Oil Revenues

Yet, with the quadrupling of the price of oil and the emergence of Petrodollars, there seems to be the following three main concerns: management of accumulated money reserves resulting from the sale of oil, the effect on the balance of payments in both industrialized and developing countries and the impact on international liquidity.

Needless to say that major oil-exporting countries are less developed. Therefore, earning Petrodollars does not represent real wealth, but rather, a means to acquire it. Hence, economic development of the oil-exporting countries should be based on the conversion of their subsoil resources into plants, equipment, infrastructure, hospitals, education, technology and such other forms of real income-generating assets. Obviously the conversion process can be carried on at different rates. An optimum rate is that at which oil should be pumped so that the present discounted value of the income created in the conversion process is maximized.

Yet, oil-exporting countries have pumped oil at a rate far in excess the optimum rate. Furthermore, we know that within a certain band of prices and during certain time intervals, demand for oil is inelastic which means that more revenue will be realized by the seller if offers fewer units of the product for sale. Oil-exporting countries have sold and are selling far more oil than they would sell if these basic economic principles are observed.

This excess - the difference between the volume of oil actually supplied and the volume that should be supplied in the strict observance of the national economic interests of the oil-exporting countries - is, in fact, a subsidy these countries grant the Western world and Japan.

Incidentally, there could be a number of political and other reasons which would lead oil-exporting countries to adopt an oil policy which is not consistent with their own economic interests.

Be it as it may, this actual production policy lead to the emergence of Petrodollars which will substantially increase as a result of the recent hike in the price of oil, thus providing financial means to spend on development projects.

I shall, however, restrict my remarks to the Petrodollars accruing to the Arab-oil exporting countries since they have the largest known reserves of oil in the world and, hence, they are the largest exporters of crude petroleum to world markets.

As monetary wealth holders, Arab oil producing countries have the following main goals: portfolio management of Petrodollars, risk minimization in holding foreign money in foreign territories and economic development through the conversion process as explained above.

In pursuing the first two goals, American and European financial institutions together with Arab banks formed the following multinational combines:

Union des Arabes et FranHaises (UBAF) was established in Paris in 1970 with more than $700 million in assets. It is 40% owned by CrJdit Lyonnais but controlled by fourteen Arab banks. UBAF has subsidiaries in London, Rome, Frankfurt, Luxembourg and Tokyo. Partners in those subsidiaries including several big European banks and the Bank of Tokyo.

Banque Franco-Arabe d=Investissements Internationaux (FRAB) was chartered in Paris in 1969 by the Kuwait Investment Company in partnership with the French SociJtJ GJnJrale and the SociJtJ de Banque Suisse. It has about $180 million in assets.

The European Arab Bank headquartered in Luxembourg started in 1972 . It was made up of sixteen Arab financial institutions including FRAB and seven European banks. It has subsidiaries in Brussels and Frankfurt and plans to have branches in Paris and Milan.

La Compagnie Arabe et International d=Investissements was incorporated in Luxembourg in January, 1973. It is owned by twenty four Arab and Western banks including the Bank of America together with West German, Italian, Japanese and french banks. It opened its first subsidiary in Paris in April, 1973.

In addition to the above four major consortia, there are several other institutions and banks which are presently competing independently for business with Arab oil-exporting countries. The First National City Bank of New York operates branches in Beirut, Saudi Arabia, Bahrain and Dubai. The Chase Manhattan Bank of New York has branches in Beirut and Bahrain. Chase Manhattan along with Morgan Guarantee Trust of New York hold most of Saudi Arabian government deposits. In addition, a number of other American banks operate out of Beirut which is regarded as the Mideast financial center.

There is only one private Arab banking institution, The Arab Bank, which is functioning on an international basis in bidding for deposits of Petrodollars. The Arab Bank was incorporated in Jordan and has branches in Zurich, London and Frankfurt.

Furthermore, there are a few individuals who manipulate some funds from Petrodollars in world money markets strictly for commission. Using those funds as collateral, they can even borrow money at a certain rate and lend out at a higher rate. This probably explains why four Arabian Gulf Emirates were the largest borrowers in the Euro-dollar market during the month of November and the first week of December. AAn amount of $340 million has been borrowed by four [Arabian] Gulf Emirates in the Euro-dollar market over the last five weeks. These loans alone equal about two weeks normal world Euro-dollar borrowing and have had an upward effect on rates in the market.@⁸ The following question may now be posed. Will the above financial institutions and private bankers be able to manage Arab Petrodollars particularly when such reserves increase from $13.1 billion in 1973 to an estimated figure of about $50 billion in 1974?

Recent regulations to control mobility of international money in industrial advanced countries suggest that the answer is in the negative. Such measures include temporary prohibition of reconversion of non-resident accounts into foreign currency as well as blocking increments to accounts as is the situation in West Germany, Switzerland, Belgium and the Netherlands. There are also straightforward limits on foreign borrowing by requiring compulsory cash deposits on inflows arising from borrowing abroad. In West Germany, such borrowing can be prohibited once the compulsory cash deposit is raised to one hundred percent of the amount borrowed from foreign international money markets.

Even advanced payments for imports were restricted in France, Italy and Japan while advance receipts for exports were banned in Australia, Japan and the Netherlands. Further restrictions may be exhibited in the establishment of dual exchange markets in Belgium, France, Italy and Luxembourg for the purpose of discriminating against international flows of money whenever monetary policy so requires.

The main reason for such controls is to avoid disruptive movement of money in international money markets caused by interest-rate differentials and exchange rate fluctuations, a situation which would make it difficult for any nation to pursue an independent monetary policy and a situation which may also cause balance of payments disequilibria. Still fresh in their minds, The European central bankers learned from the Eurodollar experience, a lesson which they are not likely to repeat.

Therefore, the placement of Arab Petrodollars in the European banks and in the Eurodollar market will be limited due to recent restrictions on money movements in industrialized countries and the fear from currency devaluations.

Yet, before we turn to the prospects of allocating Arab Petrodollars to other alternative uses, it is important to comment on the many projections of the oil revenues in the future.

While projections of OPEC=s oil revenues presented by the International Bank for Reconstruction and Development, the International Monetary Fund, the OECD, or else by Walter J. Levy, may be accurate in the very short run, they are definitely exaggerated in the long run. The bias - between reasonable economic projections and the exaggerated ones which may be designed on purpose - stems from a simple extrapolation of Petrodollars while neglecting crucial dynamic forces such as the expected rise in the price of goods and services industrialized advanced countries will export to the members of OPEC for their massive developmental programs. ABlind extrapolation..of this sort ignores the many economic factors at work in the world oil market which tend to moderate adverse consequences.@⁹

Therefore, it seems that the effect of the recent quadrupling of the price of oil on the balance- of-payments deficits of the industrialized advanced countries is exaggerated in the long run. This does not mean there will be no deficits in the international segment of the world advanced economies. In fact those deficits will exist so long as there are causes of external disequilbria long before the rise in the price of oil and which have not been properly addressed.

It is also expected that in a few years the price of oil will rise once again but will have to fall according to what market conditions dictate as it is not even in the economic interests of oil-exporting countries to push the price beyond the interval in which demand is inelastic.