When The Surge of Liquidity Collides With Pent-Up Demand.
The massive transfer of liquidity, using the medium of commodities, is underway and has worked itself up into its own phenomenon. ANd it's not just OPEC countries with teeming populations and decades of pent-up demand...
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March 14, 2005
ECONOMY
By BHUSHAN BAHREE
Staff Reporter of THE WALL STREET JOURNAL
March 14, 2005; Page A2
Flush from the biggest oil-price boom in a generation, OPEC nations have gone on a buying binge of imports from Europe, the U.S. and Asia that is recycling petrodollars back to those major oil consumers and helping blunt the impact of higher energy costs on the global economy.
The speed and extent of the import spree, which contrast with OPEC nations' relatively slow, meager spending during the oil shocks of the 1970s, help explain why the world has weathered the yearlong bout of higher prices better than many observers had expected.
The development also underlines the marked economic and demographic changes that have reshaped many members of the Organization of Petroleum Exporting Countries in the quarter-century since the Iranian Revolution triggered the second oil shock.
Most OPEC nations are still burdened with underdeveloped and state-fettered economies, but they are increasingly putting their wealth into consumption and domestic investment. In the oil-rich Middle East, several governments are plowing some of the petroleum bonanza into infrastructure and industrial projects, including more oil and natural-gas development.
(My Comment: copper, cement, iron ore, and on and on...)
Dramatic population growth has expanded the market for a wide range of goods, from digital cameras to aircraft. The 11 OPEC states have seen their overall population rise nearly 69% -- to 526 million from 312 million -- since 1979, the year of the last big oil shock.
Total imports by the 11 OPEC nations are expected to have risen by a record $26 billion last year, up 13% from 2003 to $220.9 billion, according to data and projections by the Washington-based PFC Energy consulting firm. Exports -- principally of oil and natural gas -- soared by $79.3 billion in 2004, up 34% to $316.6 billion.
That suggests OPEC recycled about a third of its windfall back into the world economy through goods purchases in the first full year of the boom. In 1979, when oil prices more than doubled, OPEC's imports from industrial countries actually fell.
"There are more people and their needs are greater," says Fareed Mohammedi, chief economist at PFC Energy. "The private sector is much more savvy and has the money to spend."
DaimlerChrysler AG says its cars achieved record sales last year in the Middle East, led by strong demand for its luxury Mercedes-Benz models, particularly the top-of-the-line S-class. Digital cameras and other products from Canon Inc. are being snapped up so fast that the Japanese company reported a 38% rise in sales for 2004, making the Middle East a key growth area for the company. Airbus expects its sales in the Middle East to double in five years. Carriers in the Persian Gulf region have ordered 51 of its gargantuan new A380 aircraft, accounting for almost a third of the orders received by the European plane maker.
The oil cartel's Middle East members also appear to have bought a record amount of U.S. securities last year, reversing net sales of such assets in the two preceding years. Citing U.S. Treasury Department data, Banc of America Capital Management, the investment-management arm of Bank of America Corp., said Middle East oil states bought $20.2 billion of U.S. securities last year.
A larger group of oil exporters -- OPEC's 11 members plus Russia, Mexico, Bahrain, Gabon and Oman -- bought a net $67.7 billion of U.S. securities in 2004, a fourfold rise from 2003. That total was 25% greater than the $54.2 billion in U.S. securities purchased by euro-zone countries and 43% more than the $47.3 billion bought by China.
The import spending may be easing the impact of the past year's energy-price rise on the world economy. Early last year, OPEC leaders were fretting that rising oil prices might derail global growth. But with global growth still on track, OPEC members have begun arguing that the world-wide economy is adjusting to pricier energy.
That sort of thinking could prompt OPEC to gun for even higher prices by curbing supply, raising the odds that energy costs eventually could climb enough to hamper growth. For now, that's unlikely: The cartel expects to maintain current quotas when it holds its next regular meeting this week. The world economy is estimated to have grown 5% in 2004 and is projected to slow to 4.3% growth this year, according to the International Monetary Fund. Crude-oil prices peaked at more than $55 a barrel in October, and nearly hit new highs last week.
[Petrodollars and Trade]
Other reasons for the economy's resilience include greater energy efficiency in industrialized nations and sheer momentum: Growth has been so strong in China, India, the U.S. and the U.K. that the drag from higher energy costs hasn't been heavy enough to cause a slowdown, though it has harmed weaker economies such as Germany, Italy and Japan.
The smooth recycling of petrodollars is in contrast to what happened after the 1970s oil shocks. The price increases in percentage terms were much sharper then than now, delivering a relatively bigger blow to consumers in the West and a bigger windfall to OPEC. Prices more than tripled in 1974 and nearly tripled again in 1980. That compares with a rise of 34% in 2004, when a barrel of West Texas Intermediate crude averaged $41.50, up from $31 in 2003. The oil shocks then tipped the world into recession, with world GDP growth slowing to 1.1% in 1975 from 6.8% in 1973, and then again to 1.1% in 1982 from 4.6% in 1978.
What's more, OPEC economies were much less developed and so had little power to put the huge surpluses back into the global economy by buying consumer goods or capital equipment. When the oil producers did start ordering goods, their ports and warehouses couldn't handle the higher volumes, with ships waiting for months to unload. That led to worries about money being sucked out of the world economy.
Using IMF data, Banc of America Capital calculates that OPEC's exports to industrialized countries more than doubled to $172.3 billion in 1980 from $81.7 billion in 1978. But OPEC's imports from industrial countries, which totaled $74.4 billion in 1974, fell to $71.8 billion in 1979 before rising to $76.6 billion in 1980.
There is no such dislocation this time, with the 34% rise in OPEC oil exports last year and the 13% gain in the cartel's total imports. In part, that's because the increased money flows to OPEC are a much smaller percentage of world gross domestic product, which has grown sharply in the past two decades. But OPEC countries also have larger economies and populations eager to put that money to work.
In Saudi Arabia, OPEC's largest producer, oil revenues last year hit a record $106 billion. Brad Bourland, chief economist for the Saudi-based Samba Financial Group, noted in a report last month that "while the oil story is impressive, much of the dynamism of the Saudi economy had nothing to do with oil." The Saudi nonoil private sector grew by 5.7% last year, the Samba report said -- the highest rate of growth since the 6.3% recorded in 1982, the last year of the oil boom that began in the 1970s.
Saudi Arabia has embarked on big projects in the oil, gas, water and power sectors in the past two years. It has begun liberalizing and expanding its telecommunications sector, where Etihad Etisalat from neighboring United Arab Emirates is building a second mobile-phone network. Initial public offerings by Etihad Etisalat and Sahara Petrochemicals were big hits on the Saudi stock market, which rallied for the sixth straight year in 2004.
OPEC's buying is widespread but the European Union, traditionally the biggest exporter to the oil-rich Middle East, is benefiting most. OPEC members' imports from the EU rose 27% in the first nine months of last year to $72.64 billion from $57.04 billion a year earlier, according to IMF data analyzed by Banc of America Capital. OPEC imports from Japan rose 21% to $14.06 billion; from the U.S. by 15% to $17.14 billion; and from China by almost 16% to $13.63 billion.
OPEC import trends tend to follow crude-price changes with a lag, suggesting that oil exporters' spending may continue to rise strongly.
"It's the flip side to paying more at the pump," said Joseph Quinlan, chief market strategist for Banc of America Capital. "But you're not going to see a chief executive pounding the table and saying, 'Our sales to the Middle East are booming because you're paying more' " for gasoline |
