The leap in oil prices in the 1970s was a shock to the global economic system. But the oil boom of the 2000s has done little obvious harm, for now. Global growth remains healthy. What's the difference?
Probably the biggest difference is what's being done with all the petrodollars. Three decades ago, most were removed from global consumption and put into savings. That depressed global demand. This time, more of the petrodollars are being spent, keeping worldwide economic growth buoyant.
A bit of history: When the oil shock began in 1974, the petroleum producers of the Middle East were extremely underdeveloped and couldn't use all the money that was flowing into their coffers. So they stashed it abroad, in Eurodollar deposits at international banks and in special U.S. Treasury securities. Those funds were eventually lent out -- some in the form of big bank loans to Latin America -- but the primary effect of the oil boom was to take spending money out of the pockets of global consumers.
This time, the Middle East oil states have far more advanced financial systems, bigger populations, and a wide array of unmet needs and ambitions. So they're spending a big share of the incoming petrodollars on everything from an indoor ski slope in Dubai to government jobs in Saudi Arabia (see BW Online, 3/2/06, "Dubai's World-Beating Buildings"). More spending equals more imports. That means more jobs generated elsewhere in the world, from New York to Shanghai.
Here's a back-of-the-envelope indicator of the difference between then and now, using data from OPEC, the World Bank, and the U.S. Commerce Dept. In 1974, OPEC nations ran a current account surplus equal to 1.2% of global gross domestic product. That was enormous. By running such a big surplus, they were pulling lots of dollars out of the pockets of oil-consuming nations, but putting very few dollars back into those pockets by consuming American cars, French cheese, or Japanese televisions. No wonder the world economy was hit with stagflation (see BW, 5/9/05, "The Economy: Why It's Not Déjà Vu").
OPEC is running much smaller surpluses this time because it's spending more on imports from Europe, Asia, and the U.S. In 2004 (the last year for which OPEC has data), OPEC's current account surplus was only 0.3% of global GDP -- about one-quarter as big as in 1974.
To put things into perspective, OPEC's impact on the global economy in 1974 was far more drastic than the impact today of Japan, which also runs big current account surpluses. Japan's current account surplus, 0.4% of global GDP in 2004, is huge by today's standards, but still only one-third of OPEC's in 1974. Throw in China, and you get a combined current account surplus up to only around half a percent of global GDP.
There are two schools of thought about what happens next. Mohsin Khan, director of the Middle East and Central Asia Dept. of the International Monetary Fund, argues that the oil producers will spend more of their income in the future. The theory is that as they get used to today's high oil prices, they'll be less concerned about saving for a rainy day than they were last time (see BW, 2/6/06, "Oil Prices: The New Reality").
That would stimulate global demand even more, although at the price of decreasing the pool of savings. There's historical precedent for this. According to BusinessWeek's back-of-the-envelope measure, even though oil prices hit their all-time inflation-adjusted peak in 1981, OPEC's current account surplus was just 0.4% of global GDP, a third of the 1974 level.
(A small complication here: Khan doesn't buy the argument that OPEC spending is higher now than it was in the early 1970s. He says that the IMF's numbers show the Middle East members of OPEC are actually spending less of their income now. You'd think this debate would be easy to settle, but the quality of the data is less than ideal. So let's move on.)
But maybe OPEC won't go on a shopping spree after all. The opposing school of thought, voiced by economist Paul Donovan of UBS in London, is that OPEC will actually save a bigger share of its petrodollar income in coming years. He and others argue that as OPEC nations gradually make headway on their to-do lists, and create jobs for every potentially restive 20-year-old who needs one, the urgency of spending will diminish and they'll start socking away more money.
If that happens, the timing for OPEC could be propitious. As growth accelerates in Europe and Japan, the global demand for investment will rise and more OPEC savings would come in handy. In fact, infusions of money from the oil sheikhs of Saudi Arabia, Kuwait, and elsewhere could become highly sought after in the West, including in the capital-hungry U.S. If that's the case, then the controversy over Dubai's bid for a port operator could be just a faint foreshadowing of things to come.
Coy is BusinessWeek's Economics editor
Edited by Phil Mintz