from Follow the Money

Peak petrodollars?

October 5, 2008

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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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We aren’t there quite yet. At least not on an annual basis. The oil exporters foreign asset growth in 2008 will likely top their 2007 foreign asset growth.

But we may not be that far away.

On a quarterly basis, the foreign asset growth of the oil exporters probably peaked in either q2 or q3 2008.

The oil exporters certainly aren’t feeling quite as flush as they once did. Somehow an import bill that can be covered -- without dipping into existing assets -- if oil is above $70 and a $90 a barrel market price doesn’t feel quite as secure as an import bill that can be covered if oil is above $20 a barrel and a $40 a barrel market price.

Three things have combined to put a bit of pressure on the oil exporters -- and the portfolio managers of their central banks and sovereign funds:

1/ Oil prices are no longer rising faster than domestic spending and investment. Instead oil prices are falling as domestic spending and investment (and associated imports) rise. That means the oil exporters have a smaller monthly surplus, as a higher fraction of their oil export revenue is spent on the imports associated with higher levels of domestic spending and investment. Rachel Ziemba and I believe that the oil exporters will "break even" (neither adding to their foreign assets or dipping into their external savings) this year if oil is around $70 a barrel. That break even price though has been rising quickly -- and it isn’t inconceivable that the break even price might be $75 or $80 a barrel next year (unless some folks with ambitious plans cut back in the big way; with rents up 65% this year in Abu Dhabi there is certainly a bit of froth in the market) and, well, the market price of oil could potentially be lower than that.

2/ Any sovereign wealth fund that invested heavily in equities has been hurt by the global sell-off. Anyone who shifted from the US to Asia (remember all the talk of a new silk road?) has been hit particularly hard. Hedge funds haven’t been a safe haven either. Global equities indexes are down 25% on the year. I don’t think the Abu Dhabi Investment Authority is quite as large as some people think, so I don’t think it started the year with a $400b equity portfolio. But even it didn’t have a big enough equity portfolio to be in position to see a $100b loss on its equity portfolio, it clearly is down substantially. Indeed, Rachel and I now suspect that SAMA will have more foreign assets than ADIA by the end of the year. Holding a conservative portfolio has paid dividends this year.

3/ The oil exporters are increasingly using their reserves (and sovereign funds) to stabilize their own markets. Russia has indicated that it will lend up to $50 billion from its reserves to domestic banks having trouble rolling over their external credit lines. The UAE has announced a similar $13.5b facility, a facility that is considered to be a "quiet" bailout of Dubai by the much richer sheiks of Abu Dhabi. Dubai itself has indicated that one of its funds -- DIFC Investments -- will support the local market. Kuwait’s central bank is lending domestically as well -- and the KIA has been intervening to support Kuwait’s domestic stock market.

A lot of the oil exporters had very large fiscal surpluses from oil -- as the foreign exchange from oil sales was held in foreign currency at the central bank or invested through a sovereign fund. But a lot of private (or quasi-private, as the dividing line between public and private often isn’t clear) banks and firms in the oil exporters were borrowing heavily from banks abroad. That flow has dried up. And the state is being called on to step in to stabilize things -- much as the state in the US and Europe is trying to offset a collapse in private intermediation.

The net result: the oil exporters portfolios aren’t growing at their former pace. The times are a changing.

The big oil exporters no doubt all have substantial sums stashed away -- sums that if they were say lent out on the European interbank dollar market might make a difference. But they also aren’t quite as rich as they used to be; they have lots of cash -- but many also probably believe that they need to hold a lot more cash to protect against swings in oil prices and global capital flows than they used to.

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