Definition of Petrodollars
Petrodollars may be defined as the U.S. dollar earned front the
sale of oil, or they may be simply defined as oil revenues denominated
in U.S. dollars. Petrodollars accrued to oil-exporting nations
depend on the sale price of oil as well as the volume being sold
abroad, which is in turn dependent on oil production. The overall
world supply of oil, on the one hand, and the world demand, on
the other hand, determine sooner or later an actual market price
for oil regardless of any administered pricing system. A price
determined by OPEC can be maintained only so long as there is
sufficient demand to absorb the amount being supplied in world
markets. If demand exceeds supply, oil will be sold at an even
higher price than that determined by OPEC. The opposite holds
true when an oil glut occurs. This is reflected in a drop in the
price after a certain time lag regardless of the price dictated
by OPEC. The experience of the seventies and the eighties is no
more than art application of microeconomic tools to the pricing
of oil in world markets.
Petrodollar surpluses may also be defined as the net U.S.
dollars earned from the sale of oil that are in excess of internal
development needs. Petrodollar surpluses, accrued in the process
of converting subsoil wealth into an internal income-generating
capital stock, refers to oil production that exceeds such needs
but is transformed into monetary units.
Since petrodollars and petrodollar surpluses are by definition
denominated in U.S. dollars, then purchasing power is dependent
on the U.S. rate of inflation and the rate at which the U.S. dollar
is exchanged (whenever there is need for convertibility) by other
currencies in international money markets. It follows that whenever
economic or other factors affect the U.S. dollar, petrodollars
will be affected to the same magnitude. The link, therefore, between
the U.S. dollar and petrodollar surpluses, in particular, has
significant economic, political, and other implications.
First, the placement of petrodollar surpluses of the Arab oil
exporting nations in the United States may be regarded politically
as hostage capital. In the event of a major political
conflict between the United States and an Arab oil-exporting nation,
the former with all its military power can confiscate or freeze
these assets or otherwise limit their use. It can impose special
regulations or at least use regulations for a time, in order to
attain certain political, economic, or other goals. It may be
argued that such actions are un-American, since they are a direct
violation of the sacred principles of capitalism and economic
freedom. Nevertheless, the U.S. government resorted to such weapons
twice in the l980s against Iranian and Libyan assets. It follows,
therefore, that governments placing their petrodollar surpluses
in the United States may lose part of their economic and political
independence. Consequently, the more petrodollar surpluses are
placed in the United States by a certain oil-exporting nation,
the less independent such a nation becomes.
Second, an oil-exporting country can have petrodollar surpluses
only if its absorptive capacity is less than its earnings from
the sale of' oil for any particular period of time. It follows,
therefore, that petrodollar surpluses depend on oil prices, quantities
exported, and the nation's absorptive capacity.
Third, petrodollar surpluses do not represent real wealth
but rather are a vehicle by which the latter can be acquired.
If kept in liquid form such as paper dollars, their purchasing
power will gradually be eroded by inflation and adverse foreign
exchange rates. Both are affected in the United States by a host
of variables, for example, money supply, interest rates, marginal
productivity, stage of a business cycle, and balance-of-payments
deficit. Also a factor is U.S. monetary and fiscal policy which
in turn affects some of' these variables. Furthermore, changes
in the U.S. laws and regulations have an impact on the economic
variables, which may affect inflation rates and foreign exchange
rates. Thus, the purchasing power of liquid petrodollar surpluses
belonging, for example, to Arab oil-exporting nations is determined
by a complicated set of variables whose trends and quantities
are a function of' factors that are not in the control of these
countries.
Fourth, efficient allocation of petrodollars for internal investments
could increase the productive capacity of an oil-exporting nation
and may work to its relative advantage. However, dependency on
imported consumer goods, including luxury and rare collector's
items, promotes the export of limited resources that could have
been otherwise used for internal capital development.
Fifth, the economic development of an oil-exporting nation is
based on the conversion of its subsoil resources into other assets
such as industrial plants, equipment, education, technology, infrastructure,
and other forms of real wealth, that is, real capital stock. Obviously
the conversion process can be carried on at different rates. An
optimum rate is achieved when oil is pumped at a level that can
maximize the present discounted value of the income created in
the conversation process. By pumping oil in excess of an optimum
production rate, countries such as Saudi Arabia, Kuwait, Qatar,
the United Arab Emirates, and others accumulated petrodollar surpluses
until 1981. It is worth noting that the difference between the
volume of oil actually supplied and the volume that should have
been supplied in observance of standard microeconomic theory is
in fact a subsidy granted, in real terms, to oil-importing
nations such as the United States, Germany, France, and Japan.1