so will oil exporters' surpluses. The IMF forecasts an average annual current-account surplus of $470 billion over the next five years (assuming an average oil price of $59 a barrel). The oil exporters will have to play a role in helping to reduce global imbalances. Importing more and letting their currencies rise, as well as increasing government spending and liberalising their economies, would be steps in the right direction.
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