Allocation of Petrodollars

Turning now to the prospects of allocating Petrodollars to alternative uses, I wish to present them in order from the least to the most desirable options in view of world economic interests in general and those of oil-exporting countries in particular.

The first alternative is to hold accumulating Petrodollars in a liquid dollar deposits. In a conversation with high ranking official in the US Treasury Department, he stated, ALet us hope Arabs keep holding dollars for we keep printing themA This alternative should definitely be ruled out because of its disruptive effect on the international monetary mechanisms of transfer of vast international liquid assets from one market to another whenever circumstances arise and whenever it is possible. As stated above, such liquid assets may be blocked from certain European financial markets if it is deemed necessary to restrict an international money flow. This option should also be discontinued because the purchasing power of the dollar will keep declining as time goes by.

Another alternative is to recycle Petrodollars by financing balance of payments deficits in industrialized countries. Arab oil revenues may channeled to those countries through a modified version of an International Monetary Fund or a newly founded international Arab monetary organization. As it now stands, the International Monetary Fund is mainly run by the United States and Western Europe. If Petrodollars are to be channeled through this organization, oil-exporting countries should assume an important role directing its policy. Otherwise, members of OPEC may establish their own organization which may be called International Petrevenue Fund. Its nucleus could be the four Arab consortia discussed above.

A third alternative is a direct investment in industrialized countries. However, there may be a fear in the host country that another foreign country is buying out its economy. In this context it should be noted, however, that the only country capable of absorbing unnoticeably sudden massive amounts of Petrodollars is the United States. Current total reserves of Petrodollars constitute approximately 0.7 of one percent the current market value of the United States stock market. In the meanwhile there is also the investor=s fear of losing part or all of the capital asset invested in case of freezing, nationalizing or confiscating foreign owned enterprises for economic, political or other reasons. In this regard such direct investment may be regarded under certain circumstances as hostage capital.

A fourth alternative is to share in financing economic development and growth in the less developed countries through a reorganized world bank in which oil-exporting countries assume more responsibility in its decision-making process than they are now assuming, or else through a newly established organization which may be called The OPEC International Bank for Development. The details of this proposal can be worked out so as to minimize the risk of bad debts resulting from internal revolutions or the like in the borrowing countries. In the meanwhile, to alleviate the impact of the recent quadrupling of the price of oil on the balance of payments of those countries, bilateral and multilateral arrangements with oil-exporting countries are now at work. It is interesting to note that while the problem is highly politicized in the United States, oil-exporting countries are not abandoning their fellow less developed countries as explained above. During the 1960's, Kuwait spent close to five percent of its Gross National Product on foreign aid. Saudi Arabia which had deficits in its balance of payments as recently as 1968, is allocating substantial funds for the same purpose. Iran had established its financial institution for a wider use to finance temporary deficits in the balance of payments of oil-importing countries in the short run and developmental projects in the LDC=s in the long run. While the Islamic group will be discussing the report of its committee on aid and development in two months in Malaysia, Venezuela is submitting its own proposal to the forthcoming meeting this month.

A fifth alternative is to finance a massive developmental program in self oil-exporting countries as well as in the countries with which they have cultural and historical ties such as the rest of the Arab world. It will be naive, of course, to assume that Petrodollars can all be absorbed in developmental requirements in the short run. In the long run, it is another story. For example, it is estimated that an investment of $20 billion is required raise the per-capita income in all Arab counties by only $100 per annum in real terms. While a comprehensive program for economic development of the oil-exporting countries is an economic necessity and a definite gain, it serves multiple purposes at the same time. First, it creates a substantial demand for the goods and services imported from industrialized advance countries, thus stimulating growth and prosperity beyond the territories of the oil-exporting countries. Second, the resulting increase in exports in the advanced industrial countries will ameliorate the position of their balance of payments. Third, financing massive economic developmental projects such as construction of their superstructure, infrastructure and new cities will reduce the rate at which oil revenue surpluses are to be accumulating.

Introduction Pricing of Oil Demand and Supply

Recent Developments in Oil Pricing A Case for Higher Prices of Oil

Oil Revenues Allocation of Petrodollars Concluding Remarks/Notes