Fossil-fuel producers are minting money again

Autor: Article based upon analysis from Reuters Breakingviews
2 min

High energy prices mean the OPEC countries will earn $907 billion from oil exports this year, according to the U.S. Energy Information Administration (EIA), compared with $577 billion on average since 2000. 

Capital Economics state that Saudi Arabia, the United Arab Emirates, Qatar and Kuwait will collectively have a $409 billion current account surplus, or almost three times last year’s total and Russia’s current account surplus for 2022 to date, has also tripled.

But Western financiers hoping to share in the spoils of a 1970’s style petrodollar boom will be disappointed. In previous booms, energy producers have recycled their windfalls into the Western financial system. 

Saudi Arabia racked up a cumulative $160 billion current account surplus between 1974 and 1982, according to economist David Lubin’s book “Dance of the Trillions”, almost all of which went into the eurodollar market.  Those banks in turn lent those deposits to Argentina, Chile and others in an emerging-market debt boom.

Middle Eastern oil exporters and Russia together increased their holdings of U.S. debt and equity securities by almost $500 billion between 2003 and 2008, a fivefold increase that was only beaten in absolute terms by China and the Cayman Islands. 

That strengthened demand for U.S. stocks and bonds, while oil exporters and tycoons also splurged on European soccer clubs and department stores.

When energy prices spiked again in the early 21st century, fossil-fuel producers squirrelled away the proceeds into Western financial assets, through central-bank reserves and sovereign wealth funds. 

These financial flows, known as petrodollar recycling, mean that the money Westerners spend on fuel eventually makes its way back into their economies through energy producers’ financial investments. 

And it’s happening again. 

Saudi’s Public Investment Fund (PIF) has opened new offices in London and New York, and this summer embarked on a U.S. equity-market shopping spree, scooping up shares in Alphabet and Microsoft.  

The Abu Dhabi Investment Authority recently poached New York-based Deutsche Bank rainmaker Drew Goldman to manage its real-estate investments.

But the spoils may disappoint Western financiers with long memories. First, they’re smaller in relative terms, with adjustments for inflation OPEC’s revenue was higher between 2010 and 2014 than it will be this year, EIA data shows. 

Saudi, the UAE, Kuwait and Qatar’s forecast 2022 current account surplus will be worth 1.6% of U.S. GDP, compared with 2.5% in 1974, according to Breakingviews calculations based on Capital Economics, Federal Reserve and Bank of England data.

Current sanctions prevent Russia, for example, from investing in U.S. and European financial assets even if it wanted to, other Energy producers may choose to hedge their bets and squirrel away some of their proceeds elsewhere.

Global dollar- and euro-denominated central-bank currency reserves have already dipped to 79% of the total in March 2022 compared with 85% six years earlier, according to IMF data.

Finally, OPEC countries are facing substantial requirements for domestic investments that reduce their reliance on selling fossil fuels as the world moves towards renewable energy. 

For Saudi, that could mean investing more on solar power and education to boost its services sector.