I have focused heavily on Asian central bank financing, and the role reserve financing plays in sustaining the US current account deficit.
But it is worth remembering the other big theme in the world economy: rising oil prices.
Greenspan is right: high oil prices will eventually trigger a market reaction, whether slower demand growth, investment in new oil fields, or the development of alternative fuels. Oil may stabilize at a higher price than in the 1990s, but it probably won’t stay at current prices.
Indeed, higher oil prices do seem to be having an impact on Europe and Japan right now -- since January, oil is up (in dollar terms) and the euro is down (in dollar terms) to oil is way up in euro terms. That is a change from the falling dollar/ rising oil price pattern of the last couple of years.
But right now, demand growth in the US -- and in China -- does not seem to be slowing.
And to the extent new supply is coming on line, it is coming on line in places like Saudi Arabia, which hardly changes the basic structure of the world oil market. It also is unlikely to reduce the "geopolitical risk" premium now built into the oil market.
The result of the so-far-limited adjustment in demand, and rather limited market pressure for lower prices: an absolutely enormous transfer of revenue toward the world’s oil exporting states.
If oil stays around $55 a barrel, my very, very rough calculations (which, among other flaws, make no effort to adjust for the fact that not all crude is alike) suggest that OPEC countries would get over $500 billion in oil revenues this year, about $300 billion more than in 2002 (when oil was at $26 a barrel and the Saudis were not producing at anything like full capacity). If oil stays close to its current price, Saudi oil revenues would have increased by something like $100 billion since 2002, a China-sized sum. Russia produces a large amount of oil as well; recent data suggests its 2005 oil/ gas revenues will be $70 billion more than its 2002 revenues.
Some of that oil windfall is being spent, some of it saved.
Russia’s export revenues in q1 2005, for example are, $16 billion more than they were in q1 2004. Russia’s imports are also higher, by $5 billion. But since the increase in exports exceeded the increase in imports, Russia’s overseas assets are also increasing faster than they were a year ago. We ought to have a better idea of the overall breakdown between "spending" and "saving" in oil exporting states when the IMF puts out its updated World Economic Outlook next week.
So for all the focus on Asia, it is worth remembering that the world’s oil exporters also have tons of cash, and, even though their formal "reserves" are not growing like Asia’s, the clearly are investing large sums abroad -- whether transparently though institutions like Norway’s oil fund or less transparently through the various accounts of the world’s petrosheiks.
Their willingness to finance the US matters too ... I cannot entirely leave China out of the story. China’s economy is rather energy intensive. Import volumes are way up (or were until very recently). With volumes rising and higher prices, China is clearly spending a lot more on oil than it used to.
That only makes China’s growing current account surplus all the more remarkable. The common argument that China does not run a large overall current account surplus is simply no longer true. China’s 2004 current account surplus -- about 4% of China’s GDP -- exceeded Japan’s. And while investment is falling in Japan, it sure is not in China. If China’s current export and import performance vis a vis the US continues, China’s overall surplus will almost certainly balloon in 2005, even if oil stays at $55 a barrel.
Higher oil prices normally would reallocate the world’s current account surplus away from big oil importers -- China and the rest of the emerging Asia included. That has not happened. If oil fell back somewhat, barring a surge in non-oil imports, China’s overall current account surplus would surge.