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.

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