Petrodollar recycling

Petrodollar recycling refers to the phenomenon of major oil-producing states mainly from OPEC earning more money from the export of oil than they could usefully invest in their own economies. It was a phenomenon of the late 1970s and early 1980s with the peak years for petrodollar surpluses.

During this period, states such as Saudi Arabia, Kuwait and Qatar amassed large surpluses of petrodollars which they could not invest in their own countries. This was due to small populations or being at early stages of industrialisation. These petrodollar surpluses can be defined as net US dollars earned by those nations which were in excess of the internal development needs of those nations.

These surpluses could be profitably invested in other nations. Alternatively, the world economy would have contracted if that money was withdrawn from the world economy while the exporting nations needed to be able to profitably invest to preserve their wealth for the future.

While recycling petrodollars reduced the recessionary impact of the oil crisis, it caused problems for nations especially oil importing nations who were paying much greater prices for oil and incurring debts. The International Monetary Fund (IMF) estimates that the foreign debts of 100 developing countries increased by 150% between 1973 and 1977. Johannes Witteveen, the Managing Director of the IMF, said in 1974 "the international monetary system is facing its most difficult period since the 1930s."

From 1974 to the end of 1981, total current account surpluses for all members of OPEC amounted to $450.5 billion. Ninety percent of this surplus was accumulated by the Arab countries of the Persian Gulf and Libya with Iran also accumulating oil surpluses prior to the revolution in 1979.

The petrodollars were invested by commercial banks in the US and Europe. As the recessionary condition of the world economy made investment in corporations less attractive, bankers lent the money to developing countries especially in Central and South America such as Brazil, Argentina and Mexico and as well as other developing countries like Turkey. 1973 Opec crisis had created a vast amount of dollar shortage in these countries, they needed to finance their oil imports. In 1977 Turkish prime minister Suleyman Demirel had summarized this shortage as "We're even in need of 70 cent". In subsequent decades, some of these nations have had difficulty in repaying these debts leading to charges by anti-globalisation activists that it was a form of neocolonialism. This process also contributed to the growth of the Euromoney market as a rival to US monetary markets.

Arab oil exporting nations also used their surpluses to fund foreign aid programs with Arab nations being one of the largest donors of foreign aid since 1973. The IMF also introduced a new lending facility during this period called the Oil Facility. This facility was funded by oil exporting nations and other lenders and was available to nations suffering problems with their balance of trade due to the rise in oil prices.

See also

* petrodollar
* petroeuro
* petroruble
* petrodollar warfare
* monetary hegemony

External links

* [http://www.imf.org/external/np/exr/center/mm/eng/mm_rs_03.htm Petrodollar Problem] at International Monetary Fund
* [http://www.imf.org/external/np/exr/center/mm/eng/rs_sub_3.htm Recycling Petrodollars] at International Monetary Fund