Oil, Dollars, Debt, and Crises: The Global Curse of Black Gold
THE GLOBAL CURSE OF BLACK GOLD – Book Sample
Contents – THE GLOBAL CURSE OF BLACK GOLD
- The Challenges of Resource Curses and Globalization 1
- Volatilities: Financial, Economic, and Geopolitical 10
- Petro-States, Hydrocarbon Dependence, and Resource Curses 14
- Geopolitical Conflicts and the Politics of Discontent 16
- Mounting Debt and Fragility of the Global Financial System 18
- Constants and Variables in the Cycle: 1970s to the Present 19
- New Middle East: Childhood 1 973 –84 and Adolescence 1 985 –95 25
- OPEC’s Market Power: Economics, Politics, and Volatility 26
- Middle-East Flows of Labor, Capital, and Cultural Norms 31
- Oil Price Collapse and the Politics of Discontent 33
- The Rise of National Oil Companies 40
- Militarism, Debts, and Global Finance 44
- Road to the Status Quo: 1 996–2008 51
- Changing OPEC Politics and Renewed Oil Revenues 52
- The Other Black Gold: Natural Gas 60
- The Economics and Geopolitics of Middle-East Discontent 65
- Déjà Vu: Overgrown Children of the 1970s? 71
- Globalization of Middle-East Dynamics 75
- Hedge Funds and Sovereign Wealth Funds 76
- Increased Financial Integration and Contagion 80
- Liquefied Natural Gas and Globalized Energy Markets 85
- Conflicts, Economic Sanctions, and the “War on Terror” 90
- vi Contents
- 5 Dollars and Debt: The End of the Dollar Era? 97
- The Dollar as Reserve Currency 97
- Bretton Woods and Beyond: The Primacy of U.S. Debt 99
- Global Economic Growth, Interest Rates, and Debt 101
- Uneasy Symbiosis: U.S. Consumers and Asian Savers 103
- Contagion: Sequential Bubbles and Crashes 107
- The Dollar and Bets on Chinese Growth and Oil 110
- 6 Motivations to Attack or Abandon the Dollar 117
- America’s “Exorbitant Privilege” and Geopolitics 119
- Petrodollar Recycling and the Dollar-Pricing of Oil 121
- Saddam Hussein, Ahmadinejad, and Dreams of Petroeuros 122
- The Paradox of Pegged Currencies 125
- Pegged Currencies and “The Balance of Financial Terror” 130
- The Threat of Renewed Protectionism and Mercantilism 134
- Globalization with Multiple Currencies: Bretton-Woods III? 139
- 7 Resource Curses, Global Volatility, and Crises 143
- Continued Regional and Global Resource Curses 144
- The Global Resource Curse 147
- Continued Global Dependence on Oil 150
- Global Conflicts, Radicalisms, and Terrorism 159
- Serial Amnesia, Greed, and Financial Crises 164
- Peaks and Troughs: The Need to Ameliorate the Cycle 167
- 8 Ameliorating the Cycle 171
- Technical Solutions and International Cooperation 175
- Attenuating the Energy-Markets Cycle 177
- Energy Market Regulation and Multilateral Intervention 181
- Petrodollar Recycling and International Lender of Last Resort 184
- Managing Geopolitical Conflicts 188
The Challenges of Resource Curses and Globalization
The coincidence of oil and financial crises can be traced back historically to the time of the industrial revolution. Our story begins, more modestly, with the dramatic increase in crude-oil prices in 1973 – an episode that continues to live as a vivid memory in Western and Middle-Eastern imaginations alike. For the former, this memory serves as a constant reminder of Western economies’ vulnerability to market and geopolitical forces, especially in the Middle East.
For the latter, it feeds nostalgic yearning for the moment when the Organization of Petroleum Ex- porting Countries (OPEC) cartel’s market and political power reached its zenith. As the world continues to struggle with the task of containing the economic, financial, and geopolitical ramifications of the financial crisis of 2007–9, it is important to recognize this and the previous 1970s crisis, as well as a number of others, as phases of a larger ongoing cycle.
To paraphrase Mark Twain, rumors of the death of the business cycle – as well as the energy-price cycle, the financial boom-and-bust cycle, and the cycle of Middle-East geopolitical turmoil – have all been greatly exaggerated. In this book, we study the interaction of the global business cycle with these closely related energy-price, financial, and geopolitical cycles. We show that this super cycle is endogenous and self-perpetuating.
Like the human ego, this cycle is most dangerous when we assume that we have tamed or killed it.1 Prolonged periods of stability and prosperity become grounds for hubris, which in turn breeds unrealistic levels of confidence and greed and compels policy makers to relax counter-cyclical regulations and policies. We argue in this book that financial and energy-sector investment cycles, as well as income distribution within and across countries, play pivotal roles in perpetuating the cycle, which can be attenuated only with proper understanding and vigilance.
We write this book to gain a better understanding of the perennial cycle and its driving forces. This is especially important for informing policies today, as globalized financial contagion and the spread of weapons of mass destruction make the cyclical swings increasingly, and potentially catastrophically, more dangerous.1
2 The Challenges of Resource Curses and Globalization
Over the past four decades, the alternating ebb and flow of petrodollars have been key forces influencing financial markets. Petrodollar recycling has amplified as well as perpetuated recurring global financial and currency crises. These crises have, at times, reached severe proportions in “perfect storms” driven by three forces:
- The first force is the Dollar-centered and debt-driven global finance that has emerged since the early 1970s. Thus, our story of petrodollars and financial crises is as much about the U.S. Dollar, and its role in global finance, as it is about gyrating energy prices and Middle-East geopolitics.
- The second force, to which we have already alluded, is the volatile market for oil and gas, which is governed not only by the real-economic business cycle, but also by investment cycles and financial-market speculation.
- The third factor is the continuation of Middle-East geopolitical conflicts, which are driven by self-perpetuating arms races funded by petrodollars and serving as one of the main tools for the West to recycle the latter.
With perfect hindsight, we may notice many striking similarities between the two crises of 1973 and 2008, which highlight the importance of understanding the cyclical nature of such perfect storms. The oil crisis of 1973 was very much the product of the three factors that we have listed: (i) sustained global economic growth accelerated the growing demand for oil and other commodities, (ii) U.S. deficit spending had just recently forced the United States to abandon the quasi- gold standard of the Bretton Woods Accord in 1971, thus ushering in a new era of inflation, and (iii) the Arab-Israeli war of 1973 served as a catalyst for OPEC to restrict supply, thus forcing oil prices to rise tenfold.
Higher oil prices (1973–80), in turn, resulted in a flood of recycled petrodollars that led to an international debt crisis.
Those same forces were again coinciding and reinforcing one another in 2001– 8: (i) global economic growth that started in the 1980s and continued through the millennium mark – with the briefest of interruptions by historical standards
– had resulted in accelerating demand for oil; (ii) United States indebtedness was growing unchecked, putting pressure on the Dollar and jeopardizing its dominance and anchoring eﬀect in global finance; and (iii) terrorist attacks on the United States and military invasions by the latter of Afghanistan and then Iraq in 2001 and 2003, respectively, served as catalysts to inflate oil prices fivefold. Now, as then, the higher oil prices drove a new wave of Middle-East petrodollar outflows that contributed substantially to an international credit bubble. In turn, that bubble eventually caused an international financial meltdown the economic ramifications of which are not yet fully understood or recognized.
Left unchecked, U.S. dependence on oil in the coming years will continue to contribute to her precarious level of national debt, especially if oil prices recover their upward path with global economic recovery. In the meantime, the latest round of petrodollar inflows to the Middle East is unlikely to bring lasting eco- nomic growth and political stability to the region. Now, as in the 1970s, Middle- East economies exhibit limited absorptive capacities, and petrodollar flows have fueled real estate, stock market, and credit bubbles regionally and globally.
The façade of political and social stability in some Middle-East countries, made possible in part by rising government spending on security, masks significant threats throughout the region. The latter include a potential nuclear arms race, conventional armed conflicts, sectarian strife, increasing income inequality, and continued failure to diversify regional economies. The recent rise in global terrorism is but one of the consequences of fermenting forces of regional discontent.
Progressively Increasing Financial Contagion
The forces that made globalized financial contagion possible in the new millennium will continue to influence international finance for the foreseeable future. In this regard, advances in communication and financial technology have led to financial integration at a scale that dwarfs other forms of globalization. In the 1970s, recycling of Middle-East petrodollars fueled a credit bubble of bank and sovereign loans to developing countries, especially in Latin America. That bubble crashed in the early 1980s following the rise in United States interest rates, with substantial repercussions for global finance and economics. Later crises in Asia, Latin America, and Eastern Europe in the late 1990s illustrated that similar financial shocks today would have significantly greater impact on the international financial system and economic conditions worldwide.
It is against this backdrop of today’s precarious geopolitics and global finance that we seek to revisit the history of boom-and-bust petrodollar cycles that have influenced economic and political development in the Middle East, and financial conditions worldwide, since 1973. Until very recently, oil exporters have recycled petrodollar trade surpluses by investing mainly in Dollar-denominated assets.
In- vestment in United States debt instruments has helped simultaneously to keep interest rates low and the Dollar from depreciating precipitously. This has al- lowed spending in the United States, financed by debt, to serve as an engine for domestic as well as global economic growth. However, continued strength of the
U.S. economy and Dollar is predicated on other countries’ continued willingness to hold their investments and reserves in Dollars, even in the face of mounting U.S. debts. Most observers agree today that the status quo is not sustainable.2
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