The Bulk Of Opecs External Assets Commerce Essay


The bulk of OPECs external assets were placed in bank deposits and government securities. While this fact has been powerfully emphasized in works throughout the years, again one can find that OPEC did at first attempt to optimize their investments. Mikdashi mentions that OPEC countries did certainly look for alternative from bank deposit such as collection savings or mutual funds, but both "proved unsatisfactory." Indeed, at one point in 1981, 75% of the Saudi Arabian Monetary organization SAMA) assets were kept in short-term US government securities or Euro-market bonds. Though little arithmetical data exists which breaks down the asset share of the petrodollars during the time, as the "LDC Debt Crisis" section of this paper will show, OPEC's petrodollars were a main source of deposits in the world's banks throughout the time

Extra Flows of Petrodollars

There were of route other pathways that petrodollars took through the period, namely reinvestment of the petrodollars in Europe. Philip Windsor point out that most Arab oil revenue from Europe never left the continent but stayed as investments. He firmly deduct that, "It is the power which the Arab nations acquired from send-off their money in Europe which is at the root of the problem;" the problem of course being the often contradictory Euro-Arab, Euro-American, and Arab-American relations.

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Though Europeans faced serious nervousness over the potential trip of Arab money authors including Windsor himself stressed the same reality - there was no high chance of this occurring because it would not be in the welfare of the Arabs as it would certainly hurt their bread and lard industry, oil. Lastly, Arab oil-exporters also tried to branch out into private and public fairness. According to a trade Week article published in 1981, "Kuwait and other Arab investors owned 4.9 per cent of the equity of hundreds of America's top business, to just below the smallest amount required by the SEC for full revelation.11 It is interesting to note that similar chaos over selling domestic businesses to Arab investors took place in the '70's and '80's as is happening at the present moment. Mikdashi 422.

3.4.2) OPEC Threats:

"Dependent Development and the Arab OPEC States" highlights that within the great attention on rolling oil revenues, there is lost the understanding that in "relative economic terms" the Arab OPEC states did not develop considerably. He harassed that during this period of high oil revenues, very little was done to lesson their trust on "outside technological support, industrial capital, and foreign markets."

Not only were the OPEC countries still technically dependent on the West, the turbulent economic environment of the 1970's and early 80's also highlighted how sensitive their current account surpluses were to oil prices and subsequent worldwide recessions. The total OPEC current account surpluses fell sharply in 1974, 1976 and again in the early 1980's due to the worldwide recessions and subsequent reduced petroleum demands. There is also another dimension of OPEC's reliance on OECD countries, the task of recycling the oil windfalls. As explained in further detail later in this paper, the international private banks assumed the primary role of recycling intermediaries between surplus and deficits nations. In fact, as Mikdashi makes clear, OPEC nations preferred to use Western banks and the international banking system for two principal reasons: the wish to have relatively easy access and quick recourse to funds deposit or entrusted; and the concern for greater defense offered by banks that will assume the insolvability of debtors in contrast to the risks involved in direct bilateral lending.

LDC Debt disaster

The flow of petrodollars during the 1970's and '80's has been linked with no stuff

More closely than the Less urban Countries (LDC) Debt Crisis. The conservat ive story state that oil exporters lent their money to western banks, which then proceed to loan en masse to the developing world. In reality, the jab of petrodollars into the world's banking system only exacerbate a lending trend that had begun some years former. For more than a decade before oil prices quadrupled in 1973-1974, the growth rate in the real domestic product of the LDC's averaged about 6 percent annually. For the rest of the 1970's the growth rate slowed but averaged a reputable 4-5 percent. Such growth generate new US business investment in these markets, and the international banks followed by establish a worldwide

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attendance to support such activity.12

The shot of petrodollars into the global banking system can be seen in Figure 8 reproduce from the BIS periodical Review of December 2005. The graph shows that BIS coverage bank's net liability to OPEC member countries approximately doubled over this period, making OPEC countries one of the largest net supplier of funds to the international banking system.(2) Contrary to conventional understanding, however, the Less Developed Country Debt Crisis cannot exclusively be answerable on the arrival of petrodollars into bank deposits. Rather, there are two more sides to the story - the keenness of the banks to expand their market base and the global macroeconomic factors that prevail during the time.

The primary incentive for overseas expansion of US banks during the 1970's was the search for new markets and profit opportunities in response to major structural changes in the home market, namely losing their share of household savings to the capital markets.(3)

The new international Eurodollar loan market, or US Dollar denominated loans, obtainable just the opportunity the banks were looking for. With less regulatory oversight than US issue debt, the banks saw the LDC loans as moderately low-risk.

Chapter 4-UDC Debt Crisis

The actual recycling device consisted of transform short-term deposits into medium-word and long-term loan Recent innovation in the banking system namely the Euromarkets as well as syndication and consortium banking interest rates, and roll-over credits were also regard as reducing banks' credit risks. In fact, Windsor stressed that the international banks behave as if they suffered from "disaster myopia," i.e. as if the likelihood of a major shock affecting their international loan portfolios were zero.

The western banks, in particular the US money-center banks (as they made up the largest piece of Latin American private creditors), very lent money to the LDC's apparently without concern for overexposure. The top nine banks accounted for 65 percent of total contact of US banks in Latin America. The contact of the top nine banks in just the top four countries, Argentina, Brazil, Mexico, and Venezuela, accounted for $41 billion, or 45 percent of total US bank exposure. Sovereign loans, those to foreign public sector borrowers, accounted for about two-thirds of US bank lending to the LDC countries. (1) Figure 9 shows the increasing trend of

Latin American Debt from 1977 to 1983, just before the actual crisis began. The banks'

exposures were actually in violation of the 10 percent rule banks were required to abide by whereby they were not permitted to make loans to a single borrower in excess of 10 percent of the bank's capital and surplus.

Figure 9

This period of rapid "recycling" of petrodollars saw private banks set up themselves as the major market makers of the world's capital flows as a result, this also meant the diminish role of official agencies. The banks were regarded as the most efficient go-between between current account surplus and shortfall nations. It was deemed that they provided much greater speed and suppleness than bilateral or joint financing arrangements typically made by institution such as the International Monetary Fund (IMF) and the World Bank. Indeed, private sources accounted for 53.6 percent of net flows of average and long-term capital in 1970, 65.1 percent in 1973, and 72.0 percent in 1980. By 1980 private debt accounted for over 65 percent of outstanding medium and long term debt.17 In addition to a severely limited IMF presence, Official Development Assistance (ODA) flows actually halved from 1973-1978 as a percent of the current account deficits of the non-oil producing LDC's.

The IMF did try to get bigger its lend capability through a series of special lending "amenities"'; by 1979 a country could have in principle on loan as much as 467.5 percent of its share as compare with 125 percent official under the original Articles of Agreement.18

These initiative, though, were still not enough to handle the absolute magnitude of credit

requirements at the time. Lending banks did use the IMF as an independent certifier of debtor countries credit merit. However, as Robert Solomon pointed out in "The Debt of Developing Countries: Another Look," "In the many instances where a borrower's policy stance did not come into doubt, the IMF may not have been concerned at all."

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The limited presence of the IMF allowed a shaky recycling system to come out where countries were effectively free in their access to financing. Banks lacked the authority to direct the economic and home policies of the debtor nations and as a result, borrow nations were later accuse of relying too a lot on their supposed unlimited sources of finance rather than improving their home economic situation. In Latin America, as of year-end 1970, total outstanding debt from all sources amounted to only approximately $29 billion. By year-end 1978, these out standings had risen to approximately $159 billion - an annual compound growth rate of almost 24 percent.19 Table 4 (reproduced from "Domestic and External Causes of Latin American Debt Crisis" by Eduardo Wiesner) shows the dramatic extent of debt obligations experienced by the LDC's.

Table 4

External Debt as % of

GDP in 1983

Debt Servicing Requirements in 1982 (in terms of exports of goods and services)

Interest Servicing Requirements in 1983 (in terms of exports of goods and services)


Costa Rica






















Chile & Peru



What is critical to note of this period is that the private bank-led recycling procedure was in fact extensively praised in the early years of the lending trend. The relative softness with which banks recycled funds from surplus to deficit countries largely contributed to the escaping of major conflict in the international monetary system and to a quick change of the world economy to the global payments imbalance.20 However, in "Prospects for Recycling Oil Surpluses by the International Capital Markets" the IMF points out that the initial success of the banks was largely due to favorable macroeconomic environment. The 1974-75 recession they state, "reduced lending opportunity in the industrial countries so that banks were eager to maintain their lending to the developing world, and at the same time real interest rates were low sufficient to keep debt service requirements from becoming too onerous."

The harshness of the second oil shock of 1979 and the subsequent recession, however, shattered the system. Falling commodity prices, high real interest rates, and depleted reserves overloaded the LDC's. lessening export prices reduced their export income while rising interest rates exacerbated their debt obligations. Most loan were floating rate contracts tied to the London Interbank contribution Rate (LIBOR). During the initial surge in LDC lending (1974-1978), interest rates were really low, even negative in real terms for a period of time. After the second oil shock, though, the floating rate factor proved to be incapacitating as world wide interest rates grew in response to the oil shocks and inflationary pressures. Furthermore, the bulk of

LDC debt was dollar denominated. This became a important factor because the appreciation of

the dollar in response to higher US interest rates in the early 1980's increased the difficulty in

meeting debt obligations. Moreover, the LDC nations themselves also contributed to the crisis.

The "recycled" oil profits were not used efficiently by the borrowing nations, as most of the new

bank loans to the LDC's from 1979 to 1982 went to cover the accrued interest on existing

debt/and or maintain levels of use, rather than for productive investments

Crisis Unravels

The actual LDC debt disaster began on August 12th, 1982 when Mexico announce that it would be not capable to meet its August 16 compulsion to service an $80 billion debt (mainly dollar denominated). By October 1983, 27 countries owing $239 billion had reschedule their debts to banks or were in the procedure of doing so. As Figure 9 portrayed, it was only from this moment on that the banks began to curb their lend to the LDC's. From the end of 1983 to 1989, money center bank loans wonderful to Latin America decreased from $56 billion to $44 billion, a refuse of more than 20 percent.21

The decade following the outbreak of the debt crisis was spent taking steps to avoid a

Theatrical economic crisis. Fortunately, no large bank failed during the period though beginning in 1987 they did recognize significant loses on the LDC loans. An important factor causal to the continued existence of the banks was that they were not required to set up reserves for the distressed LDC loans. This gave them amble time to raise capital and increase reserves. The final decree to the crisis was the famous Nicholas Brady plan, in which debtor nations used funds raised from the IMF and World Bank to exercise options such as debt-equity swaps, buybacks, exit bonds, and other solutions.22

Warning Signs

Various congressional hearings were held throughout the mid-to-late 1970's in regards to the extreme contact of US banks to the LDC's. In 1979, the Interagency Country Exposure appraisal group (ICERC) was established to monitor US banks' contact to foreign lending. Paul Volcker, Chairman of the Federal Reserve Board issued warnings of the option of rescheduling of debts. Such pronouncement, however, were frequently greeted as exaggerated even by those who felt some caution was suitable, with regard to LDC debt, and belief in the likelihood of a crisis was not extensive. 23Much of this concern was done in ineffective as bank lending grew until the actual crisis in 1982. An analysis by the US General Accounting Office in 1982 optional that the "special commentary by bank examiners have had little impact in warning the growth of specially comment exposures." Although increasing numbers of observes were paying attention to the signs of future problems, the financial markets were generally not distribution any negative signals. An analysis of the movement in annual stock prices for the US money center and local banks against the S&P 500 market averages indicates no significant discounting of prices by the

market in the years leading up to the crisis.24 Moreover, business bond ratings of the money-

center banks also did not did not represent any particular concern of the concentration of risk in the LDC countries. Only after 1982 were the corporate bond ratings downgraded for the money- center banks.

4.3) Lessons Learned:

The LDC Debt Crisis dyed several details and shortfalls of the international banking system at the time. As mention earlier, the establishing of private banks as the primary mediators consequently meant the decline and absence of official agencies. Banks reduced their exposure and involvement with LDC countries at a time when their aid was needed the most. The banks as private institution simply did not have the legal or political leverage to dictate policy directly to a sovereign government. (2) Robert Solomon in "A Perspective on the Debt of Developing Countries" proposed that if countries in surplus would have lent directly to countries in deficit, then the intermediary role of the banks and the subsequent crises would have been eliminated. The turbulent period also revealed that the recycling mechanism had a fundamental flaw that was often overlooked - the incongruity of short-term objectives of private banks and OPEC lenders with the long-term development requirements of the LDC's. The private banks were merely middle-man or intermediaries, who were not in the business of planning long-term developmental projects. What's more, the initial congratulate for the recycling system and the confidence in the new financial innovations demonstrated the obvious narrow perspective of on-lookers at the time. Despite the initial positive results and the confidence in the broadened financial product range, the true colors of the recycling system could only have been seen through a proper economic cycle. Not only was their a technical limit to the absorptive capacities of the markets and the borrowing countries, but unique sets of simultaneous economic events and conditions proved that they can without warning undo the seams of the markets and their participant

Petrodollars Today:

The present oil price cycle started in 1999 when oil prices began to scale on the grounds of increased global demand and few significant discovery. The graph to the right shows the recent drift in spot WTI prices. The dip in prices in 2001 is attributed to an increase in supply from both OPEC and Russia, in arrangement with reduced demand for oil due to the Asian bend. Despite falling by about 50% in 2001, oil prices did rebound by 107%. As of December 2005, BIS reported OPEC members have earned an estimated $1.3 trillion in petrodollars since end-1998, while the world's other large exporters, Russia and Norway, have received $403 billion and $223 billion respectively.(1) Furthermore, the IMF estimated that Middle Eastern countries will hoard nearly $400 billion this year from oil export revenues. On an inflation-adjusted basis, that is double the amount of those revenues in 1980, when oil prices surge after Ayatollah Khomeini came to power

in Iran, and more than three times the figure of 1974, when the price of crude spiked after

the Arab oil embargo.(2) The top oil exporting countries as of 2004 are represent in

Appendix 3.

Figure 10









1997 2000 2003 2006

Initially one can observe the robust current account balances to appreciate the scale of the recent windfall and the vast spending opportunities present for the oil exporters. As seen from the graph, Saudi Arabia and Russia in particular wrapped up immense amount of capital in relation to their import spending, with their current accounts rising a confounding 852.42% and 156.25% in that order from 2001-2005. Interestingly enough, oil exporting nations will now have bigger current-account surpluses than Asian countries, long associated with America's looming current-account deficit (see Appendix 4 for the expected overtaking of Asia in terms of present figure 11

The recent wave of academic and media reports about petrodollars has underscored the idea that the complexity and integration of today's financial markets makes it difficult to track the flow of their investments. Indeed, Arab oil states are more and more using off-shore and British vehicle to channel their money, as the post 9-11 climate has made them weary of increased foreign asset scrutiny. as well, there is evidence to suggest that oil-exporters are channel a greater piece of their funds outside of bank deposits than in the previous period, thus causal to track difficulties.

A study by the Bank for International resolution (BIS) calculated that it was unable to account for almost 70% of an estimated $700 billion in OPEC's spend able funds generate by the increase in oil prices from 1999 to 2005. The figure represent $486 billion of increasing invest able funds that cannot be identified in counterparty data. This compares to 51% during the last windfall.

Despite the discouraging news that much of the money cannot be followed, there are enough capital flow, country, and counterparty indicator to suggest that the money, at least for now, is being used more prudently and successfully than in the previous cycle. This assertion is based on evidence suggesting improved domestic financing as well as a superior rate of savings of petrodollars than in the preceding period.

One can begin to see this in the significant drop of debt within the major exporters. The following graphs illustrate the extent of the reductions of public debt / GDP ratios for Saudi Arabia and Russia. Appendix 5 includes graphs for the remaining top oil-exporters. The only country with an increased public debt/ GDP ratio for the period is the UAEs.

Figure 12

In calculation, some countries have also used the additional oil revenue to save for future generation. Norway, for example, set aside $31 billion from end-Q3 2004 to end-Q3 2005, equal to about 11% of GDP in its Government Petroleum Fund (GPF). Russia has more than doubled the size of its stabilization fund since its beginning in early 2004, which stood at about $43 billion as of end-2005.(1) Russia's stabilization fund, however, is not without disbelief as critics warn that politicians and even President install himself have great incentive to grab their peace of the pie. Following suit with Russia and Norway, the world's other non-OPEC oil- exporters are also establishing similar funds, these include Mexico, Azerbaijan, Kazakhstan, and East Timor. The placement of petrodollars into these funds has also contributed to the difficulty in tracking the money, as the national funds rarely disclose their investments and asset allocation.

Figure 13

Venezuela also still sits in deficit country despite drastic improvements from 2003-2005.

Another positive sign of economic discipline within the major oil exporters is the improved budget balance/GDP ratio. The graphs below portray Saudi Arabia and Kuwait going into budget surplus territory during the recent period. Appendix 6 includes the rest of the major oil-exporters. The only nation to actual regress backward in terms of the budget balance was Iran, while In terms of saving more of their profits, the Arab oil exporters, in particular, have more reason to keep the petrodollars at home. What's more, with the recent spot light on insufficient global refinery capacity and little spare capacity, the Arab exporters are being pressured to invest in oil production and cleansing capacity.

5.1) Investing Abroad:

To show the higher tendency of OPEC countries to invest oil revenues abroad, the BIS calculated and compare OPEC's total "invest able funds" between the two periods. "Invest able funds" are defined as the sum of OPEC countries' current account surpluses and their gross financial inflows. Figure 13 reproduce from the BIS report shows that the ratio of the flow of invest able funds to the flow of net oil revenues has been higher in the 1999-2005 period than pervious one signifying a higher rate of foreign placement. The report also indicate that in the most recent cycle, US securities m a k e u p a lesser percentage of invested petrodollars, though they still constitute the bulk of recognized investment in foreign securities.

Figure 14

5.2) import:

Import expenditure has a dual importance in the dialogue of petrodollar flows. For one, increasing the amounts of imports of goods and services from the rest of the world can help to correct global imbalances, in exacting narrow the US trade deficit. Secondly, spending on imports can be an effective weight to too much petrodollars flowing into domestic Economies with limited absorptions. Much of the obsession with the use of petrodollars in the US is the possibility of petrodollars decreasing the record high trade deficit. However, data suggest that OPEC nations do not of necessity favor the US as its source of imports

Figure 15

Figure 15 reproduced from the IMF illustrates that while oil-exporters have trade surpluses with both the US and Asia, the surplus with the US is increasing at a faster rate than that of Asia. Indeed, Arab states are now main buyers of goods from Japan, China, and the rest of Asia. (1) In regards to the European Union, OPEC actually has a trade deficit with the region. Europe's share of OPEC's imports has climb to 32%, compare with America's 8% (see also Appendix 6). (2)

To further observe the trade dynamics between OPEC and the US, Figure 16 plots US imports, exports, and the trade balance with the oil cartel. While exports have been steadily increasing over the past few years, your imports have been increasing at a drastically higher rate.

Figure 16

While much conversation has already developed regarding OPEC's imports, the truth of the matter is that OPEC has yet to spend a great deal on imports. In 1973-76, 60% of the increase in OPEC's export revenues was spent on imports of goods and services. In 1979-81, the proportion rise to 75%. But the IMF estimate that only 40% of the windfall in the three years to 2005 will have been spent. (3) In many oil-exporting countries import growth is cover export growth because some oil exporters have chosen to increase saving and pay down debt and some face capacity limits that restrain import demand.

The Department of Treasury attribute lag of import growth relative to the pace of revenue increases to two major factors: 1) traditional oil price assumptions in national budgets (e.g. of about $30-$40 per barrel); and 2) capacity limitations (especially on capital investments). The first point has actually been tout by many authors as an clever decision - as not to repeat the same expediency in spending oil revenues as in the past. The second factor, as the Dept. of Treasury explains, "Reflects the time needed for sufficient planning, implementation and oversight of major public and private investments." Indeed, imports along with domestic spending are expected to rise with time as countries have the time to handle and absorb the excess profits. For instance, while exports from OPEC members to the United States increased $20 billion in the first seven months of the year compare to 2004, American exports to the nations of OPEC, grew $6.5 billion in the same period.(1) Looking at the previous oil cycle reinforce the notion of a lag time between oil revenues and import expenditure, as was illustrated by Figure 7.

5.3) Private Equity:

The recent roe over the DP World contract to take over a number of US port highlights the aggressive investment initiative taken on by the Arabs. Though FDI figures from the Middle East are still moderately small to the traditional US investors of Asia and Europe, it is expected that constant high oil prices will increase the Middle East's share. Arab takeovers of European and US firms totaled $30 billion last year. (1) Unlike the previous period's attempt at equity diversification, the current efforts are driven by young educated Arab investors attempting to effectively spread their assets through numerous proven businesses. Recent prominent dealings include Dubai International Capital's $1 billion stake in DaimlerChrysler and the purchase of the Tussauds Group, as well as Abu Dhabi-based Mubadala Development Company 5 per cent acquisition of Ferrari last year.

Production Diversification:

In comparing the two time periods, the deciding point of separation in regard to petrodollar investments may finally be the diversification from oil. As Edward Chancellor of the Wall Street Journal put it, "Dubai is attempt to transform itself into a leading financial center and traveler resort…Saudi Arabia intends to become a world leader in manure production. Learning from history, however, teaches us to be very skeptical of mere initial attempts rather than solidified accomplishments.

Anecdotal r e p o r t s still indicates that Arab exporters are reluctant to invest in refining capability and/or alternative energy research.


Stock Market Booms

An instantly recognizable sign of a unique outlay for petrodollars as compare to the previous cycle is the region-wide boom of stock markets in the Middle East. It has been extensively conferred that a major reason for the Middle East stock market surge has been the channel of petrodollars into these markets. Only four years ago, Gulf companies were priced at around twice book value. Today they trade on an average of 44 times significant earnings and at over eight times book value. Appendix 8 contains the historical graphs for Abu Dhabi, Kuwait, Qatar, Saudi Arabia, and the UAE (though slight corrections have occurred from the time of the graphs, the trends are still quite remarkable). Since 2002, the Egyptian, Dubai, and Saudi stock markets are up respectively by over 1,100%, 630%, and 600%. 34

Particulars of Today

The circumstances today in terms of rolling oil prices, build up petrodollars, and their following usage entails some essential distinction. For one, today's windfalls are largely continued by strong basic reason - increased global demand, little excess plant ability, and few important discovery, which is in stark contrast to the short-term supply shocks of the 1970's. These original factors suggest that while today's prices have not reached the same real highs as in the previous cycle, the high prices may be here to stay. It is important to note that for now, in the face of the surging oil prices, the IMF reported that, "More luxurious energy will have only a modest impact on global increase…"

Secondly, in regards to the investment of petrodollars, there is no doubt that today's financial markets offer a severely broader investment field This implies that petrodollars are more likely to be diversify throughout the world and the domestic economies of the oil- exporters, so as not to create the same attentiveness of funds in western banks as before. As was seen in the BIS report on petrodollar flow, OPEC as a source of funds for BIS reporting banks does not have the same importance as it once did. Moreover, given the heartening preliminary results from oil-exporters' domestic economies it seems that today's cycle has at least started off on a better grip. In spite of some of these in fact encouraging differences, there are enough workings in today's markets to actually judge the current global situation an random one. For one, there is yet another rush into the rising markets. As seen in the graphs below, equity prices have been soaring while in the debt markets, bond spreads have been consistently tapering around the standard US Treasuries. Not only has there been a strong downward fashion in bond yields, they are now even lower than their previous record-lows of 1997. lend to the emerging markets totaled $56 billion, a sum not experiential since 1997. Furthermore, the emerging debt markets have also seen a growth in derivative instruments, in particular credit default swaps and the beginning of new synthetic collateralized debt obligation

The dangerous difference here is that the lend is formed through debt issuances on the capital markets where prevaricate funds, annuity funds, and investors say the demand and the yield as opposed to direct bank lending of the 1970's and 80's. hypothetically speaking the markets should be better able to speak the lending process as access to borrow is fixed to market sentiments and movements. Furthermore, the current flash into the budding markets has been attributed to sounder financials of the developing countries, in particular the current- account surpluses of the major nations due to high product price.

However, doubts of equity and real estate bubbles are not uncommon anymore. In an October 12, 2005 commentary, the Financial Time proclaim in regards to the Middle East, "The question now is not so much whether there will be a alteration, but how severe it might be." certainly, a double correction of equity and real estate markets is expected in the area What's more, the BIS Quarterly Review of March 2006 boldly asserted,"…backer demand for budding market assets seems stronger than can be explain by the improvement in basics alone." in spite of the often sited vibrant economic indicator of the emerging markets and the countries' greater access to international debt safety markets, the BIS still sited an increased investor "taste" for risk as a major reason so much investment is geared toward the nation.

In regards to the development and propagation of innovative financial instruments in these markets, care and distrust of market's pricing ability are also not rare. Soroosh Shambayati, managing director of EMEA global emerging markets credit derivative at Citigroup, clearly stated in regards to CDO's, "The cracks will only get exposed if we have a proper credit cycle."35 If the 1970's and 1980's can teach us anything, it is that the mere introduction of new financial products or platforms carries no guarantee of stable and elastic financial systems in times of crisis The low interest rates still current throughout the world have solidify doubts of "surplus liquidity" and global imbalances. In the United States, the lack of personal savings accompany by relatively low interest rates has caused a opposed to property bubble. One study by the National Association of Realtors predictable that 23 percent of homes in 2004 were purchased primarily for investment.36 To add fuel to the fire, there has also been an bang of "foreign" mortgages to the real estate scene that has made financing a home even easier.

Other evidence of global imbalance include countries with peg exchange rates, in particular the Gulf Cooperation Council and China, which has allowed them to build up excess reserves while threatening domestic industries else where. While, on the other side of the range is the United States which depends on a unstable source of savings in order to finance the ever widen trade shortfall. It has been discussed that changes in interest rate differential may move petrodollars away from US Treasuries. Though OPEC members have solid reasons to invest in US Treasuries, it is still possible that if the Dollar starts to decrease in value even advance (a prediction investment legend Warren Buffett adheres to) oil-exporters may move a portion of their savings away from the US Dollar. With the understanding that the US shortfall cannot be continued forever this surely presents a disturbing idea

Conclusion & Final Thoughts

Though praise and self-confidence has been bestowed upon the oil-exporters, history should teach us to still remain cynical. As we have seen in the previous cycle, beginning attempts and apparent successes in the management of petrodollars by the oil-exporters may not be sustainable for a number of reasons. The complex interaction of bureaucracy, rulers, and regional politics may hold back the effective use of petrodollars at some point in the future.

Even if we were to fully subscribe to the oil-exporters' domestic improvement today as being a sign of carefulness and ability, the global macroeconomic situation still presents believable concern. With no real consensus regarding the threat posed by the current excess liquidity and global imbalance in the world, and the United States unable to sustain its deficits and energy use forever, the current situation is indeed a impulsive one. As the LDC crisis made it clearing spite of of the confidence in the global financial and banking systems or in the counterparties accepting the funds, the petrodollar recycling machinery can still give way to single sets of macroeconomic factors that are capable of undoing the seams of the system. This being said, petrodollars today cannot be ruled out as a potential source of danger for the world.

The observation that price controls induce scarcity and impose net losses on the economy is as uncontroversial among economists as are observations about gravity among physicists. The experience of the 1970s further suggests that price controls may not even achieve their stated goal of reducing consumer prices.

Intervention in oil markets has historically been more concerned with improving the welfare of politically popular market actors (primarily small, independent oil producers and small refinery owners) than with improving the welfare of consumers. Whether politicians intended that to be the case is unclear. Regardless, if wealth redistribution is the rationale for price controls and windfall profit taxes, then there are certainly less costly and more equitable ways of going about that project than through a return to ruinous energy interventions of the 1970s.

People often support price controls and windfall profit taxes despite such findings because they simply don't believe that oil producers have a moral right to higher-than- normal earnings. There is a widespread sentiment that it is somehow wrong for owners

of fixed, low-cost assets to profit when exogenous events greatly inflate the value of the commodities they produce. Yet those who hold that opinion do not generally begrudge

homeowners the same high profits when they put their houses on the real estate market.

In fact, the public tends to cheer rising home prices and reacts to falling home prices as problems to be solved. Why it is morally wrong for some parties but not others to periodically earn "windfall profits" is a mystery that we cannot solve.

Regardless of the moral issues involved, federal efforts to take excess profits from oil companies - whether via price controls or excise taxes - have proven to be ruinous exercises. Such policies fail to achieve their proximate aim, which is to reduce prices paid by retail consumers, but do manage to reduce supply, increase imports, and impose steep costs on the economy as a whole.

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