Despite huge increases in money flowing to oil-exporting nations, you seldom hear the word “petrodollar” anymore. Perhaps buzz words eventually just fall out of use. Or perhaps philosopher George Santayana’s dictum that “Those who cannot remember the past are condemned to repeat it” is in effect here.
We faced the same situation 30 years ago after the first Arab oil embargo. Crude prices rose dramatically. Unprecedented sums flowed from oil importers to oil exporters. The flows were so unprecedented that what oil exporters would do with their windfalls became a major challenge. How could “petrodollars” be “recycled?”
Some, like the Saudis, bought infrastructure – flashy new international airports, highways and universities. So did Iran before the fall of the Shah in 1979.
For many exporters, Nigeria and Indonesia most notoriously, billions flowed into rulers’ personal coffers.
Some, particularly Iraq and Iran, spent billions on military gear. Much equipment, especially for Iraq, came from the Soviet Union, although Saddam Hussein also splurged hundreds of millions on Brazilian armored vehicles. Iran and Saudi Arabia spent billions on U.S. aircraft.
Even after these spending sprees, much cash still floated around. Big banks in New York, London, Frankfurt and Tokyo captured tens of billions in deposits. The sums were so large that these banks had to scramble to loan it out again.
Their eventual solution was to flog loans to developing nations like Argentina, Brazil, Mexico, Nigeria, and smaller countries. Banks offered loans at attractive, but variable, interest rates.
The competition was so great that few thought hard about long-term default risks if interest rates rose or the world economy slowed.
The rest is history. The Fed started raising interest rates sharply in 1979. Developing nations embarked on a 15-year “debt crisis.” Iraq and Iran used up their arms in a bloody war. Elsewhere, billions in expensive military toys gathered rust and dust.
Many oil-exporting countries showed little economic growth or long-term improvements in the lives of their peoples.
Oil exporters once again are accumulating hundreds of billions in revenue. Some, especially in the Mideast, are embarking on new weapons binges. But others simply want safe financial investments in which to park their gains.
U.S. Treasury bonds seem right to many. Oil exporters’ purchases are hard to tabulate, but some estimate that they exceed $300 billion over the last three years. They have joined China and other East Asian countries as major lenders to the U.S. government.
History replays itself. But instead of petrodollars financing grandiose projects and unsustainable deficits for Latin American dictatorships, they now flow to the United States, to finance our own unsustainable deficit spending. In 2007, the average American is as blasé about the whole process as the average Brazilian or Argentine was in 1977. An eventual shakeout may differ in form, but it will come.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.