![Opecrev](https://upload.wikimedia.org/wikipedia/commons/0/0a/Opecrev.gif)
Petrodollar recycling is the international spending or investment of a country's revenues from
petroleum
Petroleum, also known as crude oil, or simply oil, is a naturally occurring yellowish-black liquid mixture of mainly hydrocarbons, and is found in geological formations. The name ''petroleum'' covers both naturally occurring unprocessed crud ...
exports ("petrodollars").
It generally refers to the phenomenon of major
petroleum-exporting states, mainly the
OPEC members plus Russia and Norway, earning more money from the export of crude oil than they could efficiently invest in their own economies.
The resulting global interdependencies and financial flows, from oil producers back to oil consumers, can reach a scale of hundreds of billions of
US dollars
The United States dollar (Currency symbol, symbol: Dollar sign, $; ISO 4217, code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from Dollar, other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American ...
per year – including a wide range of transactions in a variety of currencies, some
pegged to the US dollar and some not. These flows are heavily influenced by government-level decisions regarding international investment and aid, with important consequences for both
global finance and
petroleum politics
Petroleum politics have been an increasingly important aspect of diplomacy since the rise of the petroleum industry in the Middle East in the early 20th century. As competition continues for a vital resource, the strategic calculations of major a ...
. The phenomenon is most pronounced during periods when the
price of oil
The price of oil, or the oil price, generally refers to the spot price of a barrel () of benchmark crude oil—a reference price for buyers and sellers of crude oil such as West Texas Intermediate (WTI), Brent Crude, Dubai Crude, OPEC Ref ...
is historically high.
The term petrodollar was coined in the early 1970s during the
oil crisis, and the first major petrodollar surge (1974–1981) resulted in more financial complications than the second (2005–2014).
Capital flows
Background
Especially during the years
1974–1981 and
2005–2014, oil exporters amassed large surpluses of "petrodollars" from historically expensive oil.
(The word has been credited alternately to Egyptian-American economist Ibrahim Oweiss
Ibrahim M. Oweiss (born September 25, 1931) is an Egyptian-born American economist, international economic advisor, and professor of economics at Georgetown University in Washington, D.C.
Biography Early life and education
Oweiss received a ...
and to former US Secretary of Commerce
The United States secretary of commerce (SecCom) is the head of the United States Department of Commerce. The secretary serves as the principal advisor to the president of the United States on all matters relating to commerce. The secretary rep ...
Peter G. Peterson
Peter George Peterson (June 5, 1926 – March 20, 2018) was an American investment banker who served as United States Secretary of Commerce from February 29, 1972, to February 1, 1973, under the Richard Nixon administration. Before serving as Sec ...
, both in 1973.) 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.[ The surpluses could not be efficiently invested in their own economies, due to small populations or being at early stages of ]industrialization
Industrialisation ( alternatively spelled industrialization) is the period of social and economic change that transforms a human group from an agrarian society into an industrial society. This involves an extensive re-organisation of an econo ...
; 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.
1974–1981 surge
While petrodollar recycling reduced the short-term recessionary impact of the 1973 oil crisis
The 1973 oil crisis or first oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries (OAPEC), led by Saudi Arabia, proclaimed an oil embargo. The embargo was targeted at nations that had supp ...
, 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
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster globa ...
(IMF) estimated that the foreign debts of 100 oil-importing developing countries
A developing country is a sovereign state with a lesser developed industrial base and a lower Human Development Index (HDI) relative to other countries. However, this definition is not universally agreed upon. There is also no clear agreem ...
increased by 150% between 1973 and 1977, complicated further by a worldwide shift to floating exchange rate
In macroeconomics and economic policy, a floating exchange rate (also known as a fluctuating or flexible exchange rate) is a type of exchange rate regime in which a currency's value is allowed to fluctuate in response to foreign exchange mar ...
s. Johan Witteveen
Hendrikus Johannes "Johan" Witteveen (12 June 1921 – 23 April 2019) was a Dutch politician and economist who served as the fifth managing director of the International Monetary Fund (IMF) from 1973 to 1978.
Witteveen attended the Gymnasium E ...
, the Managing Director of the IMF, said in 1974: "The international monetary system is facing its most difficult period since the 1930s." 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
The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balance ...
due to the rise in oil prices, notably including Italy and the United Kingdom as well as dozens of developing countries.
From 1974 through 1981, the total current account Current account or Current Account may refer to:
* Current account (balance of payments), a country's balance of trade, net of factor income and cash transfers
* Current account (banking)
A transaction account, also called a checking account, ch ...
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
The Arab world ( ar, اَلْعَالَمُ الْعَرَبِيُّ '), formally the Arab homeland ( '), also known as the Arab nation ( '), the Arabsphere, or the Arab states, refers to a vast group of countries, mainly located in Western As ...
of the Persian Gulf
The Persian Gulf ( fa, خلیج فارس, translit=xalij-e fârs, lit=Gulf of Persis, Fars, ), sometimes called the ( ar, اَلْخَلِيْجُ ٱلْعَرَبِيُّ, Al-Khalīj al-ˁArabī), is a Mediterranean sea (oceanography), me ...
and Libya
Libya (; ar, ليبيا, Lībiyā), officially the State of Libya ( ar, دولة ليبيا, Dawlat Lībiyā), is a country in the Maghreb region in North Africa. It is bordered by the Mediterranean Sea to the north, Egypt to Egypt–Libya bo ...
, with Iran
Iran, officially the Islamic Republic of Iran, and also called Persia, is a country located in Western Asia. It is bordered by Iraq and Turkey to the west, by Azerbaijan and Armenia to the northwest, by the Caspian Sea and Turkmeni ...
also accumulating significant oil surpluses through 1978 before suffering the hardships of revolution
In political science, a revolution (Latin: ''revolutio'', "a turn around") is a fundamental and relatively sudden change in political power and political organization which occurs when the population revolts against the government, typically due ...
, war
War is an intense armed conflict between states, governments, societies, or paramilitary groups such as mercenaries, insurgents, and militias. It is generally characterized by extreme violence, destruction, and mortality, using regular o ...
and sanctions.
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
A sovereign wealth fund (SWF), sovereign investment fund, or social wealth fund is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as ...
. Many billions of petrodollars were also invested through the major commercial bank
A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit.
It can also refer to a bank, or a division of a large bank, which deals with co ...
s of the United States, European Union, Switzerland, and the United Kingdom. In fact, the process contributed to the growth of the Eurodollar
Eurodollars are U.S. dollars held in time deposit accounts in banks outside the United States, which thus are not subject to the legal jurisdiction of the U.S. Federal Reserve. Consequently, such deposits are subject to much less regulation than ...
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
Brazil ( pt, Brasil; ), officially the Federative Republic of Brazil (Portuguese: ), is the largest country in both South America and Latin America. At and with over 217 million people, Brazil is the world's fifth-largest country by area ...
and Argentina
Argentina (), officially the Argentine Republic ( es, link=no, República Argentina), is a country in the southern half of South America. Argentina covers an area of , making it the second-largest country in South America after Brazil, th ...
[ 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." As political journalist ]William Greider
William Harold Greider (August 6, 1936 – December 25, 2019) was an American journalist and author who wrote primarily about economics.
Early life and education
Greider was born in Cincinnati, Ohio on August 6, 1936, to Harold 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." In subsequent decades, many of these developing states found their accumulated debts to be unpayably large, concluding that it was a form of neocolonialism
Neocolonialism is the continuation or reimposition of imperialist rule by a state (usually, a former colonial power) over another nominally independent state (usually, a former colony). Neocolonialism takes the form of economic imperialism, ...
from which debt relief Debt relief or debt cancellation is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations.
From antiquity through the 19th century, it refers to domestic debts, in particu ...
was the only escape.
2005–2014 surge
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.
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.[ Beyond the OPEC countries, substantial surpluses also accrued to Russia and Norway,][ and sovereign wealth funds worldwide amassed US$7 trillion by 2014–2015. 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
The resource curse, also known as the paradox of plenty or the poverty paradox, is the phenomenon of countries with an abundance of natural resources (such as fossil fuels and certain minerals) having less economic growth, less democracy, or worse ...
". 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.
Foreign aid
Oil-exporting countries have used part of their petrodollar surpluses to fund foreign aid programs, as a prominent example of so-called "checkbook diplomacy Checkbook diplomacy, or chequebook diplomacy, is used to describe a foreign policy which openly uses economic aid and investment between countries to curry diplomatic favor.
People's Republic of China / Republic of China
In East Asia, the term has ...
" or "petro-Islam
Petro-Islam is a neologism used to refer to the international propagation of the extremist and fundamentalist interpretations of Sunni Islam derived from the doctrines of Muhammad ibn Abd al-Wahhab, a Sunni Muslim preacher, scholar, reformer an ...
". The Kuwait Fund was an early leader since 1961, and certain Arab states became some of the largest donors in the years since 1974, including through the IMF and the OPEC Fund for International Development
The OPEC Fund for International Development (OPEC Fund) is an intergovernmental development finance institution established in 1976 by the member states of the Organization of the Petroleum Exporting Countries (OPEC). The OPEC Fund was conceived ...
.[ Oil exporters have also aided poorer countries indirectly through the personal remittances sent home by tens of millions of foreign workers in the Middle East, although their working conditions are generally harsh.] Even more controversially, several oil exporters have been major financial supporters of armed groups challenging the governments of other countries.
High-priced oil allowed the USSR
The Soviet Union,. officially the Union of Soviet Socialist Republics. (USSR),. was a transcontinental country that spanned much of Eurasia from 1922 to 1991. A flagship communist state, it was nominally a federal union of fifteen nationa ...
to support the struggling economies of the Soviet-led bloc during the 1974–1981 petrodollar surge, and the loss of income during the 1980s oil glut
The 1980s oil glut was a serious surplus of crude oil caused by falling demand following the 1970s energy crisis. The world price of oil had peaked in 1980 at over US$35 per barrel (equivalent to $ per barrel in dollars, when adjusted for inf ...
contributed to the bloc's collapse in 1989. During the 2005–2014 petrodollar surge, OPEC member Venezuela
Venezuela (; ), officially the Bolivarian Republic of Venezuela ( es, link=no, República Bolivariana de Venezuela), is a country on the northern coast of South America, consisting of a continental landmass and many islands and islets in th ...
played a similar role supporting Cuba
Cuba ( , ), officially the Republic of Cuba ( es, República de Cuba, links=no ), is an island country comprising the island of Cuba, as well as Isla de la Juventud and several minor archipelagos. Cuba is located where the northern Caribbea ...
and other regional allies, before the 2014–2017 oil downturn brought Venezuela to its own economic crisis.
Petrodollar warfare
The term petrodollar warfare refers to a theory that depicts the international use of the United States dollar
The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the officia ...
as the standard means of settling oil transactions as a kind of economic imperialism
The theory of imperialism refers to a range of theoretical approaches to understanding the expansion of capitalism into new areas, the unequal development of different countries, and economic systems that may lead to the dominance of some count ...
enforced by violent military interventions against countries like Iraq, Iran, and Venezuela, and a key hidden driver of world politics. The term was coined by William R. Clark, who has written a book with the same title. The phrase ''oil currency war
Currency war, also known as competitive devaluations, is a condition in international affairs where countries seek to gain a trade advantage over other countries by causing the exchange rate of their currency to fall in relation to other currenc ...
'' is sometimes used with the same meaning. In reality, the use of dollars in international oil transactions increases overall U.S. dollar demand by only a tiny fraction, and the dollar's overall status as the major international reserve currency has relatively few tangible benefits for the United States economy as well as some drawbacks.
In August 2018, Venezuela
Venezuela (; ), officially the Bolivarian Republic of Venezuela ( es, link=no, República Bolivariana de Venezuela), is a country on the northern coast of South America, consisting of a continental landmass and many islands and islets in th ...
declared that it would cease pricing its oil in US dollars and instead use Euro
The euro ( symbol: €; code: EUR) is the official currency of 19 out of the member states of the European Union (EU). This group of states is known as the eurozone or, officially, the euro area, and includes about 340 million citizens . ...
s, Yuan and other currencies.
In March 2022, media reports suggested that Saudi Arabia was considering whether to price some of its oil sales to China in the Chinese Yuan rather than the US Dollar.
On March 23, 2022, Vladimir Putin
Vladimir Vladimirovich Putin; (born 7 October 1952) is a Russian politician and former intelligence officer who holds the office of president of Russia. Putin has served continuously as president or prime minister since 1999: as prime min ...
signed an order forbidding "non-friendly" countries (including European Union
The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been des ...
countries, the United States and Japan) from buying Russian gas in any other currency besides Russian ruble
''hum''; cv, тенкĕ ''tenke''; kv, шайт ''shayt''; Lak: къуруш ''k'urush''; Mari: теҥге ''tenge''; os, сом ''som''; tt-Cyrl, сум ''sum''; udm, манет ''manet''; sah, солкуобай ''solkuobay''
, name_ab ...
(although the Russian Finance Ministry reportedly said it would also accept gold or Bitcoin
Bitcoin ( abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Bitcoin transactions are verified by network nodes through cryptography and recorded in a public distr ...
).
Gallery of notable examples
These images illustrate the diversity of major petrodollar recycling activities, in roughly chronological order:
File:1969 $100K Treasury Bill (front).jpg, US Treasury securities, approximately $300 billion accumulated by OPEC governments during 1960–2015, alt=refer to caption
File:60 Jahre Unimog - Wörth 2011 201 Produktion (5797901460).jpg, German vehicle factory for Daimler, whose largest consistent shareholder since 1974 has been Kuwait
Kuwait (; ar, الكويت ', or ), officially the State of Kuwait ( ar, دولة الكويت '), is a country in Western Asia. It is situated in the northern edge of Eastern Arabia at the tip of the Persian Gulf, bordering Iraq to the nort ...
, alt=refer to caption
File:ItaipuAerea2AAL.jpg, Itaipu Dam
The Itaipu Dam ( pt, Barragem de Itaipu , es, Represa de Itaipú ) is a hydroelectric dam on the Paraná River located on the border between Brazil and Paraguay. The construction of the dam was first contested by Argentina, but the negotiations ...
between Brazil and Paraguay, financed by loans from petrodollar bank deposits in the 1970s, alt=refer to caption
File:FaisalMasjid.jpg, Pakistan's Faisal Mosque
The Faisal Mosque ( ur, , faisal masjid) is the national mosque of Pakistan, located in capital Islamabad. It is the fifth-largest mosque in the world and the largest within South Asia, located on the foothills of Margalla Hills in Pakistan's ...
, constructed 1976–1986, a gift from Saudi Arabia's King Faisal, alt=refer to caption
File:Wheat sacks in a Portland, Oregon warehouse (3718620966).jpg, Western grain, heavily imported by the Soviet Union
The Soviet Union,. officially the Union of Soviet Socialist Republics. (USSR),. was a transcontinental country that spanned much of Eurasia from 1922 to 1991. A flagship communist state, it was nominally a federal union of fifteen national ...
to ease food shortages in the 1970s and 1980s, alt=refer to caption
File:Saudi F-15.JPEG, American-built F-15
The McDonnell Douglas F-15 Eagle is an American twin-engine, all-weather tactical fighter aircraft designed by McDonnell Douglas (now part of Boeing). Following reviews of proposals, the United States Air Force selected McDonnell Douglas's ...
fighter jet, one of dozens owned by the Royal Saudi Air Force
The Royal Saudi Air Force ( ar, الْقُوَّاتُ الْجَوِّيَّةُ الْمَلَكِيَّةْ ٱلسُّعُوْدِيَّة, Al-Quwwat Al-Jawiyah Al-Malakiyah as-Su’udiyah) (RSAF) is the aviation branch of the Saudi Arabia ...
since 1981, alt=refer to caption
File:Harrods at Night, London - Nov 2012.jpg, Harrods
Harrods Limited is a department store located on Brompton Road in Knightsbridge, London, England. It is currently owned by the state of Qatar via its sovereign wealth fund, the Qatar Investment Authority. The Harrods brand also applies to other ...
department store in London, under Arab ownership since 1985, alt=refer to caption
File:Stamford Bridge - West Stand.jpg, London's Chelsea Football Club
Chelsea Football Club is an English professional football club based in Fulham, West London. Founded in 1905, they play their home games at Stamford Bridge. The club competes in the Premier League, the top division of English football. ...
, Russian-owned since 2003 through the Sibneft
Gazprom Neft (russian: Газпром Нефть; formerly Sibneft, russian: Сибнефть, link=no), is the third largest oil producer in Russia and ranked third according to refining throughput. It is a subsidiary of Gazprom, which owns about ...
oil fortune, alt=refer to caption
File:BarrioAdentro.jpg, "Oil for doctors" program, with thousands of Cuban physicians anchoring the Venezuelan health system from 2004, alt=refer to caption
File:Bouteilles rangées by JM Rosier.jpg, Bottles of premium French wine, millions of which were purchased by Dubai-owned Emirates airline
Emirates ( ar, طَيَران الإمارات DMG: ''Ṭayarān Al-Imārāt'') is one of two flag carriers of the United Arab Emirates (the other being Etihad). Based in Garhoud, Dubai, the airline is a subsidiary of The Emirates Group, whic ...
since 2005, alt=refer to caption
File:Türk Telekom logo.svg, Turkish Telecom Corp., whose control was privatized to the Saudi Oger
Saudi Oger Ltd ( ar, سعودي أوجيه), was a Saudi construction company, incorporated in January 1978 with its headquarters in Riyadh
Riyadh (, ar, الرياض, 'ar-Riyāḍ, lit.: 'The Gardens' Najdi pronunciation: ), formerly kn ...
organization in 2005 with IMF support, alt=refer to caption
File:ChryslerBldgNYC2007.jpg, New York's Chrysler Building
The Chrysler Building is an Art Deco skyscraper on the East Side of Manhattan in New York City, at the intersection of 42nd Street and Lexington Avenue in Midtown Manhattan. At , it is the tallest brick building in the world with a steel fra ...
, 90% owned by the Abu Dhabi Investment Council
The Abu Dhabi Investment Council (The Council) is an investment arm of the Government of Abu Dhabi. It started operations in April 2007 and is responsible for investing part of the government's surplus financial resources through a globally div ...
since 2008, alt=refer to caption
File:Flickr - Israel Defense Forces - Missiles Found Aboard Francop.jpg, Iranian weapon shipments to Lebanon and Syria, including over 300 tons intercepted in 2009, alt=refer to caption
File:Les Joueurs de cartes, par Paul Cézanne.jpg, Cézanne painting, purchased in 2011 by the Royal Family of Qatar for a record-setting price above US$250 million, alt=refer to caption
File:TOYOTA FJ's (3568773870) 3.jpg, Toyota
is a Japanese multinational automotive manufacturer headquartered in Toyota City, Aichi, Japan. It was founded by Kiichiro Toyoda and incorporated on . Toyota is one of the largest automobile manufacturers in the world, producing about 10 ...
vehicles in Kuwait
Kuwait (; ar, الكويت ', or ), officially the State of Kuwait ( ar, دولة الكويت '), is a country in Western Asia. It is situated in the northern edge of Eastern Arabia at the tip of the Persian Gulf, bordering Iraq to the nort ...
, where the Japanese automaker holds a dominant market share, alt=refer to caption
See also
*Dedollarisation
Dedollarisation is a process of substituting US dollar as the currency used for (i) trading oil and/ or other commodities (i.e. petrodollar), (ii) buying US dollars for the forex reserves, (iii) bilateral trade agreements, and (iv) dollar-denomina ...
*Saudi Arabia–United States relations
Bilateral relations between Saudi Arabia and the United States began in 1933 when full diplomatic relations were established and became formalized in the 1951 Mutual Defense Assistance Agreement. Despite the differences between the two countri ...
References
Further reading
*
*
*
{{Macroeconomics
International macroeconomics
International finance
Petroleum economics
Petroleum politics