Petrodollar recycling
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Petrodollar recycling refers to the phenomenon of major oil-producing states mainly from OPEC earning more money from the export of oil than they could usefully invest in their own economies. It was a phenomenon of the late 1970s and early 1980s with the peak years for petrodollar surpluses.
During this period, states such as Saudi Arabia, Kuwait and Qatar amassed large surpluses of petrodollars which they could not invest in their own countries. This was due to small populations or being at early stages of industrialisation. These petrodollar surpluses can be defined as net US dollars earned by those nations which were in excess of the internal development needs of those nations.
Take the following example: Japan needs to import oil for domestic use. To do so it must first acquire dollars, as the dollar is the only currency in which oil can be traded. To acquire these dollars, Japan must sell goods and services to the U.S. economy. The Japanese build a Honda to sell to the U.S. The U.S. federal reserve prints a certain amount of dollars and gives these to the Japanese in exchange for the Honda. The Japanese buy oil from Saudi Arabia using these dollars. The Saudis take the dollars and reinvest them in the Federal Reserve Bank of the U.S., and from then on they will only be used as a reserve currency. Therefore, all the U.S. had to do to acquire a Honda, was to print dollars. In essence, it has its very own money tree. The result of this is that the total debt of the United States is somewhere in the region of $8.4 trillion and increasing by $80 million per hour.
These surpluses could be profitably invested in other nations. Alternatively, the world economy would have contracted if that money was withdrawn from the world economy while the exporting nations needed to be able to profitably invest to preserve their wealth for the future.
While recycling petrodollars reduced the recessionary impact of the oil crisis, it caused problems for nations especially oil importing nations who were paying much greater prices for oil and incurring debts. The International Monetary Fund (IMF) estimates that the foreign debts of 100 developing countries increased by 150% between 1973 and 1977. Johannes Witteveen, the Managing Director of the IMF, said in 1974 the international monetary system is facing its most difficult period since the 1930s.
From 1974 to the end of 1981, total current account surpluses for all members of OPEC amounted to $450.5 billion. Ninety percent of this surplus was accumulated by the Arab gulf countries and Libya with Iran also accumulating oil surpluses prior to the revolution in 1979.
The petrodollars were invested by commercial banks in the US and Europe. As the recessionary condition of the world economy made investment in corporations less attractive, bankers lent the money to developing countries especially in Central and South America such as Brazil, Argentina and Mexico. In subsequent decades, some of these nations have had difficulty in repaying these debts leading to charges by anti-globalisation activists that it was a form of neocolonialism. This process also contributed to the growth of the Euromoney market as a rival to US monetary markets.
Arab oil exporting nations also used their surpluses to fund foreign aid programs with Arab nations being one of the largest donors of foreign aid since 1973. The IMF also introduced a new lending facility during this period called the Oil Facility. This facility was funded by oil exporting nations and other lenders and was available to nations suffering problems with their balance of trade due to the rise in oil prices.
