Allocation of Petrodollar Surpluses
The bulk of petrodollar surpluses is held either in U.S. treasury
bills and other short-term instruments or in American and Western
European banks. An examination of balance sheets of banks operating
in Saudi Arabia, Kuwait, Qatar, Bahrain, the United Arab Emirates,
and Oman reveals that most of their monetary assets are deposited
in foreign banks in Europe and the United States. Petrodollar
surpluses have also been used to increase the official reserves
of the oil-exporting countries at both the International Monetary
Fund and the International Bank for Reconstruction and Development.2
Petrodollar surpluses have been recycled by commercial banks in
the United States and other industrialized nations as well as
by international institutions. By drawing against petrodollar
surpluses as deposits or certificates of deposits, banks were
able to expand their volume of lending. For bankers the most obvious
clients were the developing countries, mainly in Latin America,
such as Mexico, Brazil, and Argentina.
The process of petrodollar recycling makes it possible for commercial
banks of industrialized nations, international lending institutions,
and Arab banking consortia to provide financial assistance to
less-developed countries (LDCs). Western Europe, Japan, and the
United States buy oil from oil-exporting countries (OECs). LDCs
pay for oil imports and other foreign goods and services with
money borrowed front Western commercial banks. The process of
recycling is complete when those commercial banks and institutions
obtain cash and investments from OECs.
Petrodollar surpluses have also contributed to the growth of the
Euromoney market, which was treated by the Soviet Union in the
fifties, when it opened a dollar account in London. Its purpose
was to protect the Soviets from a U.S. freeze on their deposits,
which could happen if such deposits were placed in the United
States. Prior to the first oil shock of 1973, the main source
of Eurodollars was the U.S. balance-of-payments deficits; these
grew from $17 billion in 1964 to $96 billion in 1970. Additionally,
several regulations set by the Department of the Treasury discouraged
American multinational corporations from repatriating profits
from overseas operations; thus, these deposits remained in Europe
and served as a source of international finance. In 1971 U.S.
balance-of-payments deficits suddenly tripled, thus precipitating
a huge leap in dollar holdings in foreign banks that led to a
massive expansion of money supplies in member countries of the
Organization of' Economic Cooperation and Development (OECD).
In my opinion this was one of the main causes of the leap in the
rate of inflation and the economic disequilibrium that came long
before the rise in the price of oil at the end of l973.
Another major use of petrodollars has been for foreign aid. Since
1973 Arab oil-exporting countries have been among the ranks of
the major donors of the world. Basically, Arab states distribute
aid in five ways, through (1) bilateral agreements; (2) multilateral
arrangements; (3) official development assistance (ODA) flows;
(4) various Arab funds established specifically to extend loans
for development projects in foreign countries; and (5) the International
Monetary Fund as well as the International Bank for Reconstruction
and Development, by providing them with loans that are recycled
to other countries in need to finance balance of payments deficits
or development projects. It should be noted that Arab oil-exporting
countries had extended a total of approximately $44 billion in
foreign aid between 1973 and 1980. It is also important to point
out that the ODA flows as a percentage of gross national product
were the highest in Arab oil exporting nations, as compared with
the United States and all other countries.3 Indeed,
even after the substantial decline in oil revenues, Arab funds
for economic development are still active in their lending policy.
At any rate, Petrodollar surpluses accumulated after the oil shocks
of 1973 arid 1979 became the second major source of outside funds,
after the U.S. balance-of-payments deficits, feeding into the
Euromoney market. Such surpluses whetted the appetite of Western
banks, which had eagerly sought borrowers for the new Euromarket
deposits.
From 1974 to the end of 1981 total current account petrodollar
surpluses were approximately $450.5 billion for all members of
OPEC .4 It should be noted ill this regard that prior
to 1979 Iran had accumulated some petrodollar surpluses, although
the Arab OECs had acquired over 90 percent of OPEC's investable
surpluses. Since 1979 OPEC's surplus has been generated mainly
by the Arab Gulf countries and Libya. Since tile beginning of
the 1980s Saudi Arabia alone has accounted for 42 percent of the
amount of the surplus, followed by Kuwait (18 percent), Iraq (17
percent), the United Arab Emirates (11 percent), Libya (8 percent),
and Qatar (3 percent).
According to the U.S. Treasury information petrodollar surpluses
have turned into deficits since 1982. In my opinion there are
three main reasons for this turn of events: increase in imports
by oil-exporting nations; reduction in the demand for oil, particularly
from OPEC; and the oil glut. which led to a reduction in its price.