43272 RECYCLING INTERNATIONAL FINANCE BRIEFING NOTE OF PETRODOLLARS IN THE RECENT OIL PRICE SHOCK JACQUELINE IRVING New Series--Number 2, December 14, 2006 MC4-366 32499 A product of DECPG designed to monitor and analyse global financial markets and their implications for development. Recycling of Petrodollars in the Recent Oil Price Increase This Briefing Note summarizes ongoing work that examines how oil export revenues are being recycled in the recent oil price increase (2002-present) as compared with the previous episode in 1979-81. Main messages are as follows: · Deposits with BIS-reporting banks are the main identifiable destination of oil exporters'investable funds. Yet compared to previous episodes, the role of oil exporters as a net supplier of funds to the international banking system has diminished. · US securities and other dollar-denominated assets constitute the second largest identifiable destination for recycled petrodollars in this round. Major oil exporters are now overtaking emergingAsia as the largest net exporters of capital to the rest of the world, particularly the US. · The more diversified investment portfolios of oil exporters in this round may have provided opportunity to mitigate risk and generate longer-term revenue streams. Introduction T he large surge in oil prices in recent years has Oil exporters' investable funds have risen sharply generated large oil revenues for major oil exporting since 2002 countries.Total oil export earnings of major oil exporters From the perspective of foreign asset allocation, a useful have risen sharply in nominal terms, to an estimated concept is that of "investable funds," which can be $624.2 billion in 2005 and a forecast $678.9 billion in defined as the sum of a country's current account 2006, up significantly from $243.7 billion in 2001 position plus financial inflows (FDI inflows, foreign (Figure 1). For major OPEC oil exporters, total earnings portfolio investment inflows, and other foreign have risen more than 75 percent in nominal terms, from investment inflows).1Alternatively, investable funds can $270.6billionin1980,thepeakduringthepreviousmajor be estimated as the sum of the country's financial oil price shock, to $475.1 billion in 2005. In real terms, outflows and the change in its total foreign exchange the trend is somewhat less dramatic over the period, reserves, in line with the balance of payments identity. with OPEC oil export earnings in 2005 still 12 percent Investable funds can be used to estimate the supply of below the peak level in 1980. Nevertheless, major oil foreign-currency resources available to a country for exporters' total oil export earnings rose nearly 140 overseas investment (Table 1). percent in real terms over the 2002-05 period. 1 INTERNATIONAL FINANCE BRIEF NOTES Figure 1. Oil export earnings of major oil exporters Figure 2. Oil prices and major oil exporters' investable funds 700 Nominal crude oil prices (US$--left 50 axis) 500 600 45 Investable funds ($ billions--right 40 400 OPEC axis) 500 35 300 sno 30 400 Mexico 25 200 illib 20 300 100 $ Russia 15 200 10 0 Total 5 100 0 -100 0 197719791981198319851987198919911993199519971999200120032005 71 76 81 86 91 96 01 06 Source: IMF, World Bank, OPEC Annual Statistical Bulletin 2004 (for current account balances for UAE, 19771986; Iraq, 1977- Source: US Department of Energy, Energy Information 1999; Qatar, 1977-1990); US Dept. of Energy EIA for nominal Administration data estimates and forecast for 2006 as of July 2006. crude oil prices. Note: Major oil exporters (in this chart and throughout the Note) Note: Total investable funds are comprised of investable funds for comprise OPEC members Saudi Arabia, Iran, UAE, Nigeria, Kuwait, OPEC only for 1977-1994 and OPEC, Mexico and Russia from Venezuela, Algeria, Libya, Iraq, and Qatar and non-OPEC oil exporters 1995. See Table 1 for data availability limitations. Russia and Mexico. Table 1. Major oil exporters' estimated investable funds ($ billions) 2001 2002 2003 2004 2005 Major oil exporters Total investable funds 91.7 71.1 154.0 234.2 412.2 OPEC Current account position 46.7 43.0 86.5 123.0 248.3 Financial inflows 3.4 -3.9 0.0 2.6 7.9 Investable funds 50.1 39.1 86.5 125.6 256.2 Of which: Saudi Arabia Current account position 9.4 11.9 28.0 51.9 87.1 Financial inflows -1.3 -5.0 -1.4 1.2 2.8 Investable funds 8.1 6.8 26.7 53.1 89.9 Iran Current account position 6.0 3.6 0.8 1.4 14.0 Financial inflows n.a. n.a. n.a. n.a. n.a. Investable funds 6.0 3.6 0.8 1.4 14.0 Kuwait Current account position 8.3 4.3 9.4 18.9 32.3 Financial inflows 0.9 1.9 0.0 0.0 n.a. Investable funds 9.2 6.1 9.4 18.9 32.3 Venezuela Current account position 2.0 7.6 11.4 13.7 26.7 Financial inflows 3.3 0.3 1.5 0.0 4.8 Investable funds 5.3 7.9 13.0 13.8 31.5 Mexico Current account position -17.7 -13.5 -8.6 -6.9 -4.3 Financial inflows 29.8 13.1 12.4 19.5 24.8 Investable funds 12.2 -0.4 3.8 12.7 20.5 Russia Current account position 33.9 29.1 35.5 58.4 79.5 Financial inflows -4.5 3.3 28.3 37.5 56.1 Investable funds 29.4 32.5 63.8 95.9 135.5 Note: Major oil exporters (in this chart and throughout the Briefing Note) comprise OPEC members Saudi Arabia, Iran, UAE, Nigeria, Kuwait, Venezuela, Algeria, Libya, Iraq, and Qatar and non-OPEC oil exporters Russia and Mexico. Source: U.S. Department of Energy, Energy Information Administration, July 2006. Forecast for 2006 as of July 2006. 2 RECYCLING OF PETRODOLLARS IN THE RECENT OIL PRICE SHOCK Major oil exporters' investable funds have generally Figure 3. Identifiable allocations of oil exporters' tended to rise during periods of high oil prices and fall investable funds during periods of collapsing oil prices (see Figure 2). In 450 the current oil price shock, total estimated investable 400 All other identifed funds of OPEC members, Russia and Mexico more 350 net investment flows than quadrupled over the four year period through end- 300 German assets s 2005, from an estimated $91.7 billion to $412.2 billion. 250 lion US assets bil 200 OPEC countries continue to account for the vast $ Changes in deposits 150 held w/BIS banks /1 majority of major oil exporters' investable funds in the 100 Investable funds recentoilpriceshock:$256.2billionin2005,or62percent 50 of the $412.2 billion in total investable funds last year 0 for the 12 top oil exporters. 2002 2003 2004 2005 Source: Estimates based on data from BIS; national central banks and statistical authorities; and DECPG, IMF, OPEC Statistical Bulletin How are oil exporters' investable funds being for current account data. allocated? /1Includes all liabilities of BIS-reporting banks to countries (ie, this Much of the available data on asset allocation by the is mainly comprised of oil exporters' deposits held with BIS-reporting banks). major oil exporters must be assembled from various counterparty sources, due to the lack of disaggregated balance of payments data for the oil exporters. These at a total $9 billion in 2005) increased from nil to 4 identifiable allocations of oil exporters' investable funds, percent, respectively, over 2002-05--and far outstripped as provided by the available counterparty data, are the share of all other trackable EU financial and comprised of oil exporters' net changes in deposits held productive assets combined. Pakistan is notable as a with BIS-reporting banks and other liabilities of BIS- relatively significant new destination for oil exporters' reporting banks to these countries; oil exporters' net identifiable investable funds, accounting for 1 percent foreign direct investment outflows; and their net foreign of the total in 2005 (sourced entirely from Middle East portfolio investment outflows. OPEC countries, particularly the UAE). In terms of the identifiable investable funds, major oil exporters' deposits held with BIS-reporting banks Deposits with BIS-reporting banks are main have become the main destination over the current identifiable destination of investable funds... episode (Figure 3), with net additions to these deposits Net additions to major oil exporters' deposits held with accounting for a combined estimated $149.2 billion in BIS-reportingbankstotaledacombinedestimated$149.2 2005 (36 percent of their total investable funds). billion for the 12 major oil exporters in 2005 Investment in US long-term securities and foreign direct (see Figure 4)--an amount that accounted for 36 percent investment in US companies and real estate assets also of these countries' estimated investable funds in 2005, remained an important destination for oil exporters' little changed from the share of investable funds in 1980 investablefunds,attractingatotalestimated$43.3billion during the previous oil shock. OPEC members' increase in 2005.2 in net deposits as a share of their investable funds was There is evidence that the major oil exporters, 31 percent in 2005, down from 35 percent in 1980. particularlyOPECcountries,havebeendiversifyingtheir Russia's share of new deposits has increased particularly investmentsintoothercountries'productiveandfinancial significantly and steadily over the past several years, assets. For instance, the share of oil exporters' accounting for an estimated 49 percent of its investable identifiable investable funds going into German funds in 2005--exceeding the corresponding figure for productiveandfinancialassets(albeitstillrelativelysmall, all of OPEC. 3 INTERNATIONAL FINANCE BRIEF NOTES Figure 4. Annual changes in BIS reporting banks' U.S. securities remain a major identified liabilities to major oil exporters destination for recycled petrodollars... 100 In 2005, major oil exporters invested a combined estimated $43.3 billion in US long-term securities and 80 OPEC Total Russia Mexico productive assets (FDI). Of this, an estimated $39.5 60 billion was in the form of portfolio investment in US 40 long-term securities (Treasury bonds and notes, US billions 20 $ government agency bonds, US corporate bonds, and 0 US stocks). US financial and productive assets remained -20 a major destination for recycled petrodollars, despite its -40 estimated share of the $203 billion in total identifiable 19781980198219841986198819901992199419961998200020022004 investable funds in 2005 declining to around 20 percent, Source: Estimates based on June 2006 BIS data. Note: Liabilities from just above 90 percent in 2002. At the same time, mainly comprise deposits held with BIS-reporting banks. oil exporters in search of yield and taking a somewhat more diversified approach have been investing increasing amounts of petrodollars in non-US assets in the past few years (see Figure 5). ...although major oil exporters' role as a net US securities are likely to be a still more important supplier of funds to the banking system has destination for oil exporters recycled petrodollars than diminished the data indicate, taking into account that a sizeable Looking at the total outstanding liabilities of BIS- portion of US government securities' purchases by oil reporting banks, the major oil exporters' accounted for exporting countries are believed to be channeled through an estimated 3 percent of the total deposits held in BIS financial centers and other offshore locations outside reporting banks in Q4 2005-Q1 2006, down from 9 the United States (UK, Switzerland, Luxembourg, percent in Q4 1981 (see Table 2). That is, major oil Belgium, Hong Kong, the Cayman Islands). Moreover, exporter's role as a net supplier of funds to the the true size of these flows are further underestimated internationalbankingsystemhasdiminishedinthecurrent by the lack of periodic data on net investment flows in oil price shock as compared with the previous one. This US short-term securities. decline in the importance of petrodollars as a source of There was a sizeable increase in FDI flows to the funds for BIS banks is noteworthy, given that OPEC U.S. in 2005 sourced from OPEC countries.3 Direct deposits during the 1979-81 oil price shock deposited in investment capital flows from OPEC countries to the international banks were on-loaned to oil importing US exceeded a record $3.4 billion in 2005, with the developing countries, particularly in Latin America, second highest annual FDI inflows from this grouping paving the way for the early 1980s' Latin American recorded during the previous oil price shock (nearly $2.7 debt crisis. billionin1981).ThistrendofrisingFDIflowsoriginating Table 2. BIS reporting banks' liabilities outstanding to major oil exporters ($ billions, unless otherwise specified) Q4 1978 Q4 1981 Q4 2002 Q4 2005 Q1 2006 OPEC aggregate 60.6 119.6 209.3 325.2 343.3 Russia - - 39 153.3 199.9 Mexico - - 52 60.1 65.5 Major oil exporters' share of total /1 8% 9% 2% 3% 3% /1As a share of total liabilities of BIS reporting banks to all countries. Liabilities mainly comprise major oil exporters' deposits held with BIS-reporting banks. Data for Q1 2006 are provisional. Major oil exporters comprise OPEC for 1978, 1981; OPEC, Russia and Mexico for 2002, 2005, 2006. 4 RECYCLING OF PETRODOLLARS IN THE RECENT OIL PRICE SHOCK Figure 5. Identifiable foreign portfolio investment For OPEC countries, this trend of greater financial and FDI outflows of major oil exporters asset diversification in the current oil price increase as 70 compared with the late 1970s episode has been US assets particularly significant (Figure 6 ). OPEC net investment 60 German assets flows into US corporate stocks and US corporate bonds 50 Other EU assets /1 Pakistan assets for the 2000-April 2006 period reached $25.6 billion and nsoill 40 Other countries' assets $11.5 billion, respectively, together exceeding the bi amounts for long-term US treasuries ($12.4 billion) and $ 30 US agency bonds ($17.6 billion). This contrasts 20 markedly with the previous episode (1979-81), when 10 US treasuries accounted for 63 percent ($18 billion) of 0 OPEC's total net investment flows in US long-term 1 2 3 4 5 6 securities. In early 2006, however, there was a renewed Source: Estimates based on data from national central banks and surge of net investment into US long-term securities by statistical authorities. Note: Country assets inflows data include net portfolio investment OPEC, particularly US treasury bonds and US corporate inflows for Austria, Belgium, Denmark (2005), Estonia (2003-05), stocks, with net investment for the first four months Finland (2004-05), Germany, Japan(2005), Pakistan (FY2001-05), and the US (long-term securities only); disaggregated portfolio already exceeding the total for all of 2005. investment flows data unavailable in other cases/for other countries across time series. Because Pakistan's FY runs from July-June, net foreign portfolio and FDI inflows in Pakistan for FY2001-02 are shown above in 2001 (and so forth); data above for 2005 covers July 2005-May 2006. Country asset inflows data are confidential in a number of cases. Figure 6. Changing patterns in OPEC net investment /1Comprised of assets of EU members other than Germany. flows into long-term US securities Share of total by type of securities: 1979-1981 from OPEC countries continued into 2006 (based on 11% numerous anecodotal reports of major deals), and was 15% drivenparticularlybyFDIsourcedfromtheUAE,mainly in the form of acquisitions of stakes in US businesses US Treasuries US agency bonds including in the real estate, tourism and hospitality, and 11% 63% US corp. bonds retail sectors.4 US corp. stocks ...within this trend, there has been more diversified investment in US securities, particularly for OPEC-- At the same time, there has been diversification in the past several years away from Treasuries and into other Share of total by type of securities: 2000-April 2006 US securities. Since the late 1990s many major oil 18% producers, particularly OPEC members, have increasingly invested in US stocks and corporate bonds, 39% US Treasuries as well as US federally-sponsored agency bonds--a US agency bonds trend that gained momentum with the onset of the recent US corp. bonds 26% oil price increase in 2002.5 Nevertheless, US treasuries US corp. stocks and government agency bonds continued to attract 17% around three quarters (30 percent and 45 percent, respectively) of the major oil exporters' total net flows Source: Estimates based on U.S. Treasury Data. Note: The U.S. Treasury does not provide periodic data for investment that were invested in long-term US securities over the flows into short-term securities.U.S. TIC transactions data do not 2002-April 2006 period. include investment in U.S. short-term securities. 5 INTERNATIONAL FINANCE BRIEF NOTES A shift into a more diversified range of assets, trend of diversification into asset classes denominated regions, countries... in other currencies, with a rising share channeled to While it is clear that US assets and deposits with BIS- emerging economies, particularly inAsia. Oil exporters reporting banks remain the main identified destinations alsoareinvestinglargeamountswithintheirownregions for recycled petrodollars, it is less clear where major oil and investing in their own local economies--targeting exporters' "unidentifiable" investable funds are going. local infrastructure and real estate development, as well Just over half (or an estimated $208.9 billion) of the as diversifying into new sectors such as tourism, total estimated investable funds sourced from these financial services and healthcare. Large amounts in major oil exporters in 2005 (see Figure 7) was recent years are believed to have gone into securities unaccountable via publicly available oil exporters' and traded on local stock exchanges, and private equity funds counterparty balance of payments' data.6 active in the Middel East and South Asia regions. While comprehensive data are not available, Moreover, oil stabilization funds and other government anecodotalevidenceindicatesthatoilexportingcountries investment arms have been managing a large share of are investing these petrodollars across a broader, more the oil exporters' savings, which in contrast to central diversified range of assets, regions and currencies in banks, tend to place more emphasis on active the current oil price increase as compared with the investment, and returns maximization. previous episode in the 1970s. There is an emerging Figure 7. The gap between major oil exporters' identifiable crossborder net investment flows and total investable funds 450 400 Changes in deposits held w/BIS banks /1 Notes US assets 1.The available data used to estimate investable funds for these 350 German assets countries are, in many instances, fragmentary: There are fragmentary Other EU assets /2 financial inflows data for Iran, Iraq, Kuwait, and UAE across the time 300 Pakistan assets series; no financial inflows data for Qatar across the entire series; no ns Other countries' assets /3 portfolio investment inflows data for Libya and Saudi Arabia across 250 Investable funds the time series; fragmentary portfolio investment data for Nigeria and illiob 200 Algeria. $ 2.Data for the first four months of 2006 show a significant pickup in 150 OPEC interest in this asset class, with OPEC estimated net purchases of US securities already exceeding the total net purchases for all of 100 2005 by $5.5 billion, while the US BEA also reported a significant pickup in FDI flows originating from OPEC countries (see also below). 50 Although transactions data for foreign investment in short-term US securities is unavailable, the US Treasury Report on Foreign Portfolio 0 Holdings of US Securities (June 2006) indicates that there was a $20.5 2000 2001 2002 2003 2004 2005 billion increase in major oil exporters' net holdings of US short-term securities over the one-year period through June 2005. Source: Estimates based on data from BIS; national central banks 3.U.S. BEA, Survey of Current Business, June 2006. 4. and statistical authorities; and DECPG, IMF, OPEC Statistical Bulletin As one prominent recent example, the UAE's Emaar Properties for current account data. paid more than $1 billion in May 2006 to acquire U.S.construction Note: OPEC total comprises all members with the exception of group WL Homes. 5. Indonesia. Country assets inflows data include net portfolio investment The origin of the investment flows is not always accurately captured inflows for Austria, Belgium, Denmark (2005), Estonia (2003-2005), in the US Treasury data. The US Treasury only provides periodic Finland (2004-2005), Japan(2005), and Pakistan (2001-2005). transactions data on US resident transactions in long-term securities. 6. Disaggregated portfolio investment flows data unavailable in other This is despite the improved availability of disaggregated balance cases/for other countries across time series. Country asset inflows of payments' counterparty data in the past several years for many are confidential in a number of cases. countries, particularly in Europe. A similar exercise conducted by the /1Includes all liabilities of BIS-reporting banks to countries (ie, this is BIS, as presented in its December 2005 Quarterly Review (although mainly comprised of oil exporters' deposits held with BIS-reporting focusing solely on the OPEC countries and based on estimates of their banks). cumulative investable funds and outbound investment flows), found /2Comprised of assets of EU members other than Germany. that nearly 70 percent of OPEC's estimated $700 billion in cumulative /3Identifiable net investment flows in combined assets of Brazil, investable funds generated in 1999-05 was unaccountable (BIS, Quarterly Japan and Turkey, which totaled an estimated $145 million in 2005. Review, December 2005). 6