Economic Impact of Receding Petrodollars

The economic impact of diminishing petrodollars is multidimensional in both the national and the international spheres. Tile oil-exporting nations, which depend mainly on oil revenues, must face a slowing down their internal growth rates, particularly in the construction sector and its feeding industries, such as cement. Receding petrodollars has had a negative set of spillover effects on countries that supplied labor to oil exporting nations. As the demand for labor follows a downward trend, many expatriates return to their home countries, such as Egypt, which by 1982 was receiving the highest foreign exchange earnings from remittances of its natives working in Arab oil-exporting nations. Furthermore, the balance of payments of oil exporting countries shifts from a surplus status to a deficit. This means that industrialized nations regain a favorable balance of payments vis-à-vis oil-exporting nations, which rely on petroleum as their major source of revenues.

Receding petrodollars has an adverse effect on the volume of foreign trade. Statistics of world exports and imports show a decline in OPEC's imports by almost one-third, that is, front $171.4 billion in 1982 to $116.9 billion in 1985.¹⁰ International liquidity is also affected by receding petrodollars, through a discontinuation of the flow of petrodollar deposits in the banking system of' international money markets. As credit from such markets is reduced, Third World countries, in particular, face further difficulties because of their limited ability to expand exports and pay accumulated debt. Even an oil-exporting country such as Mexico has faced insurmountable difficulties in the aftermath of the sharp drop in oil revenues, since it is one of the world's major debtors.

Nevertheless, there may be several positive effects of receding petrodollars in oil-exporting nations. The most obvious economic effect is a negative inflation as rents and prices in general drop, as happened in Saudi Arabia, Kuwait, Qatar, and the United Arab Emirates. Still, it should not be forgotten that such positive effects emerged at the cost of the negative effect of receding oil revenues, namely, an overall economic recession in those countries. Another positive effect of receding oil revenues in such countries is the slowing down of an unprecedented transformation of a society in a short period of time. If the pace of the seventies had continued, serious social and economic disequilibrium would have led to uncontrolled disturbances.

While the overall impact of receding petrodollars on oil-exporting countries, which rely mainly oil revenues, is negative, the overall effect on oil-importing nations is positive. It should be noted, however, that this is not a simple zero sum game in which the loss of one side is the gain of another. As was presented earlier, receding petrodollars has had all impact on international liquidity through a discontinuation of the flow of petrodollar deposits in the banking system of international money markets, which are mainly in the oil-importing developed nations. Obviously such an effect of receding oil revenues is negative for both oil-exporting and oil-importing nations. Furthermore, if an oil-exporting nation such as Mexico, suffering from receding oil revenues, is unable to pay its huge foreign debt to its lenders in the United States, devastating consequences may affect not only the latter's banking system but also its overall economy and the international monetary system.

It is also worth noting that the impact of receding oil revenues on unemployment in countries such as Saudi Arabia, Kuwait, the United Arab Emirates, and Qatar is quantitatively and qualitatively different from the case of the United States. While in the former reduced employment primarily affected expatriates, in the latter unemployment substantially increased in depressed areas such as Texas and in its oil sector in general. Oil April 20, 1986, Exxon, the largest oil company in the world, announced a layoff of a quarter of its work force. Due to the multiplier effect, since the beginning of' 1986 Texas, Louisiana, and Oklahoma have faced a serious economic depression, which has extended beyond the oil and gas industry to all other economic sectors. Even with it revival of the price of oil in the future, it may take years to repair the economic damage, probably the worst since the Great Depression in those three states.

Another negative effect of the drop in the price of oil is the impact on alternative sources of energy. Higher prices of oil of the seventies provided the main incentive to develop alternative sources of energy, both renewable and nonrenewable, in a variety of programs funded by government and the private sectors with the drop in the price of oil such programs have either been canceled or postponed.

With the drop in the price of oil, even the alcohol fuel from renewable plantations now used to supply almost one-third of all automobile fuel in Brazil is facing tough competition. Last but not least, from an economic welfare point of view, cheaper oil prices may lead to economic waste while providing no more incentive for conservation of a valuable nonrenewable source of energy.

To sum up, I may argue that the complicated interdependence of factors resulting from the drop in oil prices and receding oil revenues makes it extremely difficult to assess an overall gain or an overall loss. Nevertheless, all understanding of oil pricing through all analysis of statistical demand for oil may provide all economic tool for forecasting.

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