Brad Setser's Web Log: Greenspan's conundrum and oil
Yesterday the news was that Fed Chairman Greenspan couldn't figure out what was going with bonds and why, in spite of his moves, rates were falling. He touched on 4 possible explanations, none of which quite satisfied him. A combination perhaps? Today Brad Setser looks at the relationship between higher oil-prices and the global savings glut (the voracious appetite for bonds).
At about this time last year, oil was trading around $35 a barrel. Now it is a bit under $55 a barrel. Call in the interaction between rising demand and if not peak oil, at least less than robust production growth.
I did some very rough calculations to try to estimate how much more money OPEC gets when oil is at $55 rather than $35. Try $200 billion. The Saudis alone get an additional $70 billion; the oil states of the Persian Gulf get $150 billion. Russia -- a non-OPEC state -- in the same league as Saudi Arabia.
It is no stretch to estimate that the major oil producing states – non-OPEC as well as OPEC -- are making about $300 billion more than they would have expected this time last year. And at least for now, they seem to be saving it rather than spending it -- with some obvious exceptions (Venezuela). That must be contributing to the global savings glut in a big way. There are lots of petrodollars, and petroeuros, floating through the eurodollar and euro-euro markets (offshore markets).
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The remarkable thing is that the oil exporting emerging economies right now are running massive current account surpluses -- and so too are some oil-IMPORTING emerging economies. China for example, imports enough oil to drive up its global price, but still looks set to run a 7 or 8% of GDP current account surplus. Back in the 70s, the petrodollars were recycled – in no small part by big New York banks -- to other emerging economies who had to borrow to afford (more expensive) oil imports. Not today.
That last important, I think, and on a meta-level must explain some of Greenspan's confusion. The dollars don't have to flow back through New York banks anymore. The dollar is still the most important currency in the world, but we don't control and can't monitor it the way we once did.
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