The latest edition of the Federal Reserve Bank of New York’s Current Issues in Economics and Finance, Recycling Petrodollars, is available.
Authors Matthew Higgins, Thomas Klitgaard and Robert Lerman analyze how oil-exporting countries are deploying the increased revenues stemming from the rise in the price of oil. The authors find that about half of these revenues have been returned to oil-importing countries in the form of purchases of locally produced goods, while the remaining revenues have been used to buy foreign assets. Although it is difficult to determine where the funds are initially invested, the evidence suggests that the bulk are ultimately ending up in the United States.
Higgins, Klitgaard and Lerman begin their analysis by noting that oil exporters have seen their oil revenues rise to $970 billion in 2006, from just $300 billion in 2002. This surge in revenues represents a significant redistribution of global income from oil importers to oil exporters.
The way oil exporters “recycle” their new revenues, the authors note, has important implications for oil-importing countries. Increased purchases by oil exporters of goods produced in oil-importing countries help offset the drag on growth that oil importers face from higher oil prices. Increased financial investment by oil exporters in oil-importing countries can also help sustain economic activity in oil-importing countries, although less directly. In effect, these asset purchases allow oil importers to sustain their consumption and investment spending by borrowing from oil exporters.
The study finds notable differences across major oil importers in how petrodollars are recycled. Europe and China have seen a large fraction of their oil payments return to purchase locally produced goods, while the United States and Japan have seen only a small fraction return for this purpose. On the financial side, only the United States has chosen to increase its net borrowing in recent years. As a result, according to the authors, the bulk of the oil revenues used to buy foreign assets has ended up, directly or indirectly, in the United States, helping finance the large U.S. current account deficit.
Matthew Higgins is an assistant vice president in the Development Studies and Foreign Research Function of the Emerging Markets and International Affairs Group; Thomas Klitgaard is an assistant vice president in the International Research Function of the Research and Statistics Group; Robert Lerman is an economic and financial specialist in the Development Studies and Foreign Research Function.