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Recycling initiative
Whatever recycling of petrodollars occurs is unevenly distributed. Oil exporters buy a lot more of their imports from Europe and Asia than from America, so a shift in the “terms of trade”, which redistributes income from oil consumers to oil producers, tends to reduce the relative demand for American goods. According to research by the International Energy Agency, for each dollar America spent on oil imports from OPEC countries last year, only 34 cents came back in exports, whereas the European Union got back more than 80 cents. For each dollar China handed to OPEC, 64 cents flowed back in increased exports.
Oil producers understandably do not want to repeat the mistakes of previous times, when spending surged as oil prices rose—only to leave behind large deficits when prices later fell. Saudi Arabia, for instance, shifted from a current-account surplus of 26% of GDP in 1980 to a deficit of 13% in 1983. Exporters should certainly run a surplus as a buffer for when oil prices drop or wells run dry. The surpluses of 5-7% of GDP run by Russia, Nigeria and Venezuela seem sensible, but some countries’ prudence looks excessive. Saudi Arabia’s current-account surplus could hit 28% of GDP this year, and Kuwait’s 46% (see right-hand chart). Kuwait’s cumulative surpluses over the past decade, even ignoring capital gains, amount to a whopping 200% of last year’s GDP.
Normally, a large current-account surplus would be eroded over time by stronger domestic spending and a higher exchange rate. But the Gulf currencies are pegged, or closely linked, to the dollar. Over the past ten years their real trade-weighted exchange rates have stayed flat or fallen, despite the massive gain in their terms of trade. A floating exchange rate could lead to excessive volatility and discourage diversification of these economies (by making other sectors uncompetitive as the currency appreciates), but a bit more flexibility might assist global rebalancing.
Some economists have suggested that oil exporters’ currencies should be pegged to a basket which includes the oil price as well as other currencies. A more flexible exchange rate which rose (and fell) with the oil price would boost (or reduce) consumers’ purchasing power, and hence imports, and also smooth out the local-currency value of government oil revenues. But that would not be a silver bullet. A 2009 IMF working paper* concluded that exchange-rate appreciation is unlikely to have much impact on oil exporters’ external balances. The authors estimated that it would take a 100% appreciation to reduce a surplus by just 2.5% of GDP, both because a revaluation has no effect on oil revenues, which are priced in dollars, and because there is little scope for imports to substitute for domestic production since the manufacturing sectors of these economies are generally tiny. A huge appreciation would also drive down the local-currency value of the large net external assets of some of these countries.