The big impact of falling crude oil prices is not just at the gas pump. It's also above our heads where the daily jet stream of petrodollars has suddenly vanished. A great pipeline of money that flowed from consumers to OPEC treasuries and back into Western capital markets is broken and the consequence of the liquidity shortfall could be rising bond yields and dearer money.
Some credit analysts reckon we are already seeing the effect of the end of petrodollar recycling. According to the credit team at Citi (as reported in the Financial Times), crude prices have increased the resources of sovereign wealth funds by 80 per cent over the past five years to over $4-trillion (U.S.). With oil prices tumbling from more than $110 a barrel to less than $80, the surpluses available to the wealth fund investors are petering out, which may explain the rising yields in bond markets.
The recycling of receipts from global crude oil exports has had a huge effect on the world financial system, boosting asset prices (including Canadian real estate), while helping to keep down the cost of borrowing.
According to a study by BNP Paribas, cash flow from oil exporters last year totalled some $812-billion, including bank deposits, portfolio investments and direct equity investment. The flow of funds from emerging-market oil exporters will turn negative next year, says the bank. For the first time in 18 years, these exporters will be net recipients of the world's "savings," compared with the petrodollar recycling peak in 2006 when the emerging-market oil exporters were squirrelling away $511-billion in Western banks.
This could be the great rebalancing at work, the long-awaited shift by the U.S. from borrowing to fund growth towards a more balanced account. Fuelled by the frantic drilling in the Bakken and Eagle Ford shales, America is becoming both energy self-sufficient and transforming itself into an energy exporter. And not only has the petrodollar roundabout been broken, but it has been turned on its head: America is shipping gasoline and jet fuel to emerging-market consumers in Africa and Latin America and receiving dollars in payment.
That sounds good for America but for the emerging-market oil exporters, there is a credit crunch looming. Rating agency Fitch this week published a report warning that Bahrain, Angola, Ecuador and Venezuela were most at risk from sovereign-credit-rating downgrades. Venezuela suffers both from a heavy reliance on oil exports, which account for 40 per cent of government revenues, and an oil price of $110 to balance the state budget. Oil represents 80 per cent of Nigeria's foreign-exchange earnings and the exposure to falling oil prices has hammered the Nigerian currency, which has lost almost 10 per cent of its value since August.
But the wider worry is whether the loss of petrodollar liquidity will exacerbate the ending of the Federal Reserve's money-printing support to the credit markets. If the formerly rich sovereign wealth funds stop depositing cash in U.S. and European banks just as the Fed stops creating new dollars, will we see weaker bond prices and sharper rises in yields?
You could argue that the end of the great loop of oil money doesn't matter because loss of income to oil exporters is compensated by savings for oil consumers. While the emerging-market oil exporters tighten their belts, oil importers such as India and China and the great U.S. consumer enjoy a windfall. That is true, but the immediate effects on the global economy of consumer savings and less cash hoarding are different. The petrodollar surpluses tend to end up in T-bills and bank deposits while the U.S. consumer's traditional behaviour when he feels richer is to go shopping, a boon to businesses that make and sell stuff rather than the savings industry.
It looks like we may be on the cusp of a new world or the end of an old world and there will be casualties among those nations that struggle to adapt to change.
Carl Mortished