Tuesday, April 29, 2008

Getting paid in Oil barrels

The price of oil is touching $120 a barrel. You fume over rising gas prices. What do the rich Arabs do with all the money?

I look up this Economist story.

“The six nations of the GCC, which also includes Qatar and Oman, earned $381 billion from their exports of oil in 2007 and another $26 billion from gas, according to the Institute of International Finance (IIF). If the oil price remains at about $100 a barrel, they will reap a cumulative windfall of almost $9 trillion by 2020, reckons the McKinsey Global Institute: a vast number relative to the size of the GCC economies, which had a combined GDP of $800 billion in 2007.

Not all these riches are ingested, of course. The Gulf added $215 billion to its stock of foreign assets in 2007, the IIF calculates. This hoard is divided between the region's central banks, its sovereign-wealth funds and its wealthy sovereigns. It added up to $1.8 trillion by the end of last year, by the IIF's estimates, and more like $2.4 trillion, according to Brad Setser of the Council on Foreign Relations and Rachel Ziemba of RGE Monitor.

When an energy exporter converts its petrodollars at the central bank, its domestic spending rises. But unless the local economy has a lot of slack, it cannot magically produce more goods and services to meet this fresh demand. Their price instead rises, relative to the price of things that can come in from overseas. According to a study by three IMF economists, a doubling of the oil price results eventually in a 50% rise in the price of non-tradable goods (such as housing), relative to tradables.

This shows up as inflation. But the price rises should peter out once they have served two useful functions: diverting demand to goods from abroad, and increasing the supply of those goods and services that must be produced at home.”

Now I understand and feel more helpless. I will have to shell out more for gas at the station. Hopefully GCC economists are aware of the damage that rising export realizations do to their economies. I wait for the day when wealthy Arabs run out of options to park their wealth and cut oil price by half.
If not, I’ll seriously consider working for Abu Dhabhi’s SWF and get paid in barrels of oil !

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