Oil producing countries get rich - but where does the money go?

February 25, 2006

A recent U.S. Treasury Report indicated that increased oil prices generated an extra $1.3 trillion in revenue for OPEC countries since 1998, when oil was at $11 a barrel. Oil revenue has been spent on increased imports, higher wages for government employees, increasing reserves, and retiring debt. Oil producing countries want a cushion to fall back on, in case the world economy goes into a recession like 1998, demand for oil falls, and prices decline. These actions all help to lower volatility in their economies, and therefore the global economy.

However, up to 70% of the $700 billion in OPEC's investable reserve funds cannot be accounted for by the Bureau of International Settlements. The BIS only reports OPEC members, so that the non-OPEC funds are also unaccounted for. The Treasury does know that oil exporting countries purchased about $270 million in U.S. securities. Based on other  information, they suspect the unaccounted-for funds are invested in construction loans, regional stock markets, private equity funds and hedge funds. They don't know how much of it is invested in U.S. assets, but through foreign intermediaries,and therefore untraceable.

What it Means:
This hidden money increases global volatility, because it is large (around $400 billion) and unknown. If it is in U.S. Treasuries, a withdrawal of that size could trigger both a decline in the dollar, and higher interest rates. Probably nothing dramatic will happen, since we are also their best customer, but to protect your portfolio, it is best to plan for a declining dollar, and rising interest rates.

Action Steps:
If you have a variable rate mortgage, now would be a good time to call your mortgage broker and look at the feasibility of switching to a 15 or 30 year fixed loan. This will protect you against potential interest rate increases.

Source: Petrodollars and Global Imbalances, Occasional Paper No 1, February 2006, Department of the Treasury, Office of International Affairs.