Petrodollar recycling

Especially during the years 1974–1981 and 2005–2014, oil exporters amassed large surpluses of "petrodollars" from historically expensive oil.[1][2][8] (The word has been credited alternately to Egyptian-American economist Ibrahim Oweiss and to former US Secretary of Commerce Peter G. Peterson, both in 1973.)[9][10][11] These petrodollar surpluses could be described as net US dollar-equivalents earned from the export of petroleum, in excess of the internal development needs of the exporting countries.[12] The surpluses could not be efficiently invested in their own economies, due to small populations or being at early stages of industrialization; but the surpluses could be usefully invested in other locations, or spent on imports such as consumer products, construction supplies, and military equipment. Alternatively, global economic growth would have suffered if that money was withdrawn from the world economy, while the oil-exporting states needed to be able to invest profitably to raise their long-term standards of living.[13]

While petrodollar recycling reduced the short-term recessionary impact of the 1973 oil crisis, it caused problems especially for oil-importing countries that were paying much higher prices for oil, and incurring long-term debts. The International Monetary Fund (IMF) estimated that the foreign debts of 100 oil-importing developing countries increased by 150% between 1973 and 1977, complicated further by a worldwide shift to floating exchange rates. Johan Witteveen, the Managing Director of the IMF, said in 1974: "The international monetary system is facing its most difficult period since the 1930s."[14] The IMF administered a new lending program during 1974–1976 called the Oil Facility. Funded by oil-exporting states and other lenders, it was available to governments suffering from acute problems with their balance of trade due to the rise in oil prices, notably including Italy and the United Kingdom as well as dozens of developing countries.[15]

From 1974 through 1981, the total current account surplus for all members of OPEC amounted to US$450 billion, without scaling-up for the subsequent decades of inflation. Ninety percent of this surplus was accumulated by the Arab countries of the Persian Gulf and Libya, with Iran also accumulating significant oil surpluses through 1978 before suffering the hardships of revolution, war and sanctions.[12]

Large volumes of Arab petrodollars were invested directly in US Treasury securities and in other financial markets of the major industrial economies, often directed discreetly by government entities now known as sovereign wealth funds.[16][17] Many billions of petrodollars were also invested through the major commercial banks of the United States, European Union, Switzerland, and the United Kingdom. In fact, the process contributed to the growth of the Eurodollar market as a less-regulated rival to US monetary markets. As the recessionary condition of the world economy made investment in corporations less attractive, bankers and well-financed governments lent much of the money directly to the governments of developing countries, especially in Latin America such as Brazil and Argentina[12] as well as other major developing countries like Turkey. The 1973 oil crisis had created a vast dollar shortage in these countries; however, they still needed to finance their imports of oil and machinery. In early 1977, when Turkey stopped heating its prime minister's office, opposition leader Suleyman Demirel famously described the shortage as: "Turkey is in need of 70 cents."[18] As political journalist William Greider summarized the situation: "Banks collected the deposits of revenue-rich OPEC governments and lent the money to developing countries so they could avoid bankruptcy."[19] In subsequent decades, many of these developing states found their accumulated debts to be unpayably large, concluding that it was a form of neocolonialism from which debt relief was the only escape.[20]

Inflation and interest rates surged with oil prices in the 1970s, but not in the 2000s.[21]

In the 2005–2014 petrodollar surge, financial decision-makers were able to benefit somewhat from the lessons and experiences of the previous cycle. Developing economies generally stayed better balanced than they did in the 1970s; the world economy was less oil-intensive; and global inflation and interest rates were much better contained. Oil exporters opted to make most of their investments directly into a diverse array of global markets, and the recycling process was less dependent on intermediary channels such as international banks and the IMF.[22][23][24]

Thanks to the historic oil price increases of 2003–2008, OPEC revenues approximated an unprecedented US$1 trillion per year in 2008 and 2011–2014.[2] Beyond the OPEC countries, substantial surpluses also accrued to Russia and Norway,[8] and sovereign wealth funds worldwide amassed US$7 trillion by 2014–2015.[25] Some oil exporters were unable to reap the full benefits, as the national economies of Iran, Iraq, Libya, Nigeria and Venezuela all suffered from multi-year political obstacles associated with what economists call the "resource curse".[26][27] Most of the other large exporters accumulated enough financial reserves to cushion the shock when oil prices and petrodollar surpluses fell sharply again from an oil supply glut in 2014–2017.[28]