Petrodollar recycling refers to the phenomenon of major oil-producing states mainly from OPEC earning more money from the export of oil than they could usefully invest in their own economies. It was a phenomenon of the late 1970s and early 1980s with the peak years for petrodollar surpluses.[1]
During this period, states such as Saudi Arabia, Kuwait and Qatar amassed large surpluses of petrodollars which they could not invest in their own countries. This was due to small populations or being at early stages of industrialization. These petrodollar surpluses can be defined as net US dollars earned by those nations which were in excess of the internal development needs of those nations.
These surpluses could be profitably invested in other nations. Alternatively, the world economy would have contracted if that money was withdrawn from the world economy while the exporting nations needed to be able to profitably invest to preserve their wealth for the future.
While recycling petrodollars reduced the recessionary impact of the oil crisis, it caused problems especially for oil-importing countries that were paying much greater prices for oil and incurring debts. The International Monetary Fund (IMF) estimates that the foreign debts of 100 developing countries increased by 150% between 1973 and 1977. Johannes Witteveen, the Managing Director of the IMF, said in 1974, "the international monetary system is facing its most difficult period since the 1930s."
From 1974 to the end of 1981, total current account surpluses for all members of OPEC amounted to $450.5 billion. Ninety percent of this surplus was accumulated by the Arab countries of the Persian Gulf and Libya with Iran also accumulating oil surpluses prior to the revolution in 1979.
The petrodollars were invested by commercial banks in the US and Europe. As the recessionary condition of the world economy made investment in corporations less attractive, bankers lent the money to developing countries especially in Central and South America such as Brazil, Argentina and Mexico as well as other developing countries like Turkey. The 1973 OPEC crisis had created a vast dollar shortage in these countries, however, they still needed to finance their oil imports. In 1977, Turkish Prime Minister Suleyman Demirel summarized this shortage as "We're even in need of 70 cent." In subsequent decades, some of these nations have had difficulty in repaying these debts, leading to charges by anti-globalisation activists that it was a form of neocolonialism. This process also contributed to the growth of the Euromoney market as a rival to US monetary markets.
In an alternative view of petrodollar recycling, based on balance of payments and banking data from the 1970s and 1980s, David Spiro shows that a large portion of Arab petrodollars were invested directly in US government securities, and in the financial markets of the largest five economies. OPEC countries were net lenders to commercial banks, but this was not the primary channel for petrodollar recycling. (See David E. Spiro, The Hidden Hand Of American Hegemony (Cornell University Press, 1999).
Arab oil-exporting countries also used their surpluses to fund foreign aid programs, with Arab nations being one of the largest donors of foreign aid since 1973. The IMF also introduced a new lending facility during this period called the Oil Facility. Funded by oil-exporting nations and other lenders, it was available to nations suffering from problems with their Balance of trade due to the rise in oil prices.
David E. Spiro, The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets (Cornell University Press, 1999). [1] [2]