The economics of petrodollars has had far-reaching distributional effects in national and international economics. Yet, being dependent on oil price and exported quantities of oil, petrodollars will have to follow a pattern of cyclical fluctuation in its upward and downward phases.

A study of the economics of petrodollars reveals that no one country or group of countries such as OPEC has enough power to dictate a price level and maintain it through a production policy. OPEC's past ability to raise oil prices was mainly due to oil shortages in the market rather than to a monopolistic power. While a typical monopolistic behavior is to sustain a higher price through a cut in production, OPEC raised the price and increased their production even during the oil glut. Furthermore, as a result of the downward phase of the petrodollar cycle, it seems highly unlikely that OPEC will be able to revive its pre-1979 coordinated efforts. Internal political and economic conflicts among countries belonging to OPEC could prevent the meaningful agreement necessary for a long-term unified policy, be it in pricing or in production, unless economic benefits resulting from a proposed agreement clearly outweigh the negative aspects of those conflicts. This seems impossible to achieve.

As to the price of oil, it will he affected mainly by free market forces since from the beginning of 1986 most of it has already been transacted at free market prices. fit effect, OPEC will be unable to raise oil prices unless world oil markets permit it. Furthermore, OPEC will not be able to pursue air effective policy of contrived scarcity because in the current depressed oil market a glut still exists in spite of' the minimal level of production they can live with to meet their necessary needs.

Nevertheless, as oil prices dropped sharply in March 1986 as a direct consequence of the war among oil exporters each trying vigorously to acquire a larger market share, some producers were unable to survive. This meant a drop in oil supplies while demand has been increasing. It seems, therefore, that the current oil glut will probably disappear by the end of 1988, after which an upward phase of the cycle of oil prices will be reinstated.

I would argue that the sharper the drop in oil prices in the downward phase, the higher they become in an upward phase, within certain limits dictated by income constraints and conservation capabilities. Because of such limits a new upward phase of the demand curve for petroleum as introduced above may have an upper limit less than that of the upward phase of the previous cycle. And if another downward phase occurs, its lower limit may be higher than the previous one. In other words, in seeking a stable equilibrium in oil markets, intervals between upper and lower limits become narrower over time. This dynamic process is illustrated in Figure 3. This is, however, a case of stable equilibrium. Theoretically, fluctuations in oil markets may follow an explosive pattern in a case of unstable equilibrium.

In an analysis of oil markets it seems that certain pertinent conclusions can he drawn. First, the dynamics of oil pricing in world markets may follow the pattern of Figure 3. In normal circumstances, a stable equilibrium may eventually he reached. Yet it may not remain at a fixed level. Depending on forces of demand and supply, a neutral equilibrium for price mechanism may be followed by a change to another point of equilibrium over time. Second, the forces of demand and supply of oil in world markets are greater than any other counter force. This implies that if OPEC adopts a unified strategy--which is almost impossible to achieve--of contrived scarcity whereby oil production is to be curtailed, it will have only a limited effect on international oil markets, leaving the dominant effects to the interaction of world supplies and world demand for oil. If the former exceeds the latter, there will be a downward effect on the price of oil, while an opposite case will have an upward effect, regardless of any collective decision made by OPEC. Third, given the current projections of world oil supplies and demand, it seems that oil prices may not follow the dramatic upward pattern of the 1970s. This implies that the rate of petrodollar accumulations seen in the 1970s may not be repeated in the foreseeable future.

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  1. Ibrahim M. Oweiss, "Petro-Money: Problems and Prospects," in Inflation and Monetary Crisis, ed. G. C. Wiegand (Washington, D.C.: Public Affairs Press, 1975), pp. 84-85.
  1. IMF, International Financial Statistics Yearbook (1981): 29, 45.
  1. For further details refer to: General Secretariat of the Arab League, Joint Arab Economic Report, Arab Monetary Fund, United Arab Emirates (1982); and Ibrahim M. Oweiss, "The Arab Development Funds and Arab Foreign Aid," in Ibrahim Ibrahim (ed.), Arab Resources: The Transformation of a Society (Washington, D.C.: Center for Contemporary Arab Studies, Georgetown University, 1983), pp. 1 15-23.
  1. Department of the Treasury, Office of International Banking and Portfolio Investment (Washington, D.C.: Internal Publication, 1985).
  1. Ibrahim M. Oweiss, The Dynamics of Arab-United States Economic Relations in the 1970s (Washington, D.C.: Center for Contemporary Arab Studies, Georgetown University, 1980). U.S. Department of Commerce, FT 990 (Washington, D.C.: U.S. Department of Commerce, 1983).
  1. Saudi Arabia Ministry of Planning, Fourth Development Plan, 1985-1990. (Riyadh: Ministry of Planning, 1985).
  1. Department of Defense, Security Assistance Agency, Foreign Military Sales, Foreign Military Construction and Military Assistance Facts (Washington, D.C.: USGPO, September 1981), p. 2.
  1. Council of Economic Advisors, Economic Report of the President (Washington, D.C.: USGPO, 1983), p. 285.
  1. British Petroleum, BP Statistical Review of World Energy (1985): 5.
  1. Council of Economic Advisors, Economic Report of the President (Washington, D.C.: USGPO, February 1986), p. 374.
  1. This contribution was first presented at Oxford University on November 12, 1982. It was later published in Blakely's Commodity Reivew, May 1, 1983.
  1. Milton Friedman, Price Theory (Chicago: Aldine Publishing, l976), pp. 47-54. I. M. Henderson and Richard E. Quandt, Micro-Economic Theory, 2nd ed. (New York: McGraw-Hill, 1971), pp. 31-39.