The recycling of “petrodollars” from oil-exporting countries is playing a crucial role in propping up global markets, according to Serhan Cevik, a Morgan Stanley economist.* Massive surpluses held by oil-rich countries will probably also play a crucial role in the adjustment of global economic imbalances.
Rising crude prices have provided an enormous boost to the oil-producing countries. Cevik estimates that the export earnings of Middle Eastern oil-producing countries have risen from $251bn (£128bn) in 2002 to $593bn in 2005 and $780bn his year.
Total export revenues over the past four years are $1.5trn. The region’s cumulative export surplus has risen from 5.4% of GDP in 2002 to 22.7% in 2005 and 25.5% this year.
This surplus liquidity has been channelled in different directions. Middle Eastern stockmarkets – long a virtual irrelevance – enjoyed what Cevik calls a “speculative frenzy” before collapsing in May. Other important destinations include domestic capital expenditure and foreign financial markets.
Cevik suggests that flows into international asset markets help explain the “conundrum” of low long-term interest rates. Middle Eastern liquidity is probably even more important than China in bolstering demand for international bonds.
The collapse of Middle Eastern stockmarkets has probably accelerated the process of exporting surplus liquidity overseas. Saudi Arabia’s market gained 900% between 2001 and the first quarter of 2006, while Dubai gained 1,475% over the same period. However, from their peaks Dubai has fallen 65% and Saudi Arabia 50%.
Steep oil price rises have also led to the creation of a close correlation between Middle Eastern economic performance and the American economy over the past five years. This development suggests that the region is highly vulnerable to a global slowdown.
The last time the oil-producing Middle Eastern countries were capital exporters on a massive scale was after the quadrupling of oil prices in 1973. At that time petrodollars were recycled into international banks, which then lent much of the money to Latin America.*“The great Arabian bubble”, Morgan Stanley Global Economic Forum. December 5, 2006.