The new recycling of petrodollars


By Eric Le Boucher, Le Monde


Monday 16 June 2008



What do the kings of petrol do with their petrodollars? The rise of the price of the barrel, from $25 in 2002 to $135 this month, represents a huge money transfer from consuming countries to producing countries. These days more than $4000 billion, on a yearly basis, go from one pocket to the other. Saudi Arabia, Russia, the Emirates, Angola, Algeria, Venezuela increased their wealth in fabulous proportions. Was this wealth well employed?


The preceding examples, in the 1970’s, do not make one optimistic. The petrodollars from the first two oil shocks were relatively little invested in producing countries (with the exception of USSR and Norway). An elite in power helped itself, purchased weapons and palaces, but scant efforts were made to diversify the economy, to create jobs other than civil servants’, to build schools, hospitals, social security programs. Islamism found a barren land to thrive upon.


The financial resources generated by oil were “recycled” in developed countries. Fuelling inflation there, they went up into smoke. Another chunk was invested by western banks in Latin America, triggering the so-called “debt crisis” of that region. Another stark loss for the Emirates…


This time, during the third oil shock, were past lessons learned, is the “recycling” more efficient? The likely answer is: yes, a little better, but only a little.


If oil is a geological windfall, it is often an economic and political plague. [Giving a hell of a lot of unexpected money to a “structurally poor” entity, be it an individual or a country, like Spain in the XVIth century, has never helped it get out of its condition.] It feeds corruption, makes efforts seem unnecessary. We observe this in Russia where it is doubtful whether the Putinian power uses well the money received. Reforms are postponed; the State believes it is capable of doing without the emergence of a private capitalism. One is dismayed to see this in Venezuela, where the “Bolivarian revolution” thinks that distributing subsidies to the people makes it unnecessary to invest into an economy turned toward the future. One sees it in Algeria too where bureaucracy has always spoiled everything.


In Saudi Arabia, as elsewhere in the Arab world, the problem is to take advantage of the boom to, at last, create jobs. The king has set the goal to create a million of them via the construction of six economic cities in order to attract diversified industries. King Abdullah City, on the Red sea, north of Jeddah, should be finalized at the end of this year, with a port and all the auxiliary infrastructures to host 2500 businesses and their managers (villas, golf courses, etc.). Cost: nearly $400 billion dollars, in part financed by private capital. Will these cities be the starting point of a success story, or white elephants?


Globally, oil countries are more prudent than in the 1970’s. They try to pay heed to the coming generations, either opening the sluices only as needed (whence the prices), or accumulating monetary reserves. As soon as the oil price rose again, these countries, except Venezuela, began, as a first priority, to pay back their debts and to save. In the Gulf, at the end of 2007, reserves amounted to $1800 billion.


Two questions face governments. Which part of the surpluses should be invested in the “post-oil” period, economic diversification, and social programs? A sum which is a minor proportion of the revenues, since the economies of these countries (in general) are small, compared to the scale of the money flow from oil. And what to do with the rest, the largest part, where to invest it?


Let’s begin with financial investments. It is not easy, these days, to trace down where goes capital in the financial planet. We can estimate, however, that until August 2007 and the beginning of the financial crisis, money was to a large extent invested in Great-Britain and the Caribbean, though, doubtless, with a final destination in the United-States, the main absorber of excess capital (Monthly bulletin of the ECB, July 2007). The result of this choice has been quite mitigated, the dollars vanished into subprimes loans and bank losses. Whence, for the past year, these countries preference to establish their own investment funds (the so-called “sovereign funds”) and in the long term to invest directly into European and American firms. One cannot tell what the profitability of these funds will be, but they behave, like American pension funds, rather prudently.


As regards the sums spent locally to spur the economies, the obstacles are numerous and ancient. Here no generalization is possible. Yet for Arab countries, the challenge is simple to formulate: they must create 80 to 100 million jobs between now and 2020. Oil will not suffice. From 2002 until 2007, despite the oil price rise, unemployment climbed from 9% to 12% in Saudi Arabia, where 60% of the population is under 25.


It is imperative to get out of rudimentary social policy, the creation of civil servant jobs. To create infrastructures is just a beginning. But, more importantly, schooling will have to be less religious and more professional; the countries must adopt a more open culture, a State guaranteeing individual rights, political changes. The Chinese despotic model, unfortunately, is attractive to many; the key to a good recycling, nonetheless, is to leave the citizens free to benefit from the windfall of oil profits.