from Follow the Money

Are higher oil prices good for Europe?

October 4, 2006

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Probably not.  But they may not be so bad for Europe either.  So argues the European Commission.

Europe doesn’t use nearly as much oil as the US does – by any measure. 

And most of the oil exporters buy “European.”    The Commission calculates that about 75 cents of every dollar Europe spends on imported oil comes back to Europe in the form of higher exports to the world’s oil producers.  That is more than in the 1970s (See p.21/ graph 18) 

So even though far more of the oil windfall has been saved than spent, what has been spent seems to have been spent disproportionately on European goods and services.

Oil at $60 shouldn’t keep oil exporters from spending a bit more – most now cover their spending with oil at $25, $30 or $35.    That spending should benefit Europe.   And with oil at $60 (or less) and spending climbing, at the margins, the oil exporters will have a bit less cash to lend to the US. 

One part of the Commission’s study didn’t make sense to me.  They argued that the oil exporters in the Gulf are “diversifying” their economies. 

The evidence? Oil revenues have fallen from above 90% of the GCC’s government revenues to 85% (see p. 19 of the Commission’s report).  

That doesn’t sound like diversification to me.

Dubai has developed a bit of a business as a tourist destination – and as a stopover for those flying from Asia to Europe.   The Saudis are exporting more petrochemicals.  

But the GCC diversification story strikes me as hugely overstated.   Dubai is a place for those with oil revenues to spend their money – and perhaps a financial center for oil money.   But the “fuel” for its economy is still oil.  Not oil production.  But the petrodollars sloshing through the Gulf.    

And with so much oil and so few people, it isn’t obvious to me that places like Kuwait, Abu Dhabi or even Saudi Arabia should diversify away from oil.   No other business generates comparable margins …. 

They might want to consider distributing a bit of more of the oil windfall a bit more broadly though.   The calculations are staggering.    Rather than stashing $100b in the central bank’s foreign bank accounts (and custodial accounts/ hedge funds investing in foreign securities), the Saudis could write a check for $20,000 to each of the Kingdom’s 5 million families.   The IMF (as reported in the Khaleej Times): 

“Saudi Arabia is on track to add roughly $100 billion to its reserves in 2006 — enough to write a cheque for $20,000 to each of the kingdom's roughly five million households."

The Emir of Abu Dhabi could do even better …

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