from Follow the Money


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Monday’s FT had the story, drawing on this just released BIS report. It seems OPEC countries are holding fewer dollars and more euros in their external bank accounts. (Thanks to Marcel for alerting me to the BIS report in his comments).

The proportion of dollars in OPEC’s bank accounts started to slide well before the recent bout of dollar weakness, so the shift toward euros looks to be a reaction to 9.11 -- and the US reaction to 9.11 --more than a reaction to the dollar slump. At a certain point, though, the two trends could reinforce each other.

Certainly Lebanon was saved from a looming financial crisis by its sudden post 9.11 re-emergence as a safe haven for Arab money. Some petroeuros are going into Lebanese real estate ... though since the Lebanese pound is tied to the dollar, maybe Lebanese bank accounts are more petrodollars than petroeuros.

More generally, it seems that petroleum exporters are leading the charge to diversify their reserve holdings (Russia -- the Siberian Saudi Arabia -- as much as OPEC). Makes sense. Exporters of goods that compete with China have to worry about losing competitiveness if they stop buying dollars and see their currency appreciate v. the renminbi-dollar. Oil exporters don’t. They are selling more to China no matter what.

The BIS data also raises an interesting question: Where are the OPEC countries putting their oil windfall profits? They have yet to show up in the world’s banking system, at least according to BIS data. They are not being invested in Treasuries either. Saudi Arabia’s reported reserve growth has been pretty subdued -- though that does not mean much. The line between public and private is a bit blurred in the Kingdom. The math is clear. Suppose Saudi Arabia exports 10 mbd of oil, at $50 a barrel. That is $500 million a day, or $180 billion or so over the course of the year. Not all is pure profit, but most is -- production costs in Saudi Arabia are low. Compare that with exporting say 8 mbd at $25 per barrel -- roughly what happened in 2002. That gives you $200 million a day, or @ $73 billion a year.

This is all meant to be very rough -- sweet light crude probably averaged $41 a barrel this year, and Saudi crude clearly is not sold at the same price as US sweet light. But at say $41 a barrel and 9.5 mbd (november production), the Saudis would have oil revenues of $141 billion this year, or an increase of roughly $70 billion since say 2002. That kind of money ought to be showing up somewhere, either in higher imports or in rising external assets.

Let’s add in the three small gulf states -- Kuwait, Qutar and the UAE. Their production rose from roughly 4.3 mbd to 5.7 mbd between 2002 and November 2004. Assuming they produced that they produced 5.7 mbd every month this year (a big, no doubt inaccurate assumption), all their oil sells at the US price for sweet light crude (another huge and certainly inaccurate assumption) and sweet light crude rose from around $25 in 2002 to an average of $41 in 2004, their revenues jumped from around $40 billion to $85 billion.

All told, ballpark calculations suggest that the oil revenues of Saudi Arabia and the Arabophone Gulf states (excluding Iraq) probably rose by $100 billion, give or take some, between 2002 and 2004.

It ought to be possible to find out where that money is going -- if it is not going into higher imports, it necessarily is going into some form of external assets: petrodollars, petroeuros, petroyen. Help here would be most appreciated ...

This ballpark math is not irrelevant to the US current account story either -- oil alone probably added $45 billion to the US import bill in 2004, and $75 billion since 2002. Higher oil imports could be leading to higher US exports, if oil producers spend the windfall on US goods. Alas, that is clearly not happening: US exports to OPEC are down, European exports to OPEC are up. But even if OPEC imports from other countries, those countries selling more to OPEC might in turn import more from the US -- helping drive US exports up. Alternatively, oil windfall profits could be recycled back into US financial markets. That would happen directly if the oil sheiks bought Treasuries and Agencies, Chinese style, or if they bought US equities. It also could happen indirectly, if for example the oil sheiks are investing in East Asia and thus financing East Asian reserve accumulation.

The first order effect of an oil shock is to redistribute the world’s current account surplus from East Asia -- an oil importing, manufacturing powerhouse -- toward OPEC. It probably will turn out that the surge in East Asian trade surplus with the US this year (China’s exports to the US is likely to grow by $45-50 billion, its surplus by $35 billion or so) largely offset East Asia’s rising oil import bill. Consequently, it is possible that East Asia’s current account surplus stayed constant this year while OPEC’s surplus surged -- along with the US current account deficit.

If OPEC is less inclined than East Asia to hold dollar assets, then it matters a bit that higher oil prices shifted some of East Asia’s growing current account surplus to OPEC. Someone has to buy OPEC’s petrodollars and sell OPEC the petroeuros -- or other assets -- that OPEC wants ... and then, since someone has to finance the US deficit, lend the petrodollars bought from OPEC back to the US. That reshuffling could well have an impact on financial markets.

General Glut says the composition of OPEC’s reserves do not matter, the real problem for the US only comes when oil is priced in Euros (or renminbi, for that matter -- fifteen years ago, no one expected China to buy a big chunk of IBM). If oil prices don’t totally tank, I suspect a few other problems might arise before we get to that point.

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