Oil Producers Gain Global Clout From Big Windfall
As Prices Soar, ExportersAre Saving, Investing More,Easing Economic Damage
By GREGORY L. WHITE in Moscow and ANDREW HIGGINS in Abu Dhabi Staff Reporters of THE WALL STREET JOURNALOctober 4, 2005
(See Corrections & Amplifications item below.)
Soaring oil prices have generated a record windfall for the world's petroleum producers. But they are managing it quite differently than in the past -- helping limit, so far, the damage to the global economy.
Oil exporters like Saudi Arabia are saving far more and spending far less than they did in earlier booms. In most cases, they are controlling state spending and saving or prudently investing much of the money, largely in assets held in the U.S. and Europe.
All that money pouring into financial markets, added to the huge flows coming from Asia's thrifty economies, is enabling Americans to keep spending while borrowing overseas -- thus fueling the U.S. economy.
That has helped keep interest rates low and asset prices high, even as rising oil prices take a toll on airlines, automobile owners and other oil consumers in the U.S. and Europe.
The investment from major oil-exporting countries also makes them increasingly important creditors for the U.S. -- and players in financial markets. According to the International Monetary Fund, major oil producers are now a bigger source of funds for the world than China, Japan and the rest of Asia, which has been the dominant saver.
"The impact is presumably larger than the Asians' on global interest rates," says David Robinson, deputy head of research at the IMF.
"They weren't a factor before, just because the flows were tiny," said Stephen Jen, chief currency economist at investment bank Morgan Stanley in London, referring to oil producers' impact on currency and bond markets in Europe and the U.S. "Now they're important."
The picture is very different from that during the oil shocks of the 1970s. Then, oil-producing nations spent much of their gains rather than invest them -- often on lavish luxuries and costly projects of dubious economic value, some of which were never finished.
"It's a real turnaround from the 1970s," when the IMF was warning oil producers about spending too much, said Mohsin Kahn, head of the IMF's Middle East and Central Asia Department.
In the Middle East and Central Asia, governments are spending an average of about 36% of their additional oil revenue -- compared with nearly 90% in the 1970s and more than 60% in the 1980s.
And today oil producers are earning more than they ever have. In 2005, according to IMF data, oil-exporting nations are expected to earn $383 billion from overseas sales of oil and gas -- nearly twice the inflation-adjusted value of the previous peak, $197 billion in 1980.
Estimates of the total windfall generated for all oil producers world-wide since prices began soaring in 2003 vary. Leo Drollas, chief economist at the Centre for Global Energy Studies in London, estimates consumers will pay $1.2 trillion more in 2004 and 2005 together for oil products than they did in 2003.
Just since the start of this year, oil prices are up nearly 51%. Yesterday, crude oil for November delivery on the New York Mercantile Exchange settled down 77 cents at $65.47 a barrel.
To be sure, the oil price boosts -- and huge transfer of wealth to oil producers -- are causing some pain. Britain's government, blaming in part high oil prices, recently said its economy is likely to grow only around 2% this year, down from its earlier forecast of 3% to 3.5%. Alcoa Inc., the world's largest aluminum producer, cited high energy prices as a culprit last month in issuing a profit warning.
Two big U.S. airlines, Northwest Airlines and Delta Air Lines, recently filed for Chapter 11 bankruptcy protection in part because of surging fuel costs. The U.S. auto industry is increasingly worried that high gasoline prices will choke demand for its profit-rich sport-utility vehicles.
Moreover, the oil situation world-wide remains precarious, as global demand, fed by oil-hungry and fast-growing economies like those of China and India, exceeds supply. Continued high oil prices still could fuel higher inflation, battering consumer and investor confidence and weakening economies around the world.
That's what happened in the 1970s, when central banks raised interest rates in an effort to fight inflation, driving major economies into deep recessions.
Nonetheless, oil's rise has so far had less impact than initially was expected. The IMF last month said the rise in oil prices over the past two years had "limited impact" and probably would shave one to 1.5 percentage points off the world economic growth rate -- about half what IMF economists said they would have forecast based on past oil shocks.
There are several reasons for the less-than-expected impact. For one thing, major Western economies in the 1970s were much more dependent on oil than they are now, amplifying the effect of the era's price increases.
But the oil boom's winners also are contributing by using their cash much differently. Big Western oil companies are recycling much of their huge profits to shareholders through dividends and stock buybacks. Governments in producing countries, reaping the majority of income through direct ownership of oil companies or heavy taxes, are limiting their largesse to focus spending on infrastructure and development projects.
Overall spending has been so restrained that the IMF has found itself in the unusual position of encouraging many Middle Eastern oil producers to spend more on projects that can help diversify their economies and improve health and education. The agency is more regularly known for chiding governments for spending too much. Economists say careful spending ultimately would help the global economy more than the current savings has, as increasing imports by oil producers mean more exports for consumer countries, helping reduce trade imbalances.
Some of this kind of investment is in the pipeline. Saudi Arabia, the world's No. 1 exporter, has been eager to diversify its economy away from oil, for instance, so it is investing $30 billion to become a leading producer of petrochemicals by 2010. At the same time, with demand for oil so high, the Saudis have earmarked $50 billion to expand production of crude oil and natural gas.
And the temptation to spend is building. Saudi Arabia in August approved a 15% pay increase for all state workers. Russia, the No. 2 oil producer, has saved most of its oil earnings in a special stabilization fund held by the central bank, but in recent months authorities have approved billions of dollars in new social and other spending.
Even residents in No. 3 exporter Norway, long known for frugal management, last month voted out a conservative government in favor of one promising to spend more on welfare and other programs.
Throughout the Middle East, where economies outside the oil sector remain underdeveloped, many nations are undertaking big road, utility and factory projects. Many of these developments are being handled by foreign contractors and built with foreign equipment. That has fueled a boom in exports of machinery and services to the region, primarily from the U.S. and Europe, also helping offset the global impact of the oil-price surge, economists say.
Still, oil producers so far are using most of their income to pay off debt and boost savings. Most of that is being done through central banks and government investment agencies that pump the bulk of the money into Western stocks, bonds and other assets.
In Saudi Arabia, "the money is being saved by the central bank, as it should be," said Brad Bourland, chief economist for the Samba Financial Group, a big Saudi bank. The Saudi central bank's foreign assets nearly doubled to $109.5 billion in May from the end of 2003, when they totaled $59.5 billion. Saudi holdings of foreign securities jumped to $63.5 billion from $25.9 billion over the same period.
Some economists think the surging growth of oil producers' investments in the U.S. has become an important factor keeping interest rates low, similar to the effect from Chinese investment of its huge foreign-exchange reserves. In April, then-Federal Reserve governor Ben Bernanke pointed to the surge in oil prices as one source of what he called a "global savings glut" that has been a key force in keeping rates low in the U.S.
Oil-producing countries in the Middle East owned $121 billion in U.S. stocks and bonds as of June 30, 2004, the latest period for which U.S. Treasury data are available. That was up from $84.5 billion a year earlier. Norway, which in June had $180 billion in a petroleum fund for future generations, held $59 billion in U.S. securities on June 30, 2004, up $26 billion from a year earlier. Russia held $48 billion, up $11 billion.
Konstantin Korishchenko, deputy governor of the central bank of Russia, which keeps about 60% of its $150 billion in reserves in U.S.-dollar assets, says the windfalls generated by high oil prices are "a transmission mechanism," helping perpetuate low global interest rates.
Across the Middle East, the oil influx has made local stock markets -- which barely existed during previous oil booms -- among the best performers in the world. The United Arab Emirates' primary composite index is up 108% so far this year, while Saudi Arabia's Tadawul All Share index has risen by 81%.
Having more than doubled since 2003, Saudi Arabia's stock market is now one of the largest emerging markets in the world by value -- larger than China's or India's. Petrochemical giant Saudi Basic Industries Corp. alone is capitalized at $135 billion. Saudi initial public offerings of shares have triggered massive traffic jams as local investors scrambled to get in before prices surged.
By GREGORY L. WHITE in Moscow and ANDREW HIGGINS in Abu Dhabi Staff Reporters of THE WALL STREET JOURNALOctober 4, 2005
(See Corrections & Amplifications item below.)
Soaring oil prices have generated a record windfall for the world's petroleum producers. But they are managing it quite differently than in the past -- helping limit, so far, the damage to the global economy.
Oil exporters like Saudi Arabia are saving far more and spending far less than they did in earlier booms. In most cases, they are controlling state spending and saving or prudently investing much of the money, largely in assets held in the U.S. and Europe.
All that money pouring into financial markets, added to the huge flows coming from Asia's thrifty economies, is enabling Americans to keep spending while borrowing overseas -- thus fueling the U.S. economy.
That has helped keep interest rates low and asset prices high, even as rising oil prices take a toll on airlines, automobile owners and other oil consumers in the U.S. and Europe.
The investment from major oil-exporting countries also makes them increasingly important creditors for the U.S. -- and players in financial markets. According to the International Monetary Fund, major oil producers are now a bigger source of funds for the world than China, Japan and the rest of Asia, which has been the dominant saver.
"The impact is presumably larger than the Asians' on global interest rates," says David Robinson, deputy head of research at the IMF.
"They weren't a factor before, just because the flows were tiny," said Stephen Jen, chief currency economist at investment bank Morgan Stanley in London, referring to oil producers' impact on currency and bond markets in Europe and the U.S. "Now they're important."
The picture is very different from that during the oil shocks of the 1970s. Then, oil-producing nations spent much of their gains rather than invest them -- often on lavish luxuries and costly projects of dubious economic value, some of which were never finished.
"It's a real turnaround from the 1970s," when the IMF was warning oil producers about spending too much, said Mohsin Kahn, head of the IMF's Middle East and Central Asia Department.
In the Middle East and Central Asia, governments are spending an average of about 36% of their additional oil revenue -- compared with nearly 90% in the 1970s and more than 60% in the 1980s.
And today oil producers are earning more than they ever have. In 2005, according to IMF data, oil-exporting nations are expected to earn $383 billion from overseas sales of oil and gas -- nearly twice the inflation-adjusted value of the previous peak, $197 billion in 1980.
Estimates of the total windfall generated for all oil producers world-wide since prices began soaring in 2003 vary. Leo Drollas, chief economist at the Centre for Global Energy Studies in London, estimates consumers will pay $1.2 trillion more in 2004 and 2005 together for oil products than they did in 2003.
Just since the start of this year, oil prices are up nearly 51%. Yesterday, crude oil for November delivery on the New York Mercantile Exchange settled down 77 cents at $65.47 a barrel.
To be sure, the oil price boosts -- and huge transfer of wealth to oil producers -- are causing some pain. Britain's government, blaming in part high oil prices, recently said its economy is likely to grow only around 2% this year, down from its earlier forecast of 3% to 3.5%. Alcoa Inc., the world's largest aluminum producer, cited high energy prices as a culprit last month in issuing a profit warning.
Two big U.S. airlines, Northwest Airlines and Delta Air Lines, recently filed for Chapter 11 bankruptcy protection in part because of surging fuel costs. The U.S. auto industry is increasingly worried that high gasoline prices will choke demand for its profit-rich sport-utility vehicles.
Moreover, the oil situation world-wide remains precarious, as global demand, fed by oil-hungry and fast-growing economies like those of China and India, exceeds supply. Continued high oil prices still could fuel higher inflation, battering consumer and investor confidence and weakening economies around the world.
That's what happened in the 1970s, when central banks raised interest rates in an effort to fight inflation, driving major economies into deep recessions.
Nonetheless, oil's rise has so far had less impact than initially was expected. The IMF last month said the rise in oil prices over the past two years had "limited impact" and probably would shave one to 1.5 percentage points off the world economic growth rate -- about half what IMF economists said they would have forecast based on past oil shocks.
There are several reasons for the less-than-expected impact. For one thing, major Western economies in the 1970s were much more dependent on oil than they are now, amplifying the effect of the era's price increases.
But the oil boom's winners also are contributing by using their cash much differently. Big Western oil companies are recycling much of their huge profits to shareholders through dividends and stock buybacks. Governments in producing countries, reaping the majority of income through direct ownership of oil companies or heavy taxes, are limiting their largesse to focus spending on infrastructure and development projects.
Overall spending has been so restrained that the IMF has found itself in the unusual position of encouraging many Middle Eastern oil producers to spend more on projects that can help diversify their economies and improve health and education. The agency is more regularly known for chiding governments for spending too much. Economists say careful spending ultimately would help the global economy more than the current savings has, as increasing imports by oil producers mean more exports for consumer countries, helping reduce trade imbalances.
Some of this kind of investment is in the pipeline. Saudi Arabia, the world's No. 1 exporter, has been eager to diversify its economy away from oil, for instance, so it is investing $30 billion to become a leading producer of petrochemicals by 2010. At the same time, with demand for oil so high, the Saudis have earmarked $50 billion to expand production of crude oil and natural gas.
And the temptation to spend is building. Saudi Arabia in August approved a 15% pay increase for all state workers. Russia, the No. 2 oil producer, has saved most of its oil earnings in a special stabilization fund held by the central bank, but in recent months authorities have approved billions of dollars in new social and other spending.
Even residents in No. 3 exporter Norway, long known for frugal management, last month voted out a conservative government in favor of one promising to spend more on welfare and other programs.
Throughout the Middle East, where economies outside the oil sector remain underdeveloped, many nations are undertaking big road, utility and factory projects. Many of these developments are being handled by foreign contractors and built with foreign equipment. That has fueled a boom in exports of machinery and services to the region, primarily from the U.S. and Europe, also helping offset the global impact of the oil-price surge, economists say.
Still, oil producers so far are using most of their income to pay off debt and boost savings. Most of that is being done through central banks and government investment agencies that pump the bulk of the money into Western stocks, bonds and other assets.
In Saudi Arabia, "the money is being saved by the central bank, as it should be," said Brad Bourland, chief economist for the Samba Financial Group, a big Saudi bank. The Saudi central bank's foreign assets nearly doubled to $109.5 billion in May from the end of 2003, when they totaled $59.5 billion. Saudi holdings of foreign securities jumped to $63.5 billion from $25.9 billion over the same period.
Some economists think the surging growth of oil producers' investments in the U.S. has become an important factor keeping interest rates low, similar to the effect from Chinese investment of its huge foreign-exchange reserves. In April, then-Federal Reserve governor Ben Bernanke pointed to the surge in oil prices as one source of what he called a "global savings glut" that has been a key force in keeping rates low in the U.S.
Oil-producing countries in the Middle East owned $121 billion in U.S. stocks and bonds as of June 30, 2004, the latest period for which U.S. Treasury data are available. That was up from $84.5 billion a year earlier. Norway, which in June had $180 billion in a petroleum fund for future generations, held $59 billion in U.S. securities on June 30, 2004, up $26 billion from a year earlier. Russia held $48 billion, up $11 billion.
Konstantin Korishchenko, deputy governor of the central bank of Russia, which keeps about 60% of its $150 billion in reserves in U.S.-dollar assets, says the windfalls generated by high oil prices are "a transmission mechanism," helping perpetuate low global interest rates.
Across the Middle East, the oil influx has made local stock markets -- which barely existed during previous oil booms -- among the best performers in the world. The United Arab Emirates' primary composite index is up 108% so far this year, while Saudi Arabia's Tadawul All Share index has risen by 81%.
Having more than doubled since 2003, Saudi Arabia's stock market is now one of the largest emerging markets in the world by value -- larger than China's or India's. Petrochemical giant Saudi Basic Industries Corp. alone is capitalized at $135 billion. Saudi initial public offerings of shares have triggered massive traffic jams as local investors scrambled to get in before prices surged.
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