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Petrodollar rush may disappoint Western financiers

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Fossil-fuel producers are minting money again. Yet Western financiers hoping to share in the spoils of a 1970s-style petrodollar boom will be disappointed.

High energy prices, caused by Russia’s Ukraine invasion, mean the Organization of the Petroleum Exporting Countries (OPEC) will earn $907 billion from oil exports this year, according to the U.S. Energy Information Administration (EIA), compared with $577 billion on average since 2000. Saudi Arabia, the United Arab Emirates, Qatar and Kuwait will collectively have a $409 billion current account surplus, reckons Capital Economics, or almost three times last year’s total. Russia’s current account surplus so far in 2022 has also tripled, year-on-year.

A 3D-printed oil pump jack is placed on dollar banknotes in this illustration picture

A 3D-printed oil pump jack is placed on dollar banknotes in this illustration picture, April 14, 2020. REUTERS/Dado Ruvic/Illustration/
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Fossil-fuel producers are minting money again. Yet Western financiers hoping to share in the spoils of a 1970s-style petrodollar boom will be disappointed.

High energy prices, caused by Russia’s Ukraine invasion, mean the Organization of the Petroleum Exporting Countries (OPEC) will earn $907 billion from oil exports this year, according to the U.S. Energy Information Administration (EIA), compared with $577 billion on average since 2000. Saudi Arabia, the United Arab Emirates, Qatar and Kuwait will collectively have a $409 billion current account surplus, reckons Capital Economics, or almost three times last year’s total. Russia’s current account surplus so far in 2022 has also tripled, year-on-year.
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In previous petrodollar booms, energy producers have recycled their windfalls into the Western financial system. Saudi, for example, racked up a cumulative $160 billion current account surplus between 1974 and 1982, according to economist David Lubin’s book “Dance of the Trillions”, almost all of which went into the eurodollar market – a term for dollar-denominated deposits held outside of America, for example in European banks or the European branches of U.S. lenders. The banks in turn lent those deposits to Argentina, Chile and others in an emerging-market debt boom.

When energy prices spiked again in the early 21st century, fossil-fuel producers funnelled proceeds into Western financial assets, through central-bank reserves and sovereign wealth funds. Middle Eastern oil exporters and Russia together increased their holdings of U.S. debt and equity securities by almost $500 billion between 2003 and 2008, a fivefold increase that was only beaten in absolute terms by China and the Cayman Islands. That buttressed demand for U.S. stocks and bonds, while oil exporters and tycoons also splurged on European soccer clubs and department stores.

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These financial flows, known as petrodollar recycling, mean that the money Westerners spend on fuel eventually makes its way back into their economies through energy producers’ financial investments. It’s happening again. Saudi’s Public Investment Fund (PIF) has opened new offices in London and New York, and this summer went on a U.S. equity-market shopping spree, scooping up shares in Alphabet (GOOGL.O) and Microsoft (MSFT.O). The Abu Dhabi Investment Authority recently poached New York-based Deutsche Bank (DBKGn.DE) rainmaker Drew Goldman to run real-estate investing.

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But the spoils may disappoint Western financiers with long memories. First, they’re smaller in relative terms. Adjusted for inflation, OPEC’s revenue was higher between 2010 and 2014 than it will be this year, EIA data shows. Saudi, the UAE, Kuwait and Qatar’s forecast 2022 current account surplus will be worth 1.6% of U.S. GDP, compared with 2.5% in 1974, according to Breakingviews calculations based on Capital Economics, Federal Reserve and Bank of England data.

A 3D-printed oil pump jack is placed on dollar banknotes in this illustration picture

A 3D-printed oil pump jack is placed on dollar banknotes in this illustration picture, April 14, 2020. REUTERS/Dado Ruvic/Illustration/
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LONDON, Sept 20 – Fossil-fuel producers are minting money again. Yet Western financiers hoping to share in the spoils of a 1970s-style petrodollar boom will be disappointed.

High energy prices, caused by Russia’s Ukraine invasion, mean the Organization of the Petroleum Exporting Countries (OPEC) will earn $907 billion from oil exports this year, according to the U.S. Energy Information Administration (EIA), compared with $577 billion on average since 2000. Saudi Arabia, the United Arab Emirates, Qatar and Kuwait will collectively have a $409 billion current account surplus, reckons Capital Economics, or almost three times last year’s total. Russia’s current account surplus so far in 2022 has also tripled, year-on-year.
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In previous petrodollar booms, energy producers have recycled their windfalls into the Western financial system. Saudi, for example, racked up a cumulative $160 billion current account surplus between 1974 and 1982, according to economist David Lubin’s book “Dance of the Trillions”, almost all of which went into the eurodollar market – a term for dollar-denominated deposits held outside of America, for example in European banks or the European branches of U.S. lenders. The banks in turn lent those deposits to Argentina, Chile and others in an emerging-market debt boom.
Reuters Graphics
Reuters Graphics

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When energy prices spiked again in the early 21st century, fossil-fuel producers funnelled proceeds into Western financial assets, through central-bank reserves and sovereign wealth funds. Middle Eastern oil exporters and Russia together increased their holdings of U.S. debt and equity securities by almost $500 billion between 2003 and 2008, a fivefold increase that was only beaten in absolute terms by China and the Cayman Islands. That buttressed demand for U.S. stocks and bonds, while oil exporters and tycoons also splurged on European soccer clubs and department stores.
Advertisement · Scroll to continue

These financial flows, known as petrodollar recycling, mean that the money Westerners spend on fuel eventually makes its way back into their economies through energy producers’ financial investments. It’s happening again. Saudi’s Public Investment Fund (PIF) has opened new offices in London and New York, and this summer went on a U.S. equity-market shopping spree, scooping up shares in Alphabet (GOOGL.O) and Microsoft (MSFT.O). The Abu Dhabi Investment Authority recently poached New York-based Deutsche Bank (DBKGn.DE) rainmaker Drew Goldman to run real-estate investing.
Reuters Graphics
Reuters Graphics

But the spoils may disappoint Western financiers with long memories. First, they’re smaller in relative terms. Adjusted for inflation, OPEC’s revenue was higher between 2010 and 2014 than it will be this year, EIA data shows. Saudi, the UAE, Kuwait and Qatar’s forecast 2022 current account surplus will be worth 1.6% of U.S. GDP, compared with 2.5% in 1974, according to Breakingviews calculations based on Capital Economics, Federal Reserve and Bank of England data.
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Second, the energy producers may choose to squirrel away some of their proceeds elsewhere. Sanctions prevent Russia, for example, from investing in U.S. and European financial assets even if it wanted to. And the West’s decision to freeze Moscow’s foreign-exchange reserves may encourage Gulf states to spread their bets, lest they one day find themselves in Russia’s shoes. Global dollar- and euro-denominated central-bank currency reserves had already dipped to 79% of the total in March 2022 compared with 85% six years earlier, according to International Monetary Fund data.

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Finally, OPEC countries face huge domestic investment requirements to reduce their reliance on selling fossil fuels as the world moves towards renewable energy. For Saudi, that could mean spending more on education to boost its services sector, or building up the non-oil portion of its manufacturing industry, like solar power.

The kingdom’s human rights record has undermined its hoped-for foreign direct investment boom, but the energy windfall could serve as a substitute. For the second year in a row, the IMF expects the PIF to undertake more local investment this year than the Saudi central government. Finance Minister Mohammed Al-Jadaan said in May that the country would spend its 2022 surplus wherever it would have “the most positive impact on the economy”, including the National Development Fund, a vehicle designed to help spur private-sector investment.

Saudi may of course fail to invest its windfall wisely. Either way, it would mean that Westerners miss out on some of the spoils of the new petrodollar boom. Banks, buyout barons and high-end real-estate agents may bemoan that, but not everyone should.

Previous episodes of petrodollar recycling coincided with harmful asset bubbles. The 1970s Latin American lending boom quickly became the 1980s Latin American debt crisis, with many countries unable to service their foreign borrowings. Petrodollar demand helped keep U.S. borrowing costs low in the run-up to 2008 even as the Federal Reserve hiked interest rates, arguably contributing to the pre-crisis excess. The lesson is that huge financial flows, while enriching middlemen on Wall Street and in the City of London, often also destabilise the economy. A more muted petrodollar boom might not be such a bad thing after all.

The Organization of the Petroleum Exporting Countries will collectively earn $907 billion of net oil export revenue in 2022, the U.S. Energy Information Administration said in August.

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That compares with an annual average of $577 billion since 2000.

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Elumelu says strong insurance sector foundation for strong Nigeria

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Tony Elumelu, CON, Chairman, Heirs Holdings and United Bank for Africa Plc (UBA), giving a keynote address at the recent 60th anniversary of the Nigerian Council of Registered Insurance Brokers (NCRIB) conference, underlined the importance of a vibrant, well capitalised and deep insurance sector to Nigeria’s economy.

“Not least in these testing times, our people need financial security, secure savings and protection against uncertainty. Our industry needs to offer simple, smart products, that give value and deliver. We need an industry that is professional and can catalyse investment in key sectors such as power, infrastructure and housing”.

Elumelu congratulated the NCRIB on its anniversary and the role it has played, joining other prominent guests including Commissioner for Insurance and the President of NCRIB. But he stated there was no room for complacency, with the sector needing to regain trust, stamp down on malpractice and fundamentally evolve its customer proposition to deepen the insurance penetration.

He emphasised the commitment of Heirs Holdings to the insurance industry.

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He said: “Our two insurance companies, Heirs Life Assurance and Heirs Insurance Limited, are both leading democratisation of access to insurance – which is a tool for financial inclusion, employment creation, poverty eradication and female advancement. In a country of two hundred million, we can, should and must be more relevant than we are today. I am an optimist, not a pessimist. I know that times are tough, but together we can, and we will transform our industry, create value, and provide solutions that demonstrate the value of insurance to our people.”

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Reiterating Elumelu’s stance, Mr. Sunday Thomas, Commission for Insurance called for more collaboration and effort in enabling access to insurance, stating that the industry could do more in this prospect.

He said: “It is a fundamental truth that the insurance sector exists for other sectors to thrive. A lot has been achieved, but there is still more work to be done. Until insurance becomes the oxygen that homes and other industries breathe, and a subject that is known to everyone, we have not arrived”.

The President, NCRIB, Barrister Rotimi Edu, appreciated Elumelu for delivering the keynote speech at the event, while making a commitment on behalf of the Council to further deepen insurance penetration in Nigeria.

He said: “The Council is already creating avenues through strategic engagements with notable governmental and non-governmental institutions to deepen the industry in the country”.

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Heirs Insurance and Heirs Life are lead sponsors of the NCRIB 60th Anniversary, alongside investment group United Capital Plc and healthcare management company, Avon HMO, all investee companies of Heirs Holdings, a pan-African investment group, with a portfolio spread across 24 African countries and four continents.

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150 Years: FrieslandCampina Pays Tribute to Member Dairy Farmers

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To mark the end of its 150th anniversary year, FrieslandCampina presents its new short film, A New Day. The film pays tribute to the many generations of dairy farmers who have made FrieslandCampina what it is today; a dynamic, forward-looking dairy cooperative and a global company.

‘A New Day’ tells the story of the next generation of farmers, focused on the future of dairy farming with lots of passion and determination, while adapting to the rapidly changing world.

According to Hein Schumacher, CEO FrieslandCampina: “We are very proud of our farmers and our cooperative heritage. For over 150 years, our member farmers have always managed to adapt to what the market and society demand from them. By actively responding to evolving needs and constantly innovating, they have developed themselves into very innovative farmers.

“I have great admiration for the next generation of farmers, especially in these tense and uncertain times. They are building the future of sustainable dairy farming, with the same commitment and unwavering spirit as the many generations before them. This film is our tribute to all dairy farmers, young and old,” Schumacher said.

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Also commenting, Ben Langat, Managing Director, FrieslandCampina Sub-Saharan Africa said, “The story of our cooperative is a special one. ‘A New Day’ celebrates our farmers who are playing that critical role in bringing better nutrition to the tables of families across Sub-Saharan Africa. FrieslandCampina Sub-Saharan Africa salutes our farm heroes and remains steadfast in our commitment and support to the development and prosperity of our local dairy farmers.”

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The four-minute film tells the story of three young dairy farmers who are on a journey, sometimes literally, as they face dilemmas, make choices and emerge stronger, ready for a new day. The film shows the challenges they are facing in this rapidly changing world. ‘A New Day’ is the sequel to ‘The Story of Milk, produced in 2012, also by corporate cinema agency 1Camera.

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Watch it below.

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Asia’s richest man sees growing isolation for China

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Indian billionaire Gautam Adani says that China “will feel increasingly isolated” and the “foremost champion of globalization” would find it hard to bounce back from a period of economic weakness.

Speaking at a conference in Singapore on Tuesday, Adani said “increasing nationalism, supply chain risk mitigation, and technology restrictions,” as well as resistance to Beijing’s huge Belt and Road initiative, would impact China’s global role.

Asia’s richest man said that “housing and credit risks” in the world’s second largest economy were also “drawing comparisons with what happened to the Japanese economy during the ‘lost decade’ of the 1990s.”

Adani was speaking less than a month after the business mogul became the world’s third richest man, according to the Bloomberg Billionaires Index. He is the first Asian to take that spot.

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The founder of the eponymous Adani Group controls companies ranging from ports to power.

While pessimistic about China, Adani remains bullish about his own country, saying that India is “one of the few relatively bright spots from a political, geostrategic, and market perspective.”

He anticipates India to become the world’s third largest economy by 2030, with “the largest consuming middle class the world will ever see.”

Some technology firms looking to reduce their dependence on Chinese manufacturing already see India as an attractive alternative.

On Monday, Apple announced that it has started making its new iPhone 14 in India, as the technology giant looks to diversify its supply chain. While the company manufactures the bulk of its products in China, it has decided to start producing its latest devices in India much earlier than with previous generations.

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Businesses may have to move away from China not just because of its strict Covid restrictions, which have been hurting supply chains for months now, but also because of rising tensions between Washington and Beijing over Taiwan.

The US government ordered two of America’s top chipmakers to stop selling high-performance chips to China earlier this month. And, last week, leaders of America’s biggest banks said they could exit China if it ever attacks Taiwan.

Adani also mentioned the challenges facing the United Kingdom, and countries in the European Union, because of the war in Ukraine and Brexit.

“While I expect all these economies will readjust over time — and bounce back — the friction of the bounce-back looks far harder this time,” he said.

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